Good day, and welcome to the Federal Signal Corporation first quarter earnings conference. Today's call is being recorded. At this time, I would like to turn it over to Ian Hudson. Please go ahead, sir.
Good morning, and welcome to Federal Signal's first quarter 2017 conference call. I'm Ian Hudson, the company's interim Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today, as well as to the earnings news release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon, and signing into the webcast. We have also posted the slide presentation and the news release under the investor tab on our website. Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.
Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our news release and filings, we reconcile these non-GAAP measures to GAAP measures. We will file our Form 10-Q later today. I'm going to start today by addressing our first quarter financial results. Jennifer will provide an update on our markets and some of our strategic initiatives, including a review of our acquisition criteria, before wrapping up with her thoughts on our outlook for the remainder of 2017. After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings news release. Overall, our first quarter results exceeded expectations. Consolidated net sales for the quarter were $178 million, up 3% compared to the prior year period. Operating income of $11.3 million was down from $16.1 million last year.
The first quarter of last year was atypical in that it was the strongest quarter of the year, and we benefited from entering the year with a backlog that contained higher margin orders of products from oil and gas markets. The reduced operating income in Q1 this year includes the impact of a $2.7 million increase in depreciation and amortization expense, largely resulting from the depreciation of the rental equipment acquired in the prior year Joe Johnson Equipment transaction. Operating income in Q1 this year also included $500,000 of acquisition-related expenses, $500,000 of purchase accounting expense effects, and $1 million of combined restructuring and executive severance costs. Q1 last year, we incurred $500,000 of acquisition-related expenses and $1.2 million of restructuring charges. Excluding these costs, consolidated operating margin was 7.5% compared to 10.3% a year ago.
Given the changes in our mix of businesses over the last year, we believe that referring to comparisons of EBITDA is becoming a more relevant measure of our underlying operating performance. On that basis, consolidated adjusted EBITDA in Q1 this year was $18.9 million, compared to $20.8 million a year ago. That translates to a consolidated adjusted EBITDA margin of 10.6% in Q1 this year, compared to 12% a year ago. Income from continuing operations was $7.2 million in Q1 this year, compared to $10.4 million last year. That translates to GAAP EPS of $0.12 per share, which compares to $0.17 per share last year. On an adjusted basis, EPS for Q1 this year was $0.14 per share, which compares to $0.19 per share last year. Total orders for the quarter were $215 million, up $79 million or 58% compared to the prior year quarter.
The company reported sequential order improvement in Q1 this year, with total orders up $49 million or 30% compared to the fourth quarter of 2016. Jennifer will talk about some of the contributing market factors in her remarks. Consolidated backlog at the end of the quarter was $174 million, up $37 million or 27% from the end of 2016, and up a similar amount in comparison to the prior year quarter. First quarter sales at ESG were $128 million, up $12 million or 11%, primarily due to $23 million of incremental net sales resulting from the Joe Johnson acquisition. This improvement was partially offset by lower shipments of sewer cleaners and street sweepers in the U.S. Despite the sales improvement, ESG's reported operating income of $10.3 million was down from $16.5 million in the prior year quarter.
The reduction in ESG's operating income includes the recognition of the increased depreciation and purchase accounting expense that I just mentioned, as well as negative operating leverage and unfavorable changes in sales mix. ESG's adjusted EBITDA in Q1 this year was $15.5 million compared to $18.3 million a year ago. That translates to an adjusted EBITDA margin of 12.1% in Q1 this year, which compares to 15.9% last year. ESG's first quarter orders of $167 million were more than double its reported orders in Q1 of last year and were up $46 million compared to the fourth quarter of 2016. SSG reported a $1.5 million improvement in operating income in Q1 this year, despite a $7.4 million decrease in sales, which was largely due to lower sales of public safety products and outdoor warning systems.
The increased operating income reflects benefits associated with material and labor cost reductions resulting from initiatives implemented last year, as well as lower restructuring charges. SSG's adjusted EBITDA for Q1 this year was $7.7 million, and its adjusted EBITDA margin was 15.4%. Both improved in relation to Q1 last year, when SSG's adjusted EBITDA was $7.2 million and its adjusted EBITDA margin was 12.5%. Orders at SSG were down $4.5 million, primarily due to lower orders for public safety products and outdoor warning systems. As we've noted previously, most of SSG's business normally operates with relatively low backlogs. Corporate operating expenses of $5.4 million were relatively flat compared to last year. Turning now to the income statement. We reported a 3% net sales increase in Q1 of this year, yet gross profit was lower in comparison to a relatively strong Q1 last year.
Consolidated gross margin was 24.5% for the quarter, down from 27.4% last year, largely due to the same factors that impacted the comparisons of group operating margins that I just alluded to. Selling, engineering, general, and administrative expenses of $31.5 million were up 6% compared to the prior year quarter, primarily due to the addition of expenses associated with the Joe Johnson Equipment, which was acquired in June last year. As I just mentioned, in Q1 this year, we incurred half a million dollars of acquisition related expenses, which was unchanged from the amount recognized in the prior year quarter. In addition, we recognized lower restructuring charges at SSG. All of these factors roll into the company's $11.3 million of first quarter operating income. Other items affecting the quarterly results include a $200,000 increase in interest expense associated with higher average debt levels and a $400,000 reduction in other income.
These were partially offset by the absence of $300,000 of debt settlement charges incurred last year in connection with the company's debt refinancing. Tax expense for the quarter was down as a result of our lower income, with an effective tax rate for the quarter of 34.5%, which was slightly lower than the rate in Q1 last year. Our full year effective tax rate for 2017 is currently expected to be between 34% and 35%, assuming no change in U.S. corporate tax rates. From a cash perspective, we are projecting a cash tax rate of approximately 20%. The difference between our effective tax rate and a cash tax rate relates to the use of deferred tax assets to reduce our tax payments. On an overall GAAP basis, we therefore earned $0.12 per share from continuing operations in Q1, compared with $0.17 per share in Q1 last year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude restructuring charges, executive severance costs, acquisition related expenses, and purchase accounting expense effects. On this basis, our adjusted earnings from continuing operations for the first quarter were $0.14 per share, compared with $0.19 per share in Q1 last year. Looking now at cash flow. We generated $13.7 million of operating cash flow in Q1 this year, up $20.4 million compared to Q1 of last year. The first quarter is typically a period in which our business is at working capital.
We began 2017 with higher working capital levels than when entering the prior year, partly due to the acquisition of Joe Johnson Equipment, whose inventory levels at any point in time can fluctuate based on demand given its distribution model. In addition, the first quarter of 2017 included improved accounts receivable collections and extension of accounts payable, which were largely timing related. As a result of these factors, operating cash flow in Q1 this year benefited from a lower increase in working capital than in comparison to Q1 last year. The improved cash flow generation helped increase our cash position, and we ended the quarter with $57 million of cash, a $6 million increase from the end of last year. Total debt at the end of the quarter was $65 million, and our debt leverage remains low. We also had $243 million of liquidity available under our credit facility.
We continue to be in an extremely strong financial position. At this point, we have significant flexibility to invest in organic growth, pursue acquisition opportunities, and return value to stockholders. On that note, we paid a dividend of $0.07 per share during the first quarter, amounting to $4.2 million, and we recently announced a similar dividend for the second quarter. That concludes my comments, and I'd now like to turn the call over to Jennifer.
Thank you, Ian. I'd like to start by providing some color on the first quarter. As Ian mentioned, we entered 2017 with a smaller backlog that carried a reduced margin than in prior year, due to lower industrial demand that persisted throughout most of 2016, and a higher concentration of orders for products manufactured by other OEMs. As such, we were expecting a soft first quarter, but we're pleased to report results that exceeded both revenue and earnings expectations. During Q1, our Safety and Security Systems group saw similar operating margin benefits to those experienced in Q4 of last year, resulting from actions taken last year to right size the business and reduce material costs. We were also pleased to report significant increases in orders both sequentially and in comparison to the first quarter of last year.
In fact, our first quarter orders were the highest reported orders for our current group in any quarter in at least the last 10 years. The year-over-year order improvement was largely driven by increased orders within the Environmental Solutions Group, which reported orders of $167 million in the first quarter of 2017, more than double its reported orders in the prior quarter. This improvement was largely driven by organic order growth in excess of $30 million, as well as the effects of the prior year Joe Johnson Equipment acquisition. The sequential order improvement was primarily driven by a $46 million increase in orders within the Environmental Solutions Group, largely represented by improved industrial demand for sewer cleaners and vacuum trucks, higher municipal orders for street sweepers, and increased orders for the distribution of refuse trucks. Our municipal markets, which have historically represented about 60% of our revenues, remain steady overall.
In Q1, strong municipal demand for street sweepers and sewer cleaners within ESG has been partially offset by some recent softness in orders for products of our Public Safety Systems business. These are the part of our Safety and Security Systems group that provides light bars, sirens, and related products to municipal customers in the police, fire, and heavy-duty markets. On the industrial side, we are starting to see some signs of encouragement in our end markets, and we noted solid improvement in U.S. industrial orders during the first quarter. We also saw strong demand for our new Wolf hydro-excavator, a recent new product introduced by the Westech business that we acquired last year.
We have previously talked about the hangover effects from the downturn in the oil and gas markets in recent years and the impact within the Environmental Solutions Group of an influx of used equipment at drastically reduced prices from entities that are experiencing financial difficulty. In this respect, one of the key data points that we monitor is the amount of used equipment that is available at auction houses. The latest available data indicated there were less than 80 vacuum trucks and hydro-excavators currently available at auction, which is a meaningful reduction compared to the same time last year. In addition, we are pleased with the progress we have made to date on our strategic initiatives to diversify our end markets by expanding into the utility market.
We have a dedicated team focused on increasing sales of the Paradigm, the purpose-built vacuum truck specifically designed for that market, which was first launched from our revamped innovation initiative. Our team has been busy demonstrating the product features to potential new customers, conducting over 40 demos per month. We've also been encouraged by the team's efforts to build brand awareness and their ability to generate orders for the Paradigm. We expect sales of the Paradigm in 2017 to be more than double last year's levels. We've also noted increased upselling opportunities with multiple instances noted in the first quarter where the demonstration of Paradigm has translated to the sale of either a Prodigy or a full-size hydro excavator unit to new customers. In the first quarter of 2017, we sold the same number of Prodigy hydro-excavators as we did in all of 2016.
Our financial position is stronger than ever, which helps us continue to fund investments in organic growth initiatives, pursue strategic acquisitions, and return value to shareholders. Earlier this year, we introduced a goal to exceed a billion-dollar in revenues by 2020. We expect that strategic acquisitions will be a meaningful part of that growth. In anticipation of the last two years, we've added a number of people to our team with extensive M&A and integration experience. Earlier this month, we welcomed David Martin, our new Chief Operating Officer, who has a strong operations, M&A, and integration background. We intend to continue to apply a disciplined approach in evaluating potential future acquisitions, and we expect acquisitions will play a meaningful part of our growth in 2017 and beyond. With that, I'd like to take this opportunity to review the business and financial criteria that we consider in evaluating potential acquisitions.
First and foremost, we look for opportunities that will accelerate our strategic initiatives or provide a platform for growth in adjacent markets or new geographies. We look for companies that have leadership positions in niche markets and demonstrate sustainable competitive advantages similar to our current portfolio of businesses. Ideally, we would also be able to identify synergies, including leveraging the collective distribution channels, our expertise in manufacturing, and benefiting from the implementation of our established 80/20 principles. Outside of product line acquisitions, we also place significant emphasis on the importance of a strong management team, particularly if the business operates in a new or adjacent market. We have previously spoken about a goal to diversify the mix of our revenues from a 60% municipal, 40% industrial split to a more balanced mix, and therefore, we tend to have a bias towards industrial-focused opportunities.
Of the financial characteristics, we target companies with solid growth potential, long-term margins that are comparable to or better than our established operating margin targets, healthy cash flow, and a return on invested capital in excess of our cost of capital. If we find the right acquisition, we are committed to staying disciplined in terms of valuation. These are the same principles we applied last year in successfully completing the acquisition of Joe Johnson Equipment and Westech. I would like to move on to our earnings outlook. We were encouraged by the significant sequential and year-over-year increase in orders, particularly within our legacy businesses. We also saw a sequential increase in orders for the distribution of new product lines acquired in connection with the Joe Johnson Equipment transaction.
We are starting to see some signs of momentum on the industrial side and are making good progress with our initiative to expand into the utility market. At the same time, our municipal markets continue to be steady overall. When we issued our 2017 outlook in February, we indicated that our quarterly earnings in Q1 would be the softest of the year. We also noted the recent uptick in orders, including the increase in U.S. industrial orders since December of last year. These trends continued through the end of the first quarter. While it is still early days, the first-quarter order improvement gives us confidence in our full-year outlook. At this time, we are reaffirming our full-year 2017 adjusted EPS outlook of $0.70 to $0.78.
Before we move to questions, I would like to call your attention to our annual report video that recaps our key accomplishments in 2016 and plans for future growth. We previewed this video at our annual meeting of shareholders last week. It is posted on our website under the Investor tab. With that, I think we're ready to open the line for questions. Operator?
Great. Thank you. If you would like to ask a question, please signal by pressing star one. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one if you'd like to ask a question. We will take our first question from Chris Moore from CJS Securities. Your line is open.
Thank you. Good morning, guys.
Morning, Chris.
You had talked about previously first quarter earnings being 14%-16% of the year's. Just trying to understand how to look at that. Is that number adjusted up a little bit given the results were a little bit better than you were looking for? Obviously, that implies a higher kind of guidance range for 2017.
I think, Chris, the 14%-16% was kind of probably more of a point-in-time number that we had when we gave our outlook range at the end of February. Q1 did end up a little better than we were expecting. There were some benefits on the margins at SSG that probably weren't factored in when we gave the Q1 at 14%-16% range. We continue to believe that at this point in time, the outlook range we gave in February is appropriate.
Got you. Okay. It sounds like you had a good quarter for the Prodigy excavators. The margins on those are at the high end of what you guys sell, or?
They're good margin products. They're not as good as the hydro-excavators come in three sizes. There's the Paradigm, which is the smaller size. There's the Prodigy, which is the mid-size. Then there's the full-size hydro. The full-size hydros are the really strong margin products. The Prodigy margins are very good, and what we've seen is we've seen some pull-through from our utility initiative on the Paradigms, where we're now seeing some upselling of the Prodigies, which they're still good margin products.
Got you. In terms of the operating margins on the ESG, I know it gets a little bit, you need to add back in some of the adjustments and things like that. Moving forward in 2017, is the number, the 8.1% for Q1, is that something that can be bettered in the balance of the year? I know there's lots of things in there. You talked about operating leverage, et cetera.
Yes.
Can we get back to double digits on that?
Yes. I think, Chris, one of the things that we made reference to on the call was just the impact of the depreciation expense on the rental fleet. As we move forward, one of the things that we're going to start also probably referring to is EBITDA margin, just in reference to that. We'll be putting out, as we do with the long-term operating margin targets, we'll be putting out some long-term EBITDA margin targets as well. Those should be, I think on an EBITDA basis, and when you strip out the depreciation effects, you'll certainly see the double-digit margins for ESG.
We talked about last year the impact that volume has on those margin targets.
As we move forward through the year, that's something we'll continue to monitor closely. We expect to see some upside.
Got it. Last question, just in terms of, it sounds like your M&A pipeline is getting pretty full. From an initial leverage standpoint, is there kind of a level that you're comfortable at initially if you see something that's a little bit bigger than what you might have thought initially?
We've talked about a three times leverage if there's a clear path to delever.
Got you. All right, guys, appreciate it.
Thanks, Chris.
Thank you.
Our next question comes from Steve Dyer from KeyBanc Capital Markets. Your line is open, sir.
Good morning, Steve.
Hi, Steve.
Good morning. Yeah, I'll go back to the nice uptick in orders. Sorry if I missed this, but is any of that activity for stocking orders for dealer or rental, or are those all for end users?
They're primarily for end users.
All those orders ship in the next quarter or two?
Correct.
As you look, I know it's fairly early, only a month into 2Q, but are you trending to a book-to-bill above one in 2Q in ESG as well?
We certainly did in Q1. I think we're encouraged by the orders that we saw in ESG in Q1. I think it's still early days. There's still some uncertainty in the industrial market. We were encouraged, obviously, with the uptick in industrial. There's still some hesitation about capital outlays. We also had entered the year with a pretty low backlog, so there was some of that is building our backlog back to kind of a more sustainable level. I think we'll probably have more visibility. We haven't finished April yet, so we want to see the orders for April, and then we'll come back probably at the end of the second quarter when we have more information.
Okay. Well, I guess to that point, you said you saw signs of momentum in industrial. What are you seeing that makes you think things are turning?
There's a couple things that we look at. We're encouraged by the progress, although we're in early days on our utility initiative. We expect this year to double the sales of our Paradigm product line, we've also seen pull-through to some of our other hydro product lines. With respect to oil and gas, we haven't factored any meaningful improvement in those markets in 2017. We have seen the amount of used equipment at the third-party auctions reduce. In addition to that, the service work for that type of equipment, we monitor that also closely, and we've seen that increase.
I think one other thing, Steve, that we've seen that's an encouraging sign is we've seen some pretty good utilization rates from a rental fleet on the hydro-excavation equipment.
What that might suggest is while the rental utilization is good, it might suggest that the people are pausing in terms of purchasing the equipment outright. That's one of the benefits the rental fleet has for us.
Right. Well, I guess on hydro vac specifically, given some of the new product introduction, is it your view that that business is up year-over-year in 2017 versus last year?
Yes.
Yes.
If I heard right, the Paradigm and the mid-sized trucks are growing faster than the big ones. Is that a function of weight restriction regulations at all in certain geographies?
No
driving that mix?
No, it's really, it's a purpose-built product for the utility market. This is a new initiative for us. Historically, we haven't done a lot of business in the utility market. We now have a portfolio product and a dedicated channel. We're starting to see the benefits of that initiative.
True success in the marketplace with a new product introduction.
Correct. I would add there that we're also encouraged by the introduction of our Wolf product line from the Westech business that we acquired last year. We introduced the product at our large trade show in February. We're in very early days, but it's off to a strong start.
All right. I'll just ask one more and get back in line. Can you talk about lead times for the big purchased items right now, whether it's chassis or anything else? Are you seeing those stretch to you, or is everything still flowing pretty smoothly?
I think still flowing pretty smoothly.
All right. Thanks.
That is star one if you'd like to ask a question. Our next question comes from Walter Liptak with Seaport Global. Your line is open, sir.
Hi. Thank you. Good morning, guys.
Morning, Walter.
I wanted to go back to that first question about the guidance. Thinking about the orders and the way that the first quarter trended, I wonder if we could just revisit why you didn't take up your guidance for the full year.
In February, when we set the guidance, we had talked about the order trends that we were seeing in December, January and February, which were improving, and we factored that into the guidance. We also noted that the first quarter was going to be our softest quarter, there was going to be meaningful improvement in quarters two, three, and four. The increased order trends give us confidence that in the full year guidance and we'll be able to achieve that improvement in quarters two, three, and four.
Okay. In fairness, let me then ask a little bit about the orders. I wonder if you could, and maybe the best way to look at it sequentially, the orders that you took in this quarter around the vehicle part of the business. Can you break out for us what kind of products those were? Was it largely the sweepers and sewer cleaners? How much of it is, I think those refuse would be a pass through the rental or through Joe Johnson. I wonder if you could just parse out for us what kind of products you have that were orders?
Sure. While of the sequentially, our orders were up almost $50 million from Q4 last year. Of that, $46 million came from the Environmental Solutions Group. About half of that improvement was the organic improvement in our legacy business, and about half of it was from Joe Johnson, from the acquisition. Then within of that improvement at Joe Johnson, about half of it was for products that somebody else manufactures, and about half of it was for our products. It's kind of a mixed bag. Of the products that we manufacture, the improvements were really from industrial markets for sewer cleaners and vacuum trucks, and then we also saw higher demand for municipal orders of street sweepers.
Okay. All right, great.
What's encouraging, Walt, is the improvement is not just driven by one particular business. It's really our Vactor, Elgin, and Joe Johnson businesses.
Okay, great. Yeah, thanks for that color. I wonder if you could tell us a little bit about selling prices. We've seen raw materials, and I think chassis prices have been up recently as well. How are you doing on price and price cost?
We operate in competitive markets, as you know, but we manufacture premium products, and we have several programs in place regarding pricing discipline, and we've been able to increase our prices this year. We're confident in our ability to continue to do so.
Okay, great. You talked a little bit more about M&A, and you've got some fairly large targets out there for acquisitions. The aspirations for acquiring businesses. What does the pipeline look like this year? You think you'll be able to get one?
It's always difficult to know until you sign the deal, but our pipeline is active, and we're looking at a number of different opportunities. We tried to lay out for you guys on the call in terms of the criteria that we're looking at.
Okay. You've done share repurchases in the past. Did you repurchase stock this quarter? What's your feeling on share repurchase?
We didn't do any share repurchases in Q1. In terms of our priorities, we tend to prefer investing in organic growth first. We look at acquisitions. We pay dividends. We paid a dividend of $4.2 million in Q1 and just announced a similar one for Q2. We look at opportunistic share repurchases, and we'll continue to do that through the rest of the year.
Okay, great. Thank you.
In terms of remaining authorization, we still have about $31 million left under our authorization for share repurchases.
Okay, great. All right. Thank you.
Thank you, Walt.
Our next question comes from Marco Rodriguez from Stonegate Capital Markets. Your line is open.
Good morning, guys. Thank you for taking my questions. Just a real quick housekeeping item. Do you by chance have the gross margins per segment?
We do, Marco. Those are going to be disclosed in the Q when we file that. I don't have them handy right now, but when the Q is filed shortly, you'll see them in those materials.
Got you. Okay. Excuse me. Just kind of coming back and circling all around the ESG group. Obviously operating margins are somewhat depressed here, partially because of the D&A, but then also you've got the negative operating leverage that you guys have pointed out fairly consistently. Just wondering if you have done anything in terms of the cost structure to kind of help alleviate that negative operating leverage. If so, is there a new revenue run rate where you kind of start to break even on that operating leverage, and then you kind of get the positive effect going forward?
Yeah, we've taken some of the SG&A costs out of the ESG businesses. It's probably not clear in the comparability of the numbers because of the addition of the acquisitions. If you take into account the acquisition and normalize it, we've taken some fixed costs out at ESG. We've continued to look at the cost of our materials. In terms of leverage, obviously Q1 of this year, we had some pretty low sales volumes. What gives us encouragement going forward is any uptick in orders will hopefully help our volumes moving forward, and that should help us as we can get more equipment through our factory, we should get the benefits from that operating leverage.
Got you. Just to clarify if I heard you correctly, on the order uptick you guys saw here in Q1 for ESG, and I guess the company in general, was it fairly spread between industrial and municipal? Did I get that correctly?
Yeah.
Yeah.
Of the $50 million sequential improvement, I'd say $46 million was ESG. Of that amount, it was a fairly even split between our legacy businesses and Joe Johnson. Within the legacy businesses, we saw both high municipal orders for street sweepers as well as higher industrial demand for sewer cleaners and vacuum trucks. As Jennifer said, it was really across the board. We saw some nice improvements.
It's this broad-based improvement that gives us encouragement.
Got you. Okay. To follow up some of the questions here on the M&A pipeline, could you maybe kind of put a little bit more color in terms of, do you have more opportunities now compared to, let's say, the same time last year? Are the valuation numbers that you're looking at, are they somewhat attractive or a little stretched? Any additional information there?
As you know, we bought two companies last year. I would say in our acquisition pipeline, as we've previously reported, it's an important part of our growth story. We're active in the market, then we'll continue to do so. With respect to valuations, we will be disciplined. Regardless of what's in the marketplace, we've walked away from a number of acquisitions because of valuations that didn't make sense for Federal Signal, we will continue to employ that disciplined approach going forward.
Gotcha. Last quick question, I'll jump back in the queue. Working capital here in the quarter was obviously very helpful to your cash flow. You did note some timing issues with the payables. Is there anything in there that is, I guess, kind of sustainable that you should see more of an addition to cash flow from working capital? Or is it just an aberration, kind of everything hit at once here for Q1?
I think that, Marco, the thing that is difficult to predict sometimes is with the inventory levels at JJE. They saw some strong orders in Q1. To fill those orders, you need a lot of inventory. Some of the timing effects of carrying the inventory with JJE's distribution model can cause some swings in the working capital and can result in our cash flow being a little bit more volatile than maybe it historically has. There's a number of initiatives we have in place to improve the working capital in terms of collections, in terms of improving terms and things like that. We'd expect it to be difficult to predict, but I think in terms of the legacy businesses, we have some improvements that we're planning on implementing.
Got it. Thanks a lot, guys. I appreciate your time.
Thank you.
We have a follow-up question from Steve Dyer with KeyBanc Capital Markets. Your line is open. Steve, your line is open.
Sorry, I was muted. Just a question about your new COO, if he's in the room.
He is.
I think you said he'll be helping out with the acquisition focus, is there a priority list for his initial kind of actions internally?
Yes, he is in the room. We're thrilled that he's joined the company. Initially, we have a lot of different projects going on. Both our SSG and our ESG businesses report directly to Dave. He's working, I would say, the majority of the time with those businesses, but he will be integrally involved in any acquisition with respect to both the evaluation of the acquisitions and the integration of the acquisitions. We're very fortunate to have his skill sets, and we think that they really are perfect with respect to the types of growth that we anticipate for Federal Signal going forward.
Understood. You did have some acquisition-related charges in the quarter. Was any of that related to due diligence for potential deals, or was that all for prior activity?
There's a piece of that, Steve, that relates to every quarter, at least for the next couple of years. We have to remeasure the fair value of the earn-out for Joe Johnson. That flows through that line. About half of that charge related to basically just the accretion of the discount we took just to record it at present value. There was some nominal expense relating to some exploratory due diligence that we conducted.
Got it. Okay. That's all I have. Thanks.
If you would like to ask a question, please signal by pressing star one. If you would like to ask a question, please signal by pressing star one.
In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. We would like to express our thanks to our stockholders, employees, distributors, dealers, and customers for their continued support. Thank you for joining us today.
That concludes today's conference. Thank you for your participation. You may now disconnect.