Good day, everyone, and welcome to the Federal Signal Corporation Third Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Cooper, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good Morning, and welcome to Federal Signal's Third Quarter 2013 Conference Call. I'm Brian Cooper, the company's Chief Financial Officer. Also on this call with me are Dennis Martin, President and Chief Executive Officer; and Jennifer Sherman, Chief Administrative Officer and General Counsel. We'll refer to some presentation slides today, as well as to the 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 selecting the webcast. We have also posted the slide presentation to 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. In addition, we will file our Form 10-Q today. And now I would like to turn the call over to Dennis Martin.

Thank you, Brian, and welcome to those who are joining us on the call today. We are pleased to be here to talk about our continuing progress and our strong showing this quarter. I'll start by providing my perspective, and then Brian will review our financial results. Jennifer will wrap up our prepared comments with an update on our corporate initiatives. As you can see, our third quarter results were excellent across the board. Orders are up 5%, and backlog remained healthy. Sales were up 13%, operating income was up 52%, and our operating margin was 9%. It's the highest it's been since the second quarter of 2007. And as is expected, we continue to benefit from our refinancing with much lower interest expense. Our adjusted EPS is therefore, $0.26 per share, up 160%. These results reflect good performance across all 3 business groups, as well as low rate of spend at our corporate level. The environmental systems group and Bronto both improved sales and margins versus last year. Meanwhile, the Safety and Security Systems Group recovered to post results, comparable to last year's levels from much softer results than the first half of this year. Our results also reflect some improving momentum in our markets, as demand for our products has remained good. But it does vary by market. On the municipal side, most areas of spending in the marketplace seem to have remained relatively constrained. The bottom of the cycle was probably down about half from our peak levels in 2007. However, we have started to see some modest recovery in products that are linked to the police vehicles and targeted security needs. Municipal demand for sewer cleaners, which also served the industrial needs, has been strong and it seems to be back, half or near peak levels.…

Thanks, Dennis. I'm going to highlight some specific things in our financial results for the quarter and of course, fuller detail is included in today's news release. First, Dennis already mentioned that our adjusted earnings for the third quarter were $0.26 per share, up 160%, compared to $0.10 per share in the third quarter last year. The adjustments to reported GAAP earnings this quarter are offsetting tax items, but we have noted them for consistency and for comparisons to prior periods. On the P&L, net sales of $209 million were up 13% over the third quarter last year, driving an 11% increase in gross profit. SG&A expenses were lower versus a year ago, reflecting much lower corporate expenses, which I will discuss later. As a result, operating income jumped 52%, $18.8 million. Interest expense was $1.5 million, down significantly compared to last year, as a result of our refinancing in March. It also was down slightly compared to our second quarter this year, mostly because of declining debt levels as we have used cash flow to pay down debt. In addition, we had debt settlement charges of $1.9 million in Q3 last year. Finally, income tax expense remains very low, with an effective tax rate for the quarter of only 3%. As we explained when we released our valuation allowance last quarter, we retained a valuation allowance amount intended to cover applicable tax expense for the balance of this fiscal year. In other words, our effective tax rate on our U.S. sourced income is targeted to be close to 0 this year. On a fully-taxed basis, excluding discrete items and benefits from valuation allowance, our income tax rate for 2013 would have been about 33%. Next year, in 2014, our cash tax payments will remain low and continue to reflect…

Thank you, Brian. I'd like to review our progress and provide updates on the 2013 goals that we set forth earlier this year. Our first goal was to refinance the business. We have completed our refinancing and our businesses now stand on the firm foundation of a healthy balance sheet. As Brian described, we continue to reduce debt, our interest expense is down significantly and our leverage is now under 2x EBITDA. With this capital structure, we have the liquidity and flexibility that we need to support our businesses and invest for profitable growth. Our progress also provides flexibility to consider funding dividends, which our board does on a regular basis. Second, we are committed to growing the business organically. In that regard, we've already made a number of targeted investments and organizational changes. Earlier this quarter, we announced the hire of Dr. Scott Rohrbaugh to serve in a newly-created position of Vice President, Business Development and Innovation. Dr. Rohrbaugh will work closely with our marketing and engineering teams to assist with innovation initiatives and new product development processes. We've also made a number of organizational changes to refocus our engineering team and improve alignment with our marketing efforts. These actions strengthen initiatives started last year that are now beginning to show results. For example, in our public safety businesses, the percentage of our 2011 sales from new products was in the high-teens. This year, we expect new products to represent more than 30%. On the investment side, as we move into 2014, we are in the process of implementing capacity expansion within our ESG businesses to meet customer demand and support growth. This includes the addition of new production lines at Vactor and Elgin and the leasing of an adjacent facility to supplement Jetstream capacity, efficiency and product development.…

Thanks, Jennifer. As we look at 2014, we are completing our strategic planning cycle. And we'll be better prepared to comment on our goals for next year on our next call. But I would like to provide some direction today. We believe that our business is now on sound footings. We have improved results by doing the things that Jennifer just described, from customer focus and 80/20 efforts, and an appropriate focus on our people. With our foundation re-established, we've been turning our focus more toward growth, profitable growth. There's a better potential in our industrial markets, and our aim over the long term is to grow our industrial businesses at a faster pace than our municipal businesses. We expect this to come from a number of directions. We have already set in motion expansions of plant capacity within ESG, and we are wrapping up similar work at Bronto. This provides room to run with some of our best products for industrial markets. We also see promising growth potential in our industrial, safety and security applications. Finally, to complete the picture, we will look to our innovation efforts and to acquisition targeted around -- and adding product line to complement our existing businesses and distribution channels. These are ambitious ideas, and as we flush out our opportunities, we are committed to the same disciplined approach that we've applied over the last several years to continue building value in Federal Signal. So with that, we'd like open the lines for questions.

[Operator Instructions] We'll go first to Walt Liptak with Global Hunter Securities.

I've got a couple of quick questions. First, just on the guidance for the fourth quarter. I just want to make sure I'm interpreting it right. That you're talking about $209 million in sales and about $0.26 for the fourth quarter too. Is that right?

Well, what we said, Walt, and what we're comfortable saying at this point is, that we'll be in a similar range to what we've been the last 2 quarters on the bottom line. So we weren't trying to guide toward any particular top line and be too specific on the earnings per share, but obviously we've done pretty well this quarter. We've got a good foundation, a lot of that will carry forward.

Okay, great. And I wonder if you can provide -- a little bit more color on the corporate expenses? Was it the legal expense that was down in the quarter? I think in the press release you called out incentive comp. I wonder if you can just go into that a little bit more.

Well, those really were the 3 big things. The incentive comp was just an adjustment based on where we're coming out for the so far. Primarily, the -- there was a change in corporate allocations, but probably the biggest impact, especially versus what we might have anticipated on a -- in some scenarios, is very little cost related to -- hearing loss litigation.

Okay. On the incentive comp part of it, you're achieving better results than you thought at the beginning of the year. Wouldn't incentive comp be going up instead of down?

Well, we redesigned our incentive comp plan 2 years ago to be very highly-performance based on the long-term. And we have different components to that, one is operating income, but cash flow performance is the second piece. So I think we just -- there's a mix there that -- last year, we were at 200%, this year we're not going to be at 200% as it comes to the cash flow piece. The payout will be lower.

Okay. Got it. In the fourth quarter, so we could use a similar corporate expense to what we saw in the third?

It will probably run a little higher because we had some of these one-time effects from allocations and so forth.

Okay, okay. And then turning to the growth aspirations. I'm wondering about acquisitions and I get it with focus on industrial. But in the mission statement, you talked about how you're focused on safety markets, but then it seems like you're moving towards industrial. What should we expect in terms of new products?

That may be a confusion, Walt, on the way we're stating it. One of our largest growth opportunities is the safety and security industrial side of our business. All these natural events and unnatural events that have occurred will drive a large growth, and is already driving a large growth in that business. But we consider that to be an industrial application, in many cases. So it's not a departure from the safety side, it's a mix of the products.

Okay. And as you look at acquisitions though in the future, are you looking at anything industrial, or does it have to have the safety theme to it?

No, no, it could be industrial, but related to our core manufacturing competencies, or core distribution competencies. So the customers that we call on in oil and gas, paper, industrial, refining, municipality, safety, security and any of the close ties that we have, either by market or by manufacturing core competencies -- we're open-minded too. But it has to make sense for the company. We don't -- we want to be very diligent in our direction, but it needs to line up with our core, whether it's market or manufacturing.

We'll hear next from Steve Barger with KeyBanc Capital Markets.

As you shift from a focus on kind of fixing and stabilizing to more growth, are your innovation initiatives more focused on taking share in existing markets, or are you pushing into new markets to broaden up the product line?

It's really both, but there's an adjacent piece to many of our products, our markets, Steve, that we have opportunity in. Again, as long as fits up with core manufacturing capabilities in our distribution markets, we're going to align that way. I'll give you an example, one example is our Jetstream business. We have only 5%, we think, of the global market of jetstream products, and there are certain product adaptations we have to make to our U.S. product for those markets. So we see the potential, and we have the relationships, so we are making those changes. In other cases, we're going -- looking deeper into the oil and gas and energy-related markets. So either deep in within where we are or adjacent, seems to make the most sense to us on the surface.

And as you think about making a change to a product line like Jetstream. Is that something where it's a fairly easy thing for you to incorporate? And I'm not trying to make light of it, but you know how to do, you can do it, and you can push into that new market quickly and really drive a more rapid top line?

That's right, it's more core competency. In fact, one of the products we brought out this year was a 350 horsepower gear-driven product for the international market, which we didn't have a year ago. And looking at going to a 650, which we've been able to bring more rapidly to market as you point out, because it is competencies in areas that we have. And so, we're going to trying to do more of that, unless of course, we see an acquisition that gets us a little further afield, but also within the same neighborhood, we may be able to pick up different skills.

So as you've done your market research, on where you want to focus on product innovation, do you think this can have an impact on 2014 results in terms of putting new product in the field and really starting to see the revenue benefit from that?

We think we will begin to see -- we think we already are starting to see it, but it will be a building process, but yes.

But based on what you can see right now, and I know you're not giving bench for '14, but is this the kind of thing where you look at the normalized growth rate of Federal Signal past and think that you can take a fairly significant step up in terms of how we should think about revenue growth going forward?

Yes. I think our approach to it is going to be, to try to grow the municipal markets faster than the way municipal markets grow on the own. And so we are doing things in the municipal market today that grow faster than the market. And we think industrially, while it will take time, we think we can begin to grab additional market share in areas and in products that we are just bringing to market. So, we're not going to put a huge number out there, but we do intend to have municipal sales continue to grow and have industrial become a much, much larger part of our business, so it should start to grow, and we should see that over time.

And when you think about these new product innovations, is higher margin or a higher return on product line a gating factor for where you're going to deploy capital to address market holes that you see?

It is. It exactly is.

Excellent. So great progress toward the goals this year. Clearly results have come in faster than you anticipated. Including the guidance for 4Q, over the last 3 quarters, you had a run rate, but obviously better than $0.90. Do you have a line of sight on earnings growth for FY '14? Is it reasonable for us to think about on -- the bottom line continuing to grow at a solid pace next year?

I guess I would ask you to step back and think about the lack of expenses that we've had in the hearing loss side, because that will be a very large variable for next year and this year. Some years, we've spent as much as $10 million on hearing loss: Some years, $5 million; some years, $1 million or $2 million. So a big piece of any forecast that we would try to guess, because it would be a guess, would be trying to guess what that cost will be over the next year. And so, we expect to continue to improve our operations with 80/20, with better price controls and higher margin products. So we continue -- we expect to continue to go in the right direction, but to try to put a number on it because of the variables surrounding the hearing loss, it would be very difficult at this point.

And, Steve, I think you mentioned $0.90. We're at $0.62 year-to-date, our last 2 quarters were $0.23 and $0.26. We were trying to signal that we are most likely going to end up in a range close to that, the $0.23 to $0.26, which I don't think gets us all the way to $0.90.

Yes, a little bit under $0.90.

If you include 4Q.

Yes.

Correct. Yes.

Yes. That's all I'm saying. And looking forward I'm -- I understand the hearing loss is something you can't control, but as you think about things you can control, you -- the question is, do you have line of sight or confidence that you can drive earnings growth X whatever happens with hearing loss. Because I think in the bottom of that is...

We think that the market momentum...

[indiscernible] make their own decision about hearing loss.

Right. We think when the market momentum should, with our backlogs and with the work we're doing, continue -- we should continue to have a good year at least through the first half next year, and we don't have much visibility much beyond that, but we don't see anything that's going to derail progress.

And Matt McConnell with Citi has our next question.

So, Dennis, you mentioned that municipal markets are still relatively constrained, yet you are seeing an increase in municipal sweepers. And I think you called out police markets getting better. So I wonder if you think demand is at an inflection point here or -- I know it's not a robust recovery, but how do you gauge sustainability of some of the end market increases that you're seeing?

That's a good question. The one market area that we do have actual facts is that police car registrations are reported for the country and are data -- factual data. And as Jennifer pointed out in our last call, they dropped from something in the 80,000 per year couple of years ago, down to I think high 30,000 per year. And this year we think, they'll be in the low to mid 40,000 new vehicles being registered, something like that. And I was out with some police departments last week on the east coast and they're all running their cars longer, they're doing more maintenance, so they want to continue to spend. So I think the police market in U.S. is at an inflection point. It has come up a little bit, will continue to creep a little bit, but not make a dramatic change. In Europe, we don't see any indication that there's a big change. We've seen a few more orders over there, but again that's not a relative straight-up kind of thing the way it felt. The street sweeper business has been better for the last 2 years, but well below the peak, but better than last 2 years. And the Vacuum Truck business has been very strong. We're seeing because of the environmental requirements that drive vacuuming, we've seen vacuum business be at good levels for both the municipal and the industrial. So we think it's past the inflection point under the vacuum trucks. There's still a lot more room to go we think on police, fire and amber lights. And certainly, Bronto, all the European business or much of the European business of Bronto disappeared, but they've been able to do more globally to make up the volume. So we think there's not even -- there's no reflection -- inflection point on the Bronto sales in Europe. We think that's still on the bottom, laying flat.

Okay, great. And following up on the police car improvement. I know you've expanded your product line quite a bit there. So how much of your recent improvement is the market, and then how much might be share gains in the police market?

We've actually done 2 things in the police business. We eliminated 14,000 part numbers, while bringing out some products that are more suited for the current market demand. So we think that we have picked up some market share in the police side. We know we have a few more police state agencies than we had in the previous years, so we have a few points of market share, we think. But I think some of that is -- some of these policemen I was talking to last week have run their cars all the way up to 220,000 miles, have replaced the engines in police cars because they can get maintenance dollars instead of capital dollars to buy a new car. So we think that it really hasn't started up fast, but it will pick up some, but we don't think it will ever return to the high level of 80,000 a year. We think it will probably get back up into mid 50,000 cars a year, or something. Of course, we don't know until it happens.

Right. But you're still meaningfully above where you are now?

Meaningfully, above. Right. Right.

And if I could switch to Jetstream, the push-outs from third quarter to fourth quarter. What are the margin implications from that? And is that going to be a big benefit in the fourth quarter? And maybe just a way to start the answer, could you give us a sense of how Jetstream's margins compare to the ESG average. I know they're above, but any kind of magnitude would be helpful.

Yes. We don't really break that out. It is above -- it's much better. But you won't -- the size of Jetstream relative to the overall ESG group, you won't see a huge noticeable improvement with the return of that business.

Okay, great. And maybe the last one for me. It looks like you had a 4% price increase in ESG, or at least a 4-point benefit from price increases. So is that a function of the work you've done on new products, or a function of the market improving? Or is there something else that's driving that pricing power?

Yes. I think that what you're seeing really is an improvement in margin that has come from some price activity, not 4%. And margin improvements through 80/20 in the plants and mix, because the mix makes a huge difference in the margins. So it wasn't at all price increase. I'd love to get 4% price increase.

I think a lot of it is mix. It's -- we're selling more of the higher valued, higher margined products, generally.

Yes, the Vactor products our highest margin, international orders. Depending on the shipments there, can be lower. So really mix, mix, gross margin activities in the factories and some price, but not all price.

[Operator Instructions] We'll move on to Brad Evans with Heartland Funds.

I just want to clear up a little confusion. I think that might be -- as investors think about how to think about Federal Signal into 2014 and perhaps beyond, but -- if I'm doing the math correctly based upon kind of the guidance you've given for the remainder of the year. And if you add back stock-based compensations for an adjusted EBITDA number, it looks like you're going to come in around $80 million to $85 million of adjusted EBITDA. Brian, is that about right?

That is, yes.

Okay. So capital spending this year, you're still in the $13 million to $15 million range, is that correct?

Yes.

Yes. And that's sort of our outlook for next year at this point, although we haven't put all the plans together.

Got it. And -- so let's just take the high-end, and say $15 million. And your interest expense this year is going to be, for the full year because of the high burden you had in the first quarter, you're still going to run about $8.5 million for interest expense, so call it $9 million. And your tax bill for the full year, it looks like you're going to still run very low numbers, so call it $4 million or $5 million, correct?

Yes, so it will be -- I don't know if that's the right number, but it's in the low -- below $10 million probably, low-teens.

Got it. But what -- sorry -- what do you think the effective tax rate will be for the fourth quarter?

We have some moving parts on it. So I'm not sure how meaningful it will be. I'll tell you on the cash side the U.S., we are fully sheltered and the only question is, whether the valuation allowance that we retain covers it completely. So that depends on how well we do. The rate will be a little higher than what we've seen recently.

Got it. That's actually -- I guess the important point is that -- so if you take the taxes -- the cash taxes, the CapEx and the interest expense, you're looking at roughly deducts of roughly $30 million, $15 million for CapEx, $10 million for interest, call it, rounded up, and $5 million for taxes. So you should generate about -- before working capital changes, you're generating about $60 million in free cash flow.

Your math is pretty good, yes.

Okay. So the thing that people have to consider is that next year, you're going from a -- as you rebooked the deferred tax asset, you'll go from a non-book taxpayer to a full statutory tax payer, but you'll be deferring 80% to 90% of your book tax bill, correct?

I will be using the assets up, yes. Probably around 80%.

Okay. So you'll be deferring 80% of the current -- of the tax bill that will be on the income statement next year, correct?

That's taxable.

It depends on the mix. Obviously, overseas we tend to be paying a more of the full overseas tax rates.

Got it. Excellent point. My point is that -- if people are looking at net earnings, they're missing the forest for the trees for you next year, because will be more important in valuing the company will be your ability to grow EBITDA, which it sounds like you feel you have a line of sight towards. CapEx, will be about the same. Interest will be down substantially and taxes on a cash basis, should be up, but not meaningfully. So as you grow EBITDA next year, the earnings, the GAAP earnings will be impacted by that full statutory tax rate, but your ability to generate even further amounts of free cash flow potentially should be in play, correct?

That's exactly right. The earnings will be pulled down on the financial statements, but we're not paying more taxes than we would have otherwise. So it will be a little more difficult comparison for some people to make. But we will still be generating significant cash next year.

So the key metric is again, going to be EBITDA and free cash flow generation for the company, which has come into full force this year.

Those are certainly the metrics that we focus a lot on.

Okay, I would urge you to condition people to look at that because as you think about the earnings numbers next year, they'll be obviously, very polluted by the tax implications. But in any event, congratulations, you guys are on a great path. One question just on operations. Dennis, can you speak -- these tragedies within the malls and the airports of late, how big of a businesses is that for you today, and what would that opportunity potentially be if it were to manifest itself into a market?

Very good question, and I don't think those things are going to equate immediately, Brad, to big levels of business. The school activity factor, and I talked about that last year, we've ended up in the period of time since that occurred last December, have picked up about 6 or 7 actual orders. So we'll see some increase, but I don't think it's going to dramatically -- it's going to dramatically drive large increments of new businesses.

And Mr. Martin, at this time I'll turn the call back to you for closing remarks.

Well, thank you very much for participating, and we're proud of the quarter we've had. We'll keep working diligently to have continued success and we thank all of our teams and people for their contributions and look forward to our next call. Thank you very much.

Thanks.

Again that will conclude today's conference. Thank you, all, for joining us.