Brian Cooper – Senior Vice President and Chief Financial Officer Dennis Martin – Chief Executive Officer & President Jennifer Sherman – Chief Operating Officer.

Walter Liptak – Global Hunter Securities.

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 Brian Cooper, Senior Vice President and Chief Financial Officer. Please go ahead..

Good morning and welcome to Federal Signal's third quarter 2015 conference call. I'm Brian Cooper, company's Chief Financial Officer. Also on this call with me are Dennis Martin, President and Chief Executive Officer; and Jennifer Sherman, our Chief Operating Officer.

We will 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 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 would 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 US 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 this is going to begin by discussing some of the highlights for the quarter.

I will then go into some detail on the numbers and Jennifer will wrap things up with some additional perspective on the quarter and thoughts on our full year outlook. I’d now like to turn the call over to Dennis..

Thanks, Brian. We are pleased to be talking about another strong quarter for Federal Signal that exceeded our expectations. I’d like to review some of the highlights. We had outstanding operating results in the quarter.

I was particularly pleased with our operating margin, which was up 120 basis points, against last year’s quarter and reflected improvement in all three of our business groups.

Our sustained strong margins reflect significant efficiencies from our 80/20 and our lean efforts, our flexible manufacturing and our targets investments in production facilities. They also reflect continued pricing discipline and cost control including quick reaction to changes in volumes across the product line.

What was most pleasing was that we are able to deliver these results despite headwinds faced by many industrial companies. And although orders have been lower, our third quarter backlog was healthy and essentially unchanged from the second quarter level.

In addition to our impressive margin performance, operating cash flow for the quarter was outstanding at $41 million, almost double the Q3 cash flow a year ago. Our strong operating performance, cash generation and lack of debt at this time obviously give us excellent flexibility to fund growth initiatives and return value to shareholders.

During the third quarter, we paid a quarterly dividend of $3.8 million and we recently announced the 17% increase in our dividend by declaring a fourth quarter dividend of $0.07 per share. We also increased our repurchases during this quarter.

In today's release, we raised our earnings outlook for the year after to a range of $1.00 to $1.04 per share, which represents an increase of 8% to 12% over our adjusted earnings per share for 2004. With that finished in 2015, Federal Signal would surpass results for many industrial companies.

As we begin to plan for next year, we will continue to aggressively work toward mitigating the adverse currency effects, oil and gas headwinds and softer industrial demand, that we do expect to continue into 2016, as you can see from our financial performance how effectively our operations have managed their businesses for profitability and growth.

There are contributions from 80/20 and other operating efficiencies, as well as from product mix, price and some reduce material costs. We are working to carry that momentum forward and we will also continue to pursue strategic acquisitions using the disciplined process that we have previously described. Now I will turn things over to Brian..

Thanks Dennis. Dennis has hit many of the highlights, which makes my job easier. Starting with the top line, consolidated net sales were $206 million for the quarter, down 6% compared to the prior year quarter, excluding foreign currency translation effect, consolidated net sales were down 4%.

Operating income was $25.9 million; up 4% versus last year and third quarter consolidated operating margin was 12.6%. This is almost unchanged from our record margin for the second quarter and is much higher than the 11.4% from a year ago.

Income from continuing operations was $16.4 million for the third quarter, up 8% compared to the prior year, that translates the EPS of $0.26 per share, which is 8% compared to $0.24 per share last year. There are no material adjustments for our non-GAAP results in either period.

Operating cash flow for the quarter was $40.9 million, nearly doubling the Q3 cash flow last year. We delivered this cash flow on the strength of our earnings, even as we continue to invest in our businesses and fund operating expenses and working capital to support our growth initiative.

As Dennis alluded to in his remarks, orders continue to be soft and were 9% lower than last year. At $268 million, our backlog was down from $353 million a year ago or was about even with our second quarter level. As you can see in our group results, all three of our business groups reported improved operating margin versus Q3 last year.

Foreign currency translation reduced third quarter orders and sales in our Fire Rescue Group and to a less extent in our Safety and Security Systems Group. Although our top line was affected, foreign currency changes have had no material impact on our bottom line. The impact on third quarter consolidated operating income was less than 2%.

Environmental Solutions Group reported a net sales decrease of $11.1 million or 8% versus last year, due to reduced sales of domestic vacuum trucks and sewer cleaners. Despite the lower sale, ESG operating income matched the prior year quarter and operating margin was 17.5%, up from 16.0% last year.

Orders were down 23% for ESG compared to exceptionally high levels a year ago. The prior year included several large municipal fleet orders, street sweepers and sewer cleaners. The recent demand for vacuum trucks has been hurt by the significant downturn in oil and gas market.

With our expanded capacity and shorter lead times, we continue to see fewer advanced stocking orders, which also contribute to a lower backlog. At our Safety and Security Systems Group, sales were down 5% compared to last year's quarter, primarily due to unfavorable foreign currency translation effect.

On a constant currency basis, sales were down about 2%. Operating income of $9.3 million was down slightly, while operating margin improved to 16.4% compared to 15.7% in Q3 last year.

The improvement in SSG’s operating margin was primarily due to a recovery against a large order cancellation during the quarter that we previously anticipated to come in the fourth quarter. Orders at SSG were down 4% compared to third last year.

As we have noted previously it is normal for most of SSG’s businesses to operate with relatively low backlog. In the Fire Rescue Group, net sales were $0.6 million higher than the prior-year quarter despite a $3.4 million unfavorable foreign currency translation impact. In local currency, net sales were up 20%.

FRG reported operating income of $0.7 million for the quarter versus an operating loss of $0.2 million last year. FRG’s operating results in the third quarter also included $0.3 million of restructuring expense associated with headcount reductions and due to reduced ongoing operating cost.

In addition, FRG’s third quarter orders in local currency were up an impressive 94% compared to the third quarter of last year, primarily on the strength of order growth in Asia Pacific and the Middle East. We expect Bronto's performance to improve significantly in 2016.

Corporate operating expenses of $5.6 million were down slightly compared to $5.8 million a year ago. From a consolidated perspective we reported a 2% improvement in gross profit and a gross margin of 28.9% for the quarter, which compares to 26.6% last year.

Selling, engineering, general and administrative expenses of $33.4 million were in line with the prior year quarter, and we saw nominal increase in cost associated with restructuring activities. All these factors roll into the company’s $25.9 million of third quarter operating income.

We also reported a $0.4 million reduction in interest expense, which is associated with lower debt levels. Tax expense for the quarter was up $0.2 million with an effective tax rate for the quarter of 34.7%, which was lower than the 35.9% reported in Q3 of last year. We are trending toward a full-year effective tax rate for 2015 of about 35%.

From a cash perspective, we are projecting cash tax rate of approximately 10%. The difference between our effective tax rate and our cash tax rate relates to the use of deferred tax assets to reduce our tax payment. These assets primarily consist of net operating loss carry forwards and tax credit carry forward.

On overall basis, we therefore earned $0.26 per share from continuing operations in Q3 compared with $0.24 per share in Q3 last year. The balance sheet remains extremely strong, with our robust cash flow continues improving. Operating cash flow was $41 million for the third quarter and is up $24 million or 53% for the first nine months of the year.

Total debt was $47 million, down from $69 million a year earlier. Cash on hand at the end of the third quarter exceeded total debt by $19 million. We use some of our cash flow to pay a quarterly dividend on $2.8 million. We also funded 5.6 million of share repurchases during the quarter, bringing our year-to-date share repurchases to $10.6 million.

We have approximately $69 million remaining under our share repurchase authorization. That concludes my comment and I’d like to turn the call over to Jennifer..

Thank you, Brian. I’d like to start by commenting briefly on market conditions. Broadly speaking, municipal and government demand for our offerings has been resilient while industrial demand appears somewhat softer. Industrial demand continues to be negatively impacted by oil and gas related effects, which has been broader than we anticipated.

Our businesses have done a good job of confronting the industrial headwinds facing many companies, which has resulted in softness in our top line. I’d now like to add my thoughts on our performance this quarter for each of our group.

As Brian mentioned, the Environmental Solutions Group reported a robust 17.5% operating margins despite lower sales in the quarter. This outstanding performance is a reflection of our continued execution on 80/20 and lean initiative, maintaining pricing discipline and leveraging our capacity.

It also reflects quick responses to significant changes in our marketplace. One obvious response is careful cost management, but we’ve also taken advantage of our expanded capacity and shorter lead time to capture additional sales opportunity. We’ve also increased our focus on pursuing opportunities in adjacent markets notably the utility market.

At SSG, we continue to see healthy performance from our Public Safety Systems businesses, which are focused on fleet life [indiscernible] and related businesses. The end markets in the US have been relatively stable for the last few years and we continue to see improvement in Southern Europe.

Our teams have been steadily working on 80/20 including things like streamlining our product offerings and reducing our lead time to improve our competitiveness and profitability.

Our Integrated Systems business, which provides customized warning and security systems to municipalities, government agencies and industrial customers have lumpy demand and industrial exposures including oil and gas. They also offer profitable growth opportunities where we’ve been investing.

While these businesses have been experiencing a market downswing, we continue to be encouraged by the number of projects in our pipeline.

The Fire Rescue Group, which is our Bronto Skylift business reported $0.9 million improvement in operating income for the quarter, despite recording about $0.5 million of non-recurring expense associated with restructuring activity and legal fees.

We believe that FRG’s performance is turning around and gaining traction, as evidenced by the group’s gross margin, which improved from 16.5% last year to 19.2% in the latest quarter. We are encouraged by the volume and mix of orders in the third quarter, which merely doubled in local currency compared to last year.

We feel that the turn-around is real and will pay dividends in 2016. So to summarize, some of our markets have been more challenging during 2015, but we feel our businesses are working on the right things to build profitably and grow for the long term.

We remain committed to that profitable growth and we are working hard to supplement it with disciplined acquisition. In closing, I want to comment briefly on our growth objective. We are committed to creating disciplined growth.

There are number of internal investments that remain on track and we feel good about our acquisition pipeline, which includes a variety of opportunities of different sizes with a common theme, they are close to our core. We remain disciplined and our criteria are unchanged.

On our conference call last quarter, we announced that we would like to add at least $215 million from acquisitions to our revenue run rate over the next three years. As we move into 2016, we are optimistic about bringing some transactions to closures. With that I would like to move on to our earnings outlook for 2015.

Our third quarter results exceeded our expectations and by this time in the year, we have relatively good visibility into the fourth quarter. We therefore are comfortable raising our full year earnings outlook from a range of $0.95 to $1.02 per share to a new range of $1.00 to $1.04 per share.

With that, I think we’re ready to open the lines for question.

Operator?.

[Operator Instruction] Our first question comes from Walter Liptak from Seaport Global..

Thanks, good morning everyone. Hey just wanted to ask about the fourth quarter and you know with the guidance coming out you have got a lot of good things going on here in – on the margins.

In your model, where did you take numbers up for the fourth quarter?.

So – I mean, as we look at the fourth quarter we have – we are coming out of a couple of very strong quarters. Several of our businesses are going to be able to perform well, but some of them are going to be not be able to maintain those margins, so there is a mix in our business as always.

All of them have done an exceptional job of delivering on margin and they are continuing to do that..

I would add is – if you look at the order run rate, it’s been stable in the second and third quarter and we expect that to continue into the fourth quarter..

I appreciate that. I wonder, you talked about ESG a little bit, there is orders about $109 million.

Look, given the shorter lead times that are going on there in the ONG overheads, I wonder if you could talk a little bit more about any trends you noticed in the business during the quarter, you know ONG is impacting the vacuum trucks more or less or is it about the same, and on the municipal side what’s the pipeline look like for the fourth quarter, and maybe even if you can look further out than that?.

Sure.

If you recall Walt, last year in April of last year, so 2014, we implemented a new production lines in the plant back there, and that reduced the stocking order requirement for our customers, our dealers, and so the run rate in the last quarter tend to go [indiscernible] going into this quarter, really as you pointed out reflects that steady book-to-bill without the need for eight month lead times were down to three to four months.

In some cases, we’re actually shipping out stock in other cases. So that one impact has gone, so the run rate is pretty consistent.

The oil and gas as you recall dropped off right after the first of the year for everybody, so the run rate of oil and gas in the fourth quarter was still pretty good last year, but again in this last quarter and in the next quarter and going into next year, we see that that likely be a consistent level of operation until oil and gas kind of picks back up.

So on the industrial side I think as we move into utility a little bit more and we see a steady state of business due to short lead times in the oil and gas, we feel like that's a consistent run rate, at least in the near-term.

We also have visibility on some nice order large orders coming late year next year for some of the international markets, so everything else anything else you will see a mix. On the municipal side on the ESG, there have been fewer may go orders I’ll call it for municipalities.

There has been good, consistent municipality business on ESG this year, which we think is going to be consistent and consistent going into next year. The big fleets we saw in 2014, we saw a fleet purchase this year, they were slightly smaller that’s all.

So we see consistency I guess, and we hope we’re looking at, going into next year on the order basis..

Okay. I got it. It sounds like consistency, stability.

I wonder if you can give us some color on the utility product, I think that was introduced recently and are you taking in the orders or are you ready to take orders?.

Yeah, let me tell you – that’s been a fun project for us, the closeness team reached with the users, went back out again this summer with a couple prototypes and got even deeper experience with the customers and we’re tweaking that, but we are in the planning stages of bringing up the production line for that.

And while we’re not ready to forecast a number for next year, we’re going to take the step approach that we did with the hydro-excavators last year by introducing a new line for our fully engineered assembly product off the line.

So we expect good things from that next year in 2016, probably coming with product really being launched and at end of the first quarter, may be into the first and the second quarter.

If you think about that product too though is that it also goes along with our hydro- excavators so we’ll be going to the market with really two families of product, the solid, more versatile product that we've been talking about, as well as the big vacuum trucks..

Okay, great. And so it’s nice to see the turnaround happening at the Bronto business, and the orders look pretty good too.

I wondered if you can give us a little bit more, I guess a quantitative outlook, you’d done that previously with the -- where you expect margins to go, but I wonder if you can just refresh our memories, when you think the margin outlook would be like next year, and Jennifer you sounded pretty upbeat about Bronto being positive change in 2016.

I wonder if you can help us maybe quantify that comment..

I think Walter, what we have said and what we do believe is that that business is capable running in the 8% to 10% operating income range, and that we’re beginning to see the effects of the production changes.

We talk to share – just recently about some of the structural changes we’ve made in overhead with people, so I think the backlog is going to be strong going into next year and that I think during the year we will achieve that 8% to 10% run rate for certain quarters and that business as you know, things get delayed from quarter to quarter, month to month and some months still might be in the low to single digits, but I think that 8% to 10% in the long run for that business is achievable.

And we’ve invested to do it and we have new management and leadership there and we think we can get it done..

Okay. Great. Alright, thank you guys..

Looks like we have a follow-up question from Walter Liptak..

Okay.

I will ask another one I guess, just on the acquisition, obviously the – or acquisition pipeline, any visibility that you can give us in terms of you know, how many books have you looked or where your acquisition targets coming from and have you gotten close on anything, you know any help on – with acquisitions?.

I think we’ve talked about, we probably look that at a high level and 100 opportunities. We’ve probably gotten close in terms of ton, more on about a dozen. We’re committed in terms of our process, but remain close to the core.

[Indiscernible] right now that we are actively pursuing and this is an important part of our growth strategy and we feel confident that as we move into 2016 that we will able to grow the couple of these transactions..

And Walt the range of size and revenue, we’ve looked at things from $8 million or $9 million, although we have $100 million or $200 million. So again, Jennifer pointed out the need to be close to core, we really are dedicated to that. We want to stay close our manufacturing competencies and we’ve see lots of good opportunities.

You asked where these opportunities come from. We’ve had many presented by bankers, but we've also had many that our business units have identified as they are relationships that have existed within the marketplace either with the supplier or with our customers and some of these have been referred. So it’s a nice mix.

We like a closeness to the core and we like what we think it will do for the long run. And as Jennifer said, we expect to have one or two close sometime early in the year next year..

Okay. Alright. Sounds great. Thanks again guys..

Thanks Walt..

[Operator Instruction] And I do have another question that comes from [indiscernible]..

I know you’ve been talking just now about potential acquisitions, but are you planning to sell any parts of your business during this period and during this process or would it remain, how this is and then you would just acquire other businesses?.

That’s a good question, and I can tell you that at our board meetings, we review every business with our board of directors for the – if they still apply, if they’re still closer to core and whether we would keep ourselves.

And obviously being a public company until we decide we were going to sell something we really couldn’t explain any deeper what our thoughts might be..

Okay. Thanks very much..

Thank you..

And it appears there are no further questions today. I will turn the conference back to Dennis Martin for any additional or closing remarks..

Well thanks so much. In closing I would like to conclude by saying that we're excited about our progress and the opportunities that are in our front of us. We are proud of the hard work of our employees in achieving our outstanding third quarter results.

We do appreciate the continued support of our stockholders, our employees, all of our distributors, dealers and customers, and without them we wouldn’t be successful and we thank them all. Again, thank you for joining our call today. And look forward to talking to you in next quarter. Goodbye..

And that does conclude our conference today. Thank you all for your participation..