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

Good morning and welcome to Federal Signal's first quarter 2016 conference call. I'm Brian Cooper, the Company's Chief Financial Officer. Joining me on this call are Jennifer Sherman, our President and Chief Executive Officer; and Dennis Martin, our Executive Chairman.

We'll refer to some presentation slides today, as well this to the earnings news release which we issued this morning. The slides can be followed online by going through our website federalsignal.com, clicking on the investor call icon and signing into the webcast.

We've also posted the slide presentation and the news releases 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. In addition, we will file our Form 10-Q today. I'm going to start today by addressing our financial results.

Jennifer will then provide her perspective on our performance, current market conditions and our outlook for the remainder of 2016. After our prepared comments, Dennis, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today’s earnings new release.

Please note that the historical and current new information presented in the release exclude the results of the Fire Rescue Group, which was discontinued in connection with the sale of the Bronto Skylift business that was completed in January this year. Overall, our first quarter results were in line with our expectations.

Consolidated net sales for the quarter were $173 million, down 12% compared to the prior year period and operating income of $16.1 million was down from $24.5 million last year. This quarter’s reported operating income included $1.2 million of restructured charges and $0.5 million of acquisition and integration related expenses.

Excluding these costs, consolidated operating market was 10.3% compared to 12.5% a year ago. Income from continuing operations was $10.4 million for the first quarter compared to $14.4 million last year. That translates to GAAP EPS of $0.17 per share which compares to $0.22 per share last year.

On an adjusted basis, EPS for the first quarter of this year was $0.19 which again compares to $0.22 per share last year. We continued to see softness in orders during the first quarter with orders of $133 million, down 17% compared to the prior year period. This reduction is primarily associated with the ongoing softness in industrial markets.

On these lower orders, our consolidated backlog of $136 million decreased 21% from the end of 2015. Importantly, our financial condition is extremely strong.

Following the sale of Bronto, we are now essentially debt free, which facilitates investments such as our acquisition of Joe Johnson Equipment as well as cash returns to shareholders in the form of dividends and share repurchases.

As you can see in our group results, the lower demand from industrial markets that we began to see in 2015 is translated into reduced operating results in Q1 of this year, especially when compared to a very strong Q1 last year. Sales at ESG were down 18% versus last year, primarily due a significant decrease in shipments of vacuum trucks.

On this lower sales volume, operating income dropped to $16.5 million. ESG’s operating market for the quarter was still a respectable 14.3% but was down when compared to near record of 17% a year ago. Orders at ESG were down 22% year-over-year. Jennifer will talk about some of the contributing market factors in her remarks.

At SSG, sales were up 2% compared to last year’s quarter, reflecting improved sales into global public safety markets, partially offset by lower sales of industrial products as a result of impacts from oil and gas markets. Our public safety businesses delivered improvements in operating margin and operating income for the quarter.

SSG’s operating income for the quarter included $1.2 million of restructuring charges associated with the completion of a plan to right size and reduce costs in part of the business.

Excluding the effects of those restructuring charges, operating income for the group was $6.1 million compared to $6.6 million last year and operating margin was 10.6% compared to 11.7% in Q1 last year. Orders at SSG were down 9%, mainly due to lower order for industrial products from international market.

As we’ve noted previously, most of SSG’s business normally operates with relatively low backlog. Corporate operating expenses of $5.3 million were down from $6 million a year ago. Turning now to the consolidated income statement with the reduction in year-over-year sales, we saw a parallel decrease in gross profit.

Consolidated gross margin of 27.4% for the quarter was down slightly from 27.9% last year. Selling, engineering, general and administrative expenses $29.6 million were down 3% compared to the prior quarter.

During current year quarter, we also encouraged $0.5 million of acquisition and integration expenses in connection our Westech and Joe Johnson Equipment transactions. Those costs primarily consisted of legal and professional service fees. In addition, we’ve recognized the $1.2 million of restructuring charges at SSG that I just mentioned.

All of these factors roll into the company’s $16.1 million of first quarter operating income. In Q1 of this year, we also reported other income of $0.7 million compared to other expense of $1.2 million a year ago. Both amounts largely relate to foreign currency transactions.

Other items affecting the quarterly results include a $0.2 million reduction in interested expense resulting from our lower level of debt and $0.3 million of debt settlement charges following the completion of our debt refinancing near the end of January. These charges represent the write-off of differed financing fees.

Tax expense for the quarter was down as a result of our lower income with an effective tax for the quarter of 35.4% which was slightly lower than the 36.6% in Q1 last year. Our full year effective tax rate for 2016 is currently expected to be about 36%. From a cash perspective, we are projecting a cash tax rate of between 15% and 20%.

The difference between our effective tax rate and our cash tax rate relates to the use of differed assets to reduce our tax payments. These assets primarily consist of new operating loss carry forwards and tax credit carry forwards.

On an overall GAAP basis, we therefore earned $0.17 per share from continuing operations in Q1 compared with $0.22 per share in Q1 last year. During the quarter, we also recognized income of approximately $3.2 million from discontinued operations which primarily related to our gain on the sale of Bronto.

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 acquisition and integrated related expenses and the restructuring and debt settlement charges that I just discussed.

On this basis, our adjusted earnings from continuing operations for the first quarter were $0.19 per share compared with $0.22 per share in Q1 last year when no adjustments were made to GAAP earnings per share.

Looking at the balance sheet and cash flow, the first quarter of each year is typically a period in which our businesses add networking capital and this was no exception. We used $6.7 million of cash for continuing operations compared to the generation of $0.8 million of cash from operations during Q1 last year.

As I mentioned earlier, we also completed the sale of our Bronto Skylift business in January of this year, preceding initial proceeds of $82 million. We expect to receive additional sales proceeds of about $6 million in the second quarter.

In addition, we executed a new five year $325 million revolving credit facility replacing the $225 million credit facility that was previously in place. During the quarter, we fully paid down a $43.4 million of term loan debt outstanding under our form of credit facility.

As a result, we ended the quarter with $77 million of cash and our only debt item outstanding was $0.6 million of capital lease obligations. We are obviously 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 shareholders.

On that score, we paid a dividend of $0.07 per share during the first quarter amounting to $4.3 million and we recently announced a similar dividend for the second quarter. We also increased the level of our share repurchases during the quarter spending $16.3 million, a buyback approximately 1.3 million share at an average price of $12.64.

We typically approached share repurchases opportunistically and this repurchase activity significantly exceeded to $10.6 million of share repurchases in all of 2015. We had about $53 million remaining under our share repurchase authorization as of March 31st. That concludes my comments and I’d like to turn the call over to Jennifer..

Thank you, Brian. I’d like to start by providing some color on the first quarter. As Brian said, our results for the quarter met our expectations and they reflect the tail of two markets. Our municipal markets which constitute about 60% of our revenues remains sold. I am particularly pleased with the growth and improving profitability of our U.S.

and European public safety systems businesses. These are part of our Safety and Security Systems Group that provides lightbars, sirens and related products to municipal customers in the police, fire and heavy-duty markets. Two years ago, we began a significant new product development effort that is results in its introducing several new products.

We are starting to see the benefits of this work and we are continuing to gain market share. Notably, we had some significant links from our competitors in this quarter in Miami, Nashville [ph] and Albuquerque. We also continue to see opportunities primarily in the Western United States with our initiative to upfit police vehicle.

This key area of focus in recent years gives us control over more of the car content and supports our efforts to expand our relative product offerings. We recently received a nice boost to these efforts when Federal Signal in conjunction with our distributor achieved the Ford Quality Vehicle Modifier Certification for upfitting police vehicles.

Results on the municipal sides holds up well in the Environmental Solutions Group too especially when compared to a strong Q1 last year.

On the other hand, our industrial markets continue suffer hangover effects from the downturns in the oil and gas markets and we continue to see the impact within the Environmental Solutions Group of an influx of used equipment at drastically reduced prices from entities that are experiencing financial difficulty.

Low sales price and depressed rental rates, this type of equipment have reduced demand in rental and other adjacent industrial markets for the new equipment that we sell. As a result, incoming industrial order activity has remained low with a biggest effects occurring in our vacuum truck line.

We are uncertain how long the influx of used equipment may continue affecting our demand but are laying our plans to manage the softness that may persist well into 2017.

We are sizing our business activity to match demand and have taken actions to reduce our costs including early retirements, reduction in force, expense control and pursuing cost savings on direct material. While we are focused on cost management, we are maintaining investments in top line growth in key opportunities for the future of the business.

These investments include sales resources and the development of additional new products like an improved street sweeper designs. We are also working on a line of new Jetstream accessory products and have introduced our new tier 4 compliance street sweepers ahead of many of our competitors.

In addition, we are moving forward with new offerings for the utility market. We have a dedicated and focused team working on a launch of a line of tools for hydro-excavation work and our paradigm purposed built vacuum truck design for that market.

The paradigm will go into production in the third quarter and while we expect it will take time to earn and expand a position in this market, we are encouraged by the initial level of interest in this product.

Our balance sheet is stronger than ever which helps us to navigate through our near term market challenges, continue our needed investments and return value to shareholder. In the first quarter, we’ve returned over $20 million of value to shareholders in the form of cash dividends and opportunistic share repurchases.

This is our highest cash return to investors at a single quarter in almost 15 years. We also continue to pursue acquisitions as we look to achieve our goal of adding $250 million of incremental revenue from acquisitions within three years.

During the quarter, we completed our acquisition of Westech, which is a small business that brings us technology and key products, a strong brand reputation and the solid parts and service business. I’d also want to spend a few minutes on the more significant Joe Johnson Equipment acquisition.

Joe Johnson is a strong municipal equipment distributor that operates in four areas of business starting with new equipment sales. Although about 90% of their new equipment sales are to municipal customers, we plan to use their platform to boost our industrial sales in Canada.

They have a strong parts and service business that nicely complements the Federal Signal’s existing industrial platform in United States. We also aim to leverage their equipment rentals and used equipment businesses.

Rentals and used equipment are additional offerings that will allow us to serve additional customers in both industrial and municipal markets helping us reach more of the market for Federal Signal equipment. We believe there are significant opportunities in all these areas.

Our team is working closely with the Joe Johnson team on integration plans as we move toward closing of the transaction and we are making great progress. As we previously said, we anticipate the transaction to close during the second quarter. Looking further down the road, we continue to seek additional acquisition opportunities.

Joe Johnson is a great fit and a step along the past to $250 million goal. Like Joe Johnson, future acquisitions will also need to meet our acquisition criteria and are likely to include businesses with recurring revenue or product lines that leverage our channels or production capabilities. With that I’d like to move to our earnings outlook.

Two months ago, we laid out our expectation that adjusted earnings per share for 2016 with fall in a range between $0.70 and $0.80. First quarter earnings met our expectations. We continue to benefit from relatively steady municipal markets and we remain confident in our businesses and markets for the long term.

However, our recent adjusted order levels continue to be disappointing in the extended turmoil in oil and gas and related industrial markets make it more challenging to assess our trajectory for the second half of the year. Our first quarter is likely to represent a higher percentage of our annual earnings this year than last year.

At this point in time, we believe our adjusted earnings per share for the year will be in our previously indicated range of $0.70 to $0.80. Before we move to questions, I would like to call attention to our annual report video that recaps our key accomplishments in 2015 and our goals for 2016.

We previewed this video at our annual meeting of stockholders last week. It is posted on our website under the Investors tab. With that I think we’re ready to open the line for questions.

Operator?.

Thank you. [Operator Instructions] And we’ll go first to Steve Barger with KeyBanc Capital Markets..

Good morning, Steve.

How are you?.

Good.

How are you?.

Good..

Good.

First, I want to go to the guidance, you said this will be a higher percentage in 1Q of the full year which makes sense given the range, but what are the risks to the high end, is that really the industrial business remaining a laagered or is it operational risks?.

It’s really orders are industrial businesses..

Any - can you help us think about if order stay low and you start to see the revenue headwinds, what would the negative leverage be there, I think you put up a 23% detrimental in 1Q, can you maintain that?.

You know I think it really depends on the market conditions. We are undertaking our number of cost saving initiatives. We’ll continue to monitor those going forward..

Yeah, I mean Steve, if we don’t act the negative leverages well above our gross margin, we are acting so we’re keeping our costs in line and we’ll continue to monitor that. But that’s what we’re trying to manage through..

Understood.

And in terms of thinking about working capital, you know normally when revenue comes down, industrial companies release some working cap, is that your expectation for this year?.

Not so much. I think we first of all, we’re not expecting the top line to fall up that much. We are planning to make some investments in our inventory in order to capture some additional sales opportunities, so we’re looking at that. And we expect working capital has been pretty efficient over the last couple of years.

So we’d expect to the same little less in line..

You know I would add, in the last downturn, we cut a lot of our sales resources, our new product development resources and we are committed to maintaining those investments, particularly around revenue generating activities for the future..

Got it.

Is there - I may have missed this, is there a cash cost that you’d expect for restructuring this year?.

In the first quarter, we had a charge of 1.2 million and we’ll continue to monitor our businesses as needed for additional opportunities with respect to reductions and force if we need to. We are also exploring voluntary layouts and expense control..

Yeah and that’s an all cash restructuring charge in the first quarter..

Yeah.

But you not necessarily forecasting a specific number for the remainder of the year?.

We aren’t and we are partly - I mean we are trying to manage to what comes. So as order - depending on where orders go, we will manage up and down our businesses nearly to some other actions. But we are not projecting a specific number..

Okay. And Jennifer you talked -.

It’s all respect in our guidance..

On this, got it, okay.

Jennifer, you talked a little bit about this, but can you discuss inquiry levels in the ESG segment on the municipal side, on the industrial side, basically just what are your dealers telling you as they have move through 2Q so far?.

With respect to the municipal side and ESG, you know the orders are maintaining relatively steady, we are with our dealers in a large trade show at the end of February and the outlook was solid. On the industrial side, it’s more uncertain.

You know there’s been a number of a large auction so there has been its influx of used equipment into the market and you know it’s very difficult to understand when it’s going to work its way through the market because the number of our competitors, a number of the end users are having financial difficulties related to oil and gas.

And we are continuing to see sell off to the equipment and reduce prices. The other thing I would add on the municipal market as we talked about in the past, is the orders tend depend on the large suite orders, so we are monitoring those closely..

And when you think about the - some of the new products for hydro-excavation, I think you mentioned specifically, how do you think about revenue potential there, what is the size of the market opportunity for that?.

You know we set as a goal on the SSG side of the business a 30% goal of new product introductions from the last three years. On the ESG side of the business, the product lifecycles area much longer although we have a similar goal. So it’s a very beginning with respect to our initiatives in the utility market.

We are just filling into production for our paradigm vehicle in July of this year and we think it’s going to take some time. We are encouraged by the initial response but I guess its kind we’re in the first inning right now..

How did you arrive the 30% number, did you - is that based on a market study where you feel that you have a slate of opportunities and that’s what you can handle or is that something that’s more internally generated where you are trying to drive demand?.

It’s really internally generated in terms of driving demands going forward..

And I guess to that same thought, can you describe pricing in the market right now on the municipal side and the industrial side? Are you seeing competitors stay rational?.

On the municipal side, yes. On the industrial side, some of the auctions that I talked about previously particularly in those areas that have strong oil and gas end markets, we have seen dramatically reduced prices..

And those are reflecting some of our product lines not necessarily all of them. And that’s mostly ESG..

Right. Okay, I’ll get back in line and see if anybody else has a question..

Thank you, Steve..

[Operator Instructions] And we do have a follow-up question from Steve Barger with KeyBanc Capital Markets..

Welcome back, Steve..

Thanks a lot.

Are there synergy opportunities between Joe Johnson and Westech via broader distribution or shared services, is there - have you thought about benefits related to that beyond just the revenue?.

Yeah, we’ve looked at you know consolidation of facilities although it’s relatively small and we’ve also - an important driver is be able to use the Joe Johnson platform to drive additional sales of Westech equipment..

But more broadly, I think Steve, the opportunities are with other parts of Federal Signal, so we have opportunities to expand our sales of industrial products, Westech is one of those. And that’s one of things we’re looking forward to. A lot of these synergies with respect to Joe Johnson are really revenue synergies, there are few on the cost side..

And Jennifer on your comments, you mentioned recurring revenue and ability to leverage the channel is kind of acquisition metrics, are there other specific goals or requirements you have when you are reviewing a deal?.

Absolutely, you know we are looking at what’s core in terms of both manufacturing capabilities, we’ve talked previously about channel. We talked about having acceptable IRR is important. And let me also talk about management bandwidth, so timing of acquisitions and when we pursue those acquisitions is something that we monitor closely.

We are pleased thus far with the integration efforts that have occurred regarding Joe Johnsons but as you know it takes a lot of work..

Right, so I guess to the bandwidth point, is there - do you feel like you wouldn’t be able to do another fairly large acquisition at this point until that’s more fully integrated or are you limited or I should say, are you not limited right now in terms being able to do another deal?.

You know I think that you know depending on the opportunity, we do have bandwidth particularly on our SSG side and we’re actively in the market looking at opportunities and you know we feel like we got a strong team that we can put in place..

Are you - as you review your pipeline, do you have more opportunities on the ESG or the SSG side?.

You know it’s equally slipped..

Yeah, I’d say it’s pretty balanced, Steve..

And I’ve asked this is the past with probably with review, can you tell us what the size, range of the deals that are active on your desk are in terms of revenue?.

You know they really vary you know typically they can be small like the Westech acquisition, so there are some product lines, type opportunities, they were taking a look at and there is some larger deals. But when we see larger deals, we are looking at deals under $100 million in revenue..

It typically, yeah..

Understood. Okay, I think that’s all I have today..

Thank you, Steve..

[Operator Instructions] And we have no further questions in the queue at this time..

Okay, well thank you. In closing, I would like to reiterate that we are confident in the long term prospects for our businesses in our markets. We are excited about our pending Joe Johnson Equipment acquisition and look forward to welcoming their team to the Federal Signal family.

With the acquisition, we aim to provide even better service to our customers and to growing with new products. All of this depends on the continued support of our stockholders, employees, distributors, dealers and customers and we thank them all. Thank you very much for joining us today..

And that does conclude today’s conference. Thank you for your participation..