Good day, everyone, and welcome to the Federal Signal Corporation Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Bill Barker, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning, and welcome to Federal Signal's second quarter 2012 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Dennis Martin, President and Chief Executive Officer; and Jennifer Sherman, General Counsel and Chief Administrative Officer. We'll be using some slides in the presentation. The slides can be found by going to our website, www.federalsignal.com, clicking on the Investor Call icon and selecting the webcast. We'll also post the slide presentation to our website after the call. Before we get to the business review, 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. We expect to file our Form 10-Q shortly. And now, I'd like to turn the call over to Dennis Martin.

Thanks, Bill, and thanks to those on the call for joining us today. I am pleased with our second quarter results, which reflect a continuation of our progress toward achieving our business and financial objectives. For the quarter, sales, operating income and operating margin from continuing operations were all well above last year. In addition, our orders remain strong, and our order backlogs at the end of the quarter were very healthy. Bill will go through the financial details in a few moments, but to give a high level of summary of our results from the continuing operations. We generated strong revenue growth of 16% versus last year, and we grew revenue in each of our 3 continuing business groups. Q2 operating income increased nearly 50% versus last year and our operating margin increased from 6% to 8%. Earnings per share from continuing operations were $0.15 for the quarter compared to $0.09 last year. Our orders remain strong at $208 million, which was equal to last year, and we are overlapping a very strong Q2 from last year when orders were up 37% versus the prior year. Our order backlog at the end of the quarter was $322 million, which represents an increase of $87 million versus a year ago. So as you can see, we are delivering good results on our key financial metrics, and our strong order backlog positions us well as we head into the second half of the year and get ready for 2013. Regarding the pending sale of our FSTech business, we are working closely with 3M to close this transaction in a timely manner, and we expect to have the transaction completed by year end. As we have discussed, the transaction will enable us to transform our balance sheet and refinance our low-interest rate early next year. In addition, we'll be able to focus our resources and efforts on driving sustained profitable growth from our core businesses of industrial municipal equipment and safety and security solutions. I will give you an update on some of the profitable growth initiatives after Bill goes through the financial summary.

Thanks, Dennis. I'll give a fairly brief review of our financial results for the quarter, which are included in today's press release. Our financial results from continuing operations have been restated to reflect FSTech as a discontinued operation in all periods. Looking at our P&L for the second quarter, sales of $204 million were up 16% versus last year. Currency had a negative impact of about 2.5 percentage points on the revenue growth in the quarter. Gross margin increased 1 point to 24%, and our SG&A ratio was reduced by 1 point versus last year from 17% to 16% as our top line revenue growth enabled us to leverage our SG&A base. Operating income for the quarter improved by $5.2 million versus last year, which represented a 49% increase and our operating margin improved by 2 points from 6% to 8%. Currency had a negative impact on our operating income versus last year of about $400,000. Interest expense was $5.4 million for the quarter versus $4 million last year due to the higher cost of renewed term loan. Our interest expense has been adjusted for accounting guidelines, which state that interest expense associated with mandatory deferred payments related to the sale of the business will be allocated in discontinued operations. Our debt agreement state that net asset sale proceeds of up to $75 million are required to be used to repay our debt. Thus, the interest on $75 million of debt has been allocated to discontinued operations with the interest on the remaining debt reflected in continuing operations. Our tax rate was quite low in the quarter due primarily due to stronger domestic results. Due to our tax situation, we effectively pay no tax on domestic earnings, while we are taxed on our foreign income. Our reported EPS from continuing…

Thanks, Bill. As I said at the beginning of the call, I am pleased with our results from the second quarter, and I believe we are well positioned to drive significant profitable growth as we move forward. In terms of our outlook, we are confirming our second half EPS estimate, excluding charges of a range of $0.15 to $0.20. Consistent with prior years, we expect the fourth quarter to be a bigger quarter. This estimate excludes the impact of a noncash charge of about $0.03 per share related to debt settlement cost we will incur when we repay a portion of our debt. With the net proceeds of the FS transaction, I would to like to point out that we’re estimated a 15% to 20% EPS run rate at the back half of the year, excluding debt charges, while we are still paying 12% interest on our term loan. We expect to be able to refinance our debt in the first quarter of next year at considerably lower rates. As we discussed on our call announcing the agreement with 3M to sell FSTech, we are focused on multiple drivers of profitable growth for Federal Signal as we move ahead. We had several high-growth businesses with strong margins, and these businesses have developed plans that continued their profitable growth. Combined, our Jetstream waterblaster business and our industrial securities business, accounted for about 1/4 of our revenue from continuing operations in the quarter. And both orders of revenues for these combined businesses grew by 24% versus last year, and they delivered a combined operating margin of 20% in the quarter. We believe we can continue to generate double-digit growth at good margins for these businesses. Jetstream's growth is being driven via international expansion through expanded applications for their product and by opening…

[Operator Instructions] We'll go first to Matt McConnell with Citi.

So, Bronto volume was up nicely in the quarter, and you're still in that mid single-digit margin range. So to get to the 2012 target, is it more volume that you need to get there or better pricing in the backlog? I know you've called out the production improvement, but is there anything else that's getting that second half ramp-up?

No, it's really a matter of getting the production to flow through the plant. And we've made major steps as well as brought back a lot of new employees in the last 6 months. And they're now up to speed. So we do have the backlog, and we do have the production capacity in place. And we also redesigned some of the products that were in the production backlog that were taking a little more time to build. And we've got those reengineered enough now, Matt, so they'll flow better. So we're fairly -- very confident that we're going to get the kind of margin targets we're talking about.

And how does currency impact that business? Because I think most of the production is in Finland, and it sounds like it's really Asia and Australia driving the growth. So are your costs and revenues matched in currency there or...

Yes, they are. Matt, it's Bill. So we tend to invoice in euros. So there's not a lot of currency exposure for the Bronto business. Obviously, when you translate those results back to U.S. dollars, there's an impact there. But for the Bronto business, they tend to invoice in the local currency.

Okay, great. And is there -- was there any change in the expectations for the FSTech close? I think some of the metrics on the June call were based on a September 30 close. Now, you're saying year end. I don't know if that's intentional, or did anything change?

No, as we have spoken about this, we've left it in the last half of the year because there is complexity when you try to close a deal like this. I will say that nothing has changed. I will say also that 3M is extremely professional and diligent. And our team and their team are working through all the action items required. And that we're making the progress so it would be expected to have the transaction close as soon as possible, but clearly in the last half.

And Matt, in the last call, I think I may have used the September 30 date as an example of what our debt and our interest expense might look like if it closed on that date, which is a midpoint of the second half. But nothing's changed in the second-half target.

[Operator Instructions] We'll go next to Brad Evans with Heartland.

Bill, can you just walk through -- give us, give an update as to what the balance sheet on the debt side should look like assuming the transaction closes?

Sure. So our expectation is we will have about $150 million of debt after the transaction. And at that point, we would be somewhere in the 2.5x debt-to-EBITDA ratio. By the end of the year, we expect to be 2.5x or maybe a little bit below 2.5x. So when we go to refinance in the first quarter of next year, that will be the metrics we'll be probably putting out there.

It sounds like, just to be clear, it sounds like a fourth quarter close is more likely than a third quarter close. Is that a fair assumption?

It'll be some time there, Brad. I mean we want to do it as soon as we can. They want to do it as soon as they can. And as you know, these things, with all the details, it's just hard to pin the date.

What's the biggest impediment to getting the deal closed at this point?

Just normal transactional reviews and approvals and things like that. We had some things pop up in the U.K. we didn't expect and just as far as approvals. But nothing outside the ordinary.

Okay. Did I hear you correct that you expect earnings in the back half of the year to be at a $0.15 to $0.20 per quarter run rate. Is that correct?

No, that's total second half.

Total second half.

Right, and it's about the same number we had when we had the call about the FSTech transaction. So we haven't changed our forecast for the back half of the year.

Okay. What tax rate are you assuming for the second half?

Tax rates probably in the high teens.

What would explain the step-down in profitability from the second quarter to perhaps the third and fourth quarters?

Yes, the third quarter tends to be a lower quarter for us just because of our European businesses, because of the holiday schedule over there. I think -- then again, because of the lumpiness of the quarters, if you look at the first half of the year when you adjust Q1, we're $0.24. The back half is $0.15 to $0.20. So it's a little bit of a step-down. Part of that is we're assuming stronger results from Bronto, which does carry some more tax with it. So our mix of domestic and international will be a higher tax rate. And then also, we've got some expense in there assumed for -- once the FSTech transaction does close, there'll be some cost that are currently being allocated to that business that will stay with the entity. So that will be a little bit of a drag in the second half until we figure out how we're going to deal with that.

[Operator Instructions] And we'll take a follow-up from Matt McConnell with Citi.

So I know you're not going to have the dividend in the third quarter, but what are the metrics that you look at when you go about determining when to resume that? Are you going to look at debt to EBITDA or interest coverage? What are the markers we should pay attention to for that?

Well, look at every marker, Matt, really. The one thing that we have is we're restricted from doing it at this point because of the financing. And we assume that as soon as we can get to a normal operating run rate of expected profit levels, we'll look at all the metrics that are involved with that. We'd prefer to have a dividend, but we need to do it at a time when that's the best use of the cash rather than the best thing in the business and getting back on track. So we're not projecting a date when we would do it. If our Board of Directors considers it and we'll consider it at every one of our meetings, then we'll do what's best for the shareholders when we can.

Okay, great. And are there -- there was a $10 million use of cash in discontinued operations in the quarter or year-to-date. Is FSTech expected to be a user of cash over the next few quarters, or is there any big cash change there before the deal closes?

No, there should not be any big -- from operations there. Obviously, there will be some expenses with the transaction, but that will be netting the cash in the transaction. So it shouldn't be anything big. I think they'll probably continue to run about where they've been running. We did have some cost there associated with some of the actions related to the transaction. But that shouldn't be a big cash grant [ph], I don't think.

And we'll go next to Steve Barger with KeyBanc Capital Markets.

Kind of a forward-looking question, but as you think about the 3 segments settling in the normal operations, plus or minus, what do you think the right CapEx range is just for a maintenance basis?

I think, actually, pretty close to what we have been operating at. We've spent a lot of capital between 2008 and today to really enhance our important growing plans. So we think it will be a pretty stable run rate.

Yes, Steve, it's probably more between 10 and 15, maybe 12 or 13. Dennis -- and we spent a lot in '08 and '09. As you know, we expanded the Bronto plant and the Vactor plant. And as we sit down and go through our strategic plans as we look for growth opportunities, we might put some more back in there. But I don't think it's going to jump up much above -- I don't see it above 15 and probably more in the low teens.

Well, we are strategically adding advanced equipment in our Jetstream business and our Vactor business for production capacity. So we're pretty comfortable in that range.

Okay. And as you think about -- and again, kind of forward-looking. But getting to your margin targets over time and where you think the revenue can grow to. Just from a range standpoint, how should we think about operating cash flow? Is this -- is there a lot more working capital to come out? Can you reduce inventories from current levels? I'm just trying to get an idea of where -- what the cash generation of the business can be once you kind of settle into a normal rhythm?

Yes, I think we can -- we'll certainly stabilize working capital, and hopefully, bring it down a little bit. So I don't think it will continue to be as it was in the first half of the year, a user of cash. So I think it should be neutral to slightly positive going forward depending on what sort of growth we get. And then as we talked about, we think the margins that we put out there are pretty achievable for next year. On a revenue growth standpoint across the business, because we've got a wide range of things, I think it's probably, in total, sort of mid-single digits' a reasonable number. [indiscernible] we've got some businesses that are growing much faster than that. With some of the muni businesses, we shouldn't expect a whole lot of growth out of there. So I think that's probably a reasonable number for now.

With our backlog, Steve, we have a large amount of inventory, as you can imagine, larger than we would expect. So we will see some of that convert to cash obviously as the backlogs go.

Right. Well, and to that point, you talked about some of the improvements in the manufacturing efficiencies. Where are you in that process based on the actions you've taken? Are you halfway to where you think the plant should be running or better than that or worse?

I'd say if you had to put a percentage, I'd say more like 3/4 to where we need to go. If one of the issues we have is on our chassis-based businesses that chassis, sold such a large part of the product, the inventory and productivity can do a lot of change in the chassis. So our efforts really have been all in the internal operations on both Bronto, Elgin and Vactor. And we're well along the path on those. So we're at this point, getting the people back in place, getting the operation stabilized. Vactor, we had 28% increase in employment where we put a bump to more positions in that the way that works in the business there. So getting the workforce stabilized and getting the productivity going, we should see improvements in margin. But I think in terms of the flow, there's always -- always more you can do, but we're probably 3/4 of the way there. At SSG, we have more to go, and we are working on that one. And then that's coming along nicely.

Okay. And any more detail on the domestic muni orders in safety and security? Does it feel like you're getting to a turn in the spending environment, or is it just continuing to be lumpy and no visibility?

I think if you read our comments or read into what I said about it. It's spotty here, it's more spotty on the sweeper side. We did see some bumps -- bump-up as demand, some back -- pent-up demand really was called out to the last 6 or 8 months. But those are very large spends and a lot of the munis aren't doing much better. So we think that the sweeper business will probably kind of bump along and maybe a little bit of an increase, but bump along where it is. The muni business on the police side in the U.S., the new cars have finally been released, and that was really one of the hang-ups. And we think that there'll be upside on that as we go to the third and fourth quarter. And we have some international things that are working pretty well for us on the police, light and siren and fire business. The European police business though is just devastated right now. They're in Spain. They cover Spain, Italy, France, the whole Southern European thing. And as you know there, the finances and budgets in Spain and Europe, all of Europe are really not good. So our team has done an excellent job maintaining profit margin levels, while they're in a very, very demanding and shrinking market. So we think we're going to -- we don't want to overstate improvement in the muni market in any way.

Right, I hear you. And just for a forecasting standpoint internally there, do you just look at tax revenues as kind of the leading indicator for you, or is there any way to really gauge when that might turn?

Our teams look at a lot of things. We don't really look at tax rates or tax revenues. We look more at what is the activity with the police vehicle registrations, fire vehicle registrations. We had very close contacts with the large municipals and with the -- in the case of fire, the OEMs and the fire market. So we tried to -- reading politics and budgets doesn't help. It's really much more of what the general trends within the cities are and what their outlooks are. So we're seeing some good activity in places like New York City and Los Angeles, some of the smaller cities are certainly struggling. Chicago is a little more active now. So really, it's market by market, but it's really much closer than just general tax revenues.

[Operator Instructions] We'll go next to Brad Evans with Heartland.

Just a couple of follow-ups. What was the corporate charge in the quarter?

All right, say it again?

What was corporate in the quarter?

Corporate was $5.7 million -- I'm sorry, no. $4.7 million versus $5.6 million last year.

Okay. Is there -- do you have the ability to further take action on the SG&A line at $33.5 million this quarter? I mean is that a good run rate? Do you have an opportunity to bend that down a bit?

No, I don't really think we do have an opportunity there, Brad. We're running fairly lean on the marketing and those things. And I think from a sales point of view, we're probably at about the dollar run rate. The percentage should get better, obviously, as we increase the sales out the door, but there's not a lot of room there to do that. We've taken down cost and Europe already. We've -- as the SG&A at Bronto is more direct, that's a percentage commission basis. A lot of our businesses, we pay reps as they sell rather than high expenses. We always look at it. We have made some improvement on SSG, but I don't think there's a lot of room there.

Okay. Then just across with the bookings trend that you see right now, I know it's a point in time and things can change. But as you look out to the next year, do you feel like the end markets are such that with the internal improvements you made that you should be able to get to those operating margin targets for the respective divisions in 2013?

I think as we're sitting here, we can see that, yes. In the U.S. muni market, and certainly, the European muni market are the 2 wildcards, right? But as it appears now, the Vactor business is being driven -- the security business is being driven by market demand. Bronto business, globally, is good, which replaced the bad business in Europe. So we don't see any reason to -- we don't see a major turndown. Our only caveat is we don't expect the big bump-up on the muni.

Right. I guess all the survey that I've seen show that municipal, both sales tax and income taxes at the state level are drastically improved. I mean may be you could exclude California and maybe Illinois. But generally speaking, the health of the states is much better today.

Right, right. And what we're seeing is even in the case of sweepers, where they're not buying as many sweepers, Brad, they're buying parts. So they're still doing an awful lot of overhauling of existing sweepers, which is good for us as well. So it's just really hard to call.

So what -- assuming you close the transaction. I mean what is the right leverage ratio for the company longer term do you think on a debt-to-EBITDA basis?

We've talked in the past about sort of a range between 2x and 3x. I think we'd like to get it closer down to 2x. But I think we'll be comfortable at that level.

But if I just play it, then -- I know we're not forecasting next year yet. But I mean if you just play with the numbers, I know, again, this is a point in time and things can change obviously in this volatile world we live in. But you forecast a little bit of growth next year across your modest growth, maybe across the 3 divisions and you get the margin improvement that you just articulated. I mean you could be -- I guess in the $80 million to $90 million EBITDA numbers is -- there's hope, I guess. And you get that debt down as you -- what's that?

That's the fun with math, Brad.

I understand. But I guess you got -- you get the debt down, I mean you're looking at about 1.5 terms of debt to EBITDA if you're able to execute what you've articulated.

And we are really pushing hard on growth, profitable growth margin, good margin growth. And so all those things are within the realm. And that's really -- we're just so excited to be able to focus back on profitable growth and not -- as we've been focused for last year.

Dennis, we support that. But I guess the question is I think we'd support the dividend claim of that, but with the free cash you could generate and where the stock is today, why not put a buyback in place at some point? I mean I realize we've got to get the deal closed and refinance the debt, but a buyback at this level would seem to make a lot of sense.

Let me answer it this way. As the Board of Directors, we're looking at all of our options. We do on a regular basis, and you're right. When the cash starts to flow, then you have all those options. We could expand product lines, we could think about acquisitions. We can think about dividends, stock buybacks. There's lots and lots of options open to us. And it's exciting for us for the first time that, since I've been on the seat, to have that in front of us.

And it appears we have no further questions in the queue.

Well, I want to thank everybody. We appreciate the questions that helps us articulate our strategy and our excitement. And we thank you for joining our call.

Again, that does conclude today's presentation. We thank you for your participation.