Good day, and welcome to the Federal Signal Corporation Fourth Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Braden Waverley, Interim Chief Financial Officer. You may begin.

Good morning, and welcome to Federal Signal's Fourth Quarter 2012 Conference Call. I'm Braden Waverley, Federal Signal's Interim Chief Financial Officer. Joining me on the call today are 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, federalsignal.com, clicking on the investor call icon and selecting the webcast. We'll also post a 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-K today. And now I'd like to turn the call over to Dennis Martin.

Thanks, Braden, and thanks to those on the call for joining us today. Jennifer Sherman and I are currently visiting our Vama business in Barcelona, Spain, and we were at our Bronto business in Finland earlier in the week. Since we are hosting this quarter's call from separate locations with Braden in Chicago, we may have some pauses in our presentation and during the Q&A, and I apologize for any inconvenience. Later in the call, Braden will take you through our financial performance details, and then Jennifer Sherman, our Chief Administrative Officer, and also -- Jennifer is also responsible for our public safety business, will go through our 2013 corporate initiatives. Our fourth quarter results reflect the continued improvement of our business performance and the completion of a year in which the company fundamentally transformed its income statement, balance sheet and its ability to generate cash from operations. For the quarter, sales, operating income and cash flow from continuing operations were all above last year. We finished the fourth quarter with a healthy backlog and operating income and margin well above last year's levels. I'd like to highlight some of the important points from our continuing operations for the quarter. In comparison to last year, revenue grew in all of our segments and at a rate of 12% for the entire company. This was our fifth consecutive quarter of double-digit year-over-year revenue growth. Q4 operating income increased 12% with operating margin coming in at 6%. During the fourth quarter, our working capital management continue to improve as we generated $30 million in operating cash flow from continuing operations compared to only $1.7 million last year. Excluding restructuring charges, earnings per share from continuing operations were $0.09 for the quarter compared to $0.11 last year and consistent with our second half…

Thanks, Dennis. I will now provide a review of our financial results for the quarter, which are included in today's press release. Please note that our financial results only reflect the company's continuing operations and have been recast to reflect FSTech as a discontinued operation. Looking at our P&L for the fourth quarter, sales of $218 million were up 12% versus last year. Currency had a negative impact of less than 1 percentage point on our revenue growth in the quarter. Gross margins decreased to 22.8%, while our SG&A, as a percentage of sales, decreased by 1 percentage point to 16.5%. The decline in gross margin percentage was primarily a function of a shift in product mix at Bronto over the prior-year period. The increase in SG&A dollars during the fourth quarter reflects an increase in corporate expenses, specifically an increase in incentive compensation in 2012 and the absence of a reduction in insurance reserves that occurred in 2011. Operating income increased by $1.4 million versus last year, while our operating margin was essentially unchanged. Currency had very little impact on operating income versus last year. Interest expense is $5.7 million for the quarter versus $4.5 million last year due to the higher cost of our now retired term loan. The company recognized an income tax provision of $2 million during the quarter primarily related to tax expense at non-U.S. operations. The increase in the income tax provision represents a $0.02 per share impact on earnings compared to the prior-year period. Our effective tax rate in the quarter was 29%. Our reported earnings per share from continuing operations were $0.08 compared to $0.11 during the fourth quarter of 2011. Slide 6 outlines our pro forma earnings per share from continuing operations for each of the last 4 quarters. The corporation…

Thank you, Braden. This morning, I'd like to take the opportunity to share a series of initiatives that came out of our recent strategic planning process during the fourth quarter and are central to our long-term success. These are enterprise-wide initiatives that will have an impact on all 3 of our operating groups. It is our intention to communicate our progress on these initiatives in future discussions with our shareholders. First, this morning and in the past, we've spoken extensively about our need to refinance the company's balance sheet. In completing this refinancing, we capitalized on flexibility we built into our debt structure strategy we began over a year ago. Complemented by our strong operating performance, this flexibility opened the company to a full range of potential credit providers throughout the process. As a result, today, we have a balance sheet and capital structure that provide us both adequate liquidity for investment and the ability to redirect interest savings into further debt reduction and meaningful earnings growth. Our completed refinancing serves these objectives. Second, diversification of the customer base is central to our long-term objective of creating sustainable organic growth across all segments. In our domestic markets, we have built enduring relationships with municipal customers, and will continue to stay invested in their long-term success. We will complement this foundation with accelerated new customer acquisitions in industrial and commercial markets. We have started this process in earnest over the last year, particularly in servicing new customers in the energy and security markets. Third, as part of our investment in the long-term success of our municipal customer relationships, we also intend to create a structure to achieve long-term profitability in servicing these markets, whether in using 80/20 techniques to ensure appropriately sized product portfolios, further reductions and breakeven operating levels at…

Thank you, Jennifer. While macroeconomic uncertainties will continue in a number of our served markets during 2013, we expect the first half to be one of continued profitability and growth in revenue. Excluding the impact of our financing charges incurred in the first quarter, our estimate for earnings per share during the first half of the year is $0.20 to $0.25. There are a number of important factors impacting this guidance, including the following points. First, our interest savings will be significant as a result of our refinancing, but the full benefit of those savings will start in March and have a more material positive impact on our guidance and results for the second half of the year. Again, we believe that the annualization -- annualized reduction in interest to be over $10 million compared to our previous financing arrangements. Second, as we've indicated in the past, our hearing loss litigation defense cost present a financial exposure that can impact our earnings. And while we have won every trial for the last 3 years, including most recently in Cook County in December of 2012, we have pending cases in the court in Illinois and in Philadelphia. Depending upon trial schedules, the defense cost could have an impact on any quarter this year. Third, while our healthy backlogs at the groups support our revenue and profit goals, the timing of those shipments and the associated product mix will have some impact on earnings and this is mainly the case in our Bronto and ESG businesses. And finally, the generally uncertain market conditions under which we are operating require us to incorporate a broader set of potential demand scenarios into our guidance. While our backlog insulates us from some risk in the near-term, there is some potential impact on the first half,…

[Operator Instructions] We'll hear first from Matt McConnell with Citi.

Can we start off just with an update on the path to the longer term margin goals? And maybe Dennis, since you're over in Europe, we can start with Bronto, where there might be the most room for improvement on an annual basis, but in the quarter, you're right up there at the long-term target. So what have been the productivity improvements there in the Finland facility and kind of what's the path to the goal in each of the segments maybe?

Matt, that's a great question. The performance that we saw in the fourth quarter is more typical of what we would expect through this year. Our backlog through the end of February, we're still running about $90 million in revenue for backlog. The process changes we've made in the plan, including new assembly lines, new automation, handling of the assembly products and continued in-lining should continue to drive those margins. I think they'll go up and down perhaps quarter-to-quarter slightly as these machines are well over $1 million each, and sometimes shipments slip from one quarter to the next. But in general, the performance of the business should maintain those levels for this year. The -- we're about ready to go into another realignment of the boom plant in Pori to achieve even further 80-20 kind of simplification improvements. So we think that it's sustainable at the target levels that we suggested.

Okay, great. So in 2013, you think kind of...

I think, certainly, we'll be in the range in 2013. At this point, it's really too early to say if it's the high-end or -- but I think it should be able to stay on the range.

Okay, great. That's helpful. And then I guess one of the advantages of reporting at this time in the quarter is that you have probably decent visibility into how first quarter has started. So you had orders down year-over-year in each of the segments in 4Q, but is there any kind of market update on how the first quarter has progressed?

I think we're still in that same mode. We haven't seen a major drop or major increase. The levels we had laid in 2011 and the first quarter of 2012 really were driven very high by increasing demand in our Vactor business. So we had advanced placement of orders to get in queue. So we think we're at a sustainable level to achieve the kind of plan that we're thinking of in terms of about $200 million run rate per quarter in revenue.

Great. And then finally, on the debt to EBITDA, the covenant in the new agreements, do you have -- where do you stand versus the 2.4 where you finished this quarter? And then kind of related to that, is debt reduction still kind of the number one and maybe only priority for capital allocation for this year?

I'll let Braden answer the question about the ratio, but debt reduction is certainly an important objective for us. Cash flow, cash management, inventory reductions, generation of cash and reduction further of that is a key, but we will trade that off with decisions on investing in the capital equipment we need, as well as investing in new products in some of these high-margin businesses. So it's not a single-area direction, but certainly, we don't want to go on the wrong direction, and Braden can talk about the percentage.

Sure, Matt. Is your question just with regard to pricing as a function of the -- of our debt to EBITDA ratio?

Or just -- yes, where is the covenant maxed out like versus the 2.4 where you finished 2012? What's the threshold?

Sure, yes, when we get the debt levels in the company, the debt to EBITDA ratio below 2, our pricing will be LIBOR plus 2%. So from a maximum interest saving perspective, when you see those EBITDA levels get to that point, you will see those numbers from an interest rate standpoint shake out that way. The...

Braden, the top end of the covenant issue that, I think, is what he's asking.

Yes, that's helpful on the downside as well, but would the rate go up if the debt to EBITDA also went up?

If our debt levels went up, our rates would go up as well.

And what's the bracket on that?

And when we go -- when we get our leverage up over 3.5 -- when we get the debt levels up over the 3 level, we would see us price out at a LIBOR plus 3 level.

[Operator Instructions] We'll hear next from Steve Barger with KeyBanc Capital Markets.

First question, just on the first half guidance, over the past few years, there's typically a pretty big step-up from 1Q to 2Q in terms of EPS. Do you expect that's going to be the pattern in the first half of '13 or is the $0.20 to $0.25 more level loaded?

Braden?

Yes, I think we really need to look at the first half holistically just based upon the size of the backlogs that we have going into the first half. Our inclination at this point, Steve, is to say it's a bit more level-loaded than in the past just based on the fact that we're not experiencing the big spike in Q4 volume that we've had given our lead times. We had seen a lot of those orders flow through in Q2. So directionally, we would say a bit more level loaded, but we would -- really, for the purposes of your models, encourage you to look at the first half holistically.

Got you. And free cash flow from continuing operations, looks like it was around $36 million in 2012. You indicated -- can you tell us where CapEx is going to fall in 2013 and do you expect that operating cash flow will increase enough to have free cash flow even or better than what you put up in 2012?

Braden?

Sure. We expect to start, obviously, a big part of our cash flow enhancement is the income effect benefit performance from '11 'to 12 and the improved working capital management, certainly, over the course of the fourth quarter. So we're going to continue to directionally work those opportunities with a fiscal year '13 focus on inventory improvements, Steve. But from a standpoint of capital expenditures, we see this coming fiscal year high -- $13 million to $15 million range in terms of CapEx for the purpose of thinking about a free cash flow number in 2013.

Got you. So just broadly speaking, continued margin improvement, some reduction in inventory so maybe a positive from a working cap standpoint and then '13 to '15 CapEx? Did I get that right?

Yes, and I'd encourage you to think about our inventory performance. Inventory balances did go up, but -- and I think we spoke a little bit about this on the Q3 call as well, Steve. We really need to think about that total working capital on the context of the revenue performance, which was, as we pointed out on a call, very, very strong with regard to our AR balances, improved from a standpoint of inventory, but the inventory did experience an increase. So I think it really needs to be taken in the context of revenue performance.

I understand.

And the backlog also.

Well, it's a good question on a good point on the backlog. It's very healthy, especially in ESG. Can you talk about backlog mix for the company and I guess for ESG specifically? Is it better than the mix you just shipped in quarter in terms of machines or -- and pricing?

Braden, you want to take that one?

Yes, we had a good mix and a good volume at both the Vactor and the Elgin businesses going into fiscal '13. We also see some pretty nice margin opportunities even in our Jetstream business, which is smaller than those other 2. But in general, we expect the backlog there to lay a foundation to mirror the kind of performance and potentially improve the kind of performance we had for the full fiscal year in ESG in '12. But from an overall mix standpoint, it's a same to better kind of story, Steve.

Got you, okay. And you've talked about -- in some of the corporate goals, accelerating customer acquisition in global markets, do you have to hire a lot of people or build out a lot of infrastructure to do that or do you feel like you have that model in place and it's really just getting better leverage out of the existing assets you have?

Yes, it's -- really, the focus, Steve, is on leveraging the assets we have. We are strategically, though, adding a few more sales executives in certain areas, but generally, it's really been the shift of the leadership teams and the focus in certain markets so it won't take a lot of cash to do that. And in terms of leveraging our operating units, we have the opportunity to leverage them without adding a lot.

Okay. And then last question and I'll jump back in line. As you look at the segment growth rates and the margin expansion potential, what do you think is a reasonable way for us to think about the normalized revenue growth rate over the next few years and what level of EBITDA margin do you think the business can generate over time?

Well, I don't think we're really prepared to think about what we think the growth rate over time would be. It's just too hard for us to say at this point until we get rolling. But when we establish the rates for each of the business units, we really believe that those were achievable targets. Some quarters might hit, some might miss, but generally achievable. And as we continue to expand our new product development processes, dig deeper in some of the adjacent markets, we think we should be able to drive the revenues. So we think the business will continue to grow. We know that growth is probably the most important objective for us, and so we are launching a new innovation program within the company to make sure we separate resources to really go after our new products in these markets. So until the economy sort of sorts out, I think that the run rates this year, we said it would probably be about $200 million a quarter, and I think beyond that to try predict it would be pretty tough. We do see recovery in the municipal accounting. We see some of the businesses in the last quarter’s have delivered recovery. We see certainly more police activity, and so it's just hard to predict. But Bronto Europe was a big part of their business. It's been out of the business for the last couple of years in Europe just because of the activity levels in Europe. The Fed comes back on top of everything else we're doing. We think that we should see growth there. So we're going to continue to focus on revenue growth, profitable growth. We don't want to take orders just to take orders, and we're going to continue working on leaning out the factories, leaning out's the wrong word, but making the factories more efficient, and so we think the benefits of that, and then we can take the earnings and put it into investment or paying down debt instead of interest as we have this last year.

[Operator Instructions] We'll hear next from Brad Evans with Heartland.

Let me see, you gave us your thoughts for margins at Bronto for the year for fire rescue. Can you just -- where do you think EPG and SSG shakeout for the full year from a contribution margin perspective?

Yes, I think we'll see -- I think we should see growth in SSG to get further towards their goal. ESG, I think, will run probably fairly close to last year, and maybe with some upside, and then Bronto should, as I say, get into the 10% to 12% range, probably in the lower end of that and run there. A lot depends on the mix of the products at Bronto, and we have a lot of units that are in production right now that should support that kind of a level, and orders cycles at Bronto have been consistent, but not expanding. So I think we should see a good year in orders and certainly, the kind of margins, targets that we put up there are still achievable.

Okay. Where do you think the corporate expense shakes out for the full year within a range?

Braden, you want to take that one?

Yes. I think, it'll be on -- we anticipate the corporate expenditures to be at a fairly stable level from the 2012 levels, Brad. We don't anticipate a lot of movement there. And in fact, we are working pretty hard to drive more efficiencies out of our corporate functions. But as you think about the business in '13, we'd encourage you to think about corporate as being relatively flat compared to '12.

I'm sorry, so that's about $25 million or $26 million?

Generally, yes.

And Dennis, it sounds like -- I appreciate your caution, it does sounds like there's the prospect of things improving with industrial production growing here in the U.S. And as you've mentioned the muni markets, I guess, international markets might be a wildcard was some of the turbulence overseas, but hopefully, directionally better. So it sounds like you think across the 3 business segments that there's a -- you have a fighting chance to grow each of the segments modestly and if things turn over more quickly, we could be surprised. Is that the way to -- is that a good way to characterize it?

That's exactly how I'd think about it. We've spent some time in the marketplace recently. I'm over in Europe now, and we spent some time this last couple of weeks with our direct salespeople on the industrial side with some dealers and also end users. And I can tell you that there's a lot of optimism, and everybody puts -- keeps putting caution flags up, but the individuals we talked to felt pretty good about it. The dealers on the municipal side really are thinking that they are seeing bright spots on the street sweeper business as an example, and obviously too, it comes in to orders. It's hard to dictate, but they're not walking around gloomy. They're optimistic. They're focused. So I think, as we talked, about the kind of revenue levels and order levels for 2013, I think there's upside.

Okay. And you should be deferring the vast majority of your current tax bill, is that correct, going forward?

The domestic tax, yes. As we looked in the last quarter, we had a higher tax rate in the fourth quarter primarily driven by profits in Europe. So we still have a lot of NOLs in the U.S. and of course, that will have an impact on deferring the taxes.

So a rough number, say, you'll defer, say, 75% of the book tax level?

Braden, what do you think on that?

I'm sorry, can you repeat the question, Brad?

So you should be deferring about 75% of the book tax expense?

Yes, that's about right. We're -- yes, that's a good assumption.

So can I ask you, what's the level of debt to EBITDA that you need to get below where you have more flexibility to entertain share repurchases or restoring the dividend?

Braden, do you want to take that or Jennifer?

Sure, yes. It's really a function of 2 things. I mean, our leverage ratio has to be below 3.25 and so from a leverage ratio standpoint, that's one condition. The other condition is with regard to the fixed charge covenant, Brad. So when we have that EBITDA as a function of the restricted payments that we would made, whether they take the form of dividends or other payments, we'd need to see that number at a 1.25 kind of coverage ratio. So the decision is going to be obviously a function of how we're seeing the business and its ability to generate cash in the future as well as what the growth prospects look like for internal investment as opposed to the other alternatives that we would entertain. But it's really the fundamental restriction, so to speak, as a function of the new debt agreements, are really driven by the financial covenants.

Okay. Well I guess I'm just looking at for a basis in your -- at least, on a net debt EBITDA basis, it's not hard to see at the end of -- as you get into the second half of this year, where you'll be again net debt to EBITDA, you'll be substantially right around 1.5 turns or maybe even a little bit better than that.

Yes, I think at that point, Brad, then certainly the Board of Directors would consider the dividends and all those things that are -- that we should be thinking about.

Great, because it looks like -- well, I guess the surprise could be if the business grows a little faster than perhaps working capital would be a use of cash versus perhaps a neutral or maybe a small source. So I mean the bottom line is the free cash flow dynamics are vastly improving here?

They are. And as we make further progress into this year and start looking forward instead of backwards, we should have a better handle on it.

Ladies and gentlemen [Operator Instructions] Next, we'll hear from Nelson Obus with Wynnefield Capital.

Just in terms of corporate, I'm just -- I'm curious about your accounting philosophy in terms of pushing down as much as possible the corporate expense into the segments. Is that something you look at periodically? Or is that kind of a set process that you've governed by over a period? Where does that stand? Obviously, because the more you can push down, the clearer we get a view of the divisions.

Right, and we're doing more and more of that, Nelson. This year, we pushed down more of the comp, worker's comp, things down into the businesses. The IT, we push down into the businesses. So we're trying to do more and more of that. The things that are in corporate that we continue to have in corporate are things like legal costs that belong in more in the broad base that we've taken in and certainly, the other medical expenses as they relate to the corporate. So we're trying to be more flattened out to put more in the divisions.

And at this time, I show that we have no further questions. I'd like to turn the call back over to Dennis Martin for closing remarks.

Well, I'd like certainly to thank everybody for their participation and support of our business. We've been through a process here for the last few years of getting back on our feet and certainly starting to look out of the companies that are within. We're excited about that. We're looking for growth, and we'll continue to communicate with you, stay transparent as we've indicated in the past and are certainly looking forward to our next call not many weeks down the road for the first quarter. So thanks again. Have a good weekend and good afternoon from Barcelona.

Goodbye.

Goodbye.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.