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

Good morning, and welcome to Federal Signal's First Quarter 2013 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 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 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. We look forward to discussing the results of our businesses. I'll start our presentation with an overview of the quarter. Then Braden will take you through the financial performance details. Jennifer Sherman, our Chief Administrative Officer with operating responsibility for the Public Safety Systems business, will provide an update on our 2013 corporate initiatives, focusing on critical milestones in achieving profitable growth at Federal Signal. I'll conclude this morning's call by providing you an update on our markets and the 2013 guidance. Our first quarter results underscore the sustainably profitable business we are creating despite the challenges of uncertain demand in different geographies and customer segments. For the quarter, our operating income, sales and adjusted EPS were all higher compared to the same period last year. I'd like to highlight some important points from our continuing operations for the quarter. In comparison to last year, our operating income grew to $12 million, representing a 17% increase, while operating income margin expanded to 6.1%, representing the fifth consecutive quarter of year-over-year margin expansion from our consolidated continuing operations. Led by ESG and SSG, our sales increased by 2% compared with the first quarter of 2012. After 4 quarters of increases, we experienced a 12% decline in interest expense during the first quarter, a trend we expect to take hold through 2013 as we reap the benefits of our successful first quarter debt financing. Excluding debt settlement charges, earnings per share from continuing operations were $0.12 for the quarter compared to $0.08 last year, marking a 50% increase in adjusted EPS and positioning us to reaffirm our guidance of $0.20 to $0.25 a share in adjusted earnings from continuing operations for the first half of 2013. During the first…

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. Reviewing our P&L for the first quarter, sales of $200 million were up 2% versus last year. Currency had no material impact on total sales during the quarter. Gross margin increased to 23.4%, while our SG&A, as a percentage of sales, was equal to the prior year period at 17.4%. The improvement in gross margin was a function of increased sales volume at our Vactor business, as well as improved manufacturing efficiencies and product mix at both Vactor and Bronto. Operating income increased by $1.8 million versus last year, while operating margin from consolidated continuing operations improved by 80 basis points to 6.1%. Results from the first quarter of 2012 include a restructuring charge of $900,000 within SSG or 40 basis points of operating income margin for the period. Currency had no material impact on consolidated operating income versus last year. Interest expense was $4.5 million for the quarter versus $5.1 million last year due to the $75 million payment of debt during the third quarter of 2012 and the significantly lower interest rates associated with the company's March 2013 refinancing of debt. Based upon the existing credit agreement, the company anticipates that pricing on its debt will decline further to LIBOR plus 2.5% shortly after the filing of the first quarter 10-Q. Consistent with communications during our fourth quarter conference call, the company incurred debt settlement costs of $8.7 million associated with the refinancing of its debt during the first quarter, $4.5 million of which was a cash payment. These settlement costs had an…

Thank you, Braden. During our last call in March, I outlined our corporate goals for 2013, underscoring the fact that these initiatives were strategic in nature and that success would be a function of long-term execution. We also committed to provide you with regular updates on our progress. This morning, I would like to pick up on Dennis' comments and share some examples of how our work toward a number of these goals focuses Federal Signal on achieving profitable growth. Let me start with our efforts to diversify our customer base. As many of you are aware, historically more than half of our sales have been to municipal customers. We will continue to complement our strong foundation in municipal markets with accelerated new customer acquisitions in commercial and industrial markets. During our strategic planning period, we would like to expand our industrial customer sales to 60% of our total base. This is a reflection of where we see growth opportunities on a global basis. One of our most promising opportunities for growing our industrial market presence is our Jetstream business. Over the course of the last year, we expanded our engineering headcount at Jetstream for the purpose of creating products to address international markets and new customer segments in North America. In addition, we're in the process of planning capacity expansion at our Jetstream operations. These focused investments will serve to not only diversify Federal Signal's customer base. They will profitably grow our business, where our market share opportunities are greatest. Our integrated security systems business continues to be one of our most successful examples of profitably growing our company organically. With much of the product, integration talent and service capabilities already residing in our integrated security systems business segment, accelerating this growth is a function of investments in sales…

Thank you, Jennifer. Since we last spoke with you in the middle of March, many of the macroeconomic uncertainties we referenced are continuing. A portion of our order decline during the first quarter reflected these uncertainties in our international markets. However, we experienced a modest recovery in year-over-year orders during the month of March and continue to see progress in the sales pipelines in a number of our businesses. This progress, combined with our still healthy backlogs and continued focus on our operational initiatives, puts us in a position to extend our guidance to the full year. As I mentioned earlier in the call, we are reaffirming our first half guidance of $0.20 to $0.25 in adjusted earnings per share, excluding the impact of debt settlement charges. Turning to the full year, our estimate for adjusted earnings per share is in the range of $0.55 to $0.65, also including (sic) [excluding] the impact of debt settlement charges. I'd like to now provide you an update of factors impacting our guidance. Our earnings guidance takes into consideration previously communicated estimates for annualized savings in interest expense due to our first quarter debt refinancing. We anticipate this annualized reduction to be approximately $10 million compared to our previous financing arrangement. Consistent with past communications, hearing loss litigation defense presents a material financial exposure that can impact our earnings. While we have won every trial for the last 3 years, including the most recent Cook County trial in December of 2012, we have pending cases in the courts in Illinois and Pennsylvania. Due to a number of recent developments, we see the primary impact from hearing loss litigation coming in the second half of this year. Third, while our still healthy backlog levels at Bronto and ESG support our earnings guidance, the timing…

[Operator Instructions] And we'll take our first question from Matt McConnell with Citi.

So a pretty strong start to the year. At $0.12 of EPS, you're basically halfway to your first half guidance. But there's typically a pretty nice seasonal sequential increase into 2Q. So with that reiterated guidance, are you planning conservatively or is there a reason why there might not be that 1Q to 2Q sequential increase that we typically see from you guys?

Yes, it's a good point, Matt. And actually, it was brought up on our fourth quarter call as to whether or not we'd see a more level-loaded first half, by one of the questioners. And we did indicate that certainly compared to fiscal '12, we would see a bit more level-loaded quarter. Last year, on an adjusted basis, if you will recall, we went from $0.08 to $0.15. We certainly don't see anything in percentage terms like that kind of a sequential increase in EPS. We started the year with a pretty healthy backlog, and as a result, we think that's going to create some sort of a smoothing effect from Q1 to Q2. So the short answer to your question is there is the opportunity for an uptick in Q2, but we don't think we're being too conservative.

Okay, great. That's helpful. And do you have any timing associated with that goal for 60% industrial sales? Or if you don't have a specific timeline in mind, do you have kind of a growth rate that you expect out of your industrial businesses over the next few years? Like, any context around that target would be helpful.

Sure, Matt. Starting about a 1.5 years ago, we really took a look at the high value businesses that were industrial and began to invest in terms of engineering and sales teams. And so really in the planning period, we're talking about is the 3-year strategic planning period. And we're seeing good building and quotations and focus on those areas. So it will be a long-term objective. It won't just be during this 3-year planning horizon.

Okay, great. Then finally for me, could you differentiate demand in U.S. versus Europe? Maybe quantify the degree to what Europe sales declined? And then maybe the low tax rates suggest that Europe might have been about breakeven in the quarter. Am I correct with that assumption?

Well, if we do -- I would tell you this. If you look at distribution of income outside the United States that to your point, Matt, generate the tax liabilities or generate the tax provision that we'll make in any given quarter, those are primarily a function of our Bronto and VAMA businesses. The disclosure of our segments do incorporate Bronto. So in the aggregate sense, because we booked a provision, we did have some overseas profits, largely attributable to our European businesses. With regard to the order, your question on orders outside the United States versus Europe, and I think that was where you were headed, overall orders outside of the U.S., both international export orders and softness in Europe did have a pretty significant effect on the overall decline in orders. We do not break that number out by geography more specifically than that.

All right. Well -- but I mean, generally, were they materially weaker than the U.S.?

The international orders were a significant driver of our year-on-year decline.

And we'll move on to Steve Barger with KeyBanc Capital Markets.

I just want understand some of the assumptions. I think you said the end market uncertainty is factored into the guidance. Does that mean you assumed that current international activity stays flat with where it is for the rest of the year to get to that $0.55 to $0.65 range?

We do. At this point, we do, yes.

Got you. So obviously, any improvement would potentially provide upside to what that range suggests?

That's right, yes.

Okay. And how did April trend compared to 1Q? I think you said that March was up year-over-year on orders. Is it your confidence in -- is there something that you're seeing from an inflection point standpoint? Or is this just confidence in driving the things that you can control internally that allowed you to put out the full year outlook?

Yes, let me start with that one just with regard to assumptions. We did, to our point, we did see a modest improvement in order rates during the month of March in the context of the overall first quarter decline of 14%. Steve, we're really not in a position to comment on April at this point in time, but we do see significant opportunities coming from both those internal initiatives, as we discussed earlier, and some of the growth outlook points that Dennis outlined, particularly in regard to the improving sales order quotation pipelines that we're seeing really across the company. Other important assumptions, as you think about the fiscal year, would be the fact, and we talked about this in the fourth quarter, about $13 million to $15 million capital expenditure over the course of the year as well as right now we would estimate full year tax rate to be about 15%.

15%, okay. And so to that CapEx point, on the last call, we talked about how 2012's free cash flow from continuing ops is around $36 million. I think the expectation was that 2013 could exceed that through the margin improvement and the benefit from working cap. Is that still the general roadmap or the way that you're thinking about things?

We are still working toward continued improvement in working capital and cash flow generation. And really, as the fourth quarter illustrated, we can have very dramatic turnarounds from a working capital standpoint in the business, and that has fundamentally not changed. The overall thesis of Federal Signal to generate positive cash flow from operations remains intact. We had a considerable number of planned and understood cash obligations in the first quarter.

Sure. And you talked about inventory increasing due to finished goods. Is that finished goods increase accounting for more than the $6 million increase in inventory from year end?

The majority of the increase is attributable to -- from December 31 to March 31, the majority of the increase is a function of finished goods inventory, a little bit of an increase in work-in-progress, and raw material inventory actually declined.

Okay. And for the finished goods, is that stuff all scheduled to ship in 2Q or does some of that ship in the back half?

Yes, I mean this is Bronto ESG. We don't build it unless we have customers, so a lot of that will actually flow in Q2.

The Bronto, the Bronto, we actually bumped up a little bit ahead of the summer as we're doing a relay out of the plant in the summer. But it's all for stated orders.

Okay. And do you have a target for year-end inventory?

We're not guiding the balance sheet at this point, Steve.

Okay. And going back to the free cash flow plan. Capital allocation, should we expect that deleveraging is the primary use?

At this point in time, to the extent that the company generates free cash flow, the plan is to allocate it to debt reduction.

[Operator Instructions] Next, we'll move to Walt Liptak with Global Hunter Securities.

I wanted to ask just a couple on Dennis' comments. The interest expense you mentioned, $10 million savings, could you give us a quarterly number? I'm at I think a little bit above $3 million per quarter, but I just want to check the number.

Yes. Walt, we've really restricted our guidance on interest expense to the full year numbers, kind of like the way we've treated capital expenditures and tax rates. That $10 million number is an approximation of our year-on-year savings that we see from interest expense, and they don't include the refinancing cost or the cost associated with initiating the new credit agreement, which were approximately $2 million. So as you look at our interest expense over the course of the first quarter, we really only incurred a small portion of the benefit of those lower rates during the back half of March subsequent to the actual refinancing, and it's really Q2 through Q4 that we'll get the full benefit of these lower rates. So hopefully, that helps in the context of that $10 million.

Okay. Well, let me just ask you this way so we can move on. You did $21 million of interest expense in 2012. So you're saying that your interest expense, all-in excluding that charge, is going to be $10 million lower, so roughly $11 million?

In that range.

Over the next year, though. This year, we have all the expenses.

Okay, got it. And then second half, do you have a ballpark on the hearing loss expenses?

Our hearing loss expenses have varied significantly from year-to-year, and we typically don't disclose that number.

Okay. But that will be tax expense -- or I mean, a cash expense?

Yes.

Okay. And then I wanted to ask about Bronto and the profitability outlook. The backlog that's there, is the profit -- what does the profit margin look like in the backlog and what does the pipeline look like for incoming orders through the year?

Walt, the backlog is pretty strong. But as far as the order in-rate inflow, it's really a month-to-month. We have a backlog that's out through October. But it's going to vary from quarter to quarter depending how many machines actually get out to the door and get billed. There's a lot of pricing pressure on Bronto, and we've been able to be competitive. So it's really a mixed bag in terms of trying to forecast or at least outwardly what we think it's going to be.

Yes, Dennis' comments incorporated, Walt -- sorry, just to -- I also want to make sure that the point was clear in our prepared remarks. We feel very good about the second quarter. We do anticipate that we'll see a year-over-year improvement in operating margins in Bronto, and we have very good visibility, obviously, into the production schedule for the second quarter. To Dennis' point, getting out beyond that, our production schedules do take us past the middle of the year, but getting out beyond that, we do get more speculative given some of the broader market considerations we outlined on the call.

Okay. And if Bronto were to pick up in the second half of the year and you got some nice orders, you would think that those would be Asia-related?

Yes, it's hard to predict, but generally, Europe is down. So it would be Asia Pacific, U.S. market. We have some activity in the U.S. market, but not Europe.

Okay. And then Dennis, I wonder if I could ask you just about doing the 80/20 and restructuring given the mixed municipal markets and what we should expect. Obviously, we have some of your margin targets, but is it -- we're seeing the margins pick up now. Would we see a lot more of it? Or how should we think about the 80/20 that's going on and what things might look like as business picks up?

Yes, I think when we gave you the year estimate on EPS, we're kind baked in our thoughts. But primarily we still have a pretty good amount of 80/20 on the expense side that we can do. We're doing product line simplification still pretty actively in our PSS business. The focus on the productivity and the efficiencies in the plants still will continue to give us improving margins, we think. But probably the biggest thing is the effort we've made in the last 1.5 years on adding engineering and sales forces in those active areas where we're highly profitable. We did talk specifically about Jetstream. Jetstream is one of our most profitable businesses, and it's also one where we have a very small market share internationally, fair market share domestically, so we see growth. The Safety and Security, every day a new event occurs that's tragic, and the demand for those products seems to be really -- obviously, the interest has peaked. So as we continue to go through the year, there will be both benefit of high-value new products end markets in the high-margin areas as well as the sustained work on the cost savings.

Okay, great. Can you give is a ballpark about the revenue size for Jetstream and the Safety business?

Yes, we don't break those out. We don't break those out, Walt, in terms of the part of the other divisions.

Okay. But you highlight them because they're big enough to move the needle?

We highlight them because of the high-value opportunity that we see and we put a lot of resources into growing them, so...

Right, and Jetstream is part the ESG segment and the Systems opportunities represent a subsegment of SSG.

[Operator Instructions] And there are no further questions. I will turn the call back over to Dennis Martin for any additional or closing remarks.

Well, thanks again for joining our call today and for supporting Federal Signal. We have a lot of good things going on, and we're going to stay active and continue to try to drive value. So thanks again. Enjoy your day and your week.

And that will conclude today's call. We thank you for your participation.