Federal Signal - Earnings Call - Q3 2013

Transcript

Speaker 0

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

Speaker 1

Good morning, welcome to Federal Signal's third quarter twenty thirteen conference call. I'm Brian Cooper, the company's Chief Financial Officer. Also on this call with me are Dennis Martin, President and Chief Executive Officer and Jennifer Sherman, Chief Administrative Officer and General Counsel. We'll refer to some presentation slides today as well as to the news release, which we issued this morning. The slides can be followed online by going to our website federalsignal.com, clicking on the Investor Call icon and selecting the webcast.

We have also posted the slide presentation to 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. And now I'd like to turn the call over to Dennis Martin.

Speaker 2

Thank you, Brian, and welcome to those who are joining us on the call today. We are pleased to be here to talk about our continuing progress and our strong showing this quarter. I'll start by providing my perspective and then Brian will review our financial results. Jennifer will wrap up our prepared comments with an update on our corporate initiatives. As you can see, our third quarter results were excellent across the board.

Orders were up 5% and backlog remained healthy. Sales were up 13%, operating income was up 52% and our operating margin was 9%. It's the highest it's been since the 2007. And as is expected, we continue to benefit from our refinancing with much lower interest expense. Our adjusted EPS is therefore $0.26 per share, up 160%.

These results reflect good performance across all three business groups as well as low rate of spend at our corporate level. The Environmental Systems Group and Bronto both improved sales and margins versus last year. Meanwhile, the Safety and Security Systems Group recovered to post results comparable to last year's levels from much softer results in the first half of this year. Our results also reflect some improving momentum in our markets as demand for our products has remained good, but it does vary by market. On the municipal side, most areas of spending in the marketplace seem to have remained relatively constrained.

The bottom of the cycle was probably down about half from our peak levels in 02/2007. However, we have started to see some modest recovery in products that are linked to the police vehicles and targeted security needs. Municipal demand for sewer cleaners, which also serve the industrial needs has been strong and it seems to be back at or near peak levels. Other industrial markets in North America have produced relatively well for us, although we did see some push out on the timing of planned turnarounds in our Jetstream business. Some of the Jetstream activity, which we would normally see in Q3, did move to Q4.

We also experienced further delays on ordering for industrial systems within SSG versus our expectations, although our funnel of opportunities remains very active. International markets have continued to be soft, particularly in Europe, where demand also is down more than half from what it had been in the peak a few years ago. Even so, Bronto has largely maintained its top line by replacing its European sales in other geographies, albeit with somewhat more competitive pricing and gross margin. Our Police business in Europe has fought to remain profitable as well. These market realities have helped our order flow, which remains solid.

And we believe that overall our backlogs are at healthy levels. During the second quarter, we had deliberately worked down backlogs at Vactor that had become unnaturally extended. In this quarter, ESG orders were up 17% and essentially matched sales during the quarter. At Bronto, orders were down during the quarter. However, Bronto is subject to large quarterly fluctuations.

It still has a significant backlog and we expect orders for the full year to be similar to the level of 2012. At this point, I'd like to focus on operating margins. We set the target ranges in the right column for our businesses a few years ago. I believe these ranges remain appropriate at this time. Although, we will continue to evaluate the targets as the businesses evolve, I am pleased with the progress we continue to make.

For the third quarter, ESG's margin of 10.7% is up nicely over the prior year, although a bit off our quarterly trend. That is a normal variance based on higher percentage of sales from lower margin products and geographies during the quarter. Our ESG margin should generally be in the top end of its range over time as we grow with Vactor and Jetstream. SSG margins for the quarter is lower than last year, but up significantly compared to the preceding two quarters. You will recall that SSG operating margin had dipped into the single digits, including 6.3% last quarter.

And the 12.2% margin this quarter is much closer to the norm for the business. The decline in Q1 and Q2 was largely a result of cost and distractions related to our ERP system go live at SSG during the second quarter. We now have most of that behind us. Bronto's operating margin was good during the quarter as well at 8.5% and I continue to feel good about our progress in that In any given quarter of course, we can experience significant fluctuations in Branto's results based on shipments and product mix. All of our businesses, we continue to work on eightytwenty and continuous improvement opportunities, which are driving near term performance and certainly have contributed to another exceptionally strong quarter.

We are also moving forward with growth initiatives, which Jennifer will discuss after Brian reviews the financials in a little bit more detail. Thank you, Brian.

Speaker 1

Thanks, Dennis. I'm going to highlight some specific things in our financial results for the quarter and of course, fuller detail is included in today's news release. First, Dennis already mentioned that our adjusted earnings for the third quarter were $0.26 per share, up 160% compared to $0.10 per share in the third quarter last year. The adjustments to reported GAAP earnings this quarter are offsetting tax items, but we have noted them for consistency and for comparison to prior periods. On the P and L, net sales of $2.00 $9,000,000 were up 13% over the third quarter last year, driving an 11% increase in gross profit.

SG and A expenses were lower versus a year ago, reflecting much lower corporate expenses, which I will discuss later. As a result, income jumped 52% to $18,800,000 Interest expense was $1,500,000 down significantly compared to last year as a result of our refinancing in March. It also was down slightly compared to our second quarter this year, mostly because of declining debt levels as we have used cash flow to pay down debt. In addition, we had debt settlement charges of $1,900,000 in Q3 last year. Finally, tax expense remains very low with an effective tax rate for the quarter of only 3%.

As we explained when we released our valuation allowance last quarter, we retained the valuation allowance amount intended to cover applicable tax expense for the balance of this fiscal year. In other words, our effective tax rate on our U. S. Sourced income is targeted to be close to zero this year. On a fully taxed basis, excluding discrete items and benefits from valuation allowance, our income tax rate for 2013 would have been about 33%.

Next year, in 2014, our cash tax payments will remain low and continue to reflect the benefit of utilizing our carried forward net operating losses and tax credits. However, the income taxes before discrete items that are reflected in our 2014 financial statements should reflect an effective income tax rate percentage in the low 30s. Moving on to our group results, you can see that orders during the quarter were up at ESG, flat at SSG and somewhat soft at Bronto, as Dennis has already discussed. Sales were up 11% at ESG compared to last year's quarter. We continued to benefit from capacity and efficiency improvements at Factor.

Jetstream was up less than we had expected because of the push out in plant turnaround timetables that we mentioned earlier. Both Elgin and our parts business at FS Depot were also up. Leveraging the higher sales and more profitable mix compared to last year, ESG operating income was up 30% to 12,100,000 At SSG, sales were flat compared to last year and operating income of $7,000,000 was down 10%. However, it is up significantly compared to $3,600,000 in the second quarter, reflecting both recovery from temporary disruptions related to our ERP system implementation and relative stability in product demand. Turned in a strong third quarter with sales up 51% and operating income up 74%.

Fronto is benefiting from an uptick in deliveries to The Middle East, Europe and The U. S. During the quarter, as well as from our ongoing work on production efficiencies. Bronto continues to be subject to variability based on the mix and timing of project deliveries, but the improvement reflects a positive trend resulting from a lot of good work. Corporate operating expenses for the quarter were $3,600,000 reflecting lower incentive compensation expense, lower medical plan costs and a one time reduction in corporate costs from a change in corporate allocations.

We also continue to benefit from low activity and costs related to hearing loss litigation defense. While the timing of hearing loss costs is difficult to predict, it appears that they will remain low for the fourth quarter as well. Reflecting all of these factors, Q3 consolidated operating income was $18,800,000 up 52% against the prior year quarter. Turning to the balance sheet and cash flow. Net cash provided by continuing operations was $26,400,000 during the quarter and $37,300,000 year to date with strong positive contributions from earnings as well as some working capital improvement.

Our cash flow allowed us to raise our borrowings by more than $16,000,000 during the quarter. Total debt of $128,000,000 at the end of Q3 was down $30,000,000 since the beginning of the year and our leverage ratio dropped to 1.7 times adjusted EBITDA. This is well within a comfortable range. Based on our lower leverage, the average interest rate paid on our debt should drop to about 3% during Q4. Finally, would note that our strong performance this quarter brings us to adjusted earnings of $0.62 per share through nine months.

These adjusted results exclude debt settlement charges from Q1, restructuring effects and the release of income tax valuation allowance. At this stage, it seems likely that for the fourth quarter, our markets will remain stable, SSG can sustain its recovery, hearing loss costs will remain low and our effective income tax rate will be low. As such, we are likely to exceed our previous indications of potential adjusted earnings per share for the full year. We believe that the last two quarters are fairly representative of what Federal Signal can achieve and we expect the adjusted fourth quarter results to be comparable to our second and third quarter levels. That concludes my comments on the financial results and outlook.

I'd like to hand off to Jennifer Sherman to talk about the company's twenty thirteen goals and initiatives.

Speaker 0

Thank you, Brian. I'd like to review our progress and provide updates on the twenty thirteen goals that we set forth earlier this year. Our first goal was to refinance the business. We've completed our refinancing and our businesses now stand on the firm foundation of a healthy balance sheet. As Brian described, we continue to reduce debt, our interest expense is down significantly and our leverage is now under two times EBITDA.

With this capital structure, we have the liquidity and flexibility that we need to support our businesses and invest for profitable growth. Our progress also provides flexibility to consider funding dividends, which our Board does on a regular basis. Second, we are committed to growing the business organically. In that regard, we've already made a number of targeted investments and organizational changes. Earlier this quarter, we announced the hire of Doctor.

Scott Robar to serve in the newly created position of Vice President Business Development and Innovation. Doctor. Robar will work closely with our marketing and engineering team to assist with innovation initiatives and new product development processes. We've also made a number of organizational changes to refocus our engineering team and improve alignment with our marketing efforts. These actions strengthen initiatives started last year that are now beginning to show results.

For example, in our public safety businesses, the percentage of our 2011 sales from new products was in the high teens. This year, we expect new products to represent more than 30%. On the investment side, as we move into 2014, we are in the process of implementing capacity expansion within our ESG businesses to meet customer demand and support growth. This includes the addition of new production lines at Vactor and Elgin and the leasing of an adjacent facility to supplement Jetstream capacity, efficiency and product development. Such investments are targeted to our businesses with the best opportunities to drive our organic growth.

A related initiative is our focus on diversifying our customer base. Historically, approximately 60% of our revenue has derived from municipal markets. While municipalities will continue to be important customers, our organic and M and A growth initiatives generally will focus on expanding our industrial customer base. Industrial markets offer more promise to further improve our operating margins, while reducing earning volatility over the longer term. To give you a flavor of the organic initiatives, we currently have R and D projects in progress to develop a new family of Jetstream pumps and accessory valves for high flow applications and to expand our Industrial Systems product line to serve additional global markets that operate on European standards.

In our Vactor business, we introduced the Vactor Track, a data technology solution that allows customers to monitor and review their sewer cleaning operations. And our Elgin and Vactor teams have developed innovative horsepower management solutions to help customers avoid the rising cost of complying with future auxiliary engine emissions. We also continue to focus on reducing the breakeven levels and product costs in our municipal based businesses and to improve manufacturing efficiencies at all of

Speaker 3

our

Speaker 0

businesses. We started our eightytwenty Lean initiative program when Dennis began as CEO three years ago and they have been a critical part of the margin improvement in our businesses. Steps taken during 2013 include moving a Vactor product line and small component welding to our Elgin facility, significant reorganization of Branto's Pori facility, targeted capital investments in machinery and paint systems in our plants and the completion of the last implementation of our ERP system providing for an integrated North American platform for the company. As we continue to eliminate low value tasks and products and get more efficient with others, we can reassign resources to further focus on our growth initiatives. Underlying the success of all of these initiatives is our focus on building our teams and developing employees at all levels.

Attracting, developing and retaining highly qualified people is imperative to our success as a company. As I've already mentioned, we attracted an exciting candidate to fill a newly created Vice President position for Business Development and Innovation. Also in 2013, we have made a couple of key additions to our finance department at the corporate level and at our Bronto business and we brought back a highly effective leader for our FS depot business who's already made a big impact. We've also made some important internal reassignments in engineering, marketing and other disciplines to put key talent where it can best help us succeed. Such changes will continue emerging from both our business strategies and the talent development and succession management processes that we've implemented this year.

In the three years since Dennis stepped in as CEO, we've made a lot of change in the business, focusing more effectively on our customers, innovating the products that they want, improving our processes and efficiency, building our teams and investing in our people. We have wanted to capture what we've been doing and how we intend to continue running the business in a redefinition of our mission and values, which we are in the process of rolling out. Our mission is providing products and services to protect people and our planet. And we express our values with a clear statement that we operate with the highest principles and deliver results through customer focus, innovation, continuous improvement, teamwork and investing in our people. I will now turn the call back over to Dennis for closing remarks.

Speaker 2

Thanks, Jennifer. As we look to 2014, we are completing our strategic planning cycle and we'll be better prepared to comment on our goals for next year on our next call. But I would like to provide some direction today. We believe that our business is now on sound footings. We have improved results by doing the things that Jennifer just described from customer focus and eightytwenty efforts and an appropriate focus on our people.

With our foundation reestablished, we've been turning our focus more toward growth, profitable growth. There is a better potential in our industrial markets and our aim over the long term is to grow our industrial businesses at a faster pace than our municipal business. We expect this to come from a number of directions. We have already set in motion expansions of plant capacity within ESG and we are wrapping up similar work at Bronto. This provides room to run with some of our best products for industrial markets.

We also see promising growth potential in our industrial safety and security applications. Finally, to complete the picture, we will look to our innovation efforts and to acquisition targeted around and adding product lines to complement our existing businesses and distribution channels. These are ambitious ideas. And as we flush out our opportunities, we are committed to the same disciplined approach that we've applied over the last several years to continue building value in Federal Signal. So with that, we'd like to open the lines for questions.

Speaker 0

Thank you. We'll go first to Walt Liptak with Global Hunter Securities.

Speaker 4

Hi, thanks. Good morning everybody and great quarter.

Speaker 2

Good morning, Walt. Thank you.

Speaker 4

I have a couple of quick questions. First, just on the guidance for the fourth quarter. I just want to make sure I'm interpreting it right that you're talking about two zero nine million dollars in sales and about $0.26 for the fourth quarter too. Is that right?

Speaker 1

Well, what we said Walt and what we're comfortable saying at this point is that we'll be in a similar range to what we've been in the last two quarters on the bottom line. So we weren't trying to guide toward any particular top line and be too specific on the earnings per share. Obviously, we've done pretty well this quarter. We've got a good foundation. A lot of that will carry forward.

Speaker 4

Okay, great. And I wonder if you can provide a little bit more color on the corporate expenses. Was it the legal expense that was down in the quarter? I think in the press release you called out incentive comp. I wonder if you can just go into that a little bit more.

Speaker 1

Well, those really were the three big things. Incentive comp was just an adjustment based on where we're coming out for the year so far. Primarily, there was a change in corporate allocations, but probably the biggest impact, especially versus what we might have anticipated in some scenarios is very little costs related to hearing loss litigation.

Speaker 4

Okay. On the incentive comp part of it, you're achieving better results than you thought at the beginning of the year. Wouldn't incentive comp be going up instead of down?

Speaker 2

Well, redesigned our incentive comp plan two years ago to be very highly performance based on the long term. And we have different components to that. One is operating income, but cash flow performance is the second piece. So I think we just there's a mix there that last year we were at 200%. This year we're not going be at 200% as it comes to the cash flow piece.

Okay. The payout will be lower.

Speaker 4

Okay. Got it. In the fourth quarter, so we could use a similar corporate expense to what we saw in the third?

Speaker 1

It will probably run a little higher because we had some of these onetime effects from allocations and so forth.

Speaker 4

Okay. Okay. And then turning to the growth aspirations. I'm wondering about acquisitions and I get it with focus on industrial. But in the mission statement you talked about how you're focused on safety markets, but then it seems like you're moving more towards industrial.

What should we expect in terms of new products like Yes.

Speaker 2

May be confusion Walt on the way we're stating it. One of our largest growth opportunities is the safety and security industrial side of our business. All these natural events and unnatural events that occurred will drive a large growth and is already driving a large growth in that business, but we consider that to be an industrial application in many cases. So it's not a departure from the safety side. It's a mix of the products.

Speaker 4

Okay. And as you look at acquisitions though in the future, are you looking at anything industrial? Does it have to have the safety theme to it?

Speaker 2

No, no. Be industrial but related to our core manufacturing competencies or our core distribution competencies. So the customers that we call on an oil and gas, paper, industrial, refining, municipality, safety, security, any of the close ties that we have either by market or by manufacturing core competencies, we're open minded too. So but it has to make sense for the company. We don't we want to be very diligent in our direction, but it needs to line up with our core whether it's market or manufacturer.

Speaker 4

Okay. Got it. All right. Thanks guys.

Speaker 2

Thank you.

Speaker 0

We'll hear next from Steve Barger with KeyBanc Capital Markets.

Speaker 5

Hi. Good morning, Sorry about my voice. Have a little bit of a cold. But as you shift from a focus on kind of fixing and stabilizing to more growth, are your innovation initiatives more focused on taking share in existing markets? Or are you pushing into new markets to broaden out the product line?

Speaker 2

It's really both, but there's an adjacent piece to many of our products, our markets, Steve, that we have opportunity in. Again, as long as it fits up with our core manufacturing capabilities and our distribution markets, we're going to align that way. I'll give you an example. One example is our Jetstream business. We have only 5% we think of the global market in Jetstream products.

And there are certain product adaptations we have to make to our U. S. Product for those markets. So we see the potential and we have the relationships. So we are making those changes.

In other cases, we're going looking deeper into the oil and gas and energy related markets. So either deep in within where we are or adjacent seems to make the most sense to us on the surface.

Speaker 5

And as you think about making a change to a product line like Jetstream, is that something where it's a fairly easy thing for you to incorporate? And I'm not trying to make light of it, you know how to do it, you can do it and you can push into that new market quickly and really drive a more rapid top line?

Speaker 2

That's right. It's more core competency. In fact, one of the products we brought out this year was a three fifty horsepower geared driven product for the international market, which we didn't have a year ago. And we're looking at going to a six fifty, which we've been able to bring more rapidly to market as you point out because it is competencies in areas that we have. And so we're going to try to do more of that unless

Speaker 3

of

Speaker 2

course we see an acquisition that gets us a little further afield, but also within the same neighborhood, we may be able to pick

Speaker 4

up their skills. So as you've done

Speaker 5

your market research on where you want to focus on product innovation, is it do you think this can have an impact on twenty fourteen results in terms of putting new product in the field and really starting to

Speaker 2

see the revenue benefit from that? We think we will begin to see it. We think we already are starting to see it. But it will be a building process, but yes.

Speaker 5

But based on what you can see right now, I know you're not giving guidance for 2014, but is this the kind of thing where you look at the normalized growth rate of Federal Signal past and think that you can take a fairly significant step up in terms of how we should think about revenue growth going forward?

Speaker 2

Yes. I think our approach to it is going to be to try to grow the municipal markets faster than the rate of municipal markets grow on their own. And so we are doing things in the municipal market today to grow faster than the market. And we think industrially, while it will take time, we think we can begin to grab additional market share in areas and in products that we or just bring it to market. So we're not going to put a huge number out there.

But if we do intend to have municipal sales continue to grow and have industrial become a much, much larger part of our business, So it should start to grow and we should see that over time.

Speaker 5

And when you think about these new product innovations, is higher margin or a higher return on a product line a gating factor for where you're going to deploy capital to address market holes that you see? It is. It exactly is. Excellent. So great progress towards the goals this year.

Clearly results have come in faster than you anticipated. Including the guidance for 4Q over the last three quarters you had a run rate that's obviously better than $0 Do you have a line of sight on earnings growth for FY 2014? Is it reasonable for us to think about on the bottom line continuing to grow at a solid pace next year?

Speaker 2

I guess I would ask you to step back and think about the lack of expenses that we've had in the hearing loss side, because that will be a very large variable for next year and this year. In some years, we've spent as much as $10,000,000 on hearing loss, some years $5,000,000 some years $1,000,000 or 2,000,000 So a big piece of any forecast that we would try to guess because it would be a guess, would be trying to guess what that cost would be over the next year. And so we expect to continue to improve our operations with eightytwenty with better price controls and higher margin products. So we continue we expect to continue to go in the right direction. But to try to put a number on it because of the variables surrounding the hearing loss Steve, be it would be very difficult at this point.

Speaker 1

And Steve, I think you mentioned $0.90 We're at $0.62 year to date. Our last two quarters were $0.23 and $0.26 We were trying to signal that we are most likely going to end up in a range close to that, the $0.23 to $0.26 which I don't think gets us all the way to $0.90

Speaker 2

Yes, a little bit under $0.09

Speaker 5

If you include 4Q?

Speaker 1

Yes. Correct. Yes.

Speaker 5

That's all I'm saying. And then looking forward, I'm and I understand the hearing loss is something you can't control. But as you think about things you can control, you the question is do you have line of sight or confidence that you can drive earnings growth ex whatever happens with hearing loss? Because I think the bottom line is think that market is a decision about hearing loss.

Speaker 2

Right. We think the market momentum should with our backlogs and with the work we're doing continue we should continue to have a good year at least through the first half of next year. And we don't have much visibility much beyond that, but we don't see anything that's going to derail progress.

Speaker 5

I'll get back in line.

Speaker 2

Thank you.

Speaker 0

And Matt McConnell with Citi has our next question.

Speaker 6

Thanks. Good morning. Great quarter.

Speaker 2

Thank you. Good morning.

Speaker 6

So Dennis you mentioned that municipal markets are still relatively constrained yet. You are seeing an increase in municipal sweepers and I think you called out police markets getting better. So I wonder if you think demand is at an inflection point here? Or I know it's not a robust recovery, but how do you gauge sustainability of some of the end market increases that you're seeing

Speaker 2

Right. That's a on both question. The one market area that we do have actual facts is the police car registrations are reported for the country and are factual data. And as Jennifer pointed out on our last call, they dropped from something in the 80,000 per year a couple of years ago down to I think high $30,000 per year. And this year we think they'll be into the low mid 40,000 new vehicles being registered something like that.

And I was out with some police departments last week on the East Coast and they're all running their cars longer and they're doing more maintenance. So they want to continue to spend. So I think the police market U. S. Is at an inflection point.

It has come up a little bit. We'll continue to creep a little bit, but not make a dramatic change. In Europe, we don't see any indication that there's a big change. We've seen a few more orders over there. But again, that's not a relative straight up kind of thing the way it fell.

The streets paper business has been better for the last two years, but well below the peak, but better than the last two years. And the vacuum truck business has been very strong. We've seen because of the environmental requirements that drive vacuuming, we've seen vacuum business be at good levels for both the municipal and the industrial. So we think it's past the inflection point on the vacuum trucks. There's still a lot more room to go we think on police fire and amber lights.

And certainly Bronto all the European business or much of the European business of Bronto disappeared, but they've been able to do more globally to make up the volume. So we think there's not even there's no inflection point on the Bronto sales in Europe. We think that's still on the bottom lane flat.

Speaker 6

Okay. Great. Thanks. And following up on the police car improvement. I know you've expanded your product line quite a bit there.

So how much of your recent improvement is the market? And then how much might be share gains the

Speaker 2

actually done two things in the police business, Steve. We eliminated 14,000 part numbers, while bringing out some new products that are more suited for the current market demand. So we think that we have picked up some market share in the Police side. We know we have a few more Police state agencies than we had in the previous years. So we have a few points of market share we think.

But I think some of that is some of these policemen I was talking to last week have run their cars all the way up to 220,000 miles have replaced engines in police cars because they can get maintenance dollars instead of capital dollars to buy new cars. So we think that it really hasn't started up fast, but it will pick up some. But we don't think it will ever return to the high level of 80,000 a year. We think it will probably get back up into mid-fifty thousand cars a year or something. Of course, we don't know it will happen.

Speaker 6

It's still meaningfully above where you are now.

Speaker 2

Meaningfully above, right.

Speaker 6

And if I could switch gears to Jet Stream, the push out from third quarter to fourth quarter, what are the margin implications from that? And is that going to be a big benefit in the fourth quarter? And maybe just a way to start the answer, could you give us a sense of how Jetstream's margins compare to the ESG average? I know they're above, but any kind of magnitude would be helpful.

Speaker 2

Yes. We don't really break that out. It is above. It's much better, But you won't the size of Jetstream relative to the overall ESG group, you won't see a huge noticeable improvement with the return of that business.

Speaker 6

Okay. Great. And maybe last one for me. It looks like you had a 4% price increase in ESG or at least a four point benefit from price increases. So is that a function of the work you've done on new products or a function of the market improving?

Or is there something else that's driving that pricing power?

Speaker 2

Yes. I that what you're seeing really is an improvement in margin that has come from some price activity not 4% and margin improvements through eightytwenty in the plants and mix, because the mix makes a huge difference in the margins. So it wasn't at all price increase. I'd love to get 4% pricing.

Speaker 1

Got A of it is mix. We're selling more of the higher valued higher margin products generally.

Speaker 2

Yeah. The Vactor products are higher margin. International orders depending on the shipments there could be lower. So it's really mix gross margin activities in the factories and some price, but not all price.

Speaker 6

Okay, great. Thanks very much. Thank you.

Speaker 0

We'll move on to Brad Evans with Heartland Funds. Good

Speaker 1

morning, team. Good morning, Brad. Good morning, Brad.

Speaker 3

Congratulations. It shows the power of focus and a strong balance sheet. So congratulations everybody.

Speaker 2

You. Thank you.

Speaker 3

Great to see. I just want to clear up a little confusion. I think that might be as investors think about how to think about Federal Signal into 2014 and perhaps beyond. But if I'm doing the math correctly based upon kind of the guidance you've given for the remainder of the year and if you add back stock based compensations for an adjusted EBITDA number, It looks like you're going to come in around 80,000,000 to $85,000,000 of adjusted EBITDA. Brian, is that about right?

Speaker 1

That is, yes.

Speaker 3

Okay. So capital spending this year, you're still in the 13,000,000 to $15,000,000 range. Is that correct?

Speaker 1

Yes. And that's sort of our outlook for next year at this point, although we haven't put all the plans together.

Speaker 3

Got it. And so let's just take the high end and say $15,000,000 And your interest expense this year is going to be for the full year because of the high burden you had in the first quarter, you're still going to run about $8,500,000 for interest expense, so call it $9,000,000 And your tax bill for the full year, it looks like you're going to still run very low numbers. So call it 4,000,000 or $5,000,000 correct?

Speaker 1

Yes. It will be I don't know if that's the right number, but it's on it's in the low below 10,000,000 probably low teens.

Speaker 3

Got it.

Speaker 2

I'm sorry, what do you

Speaker 3

think the effective tax rate will be for the fourth quarter?

Speaker 1

We have some moving parts on it. So I'm not sure how meaningful it will be. I'll tell you on the cash side, The U. S, we are fully sheltered. And the only question is whether the valuation allowance that we retain covers it completely.

So that's it depends on how well we do. The rate will be a little higher than what we've seen recently.

Speaker 3

Got it. Okay. So that's I guess that's the important point is that. So if you take the taxes the cash taxes, the CapEx and the interest expense you're looking at roughly deducts of roughly $30,000,000.15000000 for CapEx, 10,000,000 for interest call it brought it up and 5,000,000 for taxes. So you should generate about before working capital changes you're generating about $60,000,000 in free cash flow?

Speaker 1

Your math is pretty good. Yes.

Speaker 3

Okay. So the thing that people have to consider is that next year you're going from a as you rebooked the deferred tax asset, you'll go from a non book taxpayer to a full statutory taxpayer, but you'll be deferring 80% to 90% of your book tax bill, correct?

Speaker 1

We'll be using the assets up yes.

Speaker 3

So you'll be deferring 80% of the current of the tax bill that will be on income statement next year correct?

Speaker 2

That's the tax

Speaker 1

Yes. It depends on the mix. Obviously overseas we tend to be paying more of the full overseas tax rates.

Speaker 3

Got it. I think point is that if people are looking at net earnings, they're missing the forest for the trees for you next year because what will be more important in valuing the company will be your ability to grow EBITDA, which it sounds like you feel you have a line of sight towards. CapEx will be about the same interest will be down substantially and taxes on a cash basis should be up but not meaningfully. So as you grow EBITDA next year, the earnings the GAAP earnings will be impacted by that full statutory tax rate. But your ability to generate even further amounts of free cash flow potentially should be in play, correct?

Speaker 1

That's exactly right. That's exactly right. The will be pulled down on the financial statements, but we're not paying more taxes than we would have otherwise. So it will be a little more difficult comparison for some people to make. But we will still be generating significant cash next year.

Speaker 3

So the key metric again is going be EBITDA and free cash flow generation for the company, which has come into full force this year?

Speaker 1

Those are certainly the metrics that we focus a lot on.

Speaker 3

Okay. Well, I would urge you to condition people to look at that because as you think about the earnings numbers next year they'll be obviously very polluted by the tax implications. But in any event, congratulations. You guys are on a great path. One question just on operations.

Dennis, you just speak these tragedies within the malls and the airports of late, how big of a business is that for you today? And what would that opportunity potentially be if it were to manifest itself into a market?

Speaker 2

Yes. Very good question. And I don't think those things are going to equate immediately Brad to big levels of business. The school activity in fact, you and I talked about that last year. We've ended up in the period of time since that occurred last December have picked up about six or seven actual orders.

So we'll see some increase, but I don't think it's going to dramatically drive large increments of new business.

Speaker 3

Okay. Good luck you guys. Appreciate it.

Speaker 2

Thanks. Thanks, Brad.

Speaker 0

Thank you. And Mr. Martin, at this time, I'll turn the call back to you for closing remarks.

Speaker 2

Well, you very much for participating and we're proud of the quarter we've had. We'll keep working diligently to have continued success and we thank all of our teams and people for their contributions and look forward to our next call. Thank you very much.

Speaker 1

Thank

Speaker 0

you. Again, that will conclude today's conference. Thank you all