Federal Signal Corp (FSS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Federal Signal Corporation earnings conference call. My name is [Carmen], and I will be your coordinator for today.

At this time, all participants are in a listen only mode. If at any time during the call you require assistance, please press star-0 and the coordinator will be happy to assist you. Later we will conduct the question-and-answer session.

I would now like to turn the call over to your host for today Mr. Bill Barker, Senior Vice President and CFO. Please proceed.

Thank you. Good morning and welcome to Federal Signal's second quarter 2011 conference call. Sorry for the delay. We had a few technical difficulties with the slides, but I think we're up and running.

I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Dennis Martin, our President and Chief Executive Officer, and Jennifer Sherman, Federal Signal's 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 of you who have joined us today. The second quarter was an encouraging for Federal Signal. We generated good revenue and profit growth sequentially and versus last year. Our order growth trend continued with Q2 orders up 29% versus last year. Our orders have increased steadily and sequentially growing from $170 million in Q3 of last year to $241 million in this quarter. As a result, our order backlog now stands at $293 million versus $217 million at the end of the year.

We generated double-digit operating margins in ESG and SSG and are poised to do the same at Bronto in the second half of the. We are seeing traction at FSTech with significant contract wins both domestically and internationally and we generated $15 million of EBITDA and reduced our net debt by $10 million in the quarter.

Bill will cover the financials in more detail in a few minutes, but first I'd like to give you my perspective of the quarter. As I said, we saw some encouraging signs in the quarter across our businesses and I am pleased with the progress we're making. However, we still have work to do as we move into the second half of the year and get ready for 2012.

We generated continued growth in orders and backlog which provides us with a solid base as we move forward. Now we need to be sure we are executing on our margin improvement efforts and turn these orders into profitable growth. We are on the right track as evidenced by both ESG and SSG generating double-digit operating margins on a quarter, but we need to stay focused on our operating improvement to achieve the 2012 margin targets that I have established for each group, which I have aligned in our March call. I will discuss our progress against these 2012 targets a little bit later.

Our FSTech division was selected for several key contracts in the past few months. As we recently disclosed in July, FSTech was selected to upgrade the nationwide electronic tolling system in Turkey. In addition, FSTech was recently awarded tolling contracts from the State of Virginia, as well as three-year contract renewal to provide support for the ports of Los Angeles and Long Beach. Combined, these contracts should generate over $50 million of revenue over the next several years.

In addition, FSTech has numerous other sizeable opportunities both domestically and internationally in the near term pipeline. Our focus is now to make sure that we translate these contracts into a steady profit stream and leverage the success to continue to establish FSTech as the global leader in tolling and intelligent transportation.

Now we need to get our balance sheet refinanced. Bill will talk through the details of it later, but we expect to refinance our balance sheet before year-end, in anticipation of our revolving credit facility maturing in April of next year. We were in compliance with all of our debt covenants at the end of Q2 and expect to remain in compliance through the end of the year and beyond.

We reduced our net debt by $10 million in the quarter and expect to generate positive cash flow in the second half of the year as well. We believe that our good second quarter results, our improving profit trends and our growing order backlog provide a good outlook for the business as we take steps to refinance our balance sheet.

Regarding our expectations for the second half of 2011. For the third quarter, we expect to generate about the same level of operating income as we did in Q2, but we benefited from a tax credit in Q2 that we're not forecasting to repeat in the third quarter. Therefore, our expectations for Q3 -- for third quarter EPS was in the range of $0.06 to $0.09.

For Q4 we expect to more fully realize the benefits of the Bronto order backlog, as well as some of the recent FSTech contract wins. Our outlook for the fourth quarter EPS is in the range of $0.12 to $0.15.

Our forecast for the second half of the year is a bit lower than our previous expectations. The reduction is primarily due to the timing of FSTech contracts I just discussed. While we are winning sizeable contracts and the size of the contracts are as we expected, the timing of these and some of the pending contracts has shifted later into the year than we had originally planned. That means the revenue and profit stream will also start later than we had expected. Thus, we reduced our second half outlook a bit. However, these timing issues on FSTech contracts have not changed our perspective for the 2012 year.

So to sum it up, it was a good quarter and a solid step in the right direction. And the hard work of all of our teams is starting to bear fruit, but we still have lot of work to do in the back half of the year and as we prepare for 2012.

And now I'd like to turn the call over to Bill, who will go through the financials.

Thanks, Dennis. I'll give a really brief review of our financial results for the quarter which are included in today's press release. Looking at our P&L for the second quarter, orders were $241 million, which was up a strong 29% versus last year, as Dennis mentioned. Sales of $205 million were up 5% versus last year.

Gross margin was down a point due primarily to product mix. While our SG&A ratio was reduced by two points largely due to lower corporate costs in the quarter. In addition, we incurred $3.7 million in restructuring charges last year but did not repeat this year.

Operating income was $8.9 million versus $2.5 million last year. We benefited from a modest tax credit in the quarter related to the tax valuation allowance we established at the fourth quarter of last year. EPS from continuing operations was $0.09 versus a loss of $0.01 last year.

On slide 4, we show the results by segments of the quarter. Our Safety and Security Group, or SSG, generated $6.3 million of operating income in the quarter, resulting in an 11% operating margin. Q2 orders increased 10% versus last year but revenues were basically flat.

Continued double-digit growth in our core industrial safety business and our Victor safety business, which focuses on the mining industry, offset lower revenues in our European light bar and siren businesses.

Orders for our Bronto Skylift business continued to rebound from their low point in the middle of last year. Bronto's quarterly order rates have increased from about $20 million in Q2 and Q3 of last year to over $30 million per quarter for the last three quarters. Q2 orders of $31 million were up 55% versus last year's low level.

Given the relatively long order-to-revenue lead time for Bronto, most of the increased orders e have seen this year have not yet become revenues and this has impacted Bronto's operating margin.

Bronto's revenues were down 17% versus last year and the operating margin was low at 3% for the quarter. However, the stronger order rate has driven Bronto's backlog up to $83 million at the end of Q2 versus $57 million at the end of last year. This should result in higher revenues beginning in Q3 which will help us drive up the operating margin. As a point of reference, last year's 9% operating margin, with $30 million of revenue, is a good indication of the profit impact higher revenue should have for Bronto.

Our Environmental Solutions Group, or ESG, had another quarter of double-digit growth. Orders were plus 52% versus last year as ESG generated double-digit order growth across all lines of business, Elgin street sweepers, Vactor sewer cleaners, Guzzler industrial vacuum trucks and Jetstream high-pressure water blasters.

Higher orders in both Q1 and Q2 resulted in a 12% revenue increase for the quarter. The higher revenues enabled ESG to leverage their cost reduction efforts which resulted in a 10% operating margin for Q2. ESG's order backlog remained strong at $128 million versus $83 million at the end of last year.

FSTech orders were $33 million, which was lower than last year, due to overlapping of a large one-time order in our parking business last year. However, revenue was up 17% and the operating loss was reduced by $2 million versus last year. FSTech's quarterly loss of $1.5 million included $2.5 million of depreciation and amortization largely related to last year's acquisitions. As Dennis mentioned, FSTech was awarded contracts in July which has helped to drive continued growth in revenue in the second half of 2011 and into 2012.

Corporate expenses in the second quarter were lower by $4.3 million versus last year due to lower costs related to hearing loss litigation and an absence of M&A-related integration costs from last year.

On slide 5, we show our cash flow for Q2 and year-to-date. For the quarter, we generated $13.5 million of operating cash flow, driven by a higher level of profitability and approved working capital usage. Year-to-date, operating cash flow was still slightly negative due in part to the timing of cash payments related to charges we recognized in the fourth quarter of last year, primarily the hearing loss settlements and severance related to the Q4 restructuring costs.

We recognize these costs in Q4 of last year but paid the cash associated with them this year. We expect to continue to generate positive cash flow in the second half of the year. Our EBITDA for the quarter was $15 million which incorporates the $5.7 million of net income from continuing operations and $5.6 million of depreciation and amortization shown on the slide. These two pieces add up to slightly more than $11 million. Our [EBIT expense] for the quarter was about $4 million and taxes were minimal which all adds up to the $15 million EBITDA figure.

Turning to the balance sheet. Our total debt at the end of the second quarter was $234 million and our net debt after cash was just under $220 million. As Dennis mentioned, refinancing our debt will be a significantly focus for us in the second half of the year. Our revolving credit facility matures in April of next year. We had $190 million drawn on the revolver at the end of Q2. In addition, we have $35 million of private placement notes, the bulk of which mature at the end of next year.

As I mentioned before, our EBITDA on second quarter was $15 million. Given our strong backlog in order trends, we feel confident that we can at least maintain and likely grow this level for EBITDA. A $15 million quarterly EBITDA translates into an annualized rate of $60 million and our net debt position at end of Q2 was about $220 million.

We're developing a variety of options to refinance our debt, including a combination of an asset base revolver and high yield bond. We are confident we will have our debt refinanced before year end.

To wrap up the finance piece, slide 7 shows that we are in compliance on each of our key debt covenants, net worth, debt to capital and the minimum cumulative EBITDA covenant that was instituted as part of a recent (settlement).

Each of the numbers shown calculated is defined by the specific covenants. As Dennis indicated, we expect to remain in compliance with each of the covenants for the remainder of the year and beyond if necessary. As a reminder, the debt amendment places limits on dividends the company can take. As a result, the company will not pay a dividend in the third quarter. The company will review the dividend each quarter.

That wraps up the financial summary. I will now turn the call back over to Dennis.

Thanks, Bill. As I mentioned up front, the second quarter was an encouraging one and I believe we are on the right track to achieve the 2012 margin targets by operating groups I discussed in March.

Slide 8 shows the 2012 margin target ranges that I established, as well as Q2 results and some recent history. The 2012 target ranges for operating margins established were -- for both the ESG and Bronto, a 10% to 12% range; for SSG, 14% to 16%; and for FSTech, 5% to 10%.

Starting with ESG, I believe, we're on track to achieve the 2012 target range of 10% to 12%. Strong order growth, revenue growth has enabled ESG to leverage the cost actions of recent years and to generate a 10% operating margin in the second quarter. We continue to see good growth in our Jetstream water blaster business, which is the highest margin business in ESG.

Jetstream revenue increased over 35% for the quarter. In addition, we continue to see good growth in our Guzzler vacuum trucks which focus on the industrial sector. And as Bill mentioned, demand for our vehicle-based muni business, Elgin sweepers and Vactor sewer cleaners, began to pick up in Q2.

As we have been saying, these vehicle-based products do wear out over time and ultimately need to be replaced. And the cities need to keep the streets clean and need to keep the sewers running, they're starting to replace these.

Cities have been stretching the useful lives of the vehicles in recent years and now some replacement orders are beginning to flow. In total, ESG orders for the quarter were up 52% versus last year. While we don't expect this pace to continue, we are confident that we should see steady order and revenue growth which will enable ESG to meet its margin for 2012.

At our Bronto Skylift business, we have two dynamics which have pushed the operating margin up over 10%. First, as we've discussed, the quarterly order rate has increased from about $20 million per quarter last year to over $30 million per quarter since then. Bronto's history shows they're generating $30 million of sales in a quarter results some double-digit operating margin.

As seen on the chart Bronto's operating margin was 12% in 2009 and 9% last year. The strong orders we've seen since Q4 of last year will become revenues in the second half of this year and early in 2012. In addition, we expect recent US distribution agreement with Pierce will start to generate orders this year in revenue into 2012. Therefore, we Bronto's revenues will be significant and will generate the target margin next year.

The second profit dynamic for Bronto will be the completion of the multi-year plant reconfiguration project which will significantly reduce the number of labor hours per unit. This project will be finalized in the fourth quarter of this year and will improve Bronto's gross margin per unit, as well improving inventory turns and working capital management. So as is the case for ESG, I believe, Bronto is on track to meet the 2012 target margin.

Turning to SSG. The 2012 operating margin target is 14% to 16%. As you can see on the slide, SSG has consistently generated double-digit margins. In the second quarter, SSG's margin was 11%. And in order to hit the 2012 target, we need to see continued growth in our industrial warning system business which generates strong margin and had order growth over 20% in Q2.

Given this strong outlook for bid activity in the second half of the year, we expect to generate continued growth in this part of the SSG business. Industrial safety, campus security and outdoor warning systems continue to be global markets where improved and premium products are in strong demand.

The other key to SSG's margin improvement will be continuing the 80/20 project work on our public safety business which primarily manufactures light bars and sirens for police, fire and heavy-duty markets. The SSG team has made good progress on segmenting these businesses to simplify and focus them on generating sustainable levels of profitability. I believe it has taken the right steps and we'll be on track to meet their 2012 target.

Finally, our newest division, FSTech, as I mentioned, we are starting to see some traction on significant contract wins and we have a robust near-term pipeline, both domestically and internationally. These contract wins helped to build our resume in the intelligent transportation market which enhances our ability to win additional contracts.

Top line growth is a key to driving FSTech to profitability in 2012 and beyond. And while we expect FSTech to continue and become a double-digit margin business, my target for 2012 is in the range of 5% to 10% while the business builds scale. The recent progress and our expectations for additional success in contract bids in the second half of the year give me confidence that the FSTech will hit their margin target 2012.

As a partial offset to the group targets, we expect corporate costs to be about 3% of sales next year. So if we hit these targets next year, the operating margin for the total company would be between 6% and 9%. These are the targets I originally established for the business and shared with you on March and I believe we are on track to deliver those.

To recap the overall themes of this call, we made progress on several important fronts in the second quarter. Our orders, revenue and profits are all up both sequentially and versus last year. And we generated positive cash flow and reduced our debt. Our teams have worked extremely hard to get the company's momentum pointed in the right direction and I'd like to thank them for all their dedication and commitment.

Having said that, we have some more work to do in order to build on the improvements that we have made to date and I am confident that we'll continue to progress, we can achieve our 2012 targets that I've discussed.

If you recall at our last meeting, I committed that we would continue to work hard on cash management margin improvement, deliver the results that we promised and work on share holder transparency and we're keeping those on our mind as we go ahead.

Well thanks again for taking time to participate on the call and we'd like to open this up now for questions from the group.

(Operator Instructions) The first question comes from the line of Deane Dray from Citi. Please Proceed.

Hi. Good morning. James filling in for Deane.

Good morning.

Good morning, Jim.

Hi. Dennis, just starting with your 15 sub-segments I think for a temperature check, roughly two-thirds of those businesses were expected to reach 2012 margin targets by the end of this year. It appears Safety Security and Environmental Solutions were on track. And as you've said in your prepared remarks, Fire should really be delivering on those orders so they should be double-digit margins.

I guess I'm looking for a little bit more color on FSTech and at what point would maybe some of those shipments be pushed up further to the right and would step away maybe from its margin target in 2012. What's giving you your confidence? And then on the flip side, what would be the biggest hurdle to hitting that target?

On the -- that's good question. On the FSTech, the biggest thing I think we've learned is that the concept that the company had to put together a full system offering for the toll systems is valued by our customers. And the number of contracts that we are either have or are close to are significant and the dollars are significant.

The thing that we've learned though is that these are generally implemented over two- to three-year operating period. So while we originally I think anticipated having the full revenue and income during 2011, a lot of it I moving into 2012 and '13.

So I think at our next call we'll be able to talk about a significantly order backlog and yet it will be placed out over the next couple of years. So they're not immediate satisfaction, I guess, is the right answer.

The other thing is that that while we have a number of significant contracts, I don't think it's anywhere near what the industry expected two or three years ago with what's going on with the transportation bill and just over funding. Now that the government has settled the budget issue, I think perhaps some of this will start to shake out.

Okay. Got it. So for FSTech, I think, for the full year, prior guidance was that it was going to be profitable which we maybe just be thinking only to the back half or are we going to stick with the full year outlook?

Yes, I think that by the time we hit the fourth quarter run rate, we should be at a more profitable level on an EBITDA basis. But again with the orders shipping out, it's all a matter of timing when the orders fall in.

Okay. Fair enough.

We did adjust our estimate of earnings based on that.

Right. Speaking of FSTech, I was wondering if I could get an update on the E-Z Pass recomplete, anything to share with us there? And whether or not you guys have finally determined what the revenue sharing agreement would be with Kapsch?

Yes, I think the second part of that all up on the air as far as how we proceed with Kapsch. The IAG has selected and announced the decision but I don't believe that they've actually issued a contract to Kapsch or to Mark 4. But I think they've determined that that would be their partner moving ahead. And so until they get their contracts settled, we don't -- we really haven't settled ours.

Okay. And just two more if I could. The net operating losses you guy had had, from what I understand from the last call, you're going to be able to offset some of your domestic income but now that appears to not be the case. Are we going to be at the 20% tax rate in the back half or is that going to be higher?

It's Bill, James. No, we think -- again, we pay taxes on our foreign earnings because the evaluation allowances only stood up for a domestic entity.

Right.

And in the accumulative loss. So domestic income and profits will not have tax on it. We will be paying taxes on the foreign piece though.

Okay. So we're still looking for 20% back half tax rate?

I think that's probably reasonable.

Okay. Great. And what were your organic revenues in the quarter?

Organic would have been pretty much the actual for the quarter because actual would have been -- oh, I'm sorry; are you asking about currency versus --

Yes, if you could split out organic, acquisition and foreign currency.

Yes, well the acquisitions were all in-house at this point last year so we didn't have any new acquisitions in this quarter that we didn't have last year in the second quarter. Currency impacts for the quarter was about 2% on revenue.

Okay.

About 3% on the orders and about $400,000 of GAAP on the income line.

That's helpful. Thank you. That's all I have.

Thank you.

And the next question comes from the line of Charles Brady from BMO Capital Markets. Please proceed.

Good morning. This s actually Tom Brinkmann standing in for Charlie Brady.

Good morning, Tom.

Good morning.

Just a little bit more color if you would on the -- your commentary in the press release that the Bronto margins were impacted unfavorably by mix changes. Can you talk about maybe what product lines or sizes are sort of bringing down the margin here somewhat?

Yes, it was -- part of it was we had the size mix of Bronto. The biggest impact for Bronto though was the fact as we talked about, the orders we've seen the last several quarter over $30 million rate have not yet turned into revenues and that business is very sensitive to the top line. We did have some mix in terms of some of the larger units were pushed out a little bit and the smaller units which was smaller -- lower margin went through.

But the biggest thing holding down the Bronto margin is the fact that the revenue -- the orders haven't yet hit the revenue line which will start happening in Q3.

Okay. And I guess also in terms of Bronto, how much was US industrial up versus I guess the orders growth coming from overseas?

I don't have those numbers at my fingertips. I have to get back to that. We did I believe shipped the fifth unit into the US wind market, wind power market. Not much also in the US. As we talked about, we're starting up the agreement with Pierce, the division of Oshkosh. That won't really kick in in terms of our orders in revenue until the fourth quarter. So there wasn't a whole lot in the US in the wind market.

Got you. Got you. Okay. And also I guess can you talk about the -- just the impact of the debt refinancing? What kind of interest rate do you expect to be able to get? You talked about how you're going to structure it, but assuming you're able to do that, what would you -- your expectations be for maybe an interest rate or annual interest expense?

Yes, I mean, right now the markets are obviously pretty volatile. We expect to wait until after Labor Day to go out and get in to the marketplace. Right now, given the type of comparables we're looking at, we would say probably somewhere around 10%, but it could range from 9% to 11% depending on market condition.

But then maybe it'll be less.

Right. Also we have the base revolver. We won't have much draw on that though. That'll be probably LIBOR plus 350 or so. But the bulk of the debt will be on the bonds, assuming we get on that path.

Okay. And also, the -- we weren't able to access the slides. At least I wasn't able to -- it said technical difficulties on the website. But you talked about the covenants. What are the minimum EBITDA covenants going forward again? Would you remind us please?

Sure. Hang on one second. It was -- for the second quarter, again, it's a cumulative test, so it was $12 million from the second quarter. And then it becomes a monthly test beginning in July but covenants said you have to fail two months in a row to not -- to actually breach the covenant. So at the end of July, the cumulative number needs to be $17 million, end of August $22 million, end of September $28 million and then it goes up about $6 million a month from there.

Okay, great. Thank you.

Okay.

And the next question comes from the line Steve Barger from KeyBanc Capital Markets. Please proceed.

Good morning, guys.

Good morning.

Did I hear you correctly, you expect positive operating cash flow in the back half?

Yes.

Did you quantify that? I'm sorry if I missed it. But what can we expect there?

Yes, I would expect it to be about the same level we saw on the second quarter, Steve.

Okay.

At least in the third quarter and then maybe a little bit better in the fourth quarter.

Got it. Okay. And it sounds like you're making progress on cost and productivity in the various segments. Can you talk about whether your products are generally priced correctly and where the market will accept price right now and maybe what kind of price actions are implied in the 2012 operating margin goals?

Yes, we didn't build a lot of price into the 2012 because we kind of felt that whatever we get in terms of price would likewise -- would have some inflation on materials. So we kind of -- as we look ahead of 2012, we're thinking much more in terms of mix and productivity.

In terms of where pricing is capable, the municipal markets are still difficult although in certain cases, we've been able to price specific parts and, you know, specific components a little more aggressively than say the base unit.

In the police business, it's very, very competitive and that's both domestically and internationally. Bronto is on a bid basis so they've been able to grow their pricing as much as required to offset costs and so forth. So it's really kind of a mixed bag. Jetstream is the better market. But we've also been able to do some pricing things in Jetstream in terms of some of the components and some of the consumables and the wear parts.

So it's been a little bit of a mixed bag. I think everybody is cautious on the market today. So we have to be very careful in terms of how we price product and our teams stay very close to the ground and do what they can do.

Got it. And in terms of the raw materials, it seems like steel has come off a little. But can you just talk in general about the trends you're seeing from the supply chain?

Well on the steel side, we were locked in for this full year of 2011.

Okay.

So we have not yet began to negotiate our contracts for 2012, but we know that that's going to be changed form this year because we were locked in pretty good for this year. As far as the other components, we don't have such a mix of hard components in, say, plastics or materials where it's had a major impact on us.

Got it. On the Bronto side, makes sense that you can get back to double-digit operating margin, the back half just with the backlog. But can you talk about the European markets in general? How you're thinking about order activity in the second half based on what your guys on the ground are seeing just as they watch the political --

Yes, yes.

-- for example.

Yes, that's -- I would say that's not a sinking market but it's a stable market. They're not seeing it deteriorate further than it did because it did fall back quite a bit. On the police side, there are fewer projects and more competitive. On the Bronto side, there's still very limited -- more limited activity as we've seen for the first half.

So we don't expect the European piece. We do see Bronto's business about the same as they go around the world in some of these other markets, the need for the product is -- they're specified and they're engineered and they're necessary. So, so far we see that holding up.

Steve Barger Okay. And what is Bronto's quarterly capacity now after some of the actions you've taken? Could you do $40 million in revenue or more if the backlog supported it?

Yes, I think so.

Okay. And --

It's a matter of all the improvements they've made, Steve, but also the capacity, shift capacity. So we have shift capacity as well.

Got it. And last question, I'll get back in line. You signed the contract in Turkey with -- and you're using a local partner. What are the economics on something like that? And, you know, if you don't want to be specific, just in general when you sign a deal like that with a local partner in another country, how does that work?

Yes, I don't want to be specific, you're right about that. The -- there's a couple of things going on in our business. One is, we have just begun to be the full line integrator on these projects. So this is the first one where we really are the full line integrator. So it's a much broader scope than our just supplying components.

So the margins really are a mix of the value that we normally get for the component as a sale plus -- then you get the monies for the overall operations. So the blended margin is fairly good. We're still learning. I mean, we'll learn obviously after we do a couple of these. What the result is, you learn at the end.

But we think they're good business and they give us a good long term. They give us a long term operating backlog, the backroom. The backroom is part of those generally and so there's more continuous revenue that comes and more profit.

Steve Barger Okay. Great. I will ask one more. You've been there for almost three quarters now I guess. For the things that you can control, as you think about how far you've come and what your original plan was, do you think that you're ahead of schedule relative to what you were thinking when you first came on the back half of last year?

Dennis Martin Yes, I think we are. The thing you learn when you jump into one of these is that while the strategies and the philosophies and operating principals are the same, the companies are different. So we've -- I've had to approach this a little bit differently than I did some of the ITW work that I did. But I think we're probably where we need to be and maybe just slightly ahead.

Great. I appreciate the time. Thanks.

Thank you.

(Operator Instructions) The next question comes from the line of Brad Evans from Heartland Advisors. Please proceed.

Good morning.

Hey, Brad.

Hey, good morning, Brad.

Thank you for taking the questions.

Welcome.

Just building the mosaic for 2012, should we be thinking of an EBITDA level of around $90 million? Is that in the ballpark?

Bill is over there cogitating.

Yes, I think Brad, that might be a little in the high side.

I think it's a little high. But I think --

But not too proud of -- if you go with the margins we've got in there, we get a little bit of revenue growth, I don't that that's far off. We've got about $22 million of depreciation, amortization for the year.

Correct. So just looking at the backlog trends and the booking, so it looks like Environmental Safety and Bronto should grow into 2012 from what you can see today kind of mid-single digits. Is that probably about right?

That feels about right, now, yes.

And the FS is obviously going to grow much more quickly than that?

We are -- depending on how these backlog proposals go, Brad, they could, yes.

So I guess, that's just -- they're in line but I guess the question is if you're -- it would imply roughly $850 million in sales. So you put a 7.5% to 8% operating margin on that and you're at -- you're almost at $70 million of operating income, so $65 million to $70 million. So you add back the $3 million per stock-based comp and the $22 million for D&A and $90 million is -- I mean, it looks like there might be upside, but, okay we'll stay tuned to that.

What they are doing, Brad, is staying really, really focused on the operating income levels of the business.

And that's reflected in the guidance so it looks like -- we appreciate that. I'm sorry for asking a question that might have already been answered, but I'm a little unclear, how much debt do you think you can pay down the back half of the year? What's a reasonable target?

We think probably another $10 million to $20 million based on free cash flow.

Okay, that's kind of what I was thinking. Just begging the question, I guess, I mean -- so you come out of the year with net debt of around $200 million and I realized banks are looking at trailing 12-month and with your history, they're probably not inclined to be looking forward. But you're at roughly $200 million of net debt come the end of the year, plus or minus. And you're approaching this kind of just walk through an $80 million to $90 million EBITDA level.

It just seems like talking to banks, guys, I mean, the banks are dying for loans. I don't understand why -- I don't understand the high yield route. I wonder whether -- I mean, the banks are dying for credit and --

Yes, I understand.

I just wonder whether you're beating the bushes hard enough for a traditional bank line that might say to you a few hundred basis points versus the high yield.

Yes, and that's a great question. We share the same thoughts you have and we are -- we believe we're beating the bush as well enough to find whatever other alternatives are there because we prefer not to go the high yield route.

All I can tell you guys is the banks are dying for loans. They're absolutely dying for good credit. So I don't know, I just would encourage you to -- I don't know, it just looks like a high-yield offering is punitive for shareholders and a bank facility would be a way to align with your stronger cash flows and sort of continue to recapitalize the balance sheet to free cash flow as opposed to putting an issue on balance sheet where you can't pay it down. So I just encourage you.

I -- the guidance for '12 looks great. I realized the market today is aflutter with the macro concerns and things could get worse of course. But the guidance you've given for '12 is outstanding.

Right, right. And we understand your feedback.

Brad, thanks. We're certainly continuing to look at that. I think now that we've got the second out there with the $15 million of EBITDA, that gives us much better base to work from. Q4 and Q1, the numbers weren't so great. So we continue to pursue options. We are looking at -- if we do wind up going to high-yield route, looking at options where we'd have the ability to prepay up to 10% of the bond for the first three years at a 103 premium or something like that.

So we do want to make sure we've got a prepay ability in that financing. But that we've got these numbers out there, we've reconfirmed what we think for 2012, hopefully we can keep looking at options.

And we are continuing to talk with the financial community.

We can follow up after the call. I mean, because it looks like 2012 rough numbers, I mean, you could be in the range of -- I realized if you grow in '12, you're going to have some working capital needs that'll maybe offset some of the free cash flow. But it looks like you could be $40 million to $50 million in free cash flow in 2012. Does that sound about right?

Yes, that sounds reasonable.

Okay. Well --

Yes, we'll follow up.

My last question and then I'll get off, I mean, could you give us a wide range of what you think the outcome for Federal -- FSTech could be for next year from a top line perspective with the contracts you won and how could that business look, I mean, in terms of top line? Just within a wide range.

Yes, so within a wide range between $120 million and $150 million next year.

Wow. Okay. That's great. Thank you, guys.

Then the backlog is building and we're -- we feel good about it.

Okay. Well that's great. Thank you.

Thanks, Brad.

And the next question comes from the line of Walt Liptak from Barrington Research. Please proceed.

Hi. Thanks. Good morning, guys.

Good morning.

Hey, Walt.

Most of my questions have been asked and thanks for the transparency. And I'd also say that just to follow up on Brad's comments that you guys have a great asset here. And traditional financing versus high-yield, I would concur.

But I want to ask about -- just a simple question, the awards that you've gotten so far, are those in backlog? Why didn't those orders show up in the new orders?

The orders are -- we've just received them and we've really been in the process of negotiating the final contracts on some of them.

Walt, as an example, the Turkey order we talked about, the national tolling contract, we got that in July so that was not in the backlog at the end of June.

Okay, great. And you kind of addressed this earlier. But at what revenue level do you become -- on a quarterly basis, would you become operating profit breakeven?

For FSTech?

For FSTech, yes. I'm sorry.

If we can get -- again rough numbers, $35 million to $40 million should be right.

$35 million to $40 million.

-- million dollars of revenue.

Okay, got it. And in your comments you mentioned the transportation bill and I wonder if -- the highway bill, it looks like they're going to try and pass a two-year highway bill versus a six-year. And there is kind of this ongoing revenue problem which could be answered by tolling.

Yes, I think the expectation is that tolling will take a bigger and bigger role in driving the new road construction.

Okay. Would they work in a tolling kind of a revenue process into this two-year bill?

No, I don't. I think they'll be in the panel, I mean, my personal view because I think there'll be some toll construction but I think - or some road construction. But I think in general, tolling will be -- continue to be independently funded by bond transactions. And there maybe some incentives to the government. But I think the majority of this kind of have to be independently driven.

Okay, got it.

So let me, guys, say, the states also are struggling with their cash. So --

Okay. All right, thanks very much.

Thank you.

And the next question comes from the line of John Nelson from the state of Wisconsin. Please proceed.

Hi, John.

Hi guys. Congratulations to you and your team on doing a terrific job of turning this ship around. The -- I would reiterate what your previous caller has said to consider all -- work to consider all alternatives on the financing and that if -- I would also encourage increased efforts on going the traditional financing route if at all possible.

Yes, and we understand that and we're working on it.

And my questions are -- a lot of them have been answered. But I'm curious as to if there's any particular type of geographical strength in any particular either parts of the US or internationally in your markets.

Yes, more than geographical, it's more market. And right now the oil refining and mining recovery, those kind of areas are really strong. So if you look at the ESG business, both Jetstream and Vactor and Guzzler, those activities really are being driven by the energy.

Okay. And have you seen much -- I mean, a concern by many is the municipal markets that you operate in.

Right.

Have you seen much of any weakness there or any shifts that are worth noting?

Yes, the one thing Bill talked about a little bit is that some of the cities' fleets have just gotten deteriorated to the point where they've had to spring for new sweepers and vacuums. So I think that that's been of a operational driven activity this last quarter than the municipal markets getting much, much better. So -- but I do think we'll continue to see some of that as we go through this next quarter. Obviously if it's a couple, two or three quarters in a row, we will be able say obviously there's a trend where municipals are getting stronger. But we certainly don't see any activity getting better in Europe and the US market, as I said, the street sweepers are really a fundamental wear-out issue.

They generally have a five-year life, maybe seven. So their -- I think some the cities are at that seven-year level. But on the police side, we just really are seeing very conservative change-outs and very competitive.

Yes, I think that's an important question when we look at our company, people tend to think about community spending in one big bucket and we really see it as two separate categories for us. As Dennis mentioned --

I'd say almost three if you think about the warning and all that.

Yes, sweepers and the sewer cleaners, again, there things -- they're vehicle based, they wear out. Cities that have been running them a year or two longer, even three years longer than normal, they need to be replaced and that's why we saw double-digit, even north of 20% growth in sweepers and sewer cleaners.

The flip side though is the police markets for light bars and sirens, those budgets are very challenging and those things can be taken off one car and put in another car. So that's a challenge for us.

Then the third part, as Dennis mentioned, the municipal warning system, public safety aspects, those are going to continue to grow I think given the world we live in.

Okay. And maybe just for the benefit of all your shareholders, can you briefly recite where is our -- how you think your company stands out in your three major product areas, ESG, SSG and FSTech? And if they do better than others in these areas.

Tell me a little bit more about what you're looking for and you want to know how we stand out compared to competitors.

What do you think about you, you company and product -- makes your product line better or stand out or be more competitive? What attributes?

Yes, you have to remember, John, we have 15 different segments of the business but I'll give it to you this way.

Okay.

If you look at the ESG product line, we have a reputation for being heavy-duty, rugged, consistent, reliable. And we operate in a part of the market there where we have highly competitive products and good response to our customers and we're priced competitively. So in that case, it's reliability, good on-time delivery, good after-order service and we have the strength there.

On the SSG part, we have to split it up in different areas. The industrial product side of SSG we have a very strong position with leading distribution, with highly engineered and certified products that are NEMA-certified and certified for other industrial applications. So again it's engineering reputation and strength.

On the police side, we're probably in a more me-too kind of a situation. We're not as strong as we'd like to be and we're working on that with some new products and so forth. Bronto is kind of in a league of its own. There are some competitors but at the high end, it's really a unique product line that obviously is very safety oriented. They're reliable. They're huge. These things are significant items. So they stand out on their own in terms of an engineering product.

FSTech, I think the combination of the businesses that provide the full tolling solution and full security solutions in -- of other markets really sets it aside from a lot of the competitors where you may have just component sales. So each one has its own kind of position.

Terrific.

I don't think we have a huge ability to move price in any of the markets. I think we just have to be competitive and reliable.

Okay, great. Thanks very much and keep up the good work.

We're doing our best, thank you.

The next question comes from the line of Dan Mazer from Harvest Capital. Please proceed.

Good morning, guys.

Good morning.

I appreciate the color on '12. And I was thinking maybe it might be helpful, maybe not on this call, but at some point, if you could provide the stair-step assumptions to get to those -- well, I think you previously described this as stretched margin goal. I'm just looking at the history of the company I think an analyst actually pointed this out. And -- that five of the six -- five or this last six years, the out year EPS of the company been greater than 50% growth and almost I think every time you fail to get there.

So if you could articulate why 2012 is different than the previous six years, it might be helpful on just -- you know, cost savings, leverage. I'm just -- why this year? We're not setting up for another disappointment and just now looking out the 2013 or 2014 that we get the earnings growth.

Yes, that's a fair question. And the only thing I would suggest is if we look back at this quarter, the kinds of levels that we achieved are close to what we are talking about in 2012. And so I think we have the same concern you do, we want to put numbers out there and just say -- Oh, the growth is two years down the road.

I think if you look at the revenue growth, the return of some of the markets, the productivity things that we're doing and the performance we have in the second quarter, I think it's starting the stair step there already. We traditionally do a little better in the backend of the year, so if you add to the second quarter, then hopefully, we'll not disappoint and that's really our objective is not disappoint.

Okay. And that's all. And just being able to articulate that more. I mean, it sounds like - I mean, I know the end markets just probably got maybe a little bit worse since you are not recovered as much since you've kind of just provided originally those stretch goals and then it sounds like you're resetting expectations on margins in back half a little bit. So it's not we're even looking at a further step up in 2012.

Yes, the one place we reset the expectation is on FSTech because of the nature of the projects that are moving out a year. But in terms of the SSG business, for example we did not build any real growth in the municipal market back in to it. And we have had a number of those businesses there when the business is just starting to come back.

So I think we're trying to be realistic about it. We don't have Ouija board, so little tricky on some of the -- especially like these large projects, you know, the FSTech projects tooling and there's no -- there hasn't been an abundance of projects, I'll put it to you that way.

Yes, okay.

If you look at what we talked about today for ESG and SSG, we think we're on track. Bronto with the orders that we have the last three quarters, they give the backlog to get here we need to and FSTech we need to see more and more project wins. But at the end of the third quarter, I think to your point, we'll have a better sense of how things are shaping up for next year. The orders that will be really larger for next year. Right now though we think we're -- with the orders and the margins we see, we're on the right track.

Okay, great.

Yes, the wildcard is FSTech for us because of the contracts, the size of them. Good. Thank you.

And we have a follow-up question coming from the line of Brad Evans from Heartland Advisors. Please proceed.

My question was answered. Thank you. Again, good quarters, guys.

Thanks, Brad.

Thank for your help, Brad.

And we have no further questions at this time. I would now like to turn the call back over to Dennis for closing remarks.

Thank you. On behalf of our team, I would like to thank you for your confidence in our business and thank all people who have worked hard during this year to try to make it come together and this is a moving target but I think people are focused. And as I said, we're focused on the cash management, the margin improvement, really delivering the results and working on as much transparency with you, our shareholders, as we can.

So we're looking forward to continuing and talking to you next quarter. So thanks.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.