Federal Signal Corp (FSS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Federal Signal Corp earnings conference call. My name is Lisa and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star, followed by zero, and we will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Bill Barker, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you. Good morning and welcome to Federal Signal's third quarter 2011 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Dennis Martin, President and CEO, and Jennifer Sherman, General Counsel and Chief Administrative Officer.

We'll be using some slides in the presentation. The slides can be found by going to our website, www.federalsignal.com, clicking on the Investor Call icon and selecting the webcast. We'll also post the slide presentation to our website after the call.

Before we get to the business review, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. We expect to file our Form 10-Q shortly.

And now, I'd like to turn the call over to Dennis Martin.

Thanks, Bill, and thanks to those on the call for joining us today.

We continued to see encouraging signs of progress in the third quarter. Our strong order growth trend continued. Q3 orders were up 26% versus last year. Total company orders have exceeded $200 million in each of the first three quarters of the year.

As a point of reference, we did not exceed $200 million of orders in any quarter in 2010 or 2009. As a result, our backlog now stands at $301 million versus $217 million at the end of the last year. The increase in order backlog has been driven by our longer lead time, business groups, ESG and Bronto, where the order backlog is a key metric for future performance. Combined backlog for the two groups stands at $226 million, up from $140 million at the end of last year.

We continue to see strong markets for our Safety and Security products. Total SSG orders are up 19% versus last year, and code activity remains strong for our industrial and outdoor warning system businesses.

Q3 revenue increased by 8% versus last year and operating income increased more than 50%. We generated $12.5 million of EBITDA and used our positive cash flow to reduce our net debt by $5 million in the quarter.

Bill will cover the financials in more detail in a minute, but first I'd like to give my perspective on the quarter.

As I mentioned, orders for our large truck businesses at both Bronto and ESG have been very strong. As a sign of our confidence in these businesses, we are in the process of adding plant personnel to increase our production capacity for Q4 and beyond. However, our Q3 results were below our expectations as we experienced some production inefficiencies at our Bronto business as we were ramping up our production capacity. As a result, we were not able to ship several of our large higher-margin Bronto units that we had expected to ship in September and this impacted Bronto's Q3 results. These units will shift into Q4.

Looking ahead to the fourth quarter, we expect EPS to be in the range of $0.07 to $0.10 as we begin to monetize our backlogs at ESG and Bronto and benefit from the strong market dynamics in our safety and security businesses.

Our Q4 forecast has been impacted by the fact that our major supplier of engines for our ESG businesses is several months behind on their production and supply schedule.

During October a countrywide labor disruption in Finland impacted our ability to ramp up production as quickly as planned. The orders in the backlog for these businesses remain strong and these businesses are well positioned as we exit 2011 and head into 2012.

One other factor I'd like to touch on is the status of our refinancing efforts. Bill will talk through the details a bit later. As a reminder, our revolving credit facility matures in April of next year.

On our last call we talked about our intent to explore high-yield bond market once our second quarter results were made public. However, activity in the high-yield bond market slowed dramatically during the third quarter and we've continued to pursue a variety of financing options, including discussions with numerous potential lenders. We are continuing the discussions and the due diligence with several potential lenders and will monitor the high-yield market as well. We are confident that we will have our balance sheet refinanced by early next year.

So to sum up, it was another quarter of improvement and we are excited about the direction we are heading, but we had a few capacity related bumps in the third quarter that kept our results below our expectations. After Bill goes through the financials, I will be back to give you my thoughts on the state of the Company after my first year as CEO.

And now, I'd like to turn the call back over to Bill.

Thanks, Dennis.

I'll give a fairly brief review of our financial results for the quarter, which are included in today's press release.

Looking at our P&L for the third quarter, orders were $214 million, which was up a strong 26% versus last year, as Dennis mentioned. Sales of $194 million were up 8% versus last year.

Gross margin was down a point due primarily to the Bronto production efficiency issues Dennis mentioned, while our SG&A ratio was reduced by two points, largely due to lower corporate costs in the quarter.

Operating income was $7.3 million versus $4.8 million last year. However, the improvement in operating income was largely offset by higher interest expense versus last year due to the higher interest rates we are paying as part of our debt [diminement] agreement.

EPS from continuing operations was $0.03 versus $0.04 last year.

On slide four we show the results by segment for the quarter. For purpose of comparability, I have excluded the 2010 restructuring charges.

Our Safety and Security Group, or SSG, generated strong order growth of 19% in the quarter. However, due to shipment timing, sales lagged orders somewhat, which impacted our profit margin in the quarter, which was 2 points lower than last year at 8.5%. Given the strong Q3 order rate and the resulting higher than usual backlog, and the continuing strong market dynamics for our industrial and public safety warning systems, we expect SSG to return to a double-digit operating margin in Q4.

Orders for Bronto were extremely strong at $42 million, double last year's level. This was the largest quarter for Bronto orders since Q2 of 2008. Bronto's year-to-date orders are 50% higher than last year as growth in Asian markets has offset weakness in Europe. However, as Dennis discussed, Bronto had some production inefficiencies which negatively impacted Q3 shipments of the larger and higher-margin units and impacted sales and profit margin. As is the case with SSG, Bronto's strong backlog positions the business well to generate significantly higher revenues and a double-digit operating margin in Q4. Bronto's backlog now stands at $96 million versus $57 million at the end of last year.

Our Environmental Solutions Group, or ESG, had another strong quarter with double-digit growth in orders, revenues and operating income. Orders were plus 20% versus last year, with growth across all lines of business -- Elgin street sweepers, Vactor sewer cleaners, Guzzler industrial vacuum trucks and Jetstream high-pressure water blasters. Revenue was up 12% versus last year and operating income increased 43%, yielding an 8% operating margin in the quarter. ESG's strong orders have increased its backlog to $130 million versus $83 million at the end of last year.

FSTech orders were $19 million, down slightly versus last year, but revenue was $27 million, which was up 3% versus last year. There's a less direct link at FSTech between quarterly orders and revenues as some orders are for projects which are a year or longer in duration, while others are quick-turn orders for existing hardware or software.

FSTech's operating loss was reduced to $1 million in the quarter, which was less than the $2.3 million operating loss last year, and also a sequential improvement over the Q2 operating loss of $1.5 million. FSTech's EBITDA was a positive $1.3 million for the quarter as the group's quarterly operating results include $2.3 million of depreciation and amortization, largely related to last year's acquisitions. FSTech continues to pursue sizeable contracts, both domestically and internationally, which should drive future revenue growth.

Corporate expenses in the third quarter were lower by $1.2 million versus last year due to lower costs related to hearing loss litigation and a reduction in insurance reserves.

On slide five we show our cash flow for Q3 and year to date. For the quarter, we generated $9 million of operating cash flow, driven by our Q3 net income and improved working capital usage.

Our year-to-date operating cash flow was impacted by the timing of cash payments related to charges we recognized in the fourth quarter of last year, primarily the hearing loss settlement and severance related to Q4 restructuring costs. We recognized those compos 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 fourth quarter.

Our EBITDA for the quarter was $12.5 million, which incorporates the $2 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 $7.6 million. Our interest expense for the quarter was about $4.3 million and taxes were $600,000, which all adds up to the $12.5 million EBITDA figure. We generated $15 million of EBITDA in Q2 and expect to be at about that level for Q4.

Turning to the balance sheet, our total debt at the end of the third quarter was $228 million and our net debt after cash was just under $215 million. We expect to generate positive cash flow in Q4 and further reduce our debt by year end.

Slide seven 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 our debt amendment. Each of the numbers as shown is calculated as defined by the specific covenant.

As Dennis mentioned, refinancing our balance sheet is a top priority as our revolving credit facility matures in April of next year. We had $186 million drawn on the revolver at the end of Q3. In addition, we have $34 million of private placement notes, the bulk of which mature in December of 2012.

We are in continuing discussions with several potential lenders and are also keeping an eye on the high-yield market. As I mentioned before, our average quarterly EBITDA will be just under $15 million for the last three quarters of the year, and the recent order trends indicate we will have a strong order backlog going into Q1 of next year. Thus, we view our current annualized EBITDA run rate to be between $55 million and $60 million and our net debt position at the end of Q3 was about $215 million. We are moving down several parallel paths of options to refinance our debt and are confident we will have our balance sheet refinanced by early next year.

As a reminder, the debt amendment places limits on dividends the Company can pay. The Company will not pay a dividend in the fourth quarter. The Company will review the dividend each quarter.

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

Thanks, Bill.

It has been a year since I stepped into the role of CEO at Federal Signal and I'd like to share my perspective on the state of the business.

When I first came into the role, I discussed my belief that we could create value across our portfolio of businesses, and I laid our operating margin targets for each business. I had, and still have, a strong belief that we would improve our core businesses when we focused on the dynamics of each individual business, use the 80/20 process to simplify, and concentrate each business on achieving sustainable, profitable growth.

I often talk about Federal Signal reporting four business groups, but consisting of 15 businesses, and each business needs to focus on its particular strengths and opportunities. And to that point, we have seen significant improvement in the health of many of our businesses over the past year.

At ESG, orders have increased for all the lines of business -- Elgin sweepers, Vactor sewer cleaners, the Guzzler Vactor trucks -- vacuum trucks, and Jetstream water blasters. Order backlogs are up to healthy levels and margins are improving. We are focusing on improving production efficiencies at Vactor and Elgin and are hiring plant personnel to ramp up production. We are investing for growth at Jetstream and have been very pleased with the results. I feel good about the current state of the ESG businesses.

At SSG we continue to enjoy strong margins and good growth in our core warning systems, and our Victor business, which focuses on mining -- the mining industry. We are directing our growth efforts on public and industrial warning systems. The demand for reliable safety and security system remains very strong. I feel very good about the outlook for this segment of our business.

Also within SSG we've made some structural changes in our domestic light bar and siren business and the teams are pursuing numerous initiatives to improve margins and regain share in the challenging police and fire market segments.

We have discussed the strong Bronto order trends. The business team has done a good job of driving order growth outside of the traditional European market and we're focusing on the strong selling points of Bronto's superior engineering, reliability and safety. The Bronto team will complete the reconfiguration project at the final assembly plant by year end, which will yield productivity improvements in the future. I feel good about the position of the Bronto business.

I also said that we would make difficult decisions if businesses were not on track to deliver acceptable margins in 2012. Our recently acquired FSTech businesses have not met our profit objectives so far. The improvements in our ALPR and parking units are in line with our expectations.

We will strongly -- we still strongly believe that FSTech has excellent technologies and we also believe in the market opportunity for that technology. However, the market opportunity has been slower to develop than we had anticipated. The FSTech team has done a good job getting contract wins and is well on its way towards establishing FSTech as a significant player in the tolling and the intelligent transportation markets, both here in the United States and internationally. As we prepare for 2012, we are evaluating the best way to maximize the value from our FSTech business for Federal Signal.

So, one year into the job I feel good about the progress that we have made. Most of our businesses are in good position to generate improving results as we move forward. We have strong management teams in place who are using the 80/20 process across all aspects of their business to simplify their business and focus on what really drives value -- the key products, the key customers and the key processes, while reducing the lower value, time-consuming activity that can dilute effort as a result. And we've improved our cash flow and reduced our net debt by $15 million in the past two quarters.

The two biggest open questions we still face are the refinancing of our balance sheet and the best way to maximize the value of FSTech. As we have discussed, we are moving ahead on parallel paths to get our balance sheet refinancing and are confident that we will get that accomplished. On FSTech, we continue to evaluate different business models and options and we believe in the technologies and the market opportunities.

I'd also like to take a minute to thank the Federal Signal employees for their hard work and dedication. Many of our markets were significantly impacted by the financial crisis late 2008 and we faced some touch times in 2009 and 2010. However, most of our markets have improved, order trends are up, our factories are ramping up to increase production, and our teams are excited about the opportunities that lie ahead.

Thank you for your time today and now I'd like to open the call for questions.

(Operator Instructions.) Charlie Brady, BMO Capital Markets.

Thanks. Good morning, guys.

Hey, Charlie.

Hi, Charlie.

I apologize if I missed this. I jump on the call a little late. Can you talk about the margin impact across the businesses from raw material cost increases? And are you doing anything to offset that in terms of pricing?

And then, second to that, on the FSTech business, am I understanding correctly in your commentary that -- it sounds as though maybe this is not a core business and one of the options you would look to do would be to divest this business?

Let me take the first part of that question. It's Bill. Commodities did not play a big role in our margins for the quarter. We had bought -- steel is our biggest commodity and we had bought steel forward for the year. We did take some pricing earlier in the year about -- across the businesses, about 2% pricing. So, commodities haven't been an impact for us and we're looking at purchasing strategies for 2012 as well. So right now, commodities for us haven't been a big issue.

Charlie, on the second part of your question, each of our businesses are under evaluation all the time. And in each business, we are putting in place strategic steps to improve the business and FSTech falls into that category. So, we have not made a decision not to maintain FSTech.

Okay. Thank you.

Deane Dray, Citigroup.

Hi. Good morning.

Hey, Deane.

Good morning.

Hi. It's James filling in for Deane.

Hey, James.

Hi. The engine supplier disruption in ESG, is that something that you expect to reverse past fourth quarter?

We do.

Okay.

We do. We put some stopgap measures in place to try to mitigate that the best we can, but it's an industry-wide issue; it's not just us.

Right. Right; understood. But that -- from what I understood from your prepared remarks, that was the biggest impact to the lower guidance for the full year?

Yes. Yes.

Okay. And then moving to the margins, sequentially I think just about all the segments were down a little bit, but if you could just talk about your target in terms of two-thirds of your 15 sub-segments being within the targets that you set for 2012 and which ones are falling short. And I'm assuming FSTech is a big part of that.

Yes, FSTech is a big part of that. The new businesses we acquired are still not where we need them to be. And then, we still are not happy with where we are with the public safety part of our business as it relates to police and fire lights.

Right.

So, we're taking actions there, both on the market as well as new products and plant streamlining and so forth to bring that back up.

So, when --

James, this is Bill. Let me --

Yes.

Jump on the sequential margin point for a second. Q3 tends to be a little lower for us than Q2 because of the summer months in Europe tend to be a little slower. So, that obviously impacts Bronto, but also our Victor and SSG, and then in some of our export business to Europe as well. So, that's not unusual for us.

Okay, thank you for clearing that up. But, back to FSTech. Despite the agreements that you have with Kapsch and the revenue sharing, which I don't think has been agreed upon yet, that's still something where you guys will be looking to potentially step away from as you go through these evaluating options?

We did step away from the agreement with Kapsch.

Okay.

That occurred recently. We just did not renew the negotiations on the MOU that was in place. There really was -- once the contract was settled with them with the IAG states, there was really not any need to really pursue that. So, we backed away from that.

Okay. Okay, so you will not be playing a role in that.

Right.

Okay. Thank you.

We'll be playing an independent role in the markets, not --

Right.

Right, right.

Okay, terrific. And that's all I have at the moment. Let me jump back in queue. Thank you.

Thank you.

Okay.

Walt Liptak, Barrington Research.

Hi. Thanks. Good morning.

Hey, Walt.

Hi, Walt.

I wanted to make sure I understood the guidance. And I may have missed something in the presentation, but EBITDA, you said it was $15 million this quarter and be similar in the fourth quarter. Is that the guidance?

No, it's about $12.5 million in the third quarter. We were $15 in Q2 and we expect to be somewhere around $15 for Q4.

Okay. And did you say on -- did you give an EPS range?

Yes, $0.07 to $0.10 for Q4.

Okay, that's what I thought.

Yes.

Okay. And then, last quarter you gave 2012 targets. Did you do an update for this quarter?

No, we didn't. These are margin targets that we're steering the businesses towards. And I think one of the earlier questions asked Dennis about the businesses that are on track to hit those targets and the few that we're still looking at.

So, the targets are still out there. We're not giving guidance for next year at this point until we work through the businesses and get a refinancing in place. The targets haven't changed and we're working on the businesses that aren't yet there.

Okay. The Bronto reconfiguration, are the margins on the trucks that are being shipped, are those going to be fine for the fourth quarter or is -- because of the delay was there incremental costs or whatever related to shipping?

There was a slight incremental cost in the production of the units because of some of the inefficiencies and having not brought the business up completely. And we're having a little impact in the October and little bit into November here where there was a country-wide strike. That'll impact it a little bit, Walt, but it won't be significant. And the volumes should be strong through both November and December.

Okay. And Bronto was one of the groups that, in 2012, the targets are still intact?

Absolutely, yes. Yes. In fact, I think you'll see the fourth quarter intact with -- in line with the margins.

Okay.

It was really volume related. We had six machines slip out of September. So, that's really what impacted the margin in the third quarter.

Okay. Thanks for that. And then, if I could switch to FSTech, the transportation committees in Washington are trying to figure out a way to generate more revenue for the highway bill, and I think it's one of the bigger issues that the government's talking about. Is there any discussion about using highway tolling, RFID and other technologies to try and solve the problem of where the revenue's going to come from?

Absolutely. Absolutely, Walt. The thing that's occurred is it's just been -- as you can tell, nobody seems to be able to agree in Washington, so it's just coming slower than everybody would have anticipated. But by all means, where there are not gas tax funds or other state and federal taxes to support the roadways, they'll become privately funded through tolling.

Okay.

It's just occurring at a much slower rate, I think, than people projected four years ago.

Okay. Got it. Okay, thank you.

Thanks, Walt.

(Operator Instructions.) Steve Barger, KeyBanc Capital Markets.

Good morning. This is Alex Walsh in for Steve.

Hi, Alex.

I had -- how are you doing?

Good, thanks.

I jumped on the call a little late. I missed the commentary around Kapsch and was wondering if you could just provide some more detail on why you stepped away from the contract.

Yes. The -- when we were involved with them initially, their contract was still up, having been delayed as an award for three or four years, and it appeared to be that it would be the best way, I think, to capture the business for them would be working together on it. But, as that contract was renewed for them with the existing technologies, there really was no position for us side-by-side with them in that contract. They were supplying the same technology, the old technology rather than new technology.

Okay.

But, we were going to be the provider of the new technology.

Okay, thanks. That's all I had. I just missed that.

Yes.

Deane Dray, Citigroup.

Hi, just a couple of follow-ups. I was wondering if you could describe your European market for us. It looks to be bouncing along the bottom here, but I did see a couple of things called out in the press release. But, if you could just take a step back and describe that area for us, that'd be great.

Yes, I think your perception is correct, that it is bouncing on the bottom. We had two main markets in the European -- well, three, but the two largest are really the Bronto business and then the police/fire light business. The police/fire light business has actually seen some signs of activity in the last quarter, although it's still bouncing on the bottom. And the Bronto business is very, very slow still, so we don't see a turn-up in that.

Our PIPS camera business, which is -- has been slow there for the last two years is still operating pretty much at that level, but we don't see it going down further and we don't see it really dramatically improving.

Okay, great. And what was the currency impact in the quarter?

For the quarter in orders it was about $5 million, sales was about $3 million, and operating income was about $100,000.

Okay, great. Thank you very much.

Thanks.

Brad Evans, Heartland.

Yes, good morning. Thanks for taking the questions.

Good morning, Brad.

Good morning. Could you give us consolidated growth in orders for the US muni government, industrial and international, the three buckets there for the consolidated?

Yes. Hang on one second, Brad.

For the quarter US muni was up 17% -- that's for third quarter; industrial and commercial was up about 6% and international was up about 28%.

Okay. And what does your pipeline look like today versus -- how does it look today versus, say, a few months ago? I mean, in terms of -- as you've -- as the orders have been reasonably strong, how has the pipeline -- has it been able to be replenished at this point?

Within municipal, Brad? For the --?

Excuse me?

Municipal Business?

I guess across the board.

Yes. Yes.

Brad, right now we don't see any -- I don't know that Bronto's going to have another $40 million order quarter, but we haven't seen or heard of any change in the trends we're seeing across the business units.

Okay. The -- but the 2012 targets that you've set out there, it sounds like -- if I understood what you said, it sounds like EPG, SRG and SSG are in line with -- are tracking towards the goals you set for '12 with maybe a couple of modest tweaks here and there, but generally in that direction and where we have the greatest challenges on the FSTech side. Is that correct?

Yes, that's true. If you think of the 15 businesses, all the ones on the first three businesses except one, really, are on track, and the one is really domestic police. But I think with the balance what's going on at SSG that we're on track with that as well as ESG and then the Bronto. And in the FSTech business, there's about -- there's five splits there and we're seeing good progress on both parking and on PIPS. So really, it's the three that are still not quite where we want them.

Okay.

Hey, Brad, let me circle back on the answer I gave you on the orders. The international number was the year-to-date number. So, Q3 was the US muni plus 17%, US industrial commercial, plus 6%; and then international was up to 55% because of the big Bronto number.

Okay. It sounds like any part of the refinancing may include the divesture of noncore assets. Is that correct?

We're looking at everything right now. We've talked about the timing and everything else and we are not taking any options off the table.

Okay. Thank you.

Thanks, Brad.

(Operator Instructions.) Steve Barger, KeyBanc Capital Markets.

Hey, it's Alex again. I just had a couple of follow-ups on FSTech. I was wondering what the margins look like in the backlog and if you're seeing any changes in sell-through time. And then, ultimately, just kind of philosophically how you're feeling about the segment.

Philosophically. We set out on a path over a year ago to acquire these three businesses that really bring intelligent transportation to the forefront so that we could offer a complete system and do that on a global basis, and that is working very, very well.

We are disrupting the market as we expected to. We are providing the technology. We provide a solution to our customers that is both economical for them and reliable; in fact, very high reliability. And so, from that point of view, the business is very attractive from a customer satisfaction and technology point of view.

The amount of opportunities that are out there to sell to users is much less than we thought so, as a result of that, it's really stressing our margin capability when we have the overhead required to run that business.

The -- many of the projects we're getting are spread over multiple years. So, if we got an order today for $30 million we would only be able to recognize part of it as these are usually satisfied over maybe a three-year period.

So, our difficult is it's not in the same mode as our normal businesses, which have six to nine-month turn points where you can bring the margin in. So, while we like the technology and we like what we're accomplishing, it just isn't quite where we want it to be on the margin. But, as Bill pointed out in his commentary, we are seeing improving margins. So, it's kind of a mixed bag.

Okay. That's really good color. Then, I was also wondering if you could just talk to the -- maybe just directionally to the pricing and margins implied in the backlog for ESG and Bronto.

Well, I think the best thing to say is that it's stable; pricing is stable. We generally have done a good job through the early part of the backlog, hedging our cost of steel. As we go into next year we're still looking at that, which is the biggest item that's in those two product lines. And so, we're still working on strategies as we go forward.

The biggest -- the biggest difference going forward on Bronto is going to be the volume. It's very volume dependent on their margins. ESG, as we've talked about, has made good progress versus last year and we don't see anything changing that mix or margin structure going forward.

Okay. That's all I had, thanks. Appreciate the time, guys.

Thank you.

Brad Evans, Heartland.

Yes, just a few other follow-ups, if you don't mind. Just with the tenor of bookings in the backlog, you've got mid-single-digit growth aspirations for, I guess, EPG, Bronto and Safety for next year. Would those numbers maybe be conservative at this point based upon the tenor of bookings and backlog?

Yes, Brad, it's Bill. I think it's -- it might be. I think right now we feel very good about what we see right in front of us. I think there's a lot of uncertainty. And once you get out, depending on the business, whether it's three months or six months into the back half of next year, given this morning we woke up and Greece blew up again. So, I think we're trying to keep some balance between what we see as some short-term strength and some long-term uncertainty.

Okay.

We're trying to keep it as conservative as we can as well, Brad.

But to be clear, the order trends and the results year to date are exceeding your expectations, I assume. Correct?

The order trends are strong. We're never satisfied on the profit side, but I think we're seeing good activity. And we're seeing the right things being done by our teams, Brad, which is really what I kind of focus on to position us for better profits.

I mean, is demand strong enough for you to maybe take some pricing actions across the portfolio, or has that been done?

We do that selectively and it has been done; but we do it selectively.

Okay. Historically for Federal Signal, the fourth quarter has always been your strongest quarter. I'm just curious why that might not be the case this year.

Again, we tried to build in our concerns for the engine issue at ESG because it affects both sweepers and Vactors. And we have a huge production schedule in Bronto as a result of all the backlog. And so, we're just trying to be conservative with it.

Yes, Brad, we expect Q4 to be probably -- if not our strongest quarter, right, almost as strong as quarter in Q2. I think on the operating line we expect it to be our strongest quarter. Our interest expense will be higher because of the debt amendments, but we do expect Q4 to be strong.

Okay.

And our backlogs at both ESG and Bronto really stack us up into the -- pretty much through the first half of the year next year. So, as long as we can keep up the order rates, we're -- we should start building out a strong year as we go ahead. We're also seeing an increase in orders at are public safety warning business -- businesses, which will give us a pretty nice backlog of some nice margin products. So, I mean, we see it building but we don't want to declare that it's on a wild run yet.

Okay. And I just was curious if you might have an internal target for additional debt paydown in the fourth quarter.

I'd say we expect cash flow to be between $5 million and $10 million for the quarter, Brad.

Okay. And Dennis, just lastly, how would you grade yourself so far in terms of -- I know when you first came in I think you had identified a pretty significant working capital opportunity and it seems like it's been a little slower to come. Maybe we started to see a little bit of the signs of that this quarter a little bit. But, how would you grade yourself on that working capital opportunity that sits on the balance sheet?

Yes. I would say certainly not an A. I mean, maybe a B, but we ran into some things we didn't count on with our new ERP system in one of the plants and we're building a slower release of production in Bronto. But, I think by year end that we'll feel like -- it should show better than it does today. But, the focus --

Okay.

Is clearly there, but it's not an A performance.

Okay. Yes, I just want to make a statement. I think we appreciate the travails on the efforts to finance the debt. We would be big advocates as shareholders to absolute that pay down and pursuing all options to result in a very accelerated paydown of debt that would also make refinancing the debt more manageable and more likely to occur on advantageous terms for the Company and shareholders. And you need to get your debt-to-EBTIDA down well below two turns so -- and as quickly as possible. So, we appreciate all your hard work and we look forward to seeing that happen. Thank you.

I understand. Thank you.

Thanks, Brad.

I would now like to turn the presentation back over to Mr. Dennis Martin for closing remarks.

Well, thank you so much and we appreciate all the attendance and all the good questions. Talk to you next quarter.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.