Federal Signal Corp (FSS) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to Federal Signal Corporation Third Quarter Conference. 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.

Good morning and welcome to Federal Signal's Third Quarter 2013 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've 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 US 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.

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 second quarter of 2007, and it is expected [as] 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 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 plant 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 with 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 polic 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 a naturally [extending]. 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 and 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 a quarter. Our ESG margins 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 the 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 business. In any given quarter, of course, we can experience significant fluctuations in Bronto's results based on shipments and product mix.

All of our businesses -- we continue to work on 80/20 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 more detail.

Thank you, Brian.

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&L, net sales of $209 million were up 13% over the third quarter last year, driving an 11% increase in gross profit. SG&A expenses were lower versus a year ago, reflecting much lower corporate expenses which I will discuss later. As a result, operating income jumped 52% -- $18.8 million.

Interest expense was $1.5 million, 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 $1.9 million in Q3 last year.

Finally, income 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 a 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 US-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 a 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 as 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 Vactor. 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 $12.1 million.

At SSG, sales were flat compared to last year, and operating income of $7 million was down 10%. However, it is up significantly compared to $3.6 million in the second quarter, reflecting both recovery from temporary disruptions related to our ERP system implementation and relative stability in product demand.

Bronto turned in a strong third quarter, with sales up 51% and operating income up 74%. Bronto is benefiting from an uptick in deliveries to the Middle East, Europe and the US 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 $3.6 million, 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 $18.8 million, up 52% against the prior-year quarter.

Turning to the balance sheet and cash flow, net cash provided by continuing operations was $26.4 million during the quarter and $37.3 million year to date, with strong, positive contributions from earnings, as well as some working capital improvement. Our cash flow allowed us to reduce borrowings by more than $16 million during the quarter. Total debt of $128 million at the end of Q3 was down $30 million 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, I would note that our strong performance this quarter brings us to adjusted earnings of $0.62 per share through 9 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 2013 goals and initiatives.

Thank you, Brian.

I'd like to review our progress and provide updates on the 2013 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 2 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 Dr. Scott Rohrbaugh to serve in a newly-created position of Vice President, Business Development and Innovation. Dr. Rohrbaugh will work closely with our marketing and engineering teams 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 [to] strengthen initiatives started last year and 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 [fast] 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 business 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&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&D projects in progress to develop a new family of Jetstream pumps an 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 break-even levels and product costs in our municipal-based businesses and to improve manufacturing efficiencies at all of our businesses. We started our 80/20 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 Bronto'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 task 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 key additions to our finance department at the corporate level and in 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 efficiencies, 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 re-definition 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 expressed 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.

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 80/20 efforts and an appropriate focus on our people. With our foundation re-established, 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 businesses. 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 that complement our existing businesses and distribution channels. These are ambitious ideas, and as we flush out (inaudible) 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.

Thank you. (OPERATOR INSTRUCTIONS.) We'll go first to Walt Liptak with Global Hunter Securities.

Hi. Thanks. Good morning, everybody, and great quarter.

Good morning, Walt. Thank you.

The -- I had 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 $209 million in sales and about $0.26 for the fourth quarter, too. Is that right?

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 the last two quarters at -- 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, but obviously, we've done pretty well this quarter. We've got a good foundation. A lot of that will carry forward.

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

Well, those really were the three big things. The 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 on a -- in some scenarios -- is very little costs related to hearing loss litigation.

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?

Well, we redesigned our incentive comp plan two years ago to be very highly-performanced-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'd just -- there's a mix there that -- last year we were at 200%. This year, we're not going to be at 200% as it comes to the cash flow piece. So --

Okay.

So (inaudible) will be lower.

Okay. Got it. In the fourth quarter -- so we could use a similar corporate expense to what we said on the third?

It'll probably run a little higher because we had some of these one-time effects from allocations and so forth.

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 talk 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?

Yes. That may be confusing, 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 have 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.

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

No no. It could be industrial but related to our core manufacturing competencies or our core distribution competencies. So the customers that we call on in 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 to. 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 manufacturing.

Okay. Got it. Alright. Thanks, guys.

Thank you.

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

Hi. Good morning, everybody. Sorry about my voice. I 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 lines?

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 US 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.

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, but you know how to do it, you can do it and you can push into that new market quickly --

That's right.

And really drive a more rapid top line?

That's right. It's more core competency. In fact, one of the products we brought out this year was a 350-horsepower gear-driven product for the international market which we didn't have a year ago. And we're looking at going to a 650, which we've been able to bring more rapidly to market, as you point out, because it is competencies and areas that we have. And so I -- we're going to try to do more of that unless, of course, we see an acquisition that gets us a little further afield but also within the same neighborhood, we may be able to pick up different skills.

So as you've done your market research on where you want to focus on product innovation, is it -- do you think this can have an impact on 2014 results in terms of putting new products in the field and really starting to see their revenue benefit from that?

We think we will begin to see it. We think we already are starting to see it. But it'll be a building process. But yes.

But based on what you can see right now -- and I know you're not giving guidance for '14 -- 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?

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

And when you think about these new product innovations, is higher margin or a higher return on the 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 toward the goals this year. Clearly results have come in faster than you anticipated, including the guidance for 4Q. Over the last three quarters, you have your run rate that's obviously better than $0.90. Do you have a line of sight on earnings growth for FY'14? Is it reasonable for us to think about the bottom line continuing to grow at a solid pace next year?

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'll be a very large variable for next year and this year. In some years, we've spent as much as $10 million on hearing loss -- some years $5 million and some years $1 million or $2 million. 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 80/20, with better price controls, 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, would be -- it would be very difficult at this point.

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.

Yes. A little bit under $0.90.

If you include 4Q.

Yes.

Correct. Yes.

Yes.

Yes. 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 --

Yes. We think that the market --

(Inaudible) make their own decision about hearing loss.

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 next year. And we don't have much visibility much beyond that. But we don't see anything that's going to derail progress.

So I'll get back in line.

Thank you.

And Matt McConnell with Citi has our next question.

Thanks. Good morning. Great quarter.

Thank you. Good morning.

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 gage sustainability of some of the end-market increases that you're seeing on the municipal side?

Right. That's a good 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 in our last call, they dropped from something in the 80,000-per-year a couple years ago down to, I think, high 30,000-per-year. And this year, we think they'll be into the low to 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, they're doing more maintenance, so they want to continue to spend. So I think the police market US is at an inflection point. It has come up a little bit, will 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 street sweeper business has been better for the last two years but well below the peak, but better 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 a -- there's no inflection point on the Bronto sales in Europe. We think that's still on the bottom laying flat.

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 in the (inaudible) police market?

We've actually done two things in the police business, Steve. We've 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 on 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 a new car. So we think that it really hasn't started up fast, but it'll pick up some. But we don't think it'll ever return to the high level of 80,000 a year. We think it'll probably get back up into mid-50,000 cars a year or something. Of course, we don't know until it happens but --

Right. It's still meaningfully above where you are now.

Meaningfully above. Right.

And if I could switch gears to Jetstream.

Sure.

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.

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.

Okay. Great. And maybe the last one from me. It looks like you had a 4% price increase in ESG, or at least a 4-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?

Yes. I think it's -- I think that what you're seeing really is improvement in margin that has come from some price activity -- not 4% -- and margin improvements throughout 80/20 in the plants and mix, because the mix makes a huge difference in margins. So it was not all price increase. I'd love to get 4% price increase.

Yes. I think a lot of it is mix. We're selling more of the higher-valued, higher-margin products generally.

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

Okay. Great. Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS). We'll move on to Brad Evans with Heartland Funds.

Good morning, team.

Good morning, Brad.

Good morning, Brad.

Good morning.

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

Thank you.

Thank you.

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 million to $85 million of adjusted EBITDA. Brian, is that about right?

That is. Yes.

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

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

Got it. And so let's just take the high end and say $15 million. 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 $8.5 million for interest expense, so call it $9 million. And your tax bill for the full year -- it looks like you're going to still run very low numbers. So call it $4 million or $5 million. Correct?

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

Got it. I'm sorry. What do you think the effective tax rate will be for the fourth quarter?

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 US -- we are fully-sheltered and the only question is whether the valuation allowance that we retained 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.

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 million -- $15 million for CapEx, $10 million for interest, call it, round it up and $5 million for taxes. So you should generate about -- before working capital changes, you're generating about $60 million in free cash flow.

Your math is pretty good. Yes.

Okay. So -- but 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?

We'll be using the assets up, yes. Probably more like 80% but --

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

(Inaudible) tax (inaudible).

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

Got it. My 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?

That's exactly right. That's exactly right.

Okay.

The earnings will be pulled down on the financial statements, but we're not paying more taxes than we 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.

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

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

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, can 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?

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, I talked about that last year. We've ended up -- in the period time since that occurred last December -- have picked up about 6 or 7 actual orders. So we'll see some increase, but I don't think it's going to dramatically drive large increments of new business.

Okay. Good luck, you guys. Appreciate it.

Thanks, Brad.

Thank you.

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

Well, thank 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.

Thank you.

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