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Edited Transcript of FSS earnings conference call or presentation 28-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Federal Signal Corp Earnings Call

OAK BROOK Feb 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Federal Signal Corp earnings conference call or presentation Tuesday, February 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Conference Call Participants

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* New Speaker

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Presentation

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Operator [1]

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Good day and welcome to the Federal Signal fourth quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Cooper, senior vice president and Chief Financial Officer. You may begin.

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New Speaker, [2]

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Good morning and welcome to Federal Signal's fourth quarter 2016 conference call. I'm Brian Cooper, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our president and Chief Executive Officer. We'll refer to some presentation slides today, as well as to the news release that we issued this morning. The slides can be followed online by going to our website, federalsignal.com, and clicking on the investor call icon and signing into the webcast. We have also posted the slide presentation and today's news release under the investor tab on our website. Before we begin, I would 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 releases 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 earnings news release, and filing we reconciles these non-GAAP measures to GAAP measures. In addition we will file our Form 10-K later today. I will begin by providing some detail on our fourth quarter and full year results before turning the call over to Jennifer to provide her commentary on our performance in 2016, and update on our strategic initiatives and they are thoughts on our outlook for 2017. After our prepared comments, Jennifer and I will address your questions. Our consolidated fourth quarter and full year results for 2016 or provided in today's earnings news release. As a reminder, the latest fourth quarter includes operating results of Joe Johnson equipment, or JJE, which we acquired in early June of 2016. Please also note that the historical and current year information presented in the release exclude the results of the fire rescue group, which was discontinued in connection with the sale of the Bronto Skylift business which was completed in January of 2016. I would like to briefly highlight some of the our full year 2016 consolidated results. Net sales totaled $708 million, down 8% versus 2015. On lower sales volumes, operating income for the year, was $57.7 million, compared to $103.2 million in 2015. Operating income for 2016 includes the recognition of $3.9 million of expense, associated with purchase accounting effects from our acquisition. It also includes $1.4 million of other acquisition-related expenses and $1.7 million of restructuring costs. Excluding these items, consolidated operating margin for the year was 1.9%, compared to 13.5% for the prior year. On an adjusted basis, we reported full year earnings per share of $0.69, compared to $1.02 per share in 2015. We reported consolidated orders of $674 million, which were down 2% from the prior year. Overall, our full year results reflected challenging conditions some of our key end markets most notably oil and gas which significantly reduced orders, sales and operating income. The rest of my comments I will focus mostly on comparisons of the fourth quarter of 2016 to the fourth quarter of 2015. Consolidated net sales for the fourth quarter were $176 million, down 6% compared to the prior year period. Operating income of $13.8 million was down versus $24.3 million in Q4 of 2015. Consolidated operating margin for the quarter was 7.8%, compared to 13.0% a year ago. Q4's reported operating income includes $0.9 million of expense, tied to purchase accounting, $0.2 million of other acquisition related expenses and no, ma'am nail restructuring costs. Con consolidating operating margin excluding these items was 8.5%, compared to 13.0% the year before. Income from continuing operations was $12.1 million for the fourth quarter compared to $17.4 million the prior year. That translates to GAAP earnings of 20 cents per share, which compares to $0.27 per share in 2015. We also look at earnings on an adjusted basis which, I will explain later. On that adjusted basis EPS for the fourth quarter was $0.16 which compared to $0.25 per share the prior year. Orders reported in the fourth quarter were $165 million, down 8% compared to the prior year period. We ended the quarter with a consolidated backlog of $137 million, which was down from $149 million at the end of the third quarter. As you can see in our group results, lower sales volumes and changes in sales mix within the environmental solutions group have contributed to a decrease in consolidated operating income. With lower manufacturing volumes, we also experienced negative operating leverage on our fixed costs, including lower absorption of our fixed manufacturing costs. Results for the quarter also includes a $0.9 million noncash charge, related to purchase accounting. This was the additional cost of sales during the quarter, after arequired JJE equipment was stepped as part of its sales value. These stepped up costs will affect our earnings but not our cash flow. And our are expected to become smaller over the next couple of quarters. There's approximately $6 million of step up remaining to be realized. In the environmental solutions group, orders were generally consistent with the prior year and net sales were down slightly. The J. JE acquisition contributed $30.5 million of incremental net sales in the quarter was which offset by lower domestic shipments of vacuum trucks sweepers. The lower sewer cleaners were primarily represent the timing of deliveries as orders have been steady. Whereas the reduction in street sweeper sales is associated with fewer large fleet shipments when compared to the prior year quarter. ESG's operating decreased by $12.1 million. This was mostly due to a $9.3 million in decrease in gross profit, operating leverage and purchase accounting expenses. Adjusting to exclude these effects as well as acquisition expenses, ESG's operating margin for the quarter was 9.3%, down when compared to 17.9% for the prior year. At our safety and securities Systems Group, the sales were down 12% compared to Q4 of 2015, but operating income of $9 million was generally unchanged. This resulted in an improved operating margin of 16.5%, compared to 14.7% in the prior year. Orders at SSG were down 24% compared to the fourth quarter a year ago, reflecting continued softness, as a result of oil and gas, and slow receipt of municipal orders. Finally, corporate operating expenses of $5.4 million were down $1.7 million from the prior year, mainly due to lower employee incentive compensation expenses. Turning now to the consolidated income statement, you can see that the consolidated gross profit is down disproportionately to net sales as a result of the volume delevering and less favorable mix than I described in the group results. That translates to a lower consolidated gross margin of 25.8% in the last quarter, compared to 29.7% in 2015. Selling, engineering, general and administrative expenses, $31.3 million, were up 1% compared to the prior year quarter, primarily due to additional operating expenses from our current year acquisitions which offset other cost control and reduction efforts. I have also noted $0.2 million of acquisition-related expenses equal to the change in the liability that is tied to the JJE earn out. We reassess that every quarter in accordance with the accounting rules. In total, this all adds up to $13.8 million of fourth quarter operating income. Other items affecting our quarterly earnings include a $0.6 million reduction in nonoperating income, largely related to foreign currency transaction effects in the prior year and a $5.7 million reduction in income tax expense. Taxes are lower because of our lower income, but also reflect changes in income tax valuation allowances. The effective tax rate for the quarter was much lower than usual, at around 9%, largely due to inclusion of a $2.2 million net benefit from special tax items. Specifically we recognized the benefit of approximately $3.5 million in releasing of valuation allowance in Canada during the fourth quarter. Partially offsetting this benefit was $1.3 million of expense recognized in connection with establishing a valuation allowance in the UK. The effective tax rate for Q4 of 2015 was also low at 28.4%, largely due to inclusion of a $1.4 million net benefit from special tax items. I would also note that our effective tax rate in 2016 for the full year excluding special tax items was approximately 34.5%. We have currently expect our financial book effective tax rate to be in a similar range for 2015. I'm sorry, for 2017. Cash taxes paid will be lower than that at a percentage rate that we estimate at about 20%. Based on our anticipated use of deferred tax assets consisting largely of net operating loss carry forwards and tax credit carry forwards. On an overall GAAP basis, we therefore earned $0.20 per share from continuing operations in Q4, compared with $0.27 per share in Q4 of 2015. To facilitate earnings comparisons we adjust our GAAP earnings per share for unused items in the current or prior year quarter. In the fourth quarter we made adjustments to GAAP earnings per share to exclude the purchase accounting effects, acquisition-related expenses and special tax items I have already discussed. On this basis, our adjusted earnings for the fourth quarter were 16-cents per share, compared to $0.25 per share in the fourth quarter a year ago. With note to on this same basis our adjusted earnings for the full year was $0.69 per share, compared to $1.02 in 2015. Turning now to the balance sheet and cash flow, we generated $9.6 million of cash, from continuing operations in the quarter, compares to $30.7 million during Q4 of 2015. For the full year we generated $27.6 million from continuing operations in 2016, compared to $91.1 million in 2015. Operating cash flow for 2016 was somewhat artificially lower by approximately $11 million as a result of noncash settlement of accounts receivable, due from JJE that occurred upon closing of the acquisition. Other factors explaining lower cash flow for the year include lower earnings at $23.5 million increase in primary working capital, and additional $6.9 million of net cash outlow related to rental equipment transactions, and a $3.7 million increase in income tax payments. With total debt of $64 million in cash on hand of $51 million, we ended the quarter with only $13 million of net debt. Availability under our credit facility at the end of the quarter was $244 million, and our leverage ratio remains low. We are obviously in a strong financial position and have significant flexibility to invest in organic growth, pursue acquisition opportunities and return value to shareholders. On that note, we paid a dividend of $0.07 per share during the fourth quarter, amounting to $4.1 million, and we recently announced a similar dividend for the first quarter of 2017. Dividends paid during 2017 totaled $16.9 million, up from $15.6 million in 2015. We also funded share repurchases of $4 million during the quarter, bringing total repurchases in 2016 to $37.8 million, which were an average of 12-point -- of $12.75 per share. That compares with share repurchases of $10.6 million in all of 2015. We had about $31 million remaining under our share repurchase authorization, as of the end of 2016. That concludes my comments and I would hike to turn the call over to Jennifer.

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New Speaker, [3]

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Thank you, Brian thanks to all of you for joining us on the call today. Our fourth quarter results helped us deliver solid full year earnings towards the higher end of our recent expectations. However, it is clear that 2016 was a challenging year. We started 2016 with relatively low backlog, and weak incoming industrial orders throughout post of the year, reflected a major downturn in oil and gas along with general softness in our broader industrial markets. Due to our longer lead times for equipment selling to oil and gas and marks during 2015, we felt the effects of oil and gas later that most companies of the sales were down significantly and the lower volumes, especially for some of our higher margin equipment including hydroexcavators created negative operating leverage. On the positive side, several of our businesses performed well in 2016. Our public safety systems business grew market share and improved its bottom line. Our Al gin sweeper business posted the second best year for earnings despite demands towards products fluctuating as a result of the timing and the pattern of large fleet and international orders. Demand for our vacuum and sewer cleaners remain steady as I will discuss later, we finished the year and start the new year with some improving trends in industrial orders. Before I move on to our strategic objectives and outlook, I would like to recap some of the company's specific achievements in 2016. As you know, in January of 2016, we completed the sale of our Bronto Skylift business receiving proceeds of approximately $88 million. Bronto Skylift required a disproportionate a.m. of capital and the divestment facilitates the focus on more profitable growth opportunities. Also in January of 2016, we executed a new five-year $325 million revolving credit facility to replace our previous $225 million credit facility. The new facility recognized our vastly improved financial position and it gives us cost and flexibility advantages. We continue to apply a disciplined approach to potential acquisitions in June 2016, we completed the acquisition of JJE. JJE facilitated sales of Federal Signals manufactured products to new marks, expands our rental and use equipment offerings to serve customer needs and more broadly enhances the parts and services business and increases the footprint across North America. The acquisition of JJE also added product lines that are not manufactured by the company such as refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow removal equipment. In addition, we have completed the acquisition of west tech, a Canadian manufacturer of high quality, rugged vacuum trucks for a nominal price. Since the acquisition was completed in January of 2016 we have made a number of product and manufacturing enhancements and obtained US D.O.T. certifications for a new line of product offerings which opens new markets for us. We also continue to focus on new product development in 2016, and are encouraged by both the projects in our pipeline and our results so far. The most promising of these on the environmental solutions group side is our award winning purpose-built paradigm, vacuum excavator that is targeted at the utility market which is a relativey in new market for us. We have realigned the sales force to better serve that market and we are tracking ahead of our expectations. It has been our most successful product launch in over a decade. At the safety and securities Systems Group, we are working on a variety of new technologies, such as video management and Internet of Things connectivity and exploring how they can improve and expand our product offering. Finally, we demonstrated our commitment to returning value to shareholders by more than doubling cash returns in 2016, paying an aggregate $54.7 million in the year in form of cash dividends and share repurchases compared to $26.2 million in 2015. We have taken a number of deliberate steps over the last several years to position Federal Signal for profitable growth. The sale of Bronto largely completed the realignment of our portfolio of businesses, which started a number of years ago with the sale of Aztec. We believe our two remaining operating groups, the environmental solutions group and the safe and securities system group serve attractive municipal, end markets. We aim to optimize our existing end markets which is where our 80/20 efforts, customer focus and hard work help us to gain market share, serve our customers, better, drive efficiency and leverage our capital. Our consolidated operating margin has declined during the significant headwinds of the last year or so the long-term consolidated operating margin of 12% remains unchanged. We want to provide competitive advantages and grow after market services and opportunities. One of the key steps is to refocus of the parts. Acquisitions are also a key part of our future growth. In addition to our two acquisitions completed in 2016, we have a robust M&A pipeline and we expect M&A to contribute further in 2017. So where do these strategic efforts take us? We would like to share our long-term revenue perspective, looking ahead, we have set a goal to exceed $1 billion in revenues by 2020, which would equate to a compound annual growth rate of at least 9%. We believe this is achievable, with contributions from a number of areas. Starting from our 2016 revenues we expect additional revenue from having JJE for a full year in 2017, instead of seven months. In addition to GDP growth across our core businesses, we also anticipate recovery during the small time period in some of our end markets that have been soft recently, including oil and gas. We are also driving towards targets for our strategic initiatives that will contribute to growth above GDP. The remainder are our revenue directive derives from additional M&A. We are about halfway to our previously stated goal for incremental revenues of $250 million from acquisitions by 2018. We are excited about our strategic initiatives which position us well to benefit as our market strength and we are cautiously optimistic about the near term economic outlook. For the full year 2017, we anticipate solid topline growth in year over year earnings improvement, however, we expect that our first quarter will be soft, with earnings likely to be between 14 and 16% of our annual earnings. This earnings pattern reverts to our historical seasonality with a first quarter typically is the softest of the year. It reflects a smaller year-end backlog that carries the reduced margins and lower industrial demand that persisted throughout most of 2016 and a higher concentration of orders for products manufactured by other OEMs. As we look at the year, there are a number of factors reflected in our outlook. Our municipal markets which represent about 60% of our revenues remaining stable over all. Last week, I was at our largest trade show for our environmental solutions group and spent time with many of our municipal dealers. Overall, they felt positive about the municipal opportunities for 2017. On the industrial side, we have seen strong improvement in US orders since early December. In agri domestic industrial orders for December and January, were up more than 50%, versus the prior year. This was driven mostly by environmental intake in the environmental solutions group. It should start to benefit us beginning in Q2. Also benefiting the year is the ramp up of our paradigm product and a full year's contributions from JJE. JJE's business includes rental and used equipment, income and the associated rental fleet that will drive an increase in our annual depreciation expense of about 8 to 10 million. On the other hand, we have not counted on any meaning full improvement in oil and gas which would benefit the hydro equipment. We expect that it would most likely benefit us in 2018 and beyond. In 2017, we are also continuing to add sales resources and fund R&D expenses in support of our long-term strategic initiatives. Our 2017 outlook includes the net reduction of about $0.02 to $0.03 to our adjusted EPS for this spending. With, that we expect adjusted earnings per share for the year to be between $0.70 and 78 cents. At this point, we would like to open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause now for just a moment to allow everyone an opportunity to signal. We'll take our first question from Steve Barger with KeyBanc Capital Markets.

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New Speaker, [2]

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Good morning, Steve.

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New Speaker, [3]

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Hey, good morning, guys. This is actually Ken on for Steve.

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New Speaker, [4]

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Hi, Tim.

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New Speaker, [5]

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I had Tim.

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New Speaker, [6]

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First question, I just want to ask what drove the mix in SSG to give you that EBIT margin in the quarter and do you expect that is a sustainable margin going forward and first ask of the team?

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New Speaker, [7]

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Yes, Kim, we have a mix of business there. Our lease business and the public safety side in general has been doing well, and so their margins have performed well. We will see that margin going up and down from time to time. So it was a good quarter, but it is not out of range of what we think is sustainable.

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New Speaker, [8]

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Yeah, I think I would add to, in terms of our outdoor warning business, they had a very solid quarter and that was the significant contributor to the operating margin.

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New Speaker, [9]

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Got it. Going back to the guidance, could you quantify the solid year-over-year growth commentary that you gave? Should we think about that as low single digit, midsingle digit?

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New Speaker, [10]

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Yeah, I think 9 way we look at it, we look at -- you know, for 2017, we expect our growth to be 1 to 2% above GDP and then we'll also benefit from the full year impact of the JJE.

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New Speaker, [11]

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So just to clarify, that 1 and 2%, is that organic or is that also including acquisition?

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New Speaker, [12]

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No, that does not include any additional acquisition. It only includes the full year impact from JJE.

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New Speaker, [13]

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What are you seeing in terms of 2017 in terms of demand for hydrovac, first in the US and then in Canada? And then, you know, how much of a step up in that product line is embedded in your guidance whether it's for oil and gas or the utility markets that you are stepping into or just your traditional applications?

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New Speaker, [14]

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Yeah, as I mentioned, you know, we have been encouraged by the order pattern that we have seen since early December. You know, for our industrial orders, for December and January, they were up over 50%. Some of that has been driven by hydroexcavation orders. We are not baking kind of meaningful improvement in that area with respect to oil and gas in 2017. We expect that to occur -- we would start to benefit there's meaningful impact in '18. As we have talked about before, you know, we think any recovery would -- we would be delayed for us, because there is an excess inventory out, there although we are encouraged but because we have not seen a lot of our equipment in the auctions that we monitor on a regular basis, we're also encouraged by the sales of paradigm into the utility market. We were ahead of our expectations. We introduced the product in July of last year, ahead of our expectations for 2016, and we're off to a strong start in 2017.

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New Speaker, [15]

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Okay. Can you just talk about other areas of industrial orders that are seeing strength? Is that really broad based or did you get a couple of big orders that really gave you some confidence here?

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New Speaker, [16]

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Yeah, we -- it wasn't really a large -- large fleet orders. It was driven by our ESG business and we are seeing it at jet stream. We are seeing it at guzzler and we are in the early months. It's two months of data that have continued into early February. But it's more broad based.

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New Speaker, [17]

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Okay.

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New Speaker, [18]

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) Really driven by the ESG side of business.

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New Speaker, [19]

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Right.

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New Speaker, [20]

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Okay. And then just one more for me and then I will get back in line. Can you talk about how the pricing power is in both municipal and industrial? Are you seeing competitors being rational or are they pretty aggressive pricing?

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New Speaker, [21]

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You know, we operate in competitive markets but, you know, generally, we produced a premium product and we're typically able to get paid for it.

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New Speaker, [22]

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Got it. That's helpful.

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New Speaker, [23]

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Thank you.

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Operator [24]

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Our next question comes from Chris Moore with CJS Securities.

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New Speaker, [25]

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Oh, great. Good morning, guys. Thank you for taking my questions.

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New Speaker, [26]

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Good morning, Chris.

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New Speaker, [27]

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All right. Yeah, just on ESG, maybe we can talk a little bit about the operating margins and I know that -- I would say they are low this quarter. Part of that is absorption. You know, can you just talk a little bit about that in terms of Q4 and then, you know, moving forward in terms of expectations for those to rebound a little bit?

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New Speaker, [28]

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Yeah, I mean, clearly the two major drivers were volume and mix. You know know, our volumes were down significantly and then if you look at the mix of the equipment, we talked a lot in the past about the kind of higher margin hydro excavators but with respect to JJE, there was also an impact there because there was more non-Federal Signal equipment that was sold, the other equipment so that had an impact on it. As they move forward we are encouraged by. Recent order trends of the industrial products because that tends to carry higher margins.

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New Speaker, [29]

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Gotcha. On the municipal side, it sounds -- you know, what I heard was overall, you know, the trends remain positive. Are there areas within the municipal that are not necessarily the case or is there any more, you know, specifics behind that? You know, I think -- you know, our vac Stewart cleaner line, you know, as I mentioned, they were very stable throughout the year. Our public safety systems business. They had a very good year where they gained both on the top and the bottom line. That business can be impacted in terms of timing, because on the large municipalities will tend to have larger fleet-type orders. On the street sweeper side, that business can be impacted again by the larger neat orders and the international orders. So it would vary quarter to quarter, overall, we feel, you know, we believe that 2017, our municipal business will remain stable.

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New Speaker, [30]

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Gotcha.

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New Speaker, [31]

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Just one last item. On the Canadian side, I mean are you -- I have been reading some different things. Are you seeing any impact from new weight regulations in Ontario and enforcements in other parts of Canada on hydrovac operators is that anything on your radar?

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New Speaker, [32]

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That's something that our businesses -- our teams at vacuum are working very closely with the JJE steam. We are aware of the regulations. We believe that we will have products that meet those requirements and ultimately, we think it will give us the competitive advantage.

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New Speaker, [33]

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Gotcha. And one last one. In terms -- just trying to get a feel for demand from different perspectives. On the smaller truck side, is there -- can you give us a sense, is there any difference there from a demand perspective, than some of the larger, you know, ASP type offerings or is there much of a distinction there?

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New Speaker, [34]

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You know, on the smaller truck side, the paradigm and some of our trailer jutter equipment, we have seen strong demand in 2016 and we're off to a solid start in 2017. With respect to the larger trucks, the larger hydroexcavators, a lot of that business is tied to oil and gas. We talked about it earlier. You know, we are not expecting meaningful improvement in that he 17 to the extent there is a rebound it will be delayed for us and we expect to benefit the fourth quarter and into 2018.

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New Speaker, [35]

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All right. Appreciate, it guys.

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New Speaker, [36]

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Thanks, Chris.

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New Speaker, [37]

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Once again, ladies and gentlemen, if you would hike to ask a question, please press STAR one. If you do find that your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit two. We will take the next question from Marco Rodriguez, from Stonegate Capital Markets.

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New Speaker, [38]

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Good morning, guys. Thank you for taking my questions. I wonder if you could talk a little bit more about the order rates that we were discussing a little bit earlier. You saw some nice movement December and January, and I believe in your prepared remarks, you talked about some increasing confidence from the distributors that you were talking to here very recently. Did you see like any sort of a budget flush that had increases those orders and can you talk anecdotally what is driving the confidence for the distributors on the order rate?

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New Speaker, [39]

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Yeah, Marco. Just to start, we -- you know, if you look at the quarterT was a little on the softer side and what we really thought happened was there was some slowdown in demand in the November time frame, and then after the election, things seemed to open up a little bit. I wouldn't characterize it as budget flush but people were feeling more positive and that seemed to carry into the order patterns we were seeing.

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New Speaker, [40]

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Yes, last week, I had an opportunity to meet with several of our dealers and I visited with several of them over the last couple of months. And as they look into 2017, many of them are expecting year-over-year improvement. They are very enthusiastic about the paradigm product line that we have talked about, and their success to date. The rerent program that we have in place now, with JJE gives them opportunities to represent our equipment. It also gives them access to used equipment. So there's a portfolio of offerings has been broadened by the JJE acquisition and overall, last week and in my one-on-one meetings they have been very encouraging about 2017.

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New Speaker, [41]

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Gotcha. And in terms of the operating leverage that you guys might be baking into your guidance here in the fiscal '17, can you give us a little bit of a sense as far as how much you might see based on volume or mix or anything of that nature?

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New Speaker, [42]

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Um, I think operating leverage goes with volume. So as we see some of the improvement -- some of the return of volume and it also goes with mix. So it depends on where we get our orders, but as we see the industrial orders coming, that's positive for us, and it -- you know, the more we get -- and obviously municipal orders that float through Elgin and vector are positive as well.

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New Speaker, [43]

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Okay. And any update on the oil and gas? I know you talked about it slipping relatively weak. Any update expectations in terms of when you think that might kind of work its free this fiscal year for you guys?

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New Speaker, [44]

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We expect it to be late this year, perhaps fourth quarter into 2018, based on what we are seeing right now. We have talked in the past about kind of excess inventory of our equipment that's out. We are starting to see some of that equipment come out of mothballs and seeing service at our service centers. So we think that's encouraging. But, again, we would expect to see kind of any meaningful improvement that occurs late this year and really bleeding into 2018.

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New Speaker, [45]

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Got it and two real quick housekeeping items here. Do you by chance have the gross margins for the segments.

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New Speaker, [46]

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) We will be filing the 10-K later this afternoon and all that information will be in there.

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New Speaker, [47]

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Okay. Gotcha. And then last quick question, I believe this was in your press release, you talked about increasing working capital. I guess there was a specific reason for it, if you can maybe talk a little bit about that?

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New Speaker, [48]

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Yes, we had a couple of specific investments that we made, deliberately. Part of it was to build some stock units so we could capture immediate sale opportunities. Part of it was to better manage our chassis flow, as -- as we have a lower backlog and we want to make sure we maintain reasonable lead times on producing product. So we made some addition -- some specific investments in inventory. You know, I would tell you, it's -- it's a temporary thing probably, but it's something that made sense for the business at that point in time.

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New Speaker, [49]

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Got it. I appreciate your guys' time.

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New Speaker, [50]

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Thank you.

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Operator [51]

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Once again, it's star one to ask a question. We'll take our next question from Steve Barger with KeyBanc Capital market.

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New Speaker, [52]

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Hello, Kim.

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New Speaker, [53]

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Thanks for the follow-up.

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New Speaker, [54]

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So how much input costs inflation are you seeing in the manufactured items that you buy?

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New Speaker, [55]

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I'm sorry, how much input inflation?

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New Speaker, [56]

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Correct.

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New Speaker, [57]

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It's fairly minimal. We are seeing a little bit in some of the commodities but, you know, steel is probably our biggest compennent and it might be 10% or so in that category. So there's a little pressure there. We -- you know, we don't feel it makes a huge difference in our margins, though.

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New Speaker, [58]

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Got it. And then, you know, the balance sheet does look pretty strong and you talked a little bit about the M&A opportunities for 2017. Can you just provide an update on what you are seeing in the M&A pipeline, in terms of how many deals or the size of potential revenue for these deals that you are seeing?

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New Speaker, [59]

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Sure. We are looking at a number of different opportunities. We're looking at some small product line acquisitions, and we're looking at some larger opportunities. You know, everything from, you know, typically the source of most of our deals comes from our privately held, some type of family business where there's a liquidity event, but then we are also in regular dialogue with, you know, various investment bankers would bring deals forward us to. We are very active right now in the market. As I mentioned earlier, M&A will be an important part of the growth of the company.

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New Speaker, [60]

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Right. Could you talk a little bit about what multiples have been like these past few months post election?

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New Speaker, [61]

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Sure. You know, it really depends again on the transaction. But, you know, as we have seen -- have multiple creep, and it's something as a company we have remained -- we have looked at 100 plus acquisition opportunities. We remained very disciplined. You know, we will pay fair value. But, again, we are looking at all the strategic -- you know, does it advance our strategic initiatives? Where are the synergy opportunities? And, again, I said this will be an important part of our growth going forward.

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New Speaker, [62]

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100 plus opportunities that you looked at.

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New Speaker, [63]

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Over the last two years, yes.

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New Speaker, [64]

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Wow! Could you -- last one for me, could you just talk about how big the revenue range is for active projects that you are looking at?

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New Speaker, [65]

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Yeah, I don't know that we want to get into active projects and get that specific, but as Jennifer said, it's a pretty wide range, some fairly large ones and very small ones and as we work on them, you never know what's going to come through, and when. My experience has always been, you know, what you think is going to happen doesn't and what you are not sure happens seems to end up happening. So it's a pretty wide range.

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New Speaker, [66]

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Yeah, and several of the acquisition opportunities we have been in dialogue for a couple of years.

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New Speaker, [67]

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Right. And, sorry this is my last one, I promise. You know, just kind of going off of that, when you think about the M&A pipeline, are you more gears towards the JJE product type set or something that would help or I guess be a side strategy to that platform, or are you looking more towards the core-type legacy businesses to add on to or to transform?

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New Speaker, [68]

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It's many of those, really. We have a number of different businesses and whether our logical fits that can help us grow those businesses and make them more profitable, we'll look at those things. So there can be a variety of different types of businesses. The JJE platform was not something we were planning to keep growing in that respect as a distributor. But we are -- you know, we do like their products and what we are looking for in general is on the product side would be things that are, you know, match our manufacturing capabilities and kind of align that way.

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New Speaker, [69]

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Got it. Thanks for the time, guys.

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Operator [70]

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It appears there are no further questions at this time. I would like to turn the conference back to Jennifer Sherman for any additional or closing remarks.

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New Speaker, [71]

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In closing, I would like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Again, we like to express our thanks to our stockholders, distributors, dealers and customers for their continued support. Thank you for joining us today.

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Operator [72]

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This does conclude today's conference. You thank you for your participation. You may now disconnect.

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Operator [73]

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Good day and welcome to the Federal Signal fourth quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Cooper, senior vice president and Chief Financial Officer. You may begin.

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New Speaker, [74]

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Good morning and welcome to Federal Signal's fourth quarter 2016 conference call. I'm Brian Cooper, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our president and Chief Executive Officer. We'll refer to some presentation slides today, as well as to the news release that we issued this morning. The slides can be followed online by going to our website, federalsignal.com, and clicking on the investor call icon and signing into the webcast. We have also posted the slide presentation and today's news release under the investor tab on our website. Before we begin, I would 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 releases 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 earnings news release, and filing we reconciles these non-GAAP measures to GAAP measures. In addition we will file our Form 10-K later today. I will begin by providing some detail on our fourth quarter and full year results before turning the call over to Jennifer to provide her commentary on our performance in 2016, and update on our strategic initiatives and they are thoughts on our outlook for 2017. After our prepared comments, Jennifer and I will address your questions. Our consolidated fourth quarter and full year results for 2016 or provided in today's earnings news release. As a reminder, the latest fourth quarter includes operating results of Joe Johnson equipment, or JJE, which we acquired in early June of 2016. Please also note that the historical and current year information presented in the release exclude the results of the fire rescue group, which was discontinued in connection with the sale of the Bronto Skylift business which was completed in January of 2016. I would like to briefly highlight some of the our full year 2016 consolidated results. Net sales totaled $708 million, down 8% versus 2015. On lower sales volumes, operating income for the year, was $57.7 million, compared to $103.2 million in 2015. Operating income for 2016 includes the recognition of $3.9 million of expense, associated with purchase accounting effects from our acquisition. It also includes $1.4 million of other acquisition-related expenses and $1.7 million of restructuring costs. Excluding these items, consolidated operating margin for the year was 1.9%, compared to 13.5% for the prior year. On an adjusted basis, we reported full year earnings per share of $0.69, compared to $1.02 per share in 2015. We reported consolidated orders of $674 million, which were down 2% from the prior year. Overall, our full year results reflected challenging conditions some of our key end markets most notably oil and gas which significantly reduced orders, sales and operating income. The rest of my comments I will focus mostly on comparisons of the fourth quarter of 2016 to the fourth quarter of 2015. Consolidated net sales for the fourth quarter were $176 million, down 6% compared to the prior year period. Operating income of $13.8 million was down versus $24.3 million in Q4 of 2015. Consolidated operating margin for the quarter was 7.8%, compared to 13.0% a year ago. Q4's reported operating income includes $0.9 million of expense, tied to purchase accounting, $0.2 million of other acquisition related expenses and no, ma'am nail restructuring costs. Con consolidating operating margin excluding these items was 8.5%, compared to 13.0% the year before. Income from continuing operations was $12.1 million for the fourth quarter compared to $17.4 million the prior year. That translates to GAAP earnings of 20 cents per share, which compares to $0.27 per share in 2015. We also look at earnings on an adjusted basis which, I will explain later. On that adjusted basis EPS for the fourth quarter was $0.16 which compared to $0.25 per share the prior year. Orders reported in the fourth quarter were $165 million, down 8% compared to the prior year period. We ended the quarter with a consolidated backlog of $137 million, which was down from $149 million at the end of the third quarter. As you can see in our group results, lower sales volumes and changes in sales mix within the environmental solutions group have contributed to a decrease in consolidated operating income. With lower manufacturing volumes, we also experienced negative operating leverage on our fixed costs, including lower absorption of our fixed manufacturing costs. Results for the quarter also includes a $0.9 million noncash charge, related to purchase accounting. This was the additional cost of sales during the quarter, after arequired JJE equipment was stepped as part of its sales value. These stepped up costs will affect our earnings but not our cash flow. And our are expected to become smaller over the next couple of quarters. There's approximately $6 million of step up remaining to be realized. In the environmental solutions group, orders were generally consistent with the prior year and net sales were down slightly. The J. JE acquisition contributed $30.5 million of incremental net sales in the quarter was which offset by lower domestic shipments of vacuum trucks sweepers. The lower sewer cleaners were primarily represent the timing of deliveries as orders have been steady. Whereas the reduction in street sweeper sales is associated with fewer large fleet shipments when compared to the prior year quarter. ESG's operating decreased by $12.1 million. This was mostly due to a $9.3 million in decrease in gross profit, operating leverage and purchase accounting expenses. Adjusting to exclude these effects as well as acquisition expenses, ESG's operating margin for the quarter was 9.3%, down when compared to 17.9% for the prior year. At our safety and securities Systems Group, the sales were down 12% compared to Q4 of 2015, but operating income of $9 million was generally unchanged. This resulted in an improved operating margin of 16.5%, compared to 14.7% in the prior year. Orders at SSG were down 24% compared to the fourth quarter a year ago, reflecting continued softness, as a result of oil and gas, and slow receipt of municipal orders. Finally, corporate operating expenses of $5.4 million were down $1.7 million from the prior year, mainly due to lower employee incentive compensation expenses. Turning now to the consolidated income statement, you can see that the consolidated gross profit is down disproportionately to net sales as a result of the volume delevering and less favorable mix than I described in the group results. That translates to a lower consolidated gross margin of 25.8% in the last quarter, compared to 29.7% in 2015. Selling, engineering, general and administrative expenses, $31.3 million, were up 1% compared to the prior year quarter, primarily due to additional operating expenses from our current year acquisitions which offset other cost control and reduction efforts. I have also noted $0.2 million of acquisition-related expenses equal to the change in the liability that is tied to the JJE earn out. We reassess that every quarter in accordance with the accounting rules. In total, this all adds up to $13.8 million of fourth quarter operating income. Other items affecting our quarterly earnings include a $0.6 million reduction in nonoperating income, largely related to foreign currency transaction effects in the prior year and a $5.7 million reduction in income tax expense. Taxes are lower because of our lower income, but also reflect changes in income tax valuation allowances. The effective tax rate for the quarter was much lower than usual, at around 9%, largely due to inclusion of a $2.2 million net benefit from special tax items. Specifically we recognized the benefit of approximately $3.5 million in releasing of valuation allowance in Canada during the fourth quarter. Partially offsetting this benefit was $1.3 million of expense recognized in connection with establishing a valuation allowance in the UK. The effective tax rate for Q4 of 2015 was also low at 28.4%, largely due to inclusion of a $1.4 million net benefit from special tax items. I would also note that our effective tax rate in 2016 for the full year excluding special tax items was approximately 34.5%. We have currently expect our financial book effective tax rate to be in a similar range for 2015. I'm sorry, for 2017. Cash taxes paid will be lower than that at a percentage rate that we estimate at about 20%. Based on our anticipated use of deferred tax assets consisting largely of net operating loss carry forwards and tax credit carry forwards. On an overall GAAP basis, we therefore earned $0.20 per share from continuing operations in Q4, compared with $0.27 per share in Q4 of 2015. To facilitate earnings comparisons we adjust our GAAP earnings per share for unused items in the current or prior year quarter. In the fourth quarter we made adjustments to GAAP earnings per share to exclude the purchase accounting effects, acquisition-related expenses and special tax items I have already discussed. On this basis, our adjusted earnings for the fourth quarter were 16-cents per share, compared to $0.25 per share in the fourth quarter a year ago. With note to on this same basis our adjusted earnings for the full year was $0.69 per share, compared to $1.02 in 2015. Turning now to the balance sheet and cash flow, we generated $9.6 million of cash, from continuing operations in the quarter, compares to $30.7 million during Q4 of 2015. For the full year we generated $27.6 million from continuing operations in 2016, compared to $91.1 million in 2015. Operating cash flow for 2016 was somewhat artificially lower by approximately $11 million as a result of noncash settlement of accounts receivable, due from JJE that occurred upon closing of the acquisition. Other factors explaining lower cash flow for the year include lower earnings at $23.5 million increase in primary working capital, and additional $6.9 million of net cash outlow related to rental equipment transactions, and a $3.7 million increase in income tax payments. With total debt of $64 million in cash on hand of $51 million, we ended the quarter with only $13 million of net debt. Availability under our credit facility at the end of the quarter was $244 million, and our leverage ratio remains low. We are obviously in a strong financial position and have significant flexibility to invest in organic growth, pursue acquisition opportunities and return value to shareholders. On that note, we paid a dividend of $0.07 per share during the fourth quarter, amounting to $4.1 million, and we recently announced a similar dividend for the first quarter of 2017. Dividends paid during 2017 totaled $16.9 million, up from $15.6 million in 2015. We also funded share repurchases of $4 million during the quarter, bringing total repurchases in 2016 to $37.8 million, which were an average of 12-point -- of $12.75 per share. That compares with share repurchases of $10.6 million in all of 2015. We had about $31 million remaining under our share repurchase authorization, as of the end of 2016. That concludes my comments and I would hike to turn the call over to Jennifer.

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New Speaker, [75]

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Thank you, Brian thanks to all of you for joining us on the call today. Our fourth quarter results helped us deliver solid full year earnings towards the higher end of our recent expectations. However, it is clear that 2016 was a challenging year. We started 2016 with relatively low backlog, and weak incoming industrial orders throughout post of the year, reflected a major downturn in oil and gas along with general softness in our broader industrial markets. Due to our longer lead times for equipment selling to oil and gas and marks during 2015, we felt the effects of oil and gas later that most companies of the sales were down significantly and the lower volumes, especially for some of our higher margin equipment including hydroexcavators created negative operating leverage. On the positive side, several of our businesses performed well in 2016. Our public safety systems business grew market share and improved its bottom line. Our Al gin sweeper business posted the second best year for earnings despite demands towards products fluctuating as a result of the timing and the pattern of large fleet and international orders. Demand for our vacuum and sewer cleaners remain steady as I will discuss later, we finished the year and start the new year with some improving trends in industrial orders. Before I move on to our strategic objectives and outlook, I would like to recap some of the company's specific achievements in 2016. As you know, in January of 2016, we completed the sale of our Bronto Skylift business receiving proceeds of approximately $88 million. Bronto Skylift required a disproportionate a.m. of capital and the divestment facilitates the focus on more profitable growth opportunities. Also in January of 2016, we executed a new five-year $325 million revolving credit facility to replace our previous $225 million credit facility. The new facility recognized our vastly improved financial position and it gives us cost and flexibility advantages. We continue to apply a disciplined approach to potential acquisitions in June 2016, we completed the acquisition of JJE. JJE facilitated sales of Federal Signals manufactured products to new marks, expands our rental and use equipment offerings to serve customer needs and more broadly enhances the parts and services business and increases the footprint across North America. The acquisition of JJE also added product lines that are not manufactured by the company such as refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow removal equipment. In addition, we have completed the acquisition of west tech, a Canadian manufacturer of high quality, rugged vacuum trucks for a nominal price. Since the acquisition was completed in January of 2016 we have made a number of product and manufacturing enhancements and obtained US D.O.T. certifications for a new line of product offerings which opens new markets for us. We also continue to focus on new product development in 2016, and are encouraged by both the projects in our pipeline and our results so far. The most promising of these on the environmental solutions group side is our award winning purpose-built paradigm, vacuum excavator that is targeted at the utility market which is a relativey in new market for us. We have realigned the sales force to better serve that market and we are tracking ahead of our expectations. It has been our most successful product launch in over a decade. At the safety and securities Systems Group, we are working on a variety of new technologies, such as video management and Internet of Things connectivity and exploring how they can improve and expand our product offering. Finally, we demonstrated our commitment to returning value to shareholders by more than doubling cash returns in 2016, paying an aggregate $54.7 million in the year in form of cash dividends and share repurchases compared to $26.2 million in 2015. We have taken a number of deliberate steps over the last several years to position Federal Signal for profitable growth. The sale of Bronto largely completed the realignment of our portfolio of businesses, which started a number of years ago with the sale of Aztec. We believe our two remaining operating groups, the environmental solutions group and the safe and securities system group serve attractive municipal, end markets. We aim to optimize our existing end markets which is where our 80/20 efforts, customer focus and hard work help us to gain market share, serve our customers, better, drive efficiency and leverage our capital. Our consolidated operating margin has declined during the significant headwinds of the last year or so the long-term consolidated operating margin of 12% remains unchanged. We want to provide competitive advantages and grow after market services and opportunities. One of the key steps is to refocus of the parts. Acquisitions are also a key part of our future growth. In addition to our two acquisitions completed in 2016, we have a robust M&A pipeline and we expect M&A to contribute further in 2017. So where do these strategic efforts take us? We would like to share our long-term revenue perspective, looking ahead, we have set a goal to exceed $1 billion in revenues by 2020, which would equate to a compound annual growth rate of at least 9%. We believe this is achievable, with contributions from a number of areas. Starting from our 2016 revenues we expect additional revenue from having JJE for a full year in 2017, instead of seven months. In addition to GDP growth across our core businesses, we also anticipate recovery during the small time period in some of our end markets that have been soft recently, including oil and gas. We are also driving towards targets for our strategic initiatives that will contribute to growth above GDP. The remainder are our revenue directive derives from additional M&A. We are about halfway to our previously stated goal for incremental revenues of $250 million from acquisitions by 2018. We are excited about our strategic initiatives which position us well to benefit as our market strength and we are cautiously optimistic about the near term economic outlook. For the full year 2017, we anticipate solid topline growth in year over year earnings improvement, however, we expect that our first quarter will be soft, with earnings likely to be between 14 and 16% of our annual earnings. This earnings pattern reverts to our historical seasonality with a first quarter typically is the softest of the year. It reflects a smaller year-end backlog that carries the reduced margins and lower industrial demand that persisted throughout most of 2016 and a higher concentration of orders for products manufactured by other OEMs. As we look at the year, there are a number of factors reflected in our outlook. Our municipal markets which represent about 60% of our revenues remaining stable over all. Last week, I was at our largest trade show for our environmental solutions group and spent time with many of our municipal dealers. Overall, they felt positive about the municipal opportunities for 2017. On the industrial side, we have seen strong improvement in US orders since early December. In agri domestic industrial orders for December and January, were up more than 50%, versus the prior year. This was driven mostly by environmental intake in the environmental solutions group. It should start to benefit us beginning in Q2. Also benefiting the year is the ramp up of our paradigm product and a full year's contributions from JJE. JJE's business includes rental and used equipment, income and the associated rental fleet that will drive an increase in our annual depreciation expense of about 8 to 10 million. On the other hand, we have not counted on any meaning full improvement in oil and gas which would benefit the hydro equipment. We expect that it would most likely benefit us in 2018 and beyond. In 2017, we are also continuing to add sales resources and fund R&D expenses in support of our long-term strategic initiatives. Our 2017 outlook includes the net reduction of about $0.02 to $0.03 to our adjusted EPS for this spending. With, that we expect adjusted earnings per share for the year to be between $0.70 and 78 cents. At this point, we would like to open the line for questions. Operator?

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Questions and Answers

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Editor [1]

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.

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Operator [2]

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Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause now for just a moment to allow everyone an opportunity to signal. We'll take our first question from Steve Barger with KeyBanc Capital Markets.

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New Speaker, [3]

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Good morning, Steve.

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New Speaker, [4]

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Hey, good morning, guys. This is actually Ken on for Steve.

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New Speaker, [5]

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Hi, Tim.

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New Speaker, [6]

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I had Tim.

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New Speaker, [7]

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First question, I just want to ask what drove the mix in SSG to give you that EBIT margin in the quarter and do you expect that is a sustainable margin going forward and first ask of the team?

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New Speaker, [8]

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Yes, Kim, we have a mix of business there. Our lease business and the public safety side in general has been doing well, and so their margins have performed well. We will see that margin going up and down from time to time. So it was a good quarter, but it is not out of range of what we think is sustainable.

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New Speaker, [9]

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Yeah, I think I would add to, in terms of our outdoor warning business, they had a very solid quarter and that was the significant contributor to the operating margin.

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New Speaker, [10]

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Got it. Going back to the guidance, could you quantify the solid year-over-year growth commentary that you gave? Should we think about that as low single digit, midsingle digit?

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New Speaker, [11]

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Yeah, I think 9 way we look at it, we look at -- you know, for 2017, we expect our growth to be 1 to 2% above GDP and then we'll also benefit from the full year impact of the JJE.

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New Speaker, [12]

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So just to clarify, that 1 and 2%, is that organic or is that also including acquisition?

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New Speaker, [13]

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No, that does not include any additional acquisition. It only includes the full year impact from JJE.

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New Speaker, [14]

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What are you seeing in terms of 2017 in terms of demand for hydrovac, first in the US and then in Canada? And then, you know, how much of a step up in that product line is embedded in your guidance whether it's for oil and gas or the utility markets that you are stepping into or just your traditional applications?

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New Speaker, [15]

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Yeah, as I mentioned, you know, we have been encouraged by the order pattern that we have seen since early December. You know, for our industrial orders, for December and January, they were up over 50%. Some of that has been driven by hydroexcavation orders. We are not baking kind of meaningful improvement in that area with respect to oil and gas in 2017. We expect that to occur -- we would start to benefit there's meaningful impact in '18. As we have talked about before, you know, we think any recovery would -- we would be delayed for us, because there is an excess inventory out, there although we are encouraged but because we have not seen a lot of our equipment in the auctions that we monitor on a regular basis, we're also encouraged by the sales of paradigm into the utility market. We were ahead of our expectations. We introduced the product in July of last year, ahead of our expectations for 2016, and we're off to a strong start in 2017.

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New Speaker, [16]

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Okay. Can you just talk about other areas of industrial orders that are seeing strength? Is that really broad based or did you get a couple of big orders that really gave you some confidence here?

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New Speaker, [17]

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Yeah, we -- it wasn't really a large -- large fleet orders. It was driven by our ESG business and we are seeing it at jet stream. We are seeing it at guzzler and we are in the early months. It's two months of data that have continued into early February. But it's more broad based.

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New Speaker, [18]

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Okay.

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New Speaker, [19]

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) Really driven by the ESG side of business.

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New Speaker, [20]

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Right.

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New Speaker, [21]

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Okay. And then just one more for me and then I will get back in line. Can you talk about how the pricing power is in both municipal and industrial? Are you seeing competitors being rational or are they pretty aggressive pricing?

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New Speaker, [22]

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You know, we operate in competitive markets but, you know, generally, we produced a premium product and we're typically able to get paid for it.

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New Speaker, [23]

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Got it. That's helpful.

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New Speaker, [24]

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Thank you.

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Operator [25]

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Our next question comes from Chris Moore with CJS Securities.

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New Speaker, [26]

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Oh, great. Good morning, guys. Thank you for taking my questions.

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New Speaker, [27]

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Good morning, Chris.

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New Speaker, [28]

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All right. Yeah, just on ESG, maybe we can talk a little bit about the operating margins and I know that -- I would say they are low this quarter. Part of that is absorption. You know, can you just talk a little bit about that in terms of Q4 and then, you know, moving forward in terms of expectations for those to rebound a little bit?

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New Speaker, [29]

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Yeah, I mean, clearly the two major drivers were volume and mix. You know know, our volumes were down significantly and then if you look at the mix of the equipment, we talked a lot in the past about the kind of higher margin hydro excavators but with respect to JJE, there was also an impact there because there was more non-Federal Signal equipment that was sold, the other equipment so that had an impact on it. As they move forward we are encouraged by. Recent order trends of the industrial products because that tends to carry higher margins.

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New Speaker, [30]

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Gotcha. On the municipal side, it sounds -- you know, what I heard was overall, you know, the trends remain positive. Are there areas within the municipal that are not necessarily the case or is there any more, you know, specifics behind that? You know, I think -- you know, our vac Stewart cleaner line, you know, as I mentioned, they were very stable throughout the year. Our public safety systems business. They had a very good year where they gained both on the top and the bottom line. That business can be impacted in terms of timing, because on the large municipalities will tend to have larger fleet-type orders. On the street sweeper side, that business can be impacted again by the larger neat orders and the international orders. So it would vary quarter to quarter, overall, we feel, you know, we believe that 2017, our municipal business will remain stable.

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New Speaker, [31]

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Gotcha.

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New Speaker, [32]

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Just one last item. On the Canadian side, I mean are you -- I have been reading some different things. Are you seeing any impact from new weight regulations in Ontario and enforcements in other parts of Canada on hydrovac operators is that anything on your radar?

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New Speaker, [33]

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That's something that our businesses -- our teams at vacuum are working very closely with the JJE steam. We are aware of the regulations. We believe that we will have products that meet those requirements and ultimately, we think it will give us the competitive advantage.

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New Speaker, [34]

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Gotcha. And one last one. In terms -- just trying to get a feel for demand from different perspectives. On the smaller truck side, is there -- can you give us a sense, is there any difference there from a demand perspective, than some of the larger, you know, ASP type offerings or is there much of a distinction there?

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New Speaker, [35]

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You know, on the smaller truck side, the paradigm and some of our trailer jutter equipment, we have seen strong demand in 2016 and we're off to a solid start in 2017. With respect to the larger trucks, the larger hydroexcavators, a lot of that business is tied to oil and gas. We talked about it earlier. You know, we are not expecting meaningful improvement in that he 17 to the extent there is a rebound it will be delayed for us and we expect to benefit the fourth quarter and into 2018.

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New Speaker, [36]

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All right. Appreciate, it guys.

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New Speaker, [37]

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Thanks, Chris.

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New Speaker, [38]

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Once again, ladies and gentlemen, if you would hike to ask a question, please press STAR one. If you do find that your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit two. We will take the next question from Marco Rodriguez, from Stonegate Capital Markets.

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New Speaker, [39]

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Good morning, guys. Thank you for taking my questions. I wonder if you could talk a little bit more about the order rates that we were discussing a little bit earlier. You saw some nice movement December and January, and I believe in your prepared remarks, you talked about some increasing confidence from the distributors that you were talking to here very recently. Did you see like any sort of a budget flush that had increases those orders and can you talk anecdotally what is driving the confidence for the distributors on the order rate?

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New Speaker, [40]

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Yeah, Marco. Just to start, we -- you know, if you look at the quarterT was a little on the softer side and what we really thought happened was there was some slowdown in demand in the November time frame, and then after the election, things seemed to open up a little bit. I wouldn't characterize it as budget flush but people were feeling more positive and that seemed to carry into the order patterns we were seeing.

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New Speaker, [41]

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Yes, last week, I had an opportunity to meet with several of our dealers and I visited with several of them over the last couple of months. And as they look into 2017, many of them are expecting year-over-year improvement. They are very enthusiastic about the paradigm product line that we have talked about, and their success to date. The rerent program that we have in place now, with JJE gives them opportunities to represent our equipment. It also gives them access to used equipment. So there's a portfolio of offerings has been broadened by the JJE acquisition and overall, last week and in my one-on-one meetings they have been very encouraging about 2017.

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New Speaker, [42]

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Gotcha. And in terms of the operating leverage that you guys might be baking into your guidance here in the fiscal '17, can you give us a little bit of a sense as far as how much you might see based on volume or mix or anything of that nature?

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New Speaker, [43]

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Um, I think operating leverage goes with volume. So as we see some of the improvement -- some of the return of volume and it also goes with mix. So it depends on where we get our orders, but as we see the industrial orders coming, that's positive for us, and it -- you know, the more we get -- and obviously municipal orders that float through Elgin and vector are positive as well.

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New Speaker, [44]

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Okay. And any update on the oil and gas? I know you talked about it slipping relatively weak. Any update expectations in terms of when you think that might kind of work its free this fiscal year for you guys?

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New Speaker, [45]

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We expect it to be late this year, perhaps fourth quarter into 2018, based on what we are seeing right now. We have talked in the past about kind of excess inventory of our equipment that's out. We are starting to see some of that equipment come out of mothballs and seeing service at our service centers. So we think that's encouraging. But, again, we would expect to see kind of any meaningful improvement that occurs late this year and really bleeding into 2018.

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New Speaker, [46]

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Got it and two real quick housekeeping items here. Do you by chance have the gross margins for the segments.

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New Speaker, [47]

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) We will be filing the 10-K later this afternoon and all that information will be in there.

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New Speaker, [48]

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Okay. Gotcha. And then last quick question, I believe this was in your press release, you talked about increasing working capital. I guess there was a specific reason for it, if you can maybe talk a little bit about that?

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New Speaker, [49]

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Yes, we had a couple of specific investments that we made, deliberately. Part of it was to build some stock units so we could capture immediate sale opportunities. Part of it was to better manage our chassis flow, as -- as we have a lower backlog and we want to make sure we maintain reasonable lead times on producing product. So we made some addition -- some specific investments in inventory. You know, I would tell you, it's -- it's a temporary thing probably, but it's something that made sense for the business at that point in time.

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New Speaker, [50]

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Got it. I appreciate your guys' time.

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New Speaker, [51]

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Thank you.

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Operator [52]

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Once again, it's star one to ask a question. We'll take our next question from Steve Barger with KeyBanc Capital market.

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New Speaker, [53]

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Hello, Kim.

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New Speaker, [54]

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Thanks for the follow-up.

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New Speaker, [55]

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So how much input costs inflation are you seeing in the manufactured items that you buy?

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New Speaker, [56]

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I'm sorry, how much input inflation?

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New Speaker, [57]

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Correct.

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New Speaker, [58]

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It's fairly minimal. We are seeing a little bit in some of the commodities but, you know, steel is probably our biggest compennent and it might be 10% or so in that category. So there's a little pressure there. We -- you know, we don't feel it makes a huge difference in our margins, though.

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New Speaker, [59]

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Got it. And then, you know, the balance sheet does look pretty strong and you talked a little bit about the M&A opportunities for 2017. Can you just provide an update on what you are seeing in the M&A pipeline, in terms of how many deals or the size of potential revenue for these deals that you are seeing?

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New Speaker, [60]

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Sure. We are looking at a number of different opportunities. We're looking at some small product line acquisitions, and we're looking at some larger opportunities. You know, everything from, you know, typically the source of most of our deals comes from our privately held, some type of family business where there's a liquidity event, but then we are also in regular dialogue with, you know, various investment bankers would bring deals forward us to. We are very active right now in the market. As I mentioned earlier, M&A will be an important part of the growth of the company.

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New Speaker, [61]

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Right. Could you talk a little bit about what multiples have been like these past few months post election?

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New Speaker, [62]

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Sure. You know, it really depends again on the transaction. But, you know, as we have seen -- have multiple creep, and it's something as a company we have remained -- we have looked at 100 plus acquisition opportunities. We remained very disciplined. You know, we will pay fair value. But, again, we are looking at all the strategic -- you know, does it advance our strategic initiatives? Where are the synergy opportunities? And, again, I said this will be an important part of our growth going forward.

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New Speaker, [63]

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100 plus opportunities that you looked at.

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New Speaker, [64]

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Over the last two years, yes.

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New Speaker, [65]

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Wow! Could you -- last one for me, could you just talk about how big the revenue range is for active projects that you are looking at?

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New Speaker, [66]

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Yeah, I don't know that we want to get into active projects and get that specific, but as Jennifer said, it's a pretty wide range, some fairly large ones and very small ones and as we work on them, you never know what's going to come through, and when. My experience has always been, you know, what you think is going to happen doesn't and what you are not sure happens seems to end up happening. So it's a pretty wide range.

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New Speaker, [67]

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Yeah, and several of the acquisition opportunities we have been in dialogue for a couple of years.

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New Speaker, [68]

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Right. And, sorry this is my last one, I promise. You know, just kind of going off of that, when you think about the M&A pipeline, are you more gears towards the JJE product type set or something that would help or I guess be a side strategy to that platform, or are you looking more towards the core-type legacy businesses to add on to or to transform?

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New Speaker, [69]

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It's many of those, really. We have a number of different businesses and whether our logical fits that can help us grow those businesses and make them more profitable, we'll look at those things. So there can be a variety of different types of businesses. The JJE platform was not something we were planning to keep growing in that respect as a distributor. But we are -- you know, we do like their products and what we are looking for in general is on the product side would be things that are, you know, match our manufacturing capabilities and kind of align that way.

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New Speaker, [70]

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Got it. Thanks for the time, guys.

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Operator [71]

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It appears there are no further questions at this time. I would like to turn the conference back to Jennifer Sherman for any additional or closing remarks.

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New Speaker, [72]

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In closing, I would like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Again, we like to express our thanks to our stockholders, distributors, dealers and customers for their continued support. Thank you for joining us today.

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Operator [73]

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This does conclude today's conference. You thank you for your participation. You may now disconnect.