Brian S. Cooper - CFO Jennifer L.

Sherman - CEO

Steve Barger - KeyBanc Capital Markets Walter Liptak - Seaport Global Marco Rodriguez - Stonegate Capital Markets

Good morning and welcome to Federal Signal's third quarter 2016 conference call. I am Brian Cooper, the Company's Chief Financial Officer.

Also joining me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today as well as to the earnings news release which we issued this morning.

The slides can be followed online by going to our Web-site, federalsignal.com, clicking on the Investor Call icon and signing in to the Webcast. We have also posted the slide presentation and the news release under the Investors tab on our Web-site.

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 Web-site.

Our presentation also contains some measures that are not in accordance with U.S. Generally Accepted Accounting Principles.

In our news release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today.

I'm going to start by addressing our financial results. Jennifer will then provide her perspective on our performance and current market conditions.

She will also give an update on our strategies and our outlook for the remainder of 2016. After our prepared comments, Jennifer and I will address your questions.

Our consolidated third quarter financial results are provided in today's earnings new release. As a reminder, the third quarter of this year includes the operating results of Joe Johnson Equipment or JJE which we acquired in early June this year.

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 that was completed in January this year. Consolidated net sales for the third quarter were $187 million, up 4% compared to the prior year period.

Operating income of $13.5 million was down versus $25.2 million last year. Consolidated operating margin for the quarter was 7.2%, compared to 14% a year ago.

This quarter's reported operating income includes the recognition of $2.5 million of expense associated with purchase accounting effects from our acquisitions. It also includes $0.3 million of other acquisition related expenses and $0.4 million of restructuring costs.

In addition, operating results in the prior year quarter include a benefit of approximately $1.8 million relating to the receipt of an order cancellation fee. Consolidated operating margin for the quarter excluding the aforementioned items was 8.9%, compared to 13.2% a year ago.

Income from continuing operations was $7.5 million for the third quarter, compared to $15.8 million last year. That translates to GAAP earnings of $0.12 per share, which compares to $0.25 per share last year.

We also look at earnings on an adjusted basis, which I'll explain later. On that adjusted basis, EPS for the third quarter of this year was $0.17, which again compares to $0.25 per share last year.

Orders reported in the third quarter were $186.1 million, reflecting an 11% improvement compared to the prior year period. We ended the quarter with a consolidated backlog of $149 million, which was about level with the end of the second quarter.

As you can see in our Group results, despite improved sales our consolidated operating margin has decreased, largely due to changes in sales mix within the Environmental Solutions Group. 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 included a $2.5 million non-cash charge related to purchase accounting. This was the additional cost of sales during the quarter after acquired JJE equipment was stepped up to approximately its sale value as part of the initial purchase price allocation.

These step-ups will affect our earnings but not our cash flow for the next couple of quarters. Orders and sales in the Environmental Solutions Group were up 25% and 9% respectively versus last year, mostly due to effects of the JJE acquisition which contributed $31 million of incremental net sales in the quarter.

This was largely offset by lower shipments of vacuum trucks and street sweepers in the U.S. and reduced international sales of street sweepers and sewer cleaners.

Lower shipments of vacuum trucks are tied primarily to ongoing softness in oil and gas, whereas the reduction in street sweeper sales is associated with fewer large fleet shipments when compared to the prior year quarter. ESG's operating income decreased by $9 million compared to last year, largely due to a $6.6 million decrease in gross profit, which includes the effects from sales mix, operating leverage, purchase accounting and acquisition expenses that I just mentioned.

Adjusting to exclude these effects, ESG's operating margin for the quarter was 9.3%, down when compared to 17.5% a year ago. On the Safety and Security Systems side, orders were down 16% compared to last year's quarter, mainly due to lower orders for public safety products from international markets and year-over-year timing differences for orders from certain large customers.

Sales were down 8%, reflecting ongoing softness in industrial markets generally, partially offset by improved sales into domestic global public safety markets. SSG's operating income for the quarter was $6.5 million, compared to $9.3 million last year, and operating margin was 12.4% versus 16.4%.

SSG is continuing its efforts to right-size its business and take out costs and it incurred $0.4 million of restructuring charges in connection with those efforts during the quarter. Excluding those restructuring costs and the benefit from receiving a $1.8 million order cancellation fee in last year's third quarter, SSG's operating margin for the quarter was 13.2% compared to 13.7% last year.

Finally, corporate operating expenses of $5.5 million were largely unchanged from a year ago. Turning now to the consolidated income statement, you will see that the consolidated sales are up 4% year-over-year.

Gross profit is down because of the factors that I described in the Group results and corresponds to a lower consolidated gross margin of 24.3% this quarter compared to 30.4% last year. Selling, engineering, general and administrative expenses of $31.1 million were up 5% compared to the prior year quarter, primarily due to additional operating expenses from our current year acquisitions.

I've also noted $0.3 million of acquisition related expenses equal to the change in the value of the JJE earn-out liability which is reassessed every quarter in accordance with accounting rules. In total, this all sums up to $13.5 million of third quarter operating income.

Other items affecting our quarterly earnings include non-operating income of $0.3 million, largely related to interest income, and a $2.8 million reduction in income tax expense resulting from our lower income. The effect of tax rate for the quarter was higher than usual at around 43%.

This is a short-term impact that results from recognizing no tax benefit in the P&L on losses in Canada during the quarter. We expect both the losses and the tax position to reverse quickly.

To provide a little more detail, our Canadian deferred tax assets are currently subject to a valuation allowance based on losses in businesses that the Company divested years ago. This tax position results in no tax benefit on losses at this time.

We also had Q3 losses in Canada that drive mostly the JJE purchase accounting impacts, which are transitory. As Jennifer will talk about shortly, we are encouraged by the post-acquisition results of JJE and we expect to be profitable in Canada in Q4.

Following accounting practice, we will be able to reassess the need for a valuation allowance then and are optimistic that we may be in a position to release the valuation allowance as early as the fourth quarter of this year. On that basis, our full year effective tax rate for 2016 is currently expected to be between 35% and 36%.

From a cash perspective, we are projecting a cash tax rate of between 15% and 20% this year. That rate will likely increase next year.

The difference between our effective tax rate and our cash tax rate relates to use of deferred tax assets to reduce our tax payments. These assets primarily consist of net operating loss carryforwards and tax credit carryforwards.

On an overall GAAP basis, we therefore earned $0.12 per share from continuing operations in Q3 compared with $0.25 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings for unusual items.

In the current year quarter, we made adjustments to GAAP earnings per share to exclude the purchase accounting effects, acquisition related expenses and restructuring costs that I've discussed. Adjustments have also been made to third quarter GAAP EPS to exclude certain special tax items, including the effects of the valuation allowance in Canada that I just explained.

On this basis, our adjusted earnings from continuing operations for the third quarter were $0.17 per share, compared with $0.25 per share in Q3 last year. Turning now to the balance sheet and cash flow, we generated $13.2 million of cash from continuing operations in the quarter compared to $29.6 million during Q3 last year.

With total debt of $66 million and cash on hand of $51 million, we ended the quarter with $15 million of net debt. Availability under our credit facility at the end of the quarter was $241 million and our leverage ratio remained 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 third quarter, amounting to $4.2 million, and we recently announced a similar dividend for the fourth quarter.

We also funded share purchases of $0.7 million during the quarter, bringing total repurchases in 2016 to $33.8 million. That compares to share repurchases of $10.6 million in all of 2015.

We had about $35 million remaining under our share repurchase authorization as of September 30. That concludes my comments and I'd like to turn the call over to Jennifer.

Thank you, Brian. I'd like to start by providing some color on the third quarter.

Overall, our results for the quarter were slightly better than we've been anticipating, benefiting from earlier than expected deliveries to end customers, and it was pleasing to see us report another quarter of increased orders. Our municipal markets, which have historically represented about 60% of our revenues, remain stable.

While the upcoming elections can create some unevenness, we continue to see relatively steady demand in our North American municipal based businesses. We are also encouraged by the longer-term outlook for increased infrastructure spending in both the U.S.

and Canada. The growth and improving profitability during the first three quarters of this year in our U.S.

and European public safety systems businesses, which are part of our Safety and Security Systems Group, were also encouraging. These businesses make lightbars, sirens and related products for municipal customers in the police, fire and heavy-duty market.

They continue to gain market share and benefit from a number of new product introductions in recent years. While municipal markets have been solid, our industrial markets remain soft, particularly as they relate to oil and gas.

Within the Environmental Solutions Group, an overhang of used equipment available at reduced prices continues to limit demand for the new equipment that we sell from customers serving oil and gas and adjacent industrial markets. As you have seen, this has impacted ESG's orders, revenues and margins, with the biggest effects occurring in our vacuum truck lines.

While there have been signs of modest recovery in oil and gas market, we expect any meaningful impact on our business will lag significantly because of the overhang of used equipment. As we have previously indicated, we are laying out plans to manage through softness that may persist well into 2017.

Industrial demand within the Safety and Security Systems Group has also been soft, with a number of large projects being canceled or delayed. As such, we are sizing some of our businesses to match current demand and have taken cost-reduction actions, including early retirement, reductions in force, expense controls and cost savings on direct materials.

However, we have maintained our spending and focus on sales-generating activities and new product development. Importantly, our balance sheet continues to be strong, which helped us to navigate through our near-term market challenges, maintain our needed investments and return value to shareholders.

So far this year, we have returned almost $47 million of cash to shareholders in the form of dividends and opportunistic share repurchases. Now, I'd like to take a few minutes and give an update on the progress of the Joe Johnson Equipment acquisition.

As Brian mentioned, we closed the transaction at the beginning of June and our initial integration efforts are now largely complete. From a financial performance standpoint, JJE is tracking slightly ahead of our expectation so far.

Since we closed the acquisition, on a standalone basis they have generated approximately $50 million of sales and contributed $4 million of operating income, excluding purchase accounting expense effects and other acquisition related costs. While it is still early, the acquisition is also starting to deliver on our strategic objectives.

We have added rental and used equipment offerings allowing us to better serve existing customers and attract new ones in both industrial and municipal markets, ultimately expanding the market for Federal Signal equipment. JJE has given us a platform to reach and service industrial customers in Canada.

We also have gained a healthy parts and service business that fits well with Federal Signal's legacy business and will help us build a more profitable combined business. Finally, JJE has an outstanding [indiscernible] who brings us insight into new products and our dealer network.

I'd like to turn now to an update on our long-term goals and strategies. First, over the last several years, one key area of focus has been to enhance our profitability by improving our manufacturing efficiencies, managing costs and leveraging our invested capital.

We have built a culture of continuous improvement with a healthy focus on use of 80/20 tools, growing our long-term operating margins, leveraging our plants and buildings to return our invested capital. For example, across ESG, we continue to work on reducing the breakeven levels of all of our businesses which has helped us to navigate the lower industrial demand we are experiencing this year.

The second area of strategic focus is organic growth. Optimizing performance in our existing markets is critical and growth into new or adjacent end markets is equally important to our success.

During this challenging year, we have continued to invest in revenue generating activities. For example, within our Safety and Security Systems Group, we are refreshing many of our industrial product offerings, have invested in additional sales and engineering resources and have expanded our innovation center in an effort to fast-track certain new product development initiatives.

New product development remains a cornerstone of our future and a key part of our strategic initiatives. We need to keep our product lines current, improve the value our products bring to customers, and leverage innovative products to reach new customers and markets.

Towards that end, I'm proud to say that last week our ParaDIGm hydroexcavator was named a winner at the 15th Annual Chicago Innovation Awards. These awards recognize the most innovative new products or services brought to market or public service in the Chicago land area each year.

The ParaDIGm is one of the first products born from the innovation initiative that started two years ago. I'm thrilled with the team's performance in launching the ParaDIGm.

It is a purpose-built vacuum excavation truck that is designed for the utility and construction markets. We brought it to full-scale production during the third quarter and we are encouraged by the strong reception it is already receiving in the marketplace.

The utility market is relatively new for us and it will take us some time to learn the ropes and scale up this opportunity but we're off to a solid start. I believe this award is an important milestone marking Federal Signal's renewed commitment to innovative product development across our multiple product offerings.

In addition to developing and selling new equipment and systems, we are going after opportunities oriented towards aftermarket products and services and recurring revenue. In our ESG Group, we are focused on growing our parts in FS Solutions businesses.

Similarly, at SSG, we are continuing to invest in our operating businesses in the U.S. and Europe.

Finally, acquisitions are a key part of meeting our growth goals. Acquisitions also support our other strategies such as [indiscernible] our enhancement capabilities.

Last year we talked about our appetite for adding at least $250 million of revenue from acquisitions by 2018. Joe Johnson is an important step along that path.

Looking further down the road, we are working to add additional acquisitions that meet our acquisition criteria and support our strategies. These are likely to include targets that bring us recurring revenue, new products and opportunities that leverage our channels or production capabilities.

We have successfully completed two acquisitions this year and acquisitions will continue to be a meaningful part of our growth. Our acquisition pipeline is healthy and we expect to close additional transactions in the 2017 to 2018 time period.

In summary, as we look into 2017, we are maintaining our strategic imperatives. Let me focus on a key few items.

We will continue to work with disciplined and strategic focus to drive growth through acquisitions. We are focused on delivering the value of our acquisitions and the related strategies.

And we are committed to new product development and renewing and growing our existing core businesses. With that, I would like to move on to our earnings outlook.

As we mentioned, our municipal markets are stable. Like many other companies though, we continue to experience challenging conditions in our industrial markets.

While our sales and orders have improved, our backlog carries a lower gross margin than in prior year, partially due to lower industrial demand and a change in sales mix. We expect these unfavorable mix effects and negative operating leverage will work against us during the fourth quarter and into the first quarter of next year.

We also expect continued solid performance from our municipal based businesses for the remainder of 2016. Taking all of these factors into consideration, we expect our 2016 adjusted EPS to be within our previously issued guidance and we are narrowing the outlook range to between $0.65 and $0.70 per share.

With that, I think we are ready to open the lines for questions. Operator?

First question, lower gross margin in the backlog, is that strictly a function of muni products being lower margin overall or are you having to be more aggressive on price for muni as well?

I think it's a combination of a number of different factors. Typically our municipal margins are lower, but on the industrial side of the business, we've seen lower sales of our higher-margin products that have been tied to oil and gas.

We've talked about on previous calls, our hydroexcavation equipment. In addition, we have seen lower sales of equipment to our rental partners because of the glut of used equipments and depressed prices.

And then there's been in connection with the Joe Johnson acquisition a higher concentration of sales of products that we don't manufacture.

And you asked about price as well. We really haven't seen a lot of conditions where we made the move on price.

Okay. On the municipal side you're saying?

Anywhere really.

Okay. I guess to the question, you brought up hydroexcavators several times, can you talk a bit more directly about enquiry and sales activity outside of the new product, just any additional color in terms of where we are?

We continue to be impacted by the glut of used equipment that's available on the market. So, we're not seeing for example our rental partners replenish the fleet because they are not selling as much used equipment out of that fleet.

So we think that that glut of used equipment, we're hopeful that it's reached the bottom, but we expect that to continue into the fourth quarter and into the first quarter of next year.

Right. How do you measure that in the part marketplace?

Have you been able to quantify via an index or something, or is it just more anecdotal from dealers?

It's more anecdotal. We also track the used equipment market and we look at the auction prices vis-a-vis where they were a year ago, but it's more anecdotal than a specific index.

Since you brought it up, can you tell me what the change year-over-year in some of the equipment prices have been at auction?

I think we've seen stuff at auction that might be even half the price of what it probably would be in a more ordinary market, but that's – it's used equipment.

Yes, I understand. The issue that we're talking about here on the industrial ESG side, is that solely or is that the primary factor in the guidance reduction?

I mean it sounds like it is because of the gross margin commentary, but is there any other material factor that went into that?

That's the primary driver, the softness that we're seeing in our industrial markets.

Okay. To the organic growth initiatives that you talked about, R&D and new product introduction, I know it's early to talk about 2017, but do you expect these initiatives can result in organic growth in ESG next year or do you think the industrial headwinds will still overwhelm your internal efforts?

We believe that these industrial headwinds, we have visibility into the fourth quarter, will continue into the first quarter. We are moving forward with a number of new product development initiatives and we're taking a longer-term view on that.

Adoption can be slower on the ESG side of the business, particularly when you're buying a vehicle type product, but we expect to start seeing the benefits from these new product introductions in the second half of next year and into 2018.

Okay. And the last question and I'll get back in line.

Do you expect a double-digit revenue decline in ESG in 4Q and what do you expect JJE contributes from a revenue standpoint, and I'm just trying to get to a sense for the sequential move in revenue for the quarter?

We don't like to guide to the top line, probably because it's – I mean there are a lot of factors that can go into it. JJE has been operating at a pretty good level.

So I think we would expect them to continue along the same lines. And I don't think we're expecting major downshifts in other parts of the business.

But you know we're already kind of at the bottom on some of the hydroexcavator equipment, sort of the big stuff going to oil and gas, and as we get to year-end, that's what we have to work through.

Understood. I'll get back in line.

Thanks.

I wanted to ask about some of your commentary on orders and see if we can go into both segments and just get a little bit more color on them. So in ESG, it sounds like some of the systems businesses are weak.

Is that correct?

Are you talking about SSG, the systems businesses?

I'm sorry, yes, right, in SSG, some of the systems businesses.

Particularly our PAGA products on the oil and gas side, absolutely yes, they are weak.

Okay, are they weaker than – because that's been going on for a while now and now I think you're doing some restructuring, is that just a continuation or are you seeing any stabilization?

We've seen some stabilization from Q2 to Q3, but overall versus 2014 and 2015, they are down materially.

Okay. How much of a charge are you expecting to take in SSG next quarter for the restructuring?

We already took a charge this quarter. We'll probably take one that's closer to $1.5 million next quarter, but we'll also see benefits from that going forward.

Oh, great. So you'll get the benefits starting in the fourth quarter or in 2017?

Some of them, yes. I mean, it's been happening partway through the fourth quarter though, yes.

Okay, great. What are the total amount of benefits you think you'll get as a result of those?

I think a lot of it depends on the timing of some of the actions. We're in the middle of that.

So we'll update you in the next call.

Okay.

I mean it has a [indiscernible] less than a year.

Okay. I want to ask about ESG, and you may have called this out in your commentary, but what were the organic orders in ESG?

So while it's a little difficult for us to measure on that basis, so when we were selling through from and we're selling into the fleet and we're making other adjustments, it was a comparable number to last year, down maybe a little bit overall within ESG.

Okay, great. And you called out revenue for JJE this quarter and operating income, which is kind of in line I guess with what you had been talking about previously at about 8% operating margin.

Now I'm wondering about the timing of getting the operating margin up. I believe that – I wonder if you could refresh us on what your target is and where you think you can get operating margins and maybe some idea of the improvement maybe that you are expecting in 2017 for JJE's margin.

Walter, if I could just clarify the numbers, most of the numbers we talked about on JJE on the profitability side were since we acquired them, so it also includes most of June.

I see, so a little bit greater than three months.

Yes.

Okay.

[Indiscernible] as you know, JJE will be part of our ESG Group. We have a number of continuous improvement initiatives using our 80/20 tools that are ongoing for both ESG and SSG.

We believe that in a longer-term the 14% to 16% operating margins, that both our SSG and our ESG businesses should be able to operate within those targets in the long-term, but revenue is critical to achieving that objective.

Okay. Then it sounds like JJE's revenue, just how should we think about some of the slowness that we saw this quarter in the JJE business?

Is it a temporary timing issue do you think or is it something that we should be more concerned about in 2017?

So, Walt, actually – I mean we didn't really see slowness at JJE. What we did see was a mix that will move around, but I mean they are actually at revenue levels we are talking about, they are running well ahead of what we had originally anticipated, and I think when we originally were talking about JJE, we used 2015 numbers because frankly we didn't want to be forecasting too far out, but we were looking at probably $125 million annual run rate on their revenues on a gross basis.

So they are actually running ahead of that. So, I wouldn't really describe it as softness and the margins are not that different from what we had anticipated.

Right now, there's a lot of moving parts, especially with the purchase accounting. So you obviously have to take that out.

But we see good things coming out of the business. The parts and service business is going well.

All of the things we set out to do with them are in play and working.

Okay. And lastly, the 2018 accretion number the same, but at what point would you address that and take the accretion number up if you get more 80/20 out of JJE or if the revenue comes in a little bit stronger?

I think you should give us a little more time, Walt, on there, a few months.

Okay, all right, fair enough. And then your commentary on the tax rate, you talked about 35% to 36% for this year, and I think you commented that the tax rate will be up a little bit in 2017, is that right?

The cash rate will go up a little bit next year. We'll start having fewer deferred tax assets to take against our cash tax payments.

But the overall rate, we haven't really done a good look at next year yet. I wouldn't expect it to move around too much.

There are some positives and some negatives that could move it.

Okay, great. Thank you.

I was wondering if just a couple I guess housekeeping items first off, I know in your prepared remarks and also in the press release this morning you talked about obviously results for this quarter Q3 being a little bit better than expected because of some I guess earlier than expected deliveries to clients. Can you kind of help quantify what that was and in which groups?

It was more on our ESG side of the business. We had a number of customers who needed their equipment and we responded to that demand.

And that was equipment in some cases we had anticipated delivering in the fourth quarter.

Right. And about how much was that from a revenue standpoint do you know?

The revenue was probably, I don't know, I don't really want to put a specific number on it. I think it's probably less than $10 million.

Got you, okay. Then in terms of the industrial market that obviously continues to be a bit of a drag for you guys specifically on the ESG side, can you talk a little bit more there?

I mean are there other industrial customers aside from oil and gas that are negatively impacting you there or is it just all oil and gas?

It's primarily on the oil and gas side. As we've talked about with respect to the launch of some of our new products in utility market, you see that demand being relatively steady.

There are applications from our products in construction, that's been more mixed. The larger jobs, we have seen some delays, but that's been a more mixed market.

And then some of our businesses do serve other sort of adjacent industries, oil and gas refining and marketing oriented, chemical plants and so forth, and some of those seem to be soft as well partly because of oil and gas. So we think there is a carryover effect.

So it is a little broader than just the immediate oil and gas customers.

Got you. And then if you just kind of ex out the oil and gas customers, I mean what are the specific types of comments you are getting from your industrial clients that are either pushing orders or delaying orders?

Just that there's been some restrictions on CapEx this year, so we've seen some of that on our industrial cleaning side, we've seen some orders get pushed out from second to third quarter, third to fourth and into 2017. So we're hearing some of that.

We've also heard anecdotally with respect to the elections, people want to get the elections behind us and understand kind of what the new administration is going to do with respect to infrastructure investment. So, we've heard that anecdotally.

But our products overall continue to be a preferred product for many of our customers. So, we're encouraged by the long-term prospect.

Got you. And then in terms of your commentary on the oil and gas markets, I think I heard you say you've got some pretty decent visibility into Q1 2017, but I think I also heard some prepared remarks talking about that impact at least on the used equipment side going well into 2017.

Can you first off confirm if that's what I heard, and then also if you can provide a little more color as to the expectations on the used equipment and that impact and for how long you think that might drag into 2017?

I think when we talked about Q1 and going well into 2017, oil and gas were kind of at rock-bottom on most of our businesses. There just isn't much – it's frankly upside from here.

But we don't see a lot of recovery likely to come quickly. Even if oil prices trend up, it will take some time before capital spend will start to increase in a lot of parts of that business, and then we have the overhang of equipment.

So in the biggest area for us, in the area that we probably can benefit most from, we think it's going to go well into 2017 before we see any uptake at all. So, when we talked about first quarter outlook or what we can see in first quarter, it was really just a little more of a continuation of what we're seeing today and that's really not necessarily specific to oil and gas.

Our municipal businesses continue to be strong, it's a seasonally soft quarter for us typically but the industrial side is still soft, again somewhat outside of oil and gas, and if that upticks, that helps us but we are not as able to call the other parts of that.

Got you. That's helpful.

And then a last quick question and I'll jump back in queue, I'm not sure if I missed this on the call, but did you provide the gross margins by segment?

I don't think we did, but they will be in the Q which comes out later today.

Okay, got you. Appreciate it.

Thanks, guys.

Questions on the rental fleet growth that you really started talking about last quarter. Is that decision to accelerate that putting assets to help out, just to help sell the service or is it really coming from market demand?

It's really coming from both, Steve. Our rental fleet was about 85 million.

It's remained relatively constant. We have made investments as needed to replenish the fleet.

Our initial – we have a rent to re-rent program through our dealers. The additional demand has been strong.

So it serves both the needs of our customers to have rental equipment and also in many situations we've seen customers who rent to buy. So right now, our incremental investment has been pretty modest, around $6 million.

And I think we're investing in new areas bringing some equipment out there to develop demand. We're watching very closely the utilization and we're getting these utilizations on our plate.

So we're not going to grow at faster than the customer demand will support.

Right. What is the right utilization rate or what would you expect it to run across the rental locations that you have?

We target 75%.

And how many of the existing dealers I guess outside of JJE have rental fleets?

A couple of our major dealers have rental fleet and a number of the other dealers are utilizing our rental fleet through a re-rent program.

And do you expect, are you getting inquiries from other dealers who don't have it that say they want to do that, and then will that – I'm just trying to get a sense of timing of additional investments, if you know?

We're in the early stages right now. Initial reaction has been strong.

As Brian mentioned, we also use our rental fleet as an opportunity to introduce new products. So customers can try out for example our recycling product or a ParaDIGm product.

And our direct side, our industrial sales force is also out there renting the fleet. So it's really a mix here and the demand comes from a number of different areas.

Right. And so far, correct me if I'm wrong, you've been funding this via just cash from operations, and what's the longer-term thought around funding rental fleet growth?

Steve, that's the way it will go in the future. It does flow through operating cash flow rather than there is a capital expenditure.

No, I mean are you going to raise debt to support that or you don't have any need to increase leverage on the balance sheet around the rate of growth?

I don't think we foresee having the need for a rental fleet of that kind of size or magnitude. We are looking at it as a way to help leverage our offering to customers, but we're not trying to become United Rentals.

So, we're [not going to] [ph] fund it faster than we can grow, we're trying to do it selectively.

Right, okay.

I would say that that's consistent with what our approach has been thus far. We are really looking at replenishing when needed and an opportunity to introduce new products to the market.

Can you tell us how many vehicles you have out on rent through the system?

I don't know if that's a number we have here today, but our utilization rate is…

I was just wondering is it dozens or is it 100 or…?

It's 100.

Okay. That's all I've got.

Thanks.

You made some commentary about acquisitions, and I'm wondering if we can just get an idea of just the priority, how important is it to you guys to find the acquisitions, what are some of the criteria that you're looking for and maybe an idea of the pipeline and any issues about deal pricing and maybe what your price range is for deals?

Right now we're pleased with the two acquisitions that we've done this year, in particular Joe Johnson as I walked through on the call. It is right now slightly ahead of our expeditions.

As we move forward, the pipeline is healthy. We're looking at a number of opportunities, new product lines, opportunities to leverage our manufacturing or our distribution areas that would be very attractive to us.

Opportunities to complement some of our systems businesses would be another area that would be very attractive to us. As we move forward, like many other industrial companies where multiples are still healthy, so we are looking at opportunities that have an attractive return, where we think that we can collectively grow, that there are synergies where we can employ some of our continuous improvement tools like 80/20 to improve the profitability of the acquisition candidate or to advance some of our internal strategies.

Okay, great. And then any idea, you've got two done this year, obviously JJE was a fairly large one, are there other good sized deals like JJE there in the pipeline and would you look at more distribution areas than manufacturing companies at this point?

We don't have any – with respect to distribution, we have no intention of buying any additional distribution opportunities as we sit here today. And with respect to the pipeline, we're looking at a number of different opportunities.

They tend to be in that $25 million to $75 million range.

Okay, thank you.

So I don't think we have any other questions. In closing, I would like to reiterate that we are confident in the long-term prospects for our business in our markets.

We'd like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you very much for joining us today.

Thank you.