Federal Signal's Q3 2025: Contradictions Emerge on In-Sourcing, M&A Impact, Infrastructure Bill, Refuse Production, and New Way Acquisition

Date of Call: October 30, 2025

Financials Results

• Revenue: $555M, up $81M or 17% YOY (consolidated net sales)
• EPS: GAAP diluted EPS $1.11 per share, up $0.24 (28% YOY); adjusted EPS $1.14 per share, up $0.26 (30% YOY)
• Gross Margin: 29.1%, compared to 29.6% in Q3 last year
• Operating Margin: Operating income $94M, up $18.1M or 24% YOY (approx. 17.0% operating margin)

Guidance:

• Raised full-year adjusted EPS to $4.09–$4.17 (from $3.92–$4.10)
• Raised full-year net sales to $2.10B–$2.14B (from $2.07B–$2.13B); outlook excludes any contribution from New Way
• Maintaining full-year CapEx outlook of $40M–$50M
• Expect Q4 effective tax rate of 25%–26% (excluding discrete items)
• New Way acquisition expected to close in Q4 pending regulatory approval; pro forma leverage expected to be <1.5x at close

Business Commentary:

• Strong Financial Performance and Revenue Growth:
• Federal Signal reported 17% year-over-year net sales growth for Q3 2025, with consolidated net sales reaching $555 million.

• The growth was driven by strong contributions from both the Environmental Solutions Group (ESG) and the Safety and Security Systems Group (SSG), along with contributions from recent acquisitions.

• Environmental Solutions Group Performance:

• ESG's net sales for Q3 2025 were $466 million, up 17% compared to last year, with an adjusted EBITDA margin increase of 60 basis points.

• This was attributed to higher production levels, strong demand for aftermarket offerings, and contributions from recent acquisitions.

• Safety and Security Systems Group Performance:

• SSG's net sales for Q3 2025 were $90 million, up 18% from the previous year, with a 220 basis point improvement in adjusted EBITDA margin.

• The improvement was primarily driven by volume growth within its public safety and warning system businesses, proactive price/cost management, and cost savings.

• Order Intake and Backlog:

• Federal Signal's order intake for Q3 2025 was $467 million, an increase of 10% year-over-year, but backlog declined by 4%.

• The decline in backlog was mainly due to lower orders for third-party refuse trucks, which are being transitioned to New Way over time.

• Acquisition and Integration Strategy:

• Federal Signal remains committed to strategic acquisitions and has identified the New Way acquisition as a critical component of its long-term growth objectives.
• The acquisition is expected to close in the fourth quarter, pending regulatory approval, and is anticipated to be margin accretive over time.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'strong financial results' with 17% year-over-year net sales growth, record third-quarter order intake ($467M), double-digit operating income improvement and said they're raising full-year adjusted EPS and revenue outlooks, signaling confidence in demand and execution.

Q&A:

• Question from Ross Sparenblek (William Blair & Company L.L.C., Research Division): Just to level set on the orders really quick. What was the M&A contribution from Hog and Standard at ESG in the quarter?
  Response: Hog contributed about $20M and Standard about $10M to ESG net sales in the quarter.

• Question from Ross Sparenblek (William Blair & Company L.L.C., Research Division): And then the SSG, any FX to call out there? Is that just all organic? It's all organic, right?
  Response: SSG growth was essentially organic; FX impact was negligible.

• Question from Ross Sparenblek (William Blair & Company L.L.C., Research Division): Maybe just dig in a little bit on the refuse trucks. I didn't fully appreciate that you guys are going to stop taking orders for the third party within your network. Can you just help us kind of frame the backlog contribution from that and then kind of expectations for margin lift going forward as those kind of step away and hopefully, New Way fill it in?
  Response: Transitioning from third-party refuse OEMs to New Way drove ~85% of the YOY backlog reduction; deliveries will be worked through as they transition and the change should be margin-accretive over time.

• Question from Ross Sparenblek (William Blair & Company L.L.C., Research Division): This is what I'm trying to get at, I guess, is just we should expect somewhere in the range of that 85% number over the next 3 quarters impacting orders as well.
  Response: They expect the related backlog deliveries and order impacts to play out over the next ~12 months, though quarter-to-quarter variability is expected.

• Question from Christopher Moore (CJS Securities, Inc.): Now that you've made the announcement, just wondering kind of what you're hearing from the dealer channel. Is there any potential negative from the combination? Or just kind of big picture, what you're hearing at this stage?
  Response: Feedback from dealers has been overwhelmingly positive; shared dealers remain, and newly added dealers are viewed as an opportunity.

• Question from Christopher Moore (CJS Securities, Inc.): We're talking about $0.40 to $0.45 accretive to EPS in fiscal '28 and '26 is roughly flat; will it be backloaded as the integration happens or will '27 capture a reasonable portion?
  Response: Synergies are expected to be realized gradually with full benefit by the end of 2028; more detail will be provided after closing.

• Question from Michael Shlisky (D.A. Davidson & Co., Research Division): Can you maybe give us a little more commentary on the current federal government shutdown? Have you seen any changes to funding or any delays with any orders or issues local players have been mentioning?
  Response: No meaningful disruption expected from the federal shutdown given only about $10M of direct federal business last year; SSG orders remain strong.

• Question from Michael Shlisky (D.A. Davidson & Co., Research Division): So as far as federal government supporting state and local budgets, you haven't seen any kind of disruption or changes in the funding and the actual flow of cash so far?
  Response: They have not seen material funding disruptions to date; primary funding sources (water taxes, municipal taxes) and international markets provide diversification.

• Question from Michael Shlisky (D.A. Davidson & Co., Research Division): Regarding the broader environment for New Way and another large waste truck merger, do you think that could make the pricing environment sharper going forward?
  Response: Overlap with the competitor is limited to garbage trucks; management remains confident New Way is well positioned and their view is unchanged.

• Question from Steve Barger (KeyBanc Capital Markets Inc., Research Division): If we just take New Way out of the conversation, do you think existing backlog and end market strength should allow you to keep the growth momentum going in core ESG?
  Response: Management believes core ESG is well positioned to sustain momentum and achieve another record year in 2026 via execution, throughput improvements and product pipeline.

• Question from Steve Barger (KeyBanc Capital Markets Inc., Research Division): Do you feel like some of the mid- to high single-digit organic growth momentum that you've had is still achievable given the conditions, backlog and initiatives you have?
  Response: They remain committed to the long-term growth algorithm (low double-digit revenue growth split evenly between organic and M&A) and will update guidance in February.

• Question from Steve Barger (KeyBanc Capital Markets Inc., Research Division): Can you just talk about how you think about the pace of margin expansion going forward and whether New Way changes the algorithm for incremental margin?
  Response: New Way is expected to be margin-dilutive in 2026, but long-term ESG margin targets (18%–24%) remain intact; margin upside from aftermarket and capacity leverage exists.

• Question from Gregory Burns (Sidoti & Company, LLC): On the 'build more parts' initiative, what percent of your parts are currently in-sourced reflecting that ~$10M of sales you called out?
  Response: In-sourced parts sales are still very small (~$10M) with considerable untapped opportunity.

• Question from Gregory Burns (Sidoti & Company, LLC): Is there a goal percent for vertical integration of parts and what margin uplift do you expect relative to outsourcing?
  Response: No firm percentage target yet; the initiative is exiting pilot phase and is expected to scale and accelerate in 2026–27.

• Question from Gregory Burns (Sidoti & Company, LLC): Could you give more color on lead times for larger product lines and expectations for next year; do you expect to be able to bring your backlog down next year?
  Response: Current lead times: sewer cleaners ~11 months, 3-wheel sweepers 5–6 months, 4-wheel sweepers 12–18 months; they expect to continue reducing lead times (particularly sewer cleaners and 4-wheel sweepers).

• Question from Gregory Burns (Sidoti & Company, LLC): Excluding the impact of the third-party refuse trucks, do you think production rates will increase next year to where you will start to bring down the core backlog?
  Response: They plan to increase production to leverage available capacity and reduce lead times; 2026 guidance will be provided in February.

Contradiction Point 1

In-sourcing and Vertical Integration

It involves the company's strategy and progress in in-sourcing parts production and vertical integration, which can impact operational efficiency and cost management.

What percentage of parts are currently in-sourced, and what is the target for vertical integration? - Gregory Burns (Sidoti & Company, LLC)

2025Q3: Very small percentage is currently in-sourced. There's significant untapped opportunity, especially with the refuse business. We aim to expand 'build more parts' over time. - Jennifer Sherman(CEO)

Did you increase margin targets for SSG, and what is the status of PCB line in-sourcing? - Walter Scott Liptak (Seaport Global Securities)

2025Q2: We're currently producing about 17% of the PCBs for our products in-house, a level that's well below our final goal. - Jennifer Sherman(CEO)

Contradiction Point 2

Customer Demand and M&A Impact

It pertains to the company's expectations regarding the impact of tax reform on customer demand and the M&A landscape, which can influence strategic planning and financial projections.

What were the margins for ESG in the quarter, specifically regarding price-cost, aftermarket growth, and production levels? - Ross Sparenblek (William Blair & Company L.L.C.)

2025Q3: The M&A landscape remains active with no significant impact expected in 2025 from the tax reform. - Jennifer Sherman(CEO)

How might the recent tax reform affect customer demand and M&A activity? - Timothy W. Thein (Raymond James & Associates)

2025Q2: We don't see any significant impact on our effective tax rate for '25 or '26. - Ian Hudson(CFO)

Contradiction Point 3

Impact of the Infrastructure Bill

It involves the anticipated impact of the infrastructure bill on business operations and revenue, which could influence investor expectations.

Can ESG sustain growth without New Way? - Steve Barger (KeyBanc Capital Markets Inc., Research Division)

2025Q3: The infrastructure bill passed last year was certainly a positive for us. As a result of that bill, we were able to attract several large customers for our safe digging business, which was very important to us. - Jennifer Sherman(President, CEO & Director)

What is the impact of the infrastructure bill on your industrial demand, and what inning are you in to monetize it? - Gregory Burns (Sidoti & Company, LLC)

2025Q1: Less than 20% of funds are spent, with benefits expected for dump trucks, safe-digging, and road-marking. Orders are attributed to market share expansion, not directly from infrastructure spending. - Jennifer Sherman(President and Chief Executive Officer)

Contradiction Point 4

Refuse Truck Backlog and Production Transition

It involves differing expectations regarding the timeline and impact of the transition from a third-party refuse manufacturer, which could impact revenue and operational efficiency.

What is the contribution from the refuse truck backlog and expectations for margin improvement? - Ross Sparenblek (William Blair & Company L.L.C.)

2025Q3: We're transitioning from a third-party refuse manufacturer. We expect the decline of third-party refuse backlog to continue for about a year. The shift should be margin accretive over time. - Jennifer Sherman(President, CEO & Director)

Can you provide rental fleet growth for the quarter and 2025 expectations, factoring in standard acquisitions and HOG? - Christian Dial (KeyBanc Capital Markets)

2024Q4: We expect to have 100% of our production in-house by the end of this year for refuse. We expect to see some margin improvement on that but it's going to be more front loaded. - Jennifer Sherman(CEO)

Contradiction Point 5

New Way Acquisition and Synergy Realization

It highlights differing expectations regarding the timing and impact of synergies from the New Way acquisition, which directly affects financial projections and strategic alignment.

Will EPS accretion from New Way be backloaded in 2028? - Christopher Moore (CJS Securities, Inc.)

2025Q3: The synergy targets will be more gradually realized over time, with a significant portion expected by the end of 2028. - Ian Hudson(Senior VP & CFO)

How does the Hog Technologies acquisition align with your growth strategy? - Mike Shlisky (D.A. Davidson)

2024Q4: We expect the acquisition to be accretive to EPS in the first full year post-close and to achieve our synergies within 18 months. - Jennifer Sherman(President, CEO & Director)