Federal Signal Corporation Aktie

Greetings, and welcome to the Federal Signal Corporation First Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Felix Boeschen, Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin.

Good morning, and welcome to Federal Signal's First Quarter 2026 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer.

We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website.

Before I turn the call over to Ian, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission.

These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures.

In addition, we will file our Form 10-Q later today. Ian will start today with more detail on our first quarter financial results. Jennifer will then provide her perspective on our performance, current market conditions, our multiyear growth initiatives and go over our revised outlook for 2026 before we open the line for any questions.

With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our consolidated first quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with 35% year-over-year net sales growth, 52% operating income improvement, gross margin expansion, a 190 basis point improvement in adjusted EBITDA margin, robust cash generation and strong order intake.

Consolidated net sales for the quarter were $626 million, up $162 million or 35% compared to last year. Organic sales growth for the quarter was $70 million or 15%. Consolidated operating income for the quarter was $99.7 million, up $34 million or 52% compared to last year. Consolidated adjusted EBITDA for the quarter was $126.3 million, up $41.2 million or 48% compared to last year.

That translates to a margin of 20.2% in Q1 this year, up 190 basis points compared to last year. GAAP diluted EPS for the quarter was $1.14 per share, up $0.39 per share or $0.52 compared to last year. On an adjusted basis, EPS for the quarter was $1.18 per share, an increase of $0.42 per share or 55% from last year.

Orders for the quarter were $623 million, up $55 million or 10% from last year, contributing to a backlog at the end of the quarter of $1.04 billion. In terms of our group results, ESG's net sales for the quarter were $533 million, up $145 million or 38% compared to last year. ESG's operating income for the quarter was $89.1 million, up $29.4 million or 49% compared to last year.

ESG's adjusted EBITDA for the quarter was $113.3 million, up $35.8 million or 46% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 21.3%, an improvement of 130 basis points compared to last year. ESG reported total orders of $534 million in Q1 this year, an increase of $54 million or 11% compared to last year.

SSG's net sales for the quarter were $93 million this year, up $17 million or 22%. SSG's operating income for the quarter was $23.6 million, up $7.8 million or 49% compared to last year. SSG's adjusted EBITDA for the quarter was $24.7 million, up $7.9 million or 47%. That translates to an adjusted EBITDA margin for the quarter of 26.6%, up 460 basis points compared to last year.

SSG's orders for the quarter were $89 million, up $1 million or 1% from last year. Corporate operating expenses for the quarter were $13 million compared to $9.8 million last year, with the increase primarily due to higher acquisition and integration-related expenses and increased legal, stock compensation and incentive-based compensation costs. Turning now to the consolidated income statement, where the increase in net sales contributed to a $48.6 million improvement in gross profit.

Consolidated gross margin for the quarter was 28.7%, a 50 basis point increase over last year. As a percentage of net sales, our selling, engineering, general and administrative expenses for the quarter were down 150 basis points from Q1 last year. Other items affecting the quarterly results include a $2.2 million increase in amortization expense, a $600,000 increase in acquisition-related expenses and a $3.9 million increase in interest expense associated with higher average debt levels.

Tax expense for the quarter was $21.8 million, an increase of $6.1 million compared to Q1 last year, with the increase primarily due to the effect of higher pretax income levels, partially offset by the recognition of approximately $1 million of excess tax benefits from stock compensation activity. Our effective tax rate for Q1 this year was 23.6%. At this time, we continue to expect that our full year effective tax rate will be approximately 25%, excluding additional discrete tax benefits.

On an overall GAAP basis, we therefore earned $1.14 per share in Q1 this year compared with $0.75 per share in Q1 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for the quarter were $1.18 per share compared with $0.76 per share last year.

Looking now at cash flow. We generated $101 million of cash from operations during the quarter, an increase of $65 million or 176% from Q1 last year. We ended the quarter with $480 million of net debt and availability under our credit facility of $939 million. Our current net debt leverage ratio remains low even after paying the full $15 million earn-out associated with the Hog acquisition and funding the Mega Equipment acquisition during the quarter. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions, pay down debt and return cash to stockholders through dividends and opportunistic share repurchases.

On that note, we paid dividends of $9.2 million during the quarter, reflecting an increased dividend of $0.15 per share, and we recently announced a similar $0.15 per share dividend for the second quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. We are proud of our record-setting first quarter performance, which included new quarterly records across net sales, adjusted EPS and adjusted EBITDA, thanks to outstanding results from both of our groups.

As I reflect on our start to 2026, I was particularly pleased with several items in the quarter drove better-than-expected results versus our expectations. First, there was broad-based strength across several product verticals within each of our groups that contributed. Second, the early progress our teams made integrating Hog, New Way and Mega into the Federal Signal family. And third, the strong margin performance in the quarter with adjusted EBITDA margins expanding 190 basis points year-over-year.

Within our Environmental Solutions Group, we delivered 38% year-over-year net sales growth, a 46% increase in adjusted EBITDA and 130 basis point improvement in adjusted EBITDA margin. Higher production levels leveraging the power of our platform to drive internal margin initiatives and proactive price cost management were all meaningful organic contributors.

Acquisitions also contributed $92 million of net sales during the quarter with the New Way, Hog and Mega transactions driving notable increases in sales of refuse trucks, road marking and line removal equipment and mineral extraction support equipment. We remain focused on building more trucks across our family of specialty vehicle businesses in line with demand levels.

These efforts to increase throughput across our manufacturing sites contributed to strong net sales across several ESG product verticals, including vacuum trucks, dump truck bodies and trailers and other specialty equipment, including street sweepers, road marking and line removal trucks and water blasting equipment. From a capacity perspective, the combination of large-scale capacity expansions that we completed between 2019 and 2022, good access to labor and continued investments in several productivity-enhancing projects position us well to profitably absorb more volume into our existing footprint.

In 2026, we expect approximately half our annual capital expenditures to be focused on various growth initiatives with the other half focused on maintenance investments. Shifting to aftermarkets, where demand remains strong, aided by contributions from recent acquisitions. For the quarter, aftermarket revenue increased 18% year-over-year, primarily driven by higher demand for aftermarket parts, increased service activity and rental income growth.

As we continue to monitor this dynamic geopolitical and tariff environment alongside our dealer partners, customers and suppliers, we see our aftermarket operations as a critical competitive advantage for our customers. With a dedicated local service footprint across both Canada and the United States, including rental assets, we believe we are well positioned to continue to serve the local markets in which we operate.

Moreover, our unique aftermarket ecosystem spanning parts, service, rental and used equipment offerings allows customers to access equipment in a capital-efficient manner of their choice, providing flexibility throughout various economic cycles. We also continue to execute on early opportunities within our Build More Parts or BMP initiative, whereby we are vertically integrating certain parts production.

Over a multiyear time frame, this initiative should allow our teams to drive increased recurring parts revenue streams while expanding margins. Our acquisition of New Way provides additional opportunity for future BMP growth. Shifting to our Safety and Security Systems Group, where the team delivered another excellent quarter with 22% top line growth, a 47% increase in adjusted EBITDA and a 460 basis point improvement in adjusted EBITDA margin.

This improvement was primarily driven by a combination of volume increases across our public safety and industrial signaling product verticals, proactive price/cost management and realization of certain cost savings. Our SSG teams continue to drive efficiency gains across our University Park facility, partially fueled by the successful addition of a fourth printed circuit board in the fourth quarter of last year. We are also energized by several market share initiatives aimed at penetrating historically underserved customer segments such as certain law enforcement customers and environmental disaster warning applications.

Lastly, we had an outstanding quarter of cash generation with $101 million of operating cash flow, representing cash conversion of 144% of net income. On an annual basis, we continue to target 100% cash conversion. Shifting to current market conditions. On an underlying basis, excluding the impact of acquired backlog and third-party Labrie refuse orders received in Q1 last year, our orders this quarter increased by $70 million or 13% year-over-year with healthy demand across both our Environmental Solutions and Safety and Security Systems Group.

Within product lines, we experienced strength in demand for other specialty equipment, including refuse trucks and metal extraction support equipment as well as in aftermarket parts and service and warning systems. Somewhat offsetting this strength was an approximate $20 million year-over-year reduction in international export orders spanning product lines across both groups.

While they represent a small portion of our overall net sales, we are closely monitoring any political impacts on international demand stemming from current geopolitical conflicts. Looking ahead, we are energized by the pipeline of strategic market share initiatives across the enterprise that aim to further strengthen our value proposition in the marketplace for years to come.

Lastly, our backlog stood at $1.04 billion at the end of the quarter, essentially unchanged from the end of last year and down approximately 6% year-over-year. This decrease is principally driven by our successful execution decreasing lead times across vacuum trucks and street sweepers and the planned decline in the third-party Labrie refuse backlog, which was discontinued in the fourth quarter of 2025.

At the end of the quarter, our third-party Labrie refuse truck backlog stood at approximately $55 million. As a reminder, net sales of our backlog-intensive products represented approximately 45% of net sales last year. As such, given the size of our backlog, we continue to enjoy strong forward visibility for our backlog-driven product lines.

Shifting now to an update on our multiyear growth strategy. As a reminder, through cycles, we target low double-digit top line growth split roughly evenly between inorganic and organic growth. At the same time, we are committed to growing profitably and have implemented associated EBITDA margin targets for our groups that we have increased several times over the past years. While we are proud of our historical track record, we are not done here.

As a matter of fact, as I sit here today, I feel energized as I've ever been as I look across our set of strategic initiatives. A couple of highlights. Starting with SSG, we are formally raising our EBITDA margin targets today for our Safety and Security Group to a new range of 22% to 28% from the previous range of 18% to 24%.

As a reminder, these margin targets represent through-cycle margin targets and do not present any sort of long-term ceiling. Within our Safety and Security Systems Group, we continue to see a multitude of organic market share opportunities spanning the penetration of underserved customer segments within our domestic public safety and warning system businesses and active new product development pipeline, including several recently launches and certain geographic expansion opportunities.

These growth opportunities, coupled with our ongoing productivity investments include capacity optimization and automation within our factories, all underpin our confidence in these new margin targets. In fact, our consistent margin improvement journey throughout the last quarters has solidified 2 important strategic pillars for us, which we are further accelerating throughout 2026.

The first is the identification of incremental margin opportunities across the enterprise that we believe we can realize in 2027 and beyond, spanning several work streams. At the same time, we are also scaling several enterprise-wide investments starting in the second quarter of 2026 aimed at fortifying Federal Signal's competitive position to achieve continued multiyear growth.

These include investments in our internal centers of excellence with a focus on new product development, dealer development, data analytics and operations. We are also piloting 2 capacity optimization initiatives across our plants, whereby we are constructing additional warehousing space, allowing for prior storage space to available manufacturing capacity to support future growth initiatives.

While a small financial investment at less than $5 million, our teams will be well positioned to capitalize on our growing power of the platform benefits that we have identified. As an example, we are in the early stages of utilizing our dealer development processes within our refuse collection and multipurpose maintenance product verticals.

Our dealer development team in conjunction with our data analytics team helps our direct sales and dealer development teams identify untapped growth opportunities across new, used and aftermarket services on a localized basis. A institutionalized function within our vacuum truck and street sweeper product verticals, we are in early innings across other vehicle categories.

Within sales channel optimization, we are in early phases of leveraging and scaling Hog's existing airport sales channel to capitalize on opportunities across other specialty vehicle verticals. We have also identified aftermarket growth opportunities in several historically underserved states.

On the operational side, we are working on several production simplification projects across our vacuum truck, road marking and water blasting verticals. Our procurement and aftermarket teams are working diligently on leveraging the recently acquired businesses, which have provided multiple new parts optimization opportunities spanning several existing specialty vehicle verticals.

As we have added more product verticals, the possibility for further collaboration and productivity gains continue to increase. I go through this illustrative list of initiatives to highlight the breadth of our strategic growth projects as we continue to intensely focus on solving our customers' problems.

As we scale our internal power of the platform infrastructure, we believe these benefits will be split roughly evenly between revenue and costs while supporting our M&A integration efforts. Lastly, we have been pleased with the early integration progress our teams are making at New Way and Mega.

We are in the early stages of reaping benefits by merging the Mega and Ground Force sales channel which we ultimately believe will drive cross-selling opportunities in historically underserved markets for our metal extraction support equipment. We are also pleased with the early performance of New Way, including execution on our cost initiatives and reaffirm our target of delivering the outlined $15 million to $20 million of annual synergies by the end of 2028.

Turning now to our outlook for the remainder of 2026. With our first quarter performance, our current backlog and continued execution against our strategic growth and productivity initiatives, we are raising our full year adjusted EPS outlook to a new range of $4.80 to $5.05 from the prior range of $4.50 to $4.80. We are also increasing our full year net sales outlook to a new range of between $2.57 billion and $2.66 billion from the prior range of between $2.55 billion and $2.65 billion. We are maintaining our CapEx outlook of between $45 million and $55 million for the year. We also remain active in the M&A markets across both of our operating groups.

With that, we are ready to open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Tim Thein with Raymond James.

Jennifer, I was surprised you didn't weave in some Michigan basketball reference into your comments. So just on the -- just kind of how the first quarter played out and how that plays into the balance of the year. From a seasonal perspective, I guess the question just both from an earnings and order standpoint, the first quarter did not play out as the first quarter normally does.

So I'm just curious if there was anything that went for -- for you more than you thought or -- and maybe that pulled ahead earnings? Or I'm just curious as to how we should read the first quarter basically in the context of the full year. Is this fair to the question?

Yes. I mean I'll start with a couple of comments. Our teams just did an outstanding job. And what always gives me encouragement is that it's not any one business. There was really strength across the board. And again, I just want to do a shout out to our teams group because we're continuing to execute on the programs we put in place.

With that, I'll add a couple of comments. Our acquisitions did better than expected and got off to a strong start this quarter, particularly New Way, and we saw strong performance in early days from our Mega/Ground Force teams. And then SSG had a better quarter than expected. So again, strong performance across the board with a very encouraging start with respect to the acquisitions and SSG.

With respect to the cadence of the seasonality of EPS, I'll start with that the seasonality of our earnings isn't as pronounced this year, largely due to some of the seasonality of the recently acquired businesses that are different than our legacy businesses. And so for the remainder of the year, we're expecting our EPS contribution to be roughly evenly split by quarter.

Got it. That's helpful. And then just on the -- you highlighted the management of price cost as a benefit in the first quarter. There potentially what's coming down the pipe may be a little bit more inflationary dynamics. So is there any -- can you just remind us in terms of how you're thinking about just how you expect that plays out? I know you have contractual agreements and the like, which is going to impact things. But can you just speak to what potentially could be coming or not in terms of raw material and other cost inflation?

Yes. I think, Tim, if you think about it, the major raw materials we have really primarily steel. And so as we typically do, we've locked in -- for the majority of our product lines, we locked pricing is locked in through the rest of the year. With that said, we will experience some inflation on that line item in the second half of the year, even though we're locked, that is considered in the guidance that we gave today.

As it relates to our other cost increases, as everybody I expect is monitoring the freight market. That is a relatively low percentage of our overall kind of costs and sometimes is a pass-through for us. But again, that's certainly something that we're monitoring. And as we've demonstrated in the past, if we need to, we have the ability to reset it by pricing as well on kind of new quotes for the second half of the year.

Our next question comes from the line of Ross Sparenblek with William Blair.

Just to start off on the free cash flow, I mean, a record quarter for you. It looks like there's an unusual benefit from inventory. Is this related more to new acquisitions and kind of just pruning what you guys acquired? Or is it more of the progress on bringing down the lead times? Just anything come off it?

Sorry, Ross, yes, there's definitely some of that with the recent acquisitions. I mean we ended the year probably at a higher level of working capital than necessary. So there was an effort there to kind of work down some of that. I think you see that in the cash generation during the quarter.

So contribution from those acquisitions was pretty good during Q1. There's also some of that, as you mentioned, reducing the lead times. But I think overall, just a really strong management of working capital by the businesses. and just the -- obviously, the increase in the earnings there. So those are the main factors.

And then just to follow-up on that and I have one more. I mean, kind of going forward in the second quarter, third quarter, should we expect more of an inventory benefit as well in working capital? Or is this just kind of a onetime thing to start the year?

Maybe I don't -- we're not expecting to be as dramatic as what we saw in Q1. We're still expecting strong cash generation for the balance of the year. I would say what we've seen in the early part of April is as well. So I think we're still expecting very strong cash generation for the balance of the year. We aim for cash conversion of 100% on an annual basis. Obviously, we were ahead of that for Q1, but that is still the long-term goal.

And I'll add to it. The New Way team did an excellent job of implementing Federal Signal's approach, and we saw benefits from that in Q1.

That's very helpful. And then just one more on New Way. I mean, a pretty robust quarter, much higher than we were expecting on the contribution on the top line. Any seasonal factors to be aware of? Or is this just kind of penetration in Canada, part sales synergies? How should we kind of think about the strength of the first quarter?

Yes. I mean the teams -- we're very focused on executing on synergies. The revenue synergies typically take longer -- with respect to the cost side of things, we exceeded our internal expectations in terms of realization of some of those cost synergies. And again, the teams were extremely disciplined with respect to implementing this power of our platform. And we are very pleased with the progress in Q1.

Our next question comes from the line of Walt Liptak with Seaport Global Securities.

I wonder if you can talk a little bit more about the order growth. I think in the prepared remarks, you talked about a 13% order growth rate. I wonder if you could just go through those in a little bit more detail. What -- kind of what -- is it industrial, is it municipal that you're seeing the order growth? And what kind of products are getting the orders?

Yes, sure, absolutely. A couple of comments about the orders this quarter that are important to understand. As you know, we have a few moving pieces here given the discontinuation of the third-party Labrie refuse trucks and the impacts of the acquired backlog.

As I stated in my prepared remarks, kind of looking forward, we have about $55 million of Labrie, these third-party refuse trucks in our backlog. As we strip out these nonrecurring items and give you the cleanest view on net sales and orders for what we view as continuing operations into 2027 and beyond, we provided a reconciliation on Page 9 of the earnings presentation.

And when you look at that, orders are up 13%, but that does not -- that does include the impact of New Way and some of the other acquisitions. I think one of the challenges here is there can be noise in these organic growth numbers because we've effectively merged the sales and production functions across Mega/Ground Force and our road marking businesses, MRL, Hog and Blasters.

And this is a function of our 80/20 and integration growth strategies. So as you think about the underlying core organic orders without the impact of Labrie or any of the acquisitions, that number was down about $20 million, which was a reduction in international export orders as we described in the prepared remarks. Excluding that, organic orders were flat.

Okay. And then similarly, the backlog, understanding that you did a great job with production this quarter. How should we think about the backlog? Obviously, the Labrie has come out. But is -- have we seen backlog sort of the peak for backlog and we now see more stability in it? Or does the backlog keep coming down? How should we think about the future backlog?

Yes. I think, Walt, the first point would be, just as Jennifer mentioned in her remarks, that backlog -- our backlog relevant businesses represented about 45% of our net sales last year. To the point on the Labrie backlog, there is still $55 million of Labrie backlog remaining, and we expect to work that down over the next few quarters.

And also as we continue to reduce lead times for -- primarily for street sweepers and sewer cleaners, backlog could come down a bit there. So those are the kind of the main things that we could see backlog come down because of the Labrie dynamics as well as just reducing those lead times.

Okay. Great. And maybe a last one. The Section 232 modifications that happened in April, is there an impact from that? Or you already said that you've got kind of the inflation in there, but do you have some tariff-related costs that are going up?

Yes. We don't have material exposure that we talked about before because we are mostly in country for country from both a manufacturing and a supply chain perspective. The biggest potential exposure is on the chassis side, which is a pass-through for us, as you know. So the short answer is not a material impact.

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

This is actually Christian Zyla on for Steve Barger. Jennifer, you've been pretty vocal about your desire to reduce lead times and backlogs in things like vac trucks and street sweepers. Can you just give us an estimate of how much throughput you've realized with those 2019 to 2022 capacity investments that you mentioned? And is there more room for improvement kind of as we think about '26 and beyond?

Yes, absolutely. So really pleased with the progress at our vacuum truck facility and at our LGIM facility this quarter on what we call and you referenced Build More Trucks. Overall, we saw kind of 15% year-over-year improvement. Our lead times now for our sewer cleaners are running about 11 months and for our street sweepers, the 4-wheel sweepers, a tick above a year.

So again, we've made nice progress. We're going to continue to make progress. We think it's really important that those lead times be in that 4- to 6-month range, depending on the particular product line. And that will give us -- we'll be able to be more nimble in terms of responding to market opportunities. So again, really pleased with the progress, and we have the capacity and labor to continue.

That's great color. Maybe one more, just switching gears a little bit. Just thinking about your 4 strategic pillars, is there an overarching technology angle that you have in place or are working on for commonality across your products? I understand the industries you serve have probably historically been laggards of technology adoption, but it seems like that's going to become more prevalent as we go through the decade. So just any thoughts on like a commonality of technology stack.

Yes, absolutely. So we have -- our technology is segmented with respect to our SSG teams and our ESG teams and our CTO oversees that. So we're looking for opportunities, for example, and we've had quite a bit of success with respect to our control systems would be an excellent example.

In addition to that, we look for opportunities across our parts and our aftermarket systems, aftermarket businesses. So again, a critical focus. And it's frankly, it's one of the values of the power of the platform, and that distinguishes us from some of our competition in that we can make these investments in this technology at the Federal Signal level, and then we can implement it across our various vehicle or SSG businesses.

Our next question comes from the line of Chris Moore with CJS Securities.

Congrats. Maybe SSG margins, obviously, just overall exceptional, maybe even getting better. Much of that is due to internal actions. That said, maybe can you talk a little bit about the competitive landscape there? Has it changed much over the last few years? Are there a couple of players that you see consistently? I'm just interested to see kind of overall what you're seeing and what you're going up against in that marketplace.

Yes. Again, one of the things I like to talk about Federal Signal is that we have -- it's not the -- typically, our success is not the result of one initiative. I say internally a lot that we've got a lot of bets, a lot of different projects across the enterprise. So with respect to SSG, what's encouraging, and I think one of the driving factors that why we raised those margin targets is not only what they've accomplished, but what we see in the pipeline for further opportunities. And let me provide some color on that.

New product development. That team has introduced several new products to respond to customers' needs in new end markets. And we're in early innings of getting traction on that. One of the things that, that team just does an exceptional job on is speed to market in terms of speed to respond to a particular customer need.

Another example would be on the in-sourcing side. That team identified the opportunity to in-source printed circuit boards, and it gives us flexibility on the new product development team and accelerates our speed to market. And then I talked about, we completed the implementation of our fourth printed circuit board line in Q4, and we're seeing the benefits of that.

So in terms of the dynamics of the competitive market, it's primarily privately held competition. We're very active in the M&A market. So as we move forward, that team is bringing on some new products in the second half of the year. We're making some additional investments with respect to that new product development. We're making some additional investments on the talent side of things. And I feel really good about the opportunities in 2027 and beyond.

Got it. Very helpful. And maybe just one on New Way. So obviously, J.J., you've been distributing Labrie refuse trucks for a long time in Canada. You aren't taking any new orders there, looking to start ramping sale of the New Way refuse trucks.

Can you kind of compare and contrast the 2 truck lines? Is there anything on the Labrie trucks that's hard to match or that you'll have to incorporate into the New Way trucks in order to get the longer-term Labrie owners to consider making that switch?

Yes. I think what's important there is both companies make a good ASL. We would -- the Automated Side Loader. We would say that we're very pleased by the start. These are demo-intensive products. So we're in the middle and very early innings of our Canadian strategy. We've also talked about our dealer development, that's going to be important as we work with those valued dealer partners to grow their market share.

I would argue that one of the things that's really critical that differentiates us is our aftermarket support. And our teams have just years and years of experience and customer intimacy that we believe that we'll be able to successfully leverage in terms of growing New Way products.

Our next question comes from the line of Mike Shlisky with D.A. Davidson.

Can you just give us a few more comments on the -- on your international shipments in the quarter? Are some of the issues that you're facing with getting those out the door because your customers are in countries that are facing military conflict? Or is it more of a political question or tariffs? Just give us more color as to what's going on there.

Yes. I think what I was talking about in the prepared remarks was really a reduction in international export orders of about $20 million -- approximately $20 million year-over-year. And that would involve several product lines. So it's not material in and of itself to any single product, but it's the aggregate impact.

So that would include street sweepers. It would include a small portion of our SSG business. It would include a small portion of our road marking business. Also want to -- we had a onetime large order Q1 of last year out of Mexico. So was that year-over-year comparison of those large nonrecurring -- I mean, large international export orders that I was talking about in the prepared remarks.

Okay. Got it. I also wanted to ask about the increase in the SSG margin outlook. I mean it looks really strong. I guess I'm kind of wondering what has changed all of a sudden in that segment to make it go 4 full points higher? Is it a mix issue or kind of new products? Or has this been something that's been building for quite some time and now you're announcing it? I'm just trying to get a feel for what truly has changed in SSG that we haven't thought of until right now.

Yes. This is something that, as you know, we have been operating at the top end or above the previous EBITDA margin targets. And as we look at the new product development -- new products that we're introducing to the market, the market penetration of opportunities and what we've already achieved in terms of underserved markets and then the production efficiencies and scale that we've achieved, I highlighted the implementation of the fourth printed circuit board line, but there are many things that go into that.

And again, this is all done primarily in North America in one facility. And so there's opportunities to continue to expand that. I made reference to a pilot project that's small. We're putting up a warehouse to open up even more manufacturing space at our University Park facility. And that's in both to support the new products that we're introducing and some M&A opportunities that we're looking at.

So it really was a combination of all of those factors that gives us the confidence to make that material jump in the EBITDA margin targets. As I said in my prepared remarks, we're not done. There's a lot of opportunity for that business.

Got it. And maybe just one last one on mineral extraction. Can you just give us a little bit more color as to how that's been going in the last quarter or so as far as quoting activity? I'm kind of wondering if the changes to Section 232 tariffs or tariffs in general have meant a lot more quoting on domestic mineral extraction projects or products, sorry.

Yes. I guess we'll start with Mega. As you know, we closed that acquisition in January. And that was an acquisition that we had been working on for quite some time. So out of the box, initially, day 1, they were selling jointly. And we discontinued certain products, manufacturing one facility. We're now manufacturing another facility.

So the results are truly blended, and they're off to a strong start in terms of the beat of the quarter. It was one of the businesses that did better than expected. And together, we've now got additional manufacturing capacity, putting the talented ground force and Mega team together, it gives us opportunities to penetrate previously underpenetrated markets. And you are correct, we are seeing increased activity in the states.

Our next question comes from the line of Greg Burns with Sidoti & Company.

You mentioned just now just maybe some -- looking at some acquisition opportunities on the SSG side of the business. Can you just talk about maybe the pipeline you see there? What you're looking for? Is it scale in existing businesses, maybe new product lines or geographic expansion? And do you think you might be -- get something done this year?

Yes. Great question. So as we talked about, we really started cultivating that pipeline about 2 years ago. And we have spent a lot of time over the last couple of years in terms of meeting with different founders or second generation. So we're encouraged by the opportunities in both '26, '27 and beyond. And they would come in a couple of different flavors.

One is would be audible and visual warning devices that serve different end markets. One of the drivers, frankly, of building a warehouse in University Park is to open up additional manufacturing capacity for both new products we're introducing and for acquisitions that we might integrate into that particular building.

It is a very attractive niche for us. We think there are opportunities to leverage our channel, which would be important, leverage manufacturing. There's -- given the investments that are material that we've made in printed circuit board lines, there would be opportunities. One obvious cost and efficiency synergy. And we think police is the largest on portion of our SSG business.

So there'll be opportunities to -- within that police car upfitting the products that we utilize there to expand our portfolio of products. So that gives you some flavor on. Some of them are smaller, but they kind of range in all different sizes. But the team is actively working on those as we speak.

Okay. It was great to see the margin uplift in the SSG side of the business. But with the breadth of all the projects, internal projects you have outlined today, what is your view on maybe the potential for further margin gains on the ESG side of the business?

And with all of these projects that you have ongoing, like what is the time frame or maybe the realization of maybe some of the revenue and margin benefits? Are these more implemented this year in '27, '28 benefits? I'm just trying to understand maybe the durability of kind of the margin trajectory of the business.

Yes. So let me say is, this 18% to 24%, that is something we've been very clear about, and I'll continue to reiterate, that is not a ceiling. If you look at the power of the platform and the investments that we're making, we continue to believe there are opportunities to further increase those EBITDA margin targets.

Some of that, as we talked about, is going to depend on the cadence of achieving both the revenue and cost synergies in the various ESG acquisitions, as we talked about when we bought New Way, it was below our target EBITDA margin. We're only 1 quarter in. Obviously, we're off to a good start, but more work to be done.

Again, reaffirming our confidence in achieving those synergy numbers of $15 million to $20 million by 2028, but it's always going to vary quarter-to-quarter. Again, directionally, we're extremely confident that our current EBITDA margin targets are not a ceiling, and we'll continue to strive over the long term to improve those and raise those.

Our next question comes from the line of Tim Thein with Raymond James.

Just a 2-parter on the same topic on ESG orders. There was an earlier question asked, and I didn't pick it up, but the split between how the orders performed between the publicly funded versus your industrial customer base. And then part B of that, Jennifer, was I didn't follow -- I think you said orders when you -- you need to slice and dice them, but I thought you said after doing that, they came out to be flat. What did you mean by that, assuming I heard that correctly?

Yes, I'll start and then Ian can pick up. What I was talking about is a couple of things that it's really important to understand about the orders for Q1. It's, 1, the discontinuation of the third-party Labrie refuse trucks and the impacts of acquired backlog.

Second would be, as I talked about earlier, we've really merged the Mega/Ground Force and also our road marking businesses. So it's becoming across both sales and production functions. So it's becoming increasingly difficult to parse out which was a Mega order and which was a Ground Force order. And the same thing applies to the MRL Hog and Blasters roadmarking businesses.

So I was trying to give some context in terms of the orders. In addition to that, I said that our international export orders were down about $20 million. So orders were up 13%. But when you exclude the international organic orders were flat.

Yes. And I think, Tim, looking at the split between the 2, industrial is probably a little stronger than the publicly funded side of the business, again, mostly because the public side of the business was -- that was where we had some of those fleet orders in Q1 of last year from international markets.

And we have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO, Jennifer Sherman, for closing remarks.

Thank you. We would like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today, and we'll talk to you next quarter.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you, and have a great day.

Greetings, and welcome to the Federal Signal Corporation Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Felix Boeschen, Vice President, Corporate Strategy and IR. Please go ahead.

Good morning, and welcome to Federal Signal's Fourth Quarter 2025 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer.

We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website.

Before I turn the call over to Ian, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting nil. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today.

Ian will start today with more detail on our fourth quarter and full year financial results. Jennifer will then provide her perspective on our performance, current market conditions, our multiyear growth initiatives and go over our outlook for 2026 before we open the line for any questions.

With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our financial results for the fourth quarter and full year of 2025 are provided in today's earnings release. Before I talk about the fourth quarter, let me highlight some of our full-year consolidated results for 2025.

Net sales for the year were $2.18 billion, a record high for the company and an increase of $319 million or 17% compared to last year. Organic net sales growth for the year was $205 million or 11%. Operating income for the year was $340.9 million, an increase of $59.5 million or 21% from last year. Net income for the year was $246.6 million, an increase of $30.3 million or 14% from last year.

Adjusted EBITDA for the year was $438.9 million, up $88.3 million or 25% compared to last year. That translates to a margin of 20.1% this year, up [ 130 ] basis points from last year. GAAP diluted EPS for the year equated to $4.01 per share of $0.51 per share or 15% from last year. On an adjusted basis, we reported record full year earnings of $4.23 per share of $0.89 per share or 27% from last year.

Orders for the year were $2.22 billion, an increase of $374 million or 20% from last year. Backlog at the end of the year was $1.04 billion, an increase of $45 million or 5% from last year.

For the rest of my comments, I will focus mostly on comparisons of the fourth quarter of 2025 to the fourth quarter of 2024.

Consolidated net sales for the quarter were $597 million, an increase of [Technical Difficulty] or 27% compared to last year. Organic net sales growth for the quarter was $85 million or 18%. Consolidated operating income in Q4 this year was $83.5 million, up $13.4 million or 19% compared to last year. Net income for the quarter was $60.8 million, an increase of $10.8 million or 22% from last year.

Consolidated adjusted EBITDA for the quarter was $119.4 million, up $30.1 million or 34% compared to last year. That translates to a margin of 20%, an increase of 110 basis points from last year. GAAP diluted EPS for the quarter was $0.99 per share, up $0.18 per share or 22% from last year. On an adjusted basis, EPS for Q4 this year was [ $1 ] per share an increase of $0.29 per share or 33% compared to last year. Orders for the quarter were $647 million, up $201 million or 45% from last year. Orders in Q4 this year included $132 million of acquired backlog.

In terms of our fourth quarter group results, ESG's net sales were $504 million, an increase of $108 million or 27% compared to last year. ESG's adjusted EBITDA for the quarter was $109 million, up $26.1 million or 31% compared to last year. That translates to an adjusted EBITDA margin of 21.6% in Q4 this year, up 70 basis points from Q4 last year. ESG reported total orders of $566 million in Q4 this year, an increase of [ $301 ] million or 55% from last year.

SSG's fourth quarter sales were $93 million, up $17 million or 23% compared to last year. SSG's adjusted EBITDA for the quarter was $23.4 million, up $7 million or 43% from last year. SSG's adjusted EBITDA margin for the quarter was 25.2%, up 360 basis points from last year. SSG's orders for the quarter were generally in line with last year at approximately $82 million.

Corporate operating expenses in Q4 this year were $26.5 million compared to $10.5 million last year, with the increase primarily due to a $13 million increase in acquisition- and integration-related expenses.

Turning now to the consolidated statement of operations, where the increase in net [Technical Difficulty] were $36.7 million improvement in gross profit. Consolidated gross margin for the quarter was 28.4%, up 30 basis points compared to last year. As a percentage of net sales, our selling, engineering, general and administrative expenses for the quarter were down 110 basis points from Q4 last year.

During the fourth quarter of this year, we recognized $13.3 million of acquisition-related expenses, up from $300,000 in Q4 last year. The increase included an aggregate expense of $6.8 million to increase the fair value of contingent consideration associated with the acquisitions of HOG and Standard as well as expenses incurred in connection with the acquisition of New Way.

Other items affecting the quarterly results included a $1.3 million increase in amortization expense, a [Technical Difficulty] interest expense, a $200,000 reduction in other expense and the nonrecurrence of a $3.8 million pretax noncash pension settlement charge recognized in the prior year quarter.

Income tax expense for the quarter was at $17.8 million, an increase of $4.9 million from last year, with the year-over-year change largely due to higher pretax income levels and the recognition of fewer discrete tax benefits in the current year quarter compared to the prior year. Our GAAP effective tax rate for full year 2025 was 24%, including discrete tax benefits. For 2026, we currently expect a tax rate of approximately 25%, excluding any discrete tax benefits.

On an overall GAAP basis, we therefore earned $0.99 per diluted share in Q4 this year compared with $0.81 per share in Q4 last year. To facilitate earnings [Technical Difficulty] GAAP earnings per share for unusual items recorded in the current or prior-year periods. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition and integration-related expenses, debt settlement charges and purchase accounting expense effects.

In the prior year quarter, we also excluded the pension settlement charge that I just noted. On this basis, our adjusted earnings in Q4 this year were $1.16 per share compared with $0.87 per share in Q4 last year.

Looking now at cash flow, where we generated $97 million of cash from operations during the quarter, an increase of $7 million or 7% from Q4 last year. That brings our full year operating cash generation to $255 million, an increase of $23 million or 10% compared to last year. Early in the fourth quarter, we executed a new 5-year [Technical Difficulty] credit facility, replacing the $800 million credit facility that was previously in place.

During the fourth quarter, we completed the acquisition of New Way for an initial payment of approximately $413 million. And in early January, we completed the acquisition of Mega for an initial payment of approximately $45 million.

Our current net debt leverage ratio remains at a comfortable level even after factoring in recent acquisitions. We ended the quarter with $501 million of net debt and availability under our credit facility of $925 million.

With the increased borrowing capacity under our new credit facility, and our improved cash generation, we have significant flexibility to invest in organic growth initiatives, pursue additional strategic acquisitions like Mega, pay down debt and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid [Technical Difficulty] a $5 million during the quarter, reflecting a dividend of $0.14 per share.

That concludes my comments. And I would now like to turn the call over to Jennifer.

Thank you, Ian. We are proud of our record-setting fourth quarter performance, which included new quarterly records across net sales, adjusted EPS and adjusted EBITDA, thanks to the outstanding results from both of our operating groups.

Within our Environmental Solutions Group, we delivered 27% year-over-year net sales growth, a 31% increase in adjusted EBITDA and a 70 basis point improvement in adjusted EBITDA margin. Contributions from acquisitions, higher production levels and continued price realization were all meaningful year-over-year contributors.

Given continued strong order levels and an extensive pipeline of internal market share expansion initiatives, we remain focused on building more [Technical Difficulty] our family of specialty vehicle businesses and reducing lead times for sewer cleaners and 4-wheel sweepers.

These efforts to increase throughput across our manufacturing sites contributed to double-digit percent increases in net sales across several ESG product verticals, including sewer cleaners, safe digging trucks, street sweepers, metal extraction support equipment at road marking and line removal trucks.

From a capacity perspective, the combination of large-scale capacity expansions that we completed between 2019 and 2022, good access to labor and continued investments in several productivity-enhancing projects position us well to profitably absorb more volume into our existing footprint.

As in recent years, we expect approximately half of our annual CapEx expenditures in 2026 to be used on various growth initiatives, with the other half focused on maintenance investments.

Shifting to aftermarkets where demand remains strong, aided by contributions from acquisitions; for the quarter, aftermarket revenue increased 20% year-over-year, primarily driven by higher demand for aftermarket parts, increased service activity and rental income growth.

We are identifying new attractive aftermarket parts growth opportunities across the enterprise and are highly energized by the long-term prospects of our internal Build More Parts initiative, whereby we are vertically integrating certain parts production. Over a multiyear time line, this initiative will allow our teams to drive increased recurring parts revenue streams like expanding margins.

Additionally, our aftermarket teams are working diligently to integrate our most recent acquisitions [Technical Difficulty].

Shifting to our Safety and Security Systems Group, the team delivered another excellent quarter with 23% top line growth, a 43% increase in adjusted EBITDA and a 360 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by a combination of volume, increases for public safety equipment in the U.S. and in Europe, proactive price cost management and realization of certain cost savings.

Our SSG teams are laser-focused on new product development initiatives, while surgically targeting underpenetrated customer cohorts and regions, a strategy that is yielding share gains. Additionally, we expect the recent addition of a fourth printed circuit board manufacturing line at our University Park facility to drive additional efficiency improvements in 2026.

Lastly, we had another strong year of cash [Technical Difficulty] $55 million of cash generated from operations. For the full year, our cash conversion was 103%, slightly ahead of our annual target of 100%.

Before I shift to current market conditions, I would like to spend a moment to update you on our Refuse truck distribution strategy in Canada now that we have completed the acquisition of New Way.

As many of you know, we have extensive internal experience in the rough use market as we have been distributing third-party Labrie refuse trucks through our Joe Johnson Equipment sales channel for more than 20 years, primarily in Canada. This existing internal refuse service infrastructure and sales expertise was an important synergy consideration as part of the New Way transaction.

Prior to the acquisition, Neway had not penetrated the Canadian market at scale, creating unique market share growth opportunities for us starting in [ 2026 ]. As such, beginning in the fourth quarter of 2025, we stopped taking orders for third-party Labrie refuse trucks and instead begin selling new way through our Joe Johnson network in Canada.

Given these dynamics, we have provided additional disclosures in this morning's earnings presentation outlining our historical third-party Labrie wrap use orders and sales levels to facilitate more appropriate comparisons. We will continue to provide this reconciliation as we move through 2026.

From a financial perspective, we expect to deliver the remaining $80 million of third-party Labrie backlog over the next 4 quarters and eventually wind that backlog down to zero. As we wind down the sale of these lower-margin third-party rep use trucks and increased new waste sales in Canada, we expect to realize margin tailwinds in 2027 and 2028.

Shifting to current market conditions. On an underlying basis, excluding the impact of acquired backlog and third-party refuse orders Q4 orders increased $64 million or 14% year-over-year with improved demand across both our publicly funded and industrial product lines. Within product lines, we experienced particular strength in sewer cleaners, safe digging and vacuum trucks, fueled by continued demand for infrastructure and water projects in North America and rising safe digging adoption within the U.S.

Similarly, we are seeing especially constructive demand environments for our metal extraction support equipment and road marking and line removal products.

Lastly, I wanted to provide some context around our backlog, which stood at $1.04 billion at the end of fourth quarter, up approximately 5% year-over-year. When I first became CEO, we put in a multiyear growth strategy aimed at building a best-in-class specialty vehicle and industrial equipment growth company while decreasing the cyclicality of earning streams. As we've executed this strategy both organically and through M&A, the composition of our product portfolio has changed over time.

Consequently, our business has become less backlog intensive compared to historical periods. In fact, many of our least cyclical and fastest-growing product lines such as aftermarket parts are not really backlog relevant at all. To illustrate this impact in 2025, net sales of our backlog intensive products, which include vacuum trucks, street sweepers, metal extraction support equipment refuse trucks, road marking and line removal trucks; comprised approximately 45% of our sales compared to more than 50% in 2015.

While we internally continue to view backlog as an important metric and our current backlog provides excellent visibility for certain product lines throughout the next 6 to 12 months, the overall importance of backlog relative to enterprise-wide forward sales has decreased over time as we have decreased the cyclicality of the business.

As a reminder, consistent with our long-term growth strategy through cycles, we target annual low double-digit top line growth split roughly evenly between inorganic and organic growth.

Looking ahead to 2026, we are laser-focused on driving three critical multiyear growth initiatives forward that will benefit the company for years to come. First, the successful integration of our recently acquired businesses; second, new product development; and third, continuing to strengthen the [Technical Difficulty] power of our platform.

Let me share a couple of highlights. First, our teams are moving full steam ahead with the integration of Neway. As a reminder, we remain committed to achieving our targeted $15 million to $20 million in annual synergies by the end of 2028, with approximately half of those synergies tied to cost savings and the other half tied to various sales synergies, including the increased penetration of the Canadian market, dealer development, aftermarket parts optimization sales channel alignment and new product development.

Consistent with the outlook we provided our September acquisition announcement call, we are expecting the acquisition of New Way to be approximately adjusted EPS neutral in 2026, inclusive of a preliminary estimate of intangible asset amortization expense.

kSecond, we were pleased to close the acquisition of Mega Equipment last month. Mega is a manufacturer [Technical Difficulty] parts and equipment for the metal extraction support equipment sector. We have been following them for a number of years, having identified the company as a highly complementary asset to our ground force and Toho businesses. We believe Mega can accelerate several of our strategic growth initiatives within this space. As an example, Mega will substantially increase our reach into certain underpenetrated geographic regions such as South America. As we optimize our combined sales channel between ground force, Toho and Mega, we see important cross-selling opportunities similar to the playbook we have been deploying since 2022.

We also see incremental opportunities to accelerate Mega's aftermarket parts business, which has historically represented about 25% of Mega's net sales. And we have identified several operational benefits, including production savings and freight cost [Technical Difficulty]. From a financial perspective, Mega generated approximately $40 million in net sales over the last 12 months, and we expect the acquisition to be modestly accretive to cash flow and EPS in 2026.

Third, we continue to invest in our internal centers of excellence to widen our competitive advantage within the niche markets that we operate. In 2026, we see specific opportunities to drive several sales, new product development and dealer optimization initiatives bored across our vacuum truck street sweepers, multipurpose maintenance vehicle, refuse collection, road marking and safety and security systems verticals.

As part of this strategy, we acquired certain assets and territory rights in Texas in the fourth quarter, which we think will allow us to increase market share for several key product lines.

Turning now to our outlook. With the ongoing execution against our strategic initiatives, current demand backdrop, we are confident that we will have another record year in 2026. For the full year, we are anticipating net sales of between $2.55 billion and $2.65 billion and adjusted EPS between $4.50 and $4.80 per share notwithstanding an aggregate $0.16 per share headwind from higher acquisition-related intangible asset amortization expense and the normalization of our tax rate.

At the midpoint, this outlook would represent another year of double-digit growth and the highest adjusted EPS level in the company's history. In line with our typical seasonal patterns, we expect Q1 net sales and earnings to be lower than subsequent quarters due to less aftermarket revenue capture.

Lastly, we expect CapEx to be between $45 million and $55 million for the year, which includes [Technical Difficulty] enhancing projects. In closing, I want to express my profound thanks to all of our employees, suppliers, dealer partners, customers and stakeholders for a tremendous 2025.

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

[Operator Instructions] Our first question is from Tim Thein with Raymond.

Can you hear me okay? First question, just on the call the midpoint of $26 billion -- $2.6 billion in revenues. Apologies if I missed this. Is there a way to parse out? I'm not sure if you updated what you're expecting in terms of New Way and Mega and other acquisition impacts. Just trying to parse out organic versus relative to that number? .

Yes, sure, Tim. I'll take this. So if you think of the guide -- the revenue guide, obviously, on the -- in the aggregate, 17% to 20% -- sorry, 17% to 22% year-over-year growth, that's about 5% to 9% is organic and the rest would be contributions from New Way and Mega. So that's how it breaks down.

And then the midpoint, that's squarely in line with what we've delivered really since 2015, our organic growth has been a CAGR of about 7%. So that's squarely in line with the guide.

Yes. Okay. Excellent. And then just on the order trends, and I'm sure you have a perfect visibility as to every order placed and what the motivation is behind it. But I'm just curious maybe what feedback, if any, you hear from dealers in terms of -- or maybe how you're seeing that order board fill out, meaning are there any signs of maybe customer 1 we get ahead of a prebuy, meaning more of those orders may be coming later in the year? Or -- just curious as to what, if any, impact do you think that is having in terms of order activity.

Yes, I'll start with the prebuy discussion. We see -- there's been a lot of discussion around this. We have not baked any meaningful pre-buy into our guidance. We're going to continue to monitor it, and we will be prepared to respond to it.

So -- the other thing I would pretty -- I would add there is publicly funded customers don't materially engage in prebuying. So with respect to that part of the business, we don't think it would be a significant driver. Where we would see traction would be on those nonpublicly revenue customers.

Our next question is from Steve Barger with KeyBanc Capital.

For the 5% to 9% organic for the consolidated guide, -- is that similar for both ESG and safety? Or is 1 expected to outgrow organically versus the other? .

Yes, Steve, ESG to grow a little faster rate than SSG SSG is probably more of a kind of a GDP+ type rate, but you would expect ESG to be kind of a larger contributor to organic growth.

Got it. And thanks for the reminder on how the mix of backlog-dependent business is changing. So maybe a two-parter First, is it safe to say that you expect book-to-bill above 1 for the business units that still depend on backlog for forward visibility?

So a couple of comments there. As we previously talked about, our lead times are still extended for sewer cleaners and 4-wheel street sweepers. So we have been focused on build more trucks I'm pleased to report that we made some really good progress during Q4.

If you look at unit production combined to both Elgin and Vector, it was [Technical Difficulty] versus Q4 of 2024 and up 13% for the full year. So we were pleased with that progress. So for those particular businesses, it would have a -- we would expect -- we're very focused on getting those lead times in that 6- to 8-month range.

We provided some additional information in the slides today regarding the impact of the $80 million third-party Labrie refuse trucks. We will not be taking orders for lebri refuse trucks in 2026, and we'll be delivering those throughout the year. So we tried to separate that out for everybody so they understand the impact that will have. We will be taking orders for new way, but it will take us some time to build up to those particular rates over a multiyear period.

So outside of those particular things, we would expect over a 12-month period, the backlog would be around 1.0, a little bit better. but we wanted to call out those two particular issues as people -- as we move forward.

Yes, that's great detail. And then the second part, just a clarification, do book and ship orders within any given quarter get reported in -- or book and ship business, I should say, in a given quarter get reported in orders? And how do we think about rental and used equipment and how that flows through? Just for clarification.

Yes. The short answer, Steve, is yes. They do get reported in both orders and sales within the quarter. And we typically don't have much backlog for rentals, if any, because that typically you'll receive the request around the equivalent. So that's probably an in and out within the quarter. So not a whole lot of backlog in the rental business.

Yes. But rental would still show in orders? Or is that just kind of a...

Correct.

Our next question is from Ross Fehrenbach with William Blair.

Nice quarter here. Maybe maybe just start with a housekeeping item. Can you help parse out the 132 inorganic contribution to orders in the quarter? I understand some backlog, some is going to be incremental orders that were secured once you own the asset?

Yes, Ross, that's just the backlog that we acquired on the date of the acquisition.

Can you give us a sense of what the inorganic order flow look like to try to parse out the organic orders for ASG?

Yes. I mean, the difference wasn't really material. -- from what we've reported. If you strip out the acquired backlog, then the delta wasn't material.

Okay.

I mean, how should I think about that though is you guys did start stocking inventory in Canada for New Way and presumably the rest of the United States?

We didn't do anything meaningful in the 1 month that we owned them. .

Okay. Well, I mean, just kind of based on early discussions, you get the sense that you're going to have a strong adoption rate with existing dealers that might be selling other third-party refuse trucks.

Right now, New Way has a number of strong dealers and we're working with them. And we're in the JJE. Sales arm is we've hired a number of people. We're leveraging the existing infrastructure that's in place. We're training them on the new way equipment. So they're still in early stages. We're excited about some of the opportunities that are out there.

And then in certain areas, we plan on strengthening that dealer network through either the JJE team or other additions to the network.

Okay. So I mean, probably first quarter though, like, I mean, kind of time line on when we should start seeing more meaningful contribution? It just seems a little odd that you would what the brief phase out? I guess you do have a backlog there, you should wait until the end -- or shouldn't expect until the end of the year for the overlap of replacing Labrie with New Way inventory, correct?

Yes. We're taking orders since closing. And New Way has a number of strong dealers in place. There's a number of opportunities, and we're continuing to take orders. And we -- our view on New Way's contribution to the 2026 earnings has not changed, including the amortization, we expect it to be neutral.

Our next question is from Walt Liptak with Seaport.

So I wanted to ask, I didn't catch it. Jennifer, in your remarks, you talked about the first quarter. I wonder if you could talk a little bit about what you're expecting seasonally and from production schedules so we can get our modeling, right?

Sure. We expect in terms of earnings, the cadence to be similar to the past in terms of 19% to 20%. With respect to orders, there could be this year [indiscernible] in the New Way and part of first quarter Hog and Mega will be new. So there could be some change to the seasonality of orders. But in general, we -- what I said in my prepared remarks is we would expect the cadence of earnings to be similar to the past.

Okay. Great. And I wanted to ask too about New Way and just the cost synergies now that you've had a chance to do a full financial review and look at the operations. are you going to be able to do more with the cost synergies? And I wonder about 80/20, if that's something that you're going to give them time to integrate first and then start 80-20? Or do you start doing that right away with the New Way business strategies?

Yes. So we identified the $15 million to $20 million by 2028. It's about half cost and half revenue synergies. We have various teams that have been in place since we announced the acquisition in September that are working on those cost synergies and revenue synergies .80-20 and operational optimization is absolutely a critical synergy, and we have transferred 1 of our best 80-20 people. our Oates facility, the General Manager in that facility is now working directly with the new team on 80-20 opportunities.

Okay. Great. And just the last one for me. I was curious about the University Park, the fourth PCB line that went in. You guys have been really successful with vertically integrating. And I wonder if this one is for demand that you already have? Or is this kind of room to grow? Why did you have to have a fourth PCB line? .

There are a couple of drivers. First of all, the team did a super job and we installed that line. We're actually a little bit ahead of schedule in Q4. So we look at -- it drives a couple of things: continued growth. It really accelerates new product development. It allows us to drive customer needs, particularly within both our police and our signaling businesses.

So the short answer is accelerating new product development, the team a star in that particular area. And number two, it facilitates additional growth opportunities.

Our next question is from Mike Shlisky with D.A. Davidson.

Wanted to start off asking about Mega and about New Way. Can you share for us how 2025 fared within their own 4 walls as far as organic growth in those businesses. Are those in 2025, were those both growth businesses? And do you expect them organically to be for themselves, growth businesses in 2026?

Yes. I think with respect to Mega, we're obviously very excited about the combination of Mega with the ground force and Toho businesses. I think in Jennifer's remarks, she commented on how Mega brings some things to the table that we didn't necessarily have before in terms of geographic expansion.

So Mega's been on -- they've had a some nice organic growth in 2025. We're expecting that to continue as we go into 2026. They had revenues of about $40 million in -- as we go into '26, we're expecting that to grow a little bit.

As it relates to Neway, obviously, they were in the middle of a process, a sale process. So there was -- we didn't necessarily have audited financials, but the last audited financials that we had, they did $36 million of EBITDA and about $250 million of sales in 2024. As we talked about in September, we are expecting them to be slightly lower in 2026 just because there's some kind of normalization of the trends within that industry. So that's what we've implied in our guide for 2026.

Got it. And then your comment earlier about expanding a little bit into South America was also very interesting. Was that just a comment about ground force and Toho or are there other amounts of business that you think could actually work as well in South America? Just any comments on on kind of local sourcing, whether you have to have engine changeover to kind of make that happen because there's often some rules around local to-store content when you try to get into South America.

Yes. So my comments were focused on Mega and Toho and ground force. -- we have partners that we work with in South America. Mega has a very strong brand in the -- with respect to the chassis. So it's similar to how we export other ground force and Toho products. But the -- given the strong brand recognition of Mega, the teams are excited about the synergies for both those other products.

Great. Just one last one for me. You had a busy 2025 for M&A. Just a sense as to the pipeline you think for 2026? And what areas are you looking to grow through inorganic means ahead here?

Yes. Our pipeline continues to be full, We're very focused on identifying companies purchasing integrating, delever and then repeat. With that being said, different teams work on different opportunities.

We've mentioned previously that our SSG team is looking at a number of opportunities right now. We would expect that to continue. There are some other opportunities we're looking at with respect to specialty vehicles that involve different teams than the Rouse team or the mineral extraction team.

So M&A over the long run, will continue to play a critical part in our growth, but we will meter according to bandwidth.

Our next question is from Chris Moore with CJS .

Great quarter, as always. You guys were obviously ahead of the curve early in COVID expanding capacity and certainly recognizing it depends on mix. But just trying to get a sense of roughly how much annual revenue Federal Signal can currently handle with the existing infrastructure?

Yes. So we're currently running at about 70%. I would highlight that we added some additional capacity with A and Mega, particularly UA. And we're excited about that capacity [Technical Difficulty] some organic growth initiatives that we're incubating right now. that we expect will have multiyear benefits into '27 and '28.

So I'll say what I say all the time, we are continuously tweaking our capacity at various facilities where we might do something that is less than $5 million type expansion. The teams have done a super job in terms of 80/20, which one of the many benefits of 80/20 is freeing up additional capacity. We've been able to add some additional capacity. We're leveraging some of the -- as I mentioned, some of the opportunities in new way. I can give a great example in our dump truck body business. We had excess capacity in Pennsylvania. You've now are producing dump trucks in a particular facility there. So I think we're in pretty good shape right now as we sit here to support our growth initiatives going forward.

Got it. Helpful. Maybe just one on New Way. So you've talked about the new acquisition being neutral to EPS in '26, potentially adding 40% to 45% in 2018. I'm assuming based on prior conversations and prior comments, that would be pretty pretty back-end loaded for 2028. Is that the way we should be looking at that and also the kind of the margin progression from EBITDA margins from 14% to 15% to the 20% range?

Yes. I think we talked about -- I think [Technical Difficulty]is with the $15 million to $20 million of synergies that we identified by 2028, kind of evenly split between cost and revenue synergies. We'd expect those cost synergies to kind of be more evenly split as we move through that 3-year period with the revenue synergies to be more back-end loaded, they take some time. .

If you think about for a good example is we're very focused on new product development for that particular team. We have a number of products in the work and it will take some time to get traction, for example, on those particular initiatives.

Got it. It makes sense. And just any thoughts on the current tariff discussions?

Yes. I think that we are fortunate because as we talked about [Technical Difficulty] quite last year, we're in country for countries. So they had a nominal impact. USMCA is important to us, particularly given the importance of our Canadian businesses. But we're not taking any meaningful impact into the guidance that we provided earlier today.

Our next question is from Greg Burns with Sidoti.

The adjusted pro forma order number of $64 million, how much of that is organic? And what is the contribution from acquisitions in that adjusted number? .

Yes. I mean I think what we've done, Greg, is we've stripped out the [Technical Difficulty] at the time of the acquisition. So that's the year-over-year growth from Q4. The vast majority of that is organic.

Almost all.

Okay. Okay. Perfect. And then the -- in your municipal publicly funded markets, I know there was a lot of federal money coming post pandemic into that market? I assume a lot of that's been allocated and and spent. So is there any concern that we might see kind of a slowdown in those end markets?

Yes. I'll start with, as we've talked about before, we didn't see any meaningful contributions in '23 -- I'm sorry, in 2024 or '25 from those pandemic [Technical Difficulty] infrastructure projects are still ongoing. We expect those to be ongoing for several years.

Again, within that public funded revenue bucket, water taxes is an important part of that. That's our largest single product line, which supports purchases of sewer cleaners and other types of municipal vacuum trucks, and we find that to be a growing revenue stream. Our general municipal exposure would really be around street sweepers, some of our multipurpose tractors, a small portion of our public CT systems and then a portion of refuse.

So again, as we talked about in the prepared remarks, we saw strong orders in Q4 for sewer cleaners, street sweepers. So again, we feel we've baked this into our outlook. And it is really, frankly, the diversification within that public funded revenue stream that is important to look at with respect to the order trends.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Jennifer Sherman for any closing remarks.

Thank you. Again, we would like to express our thanks to our shareholders customers, employees, distributors and dealers for their continued support. Thank you for joining us today, and we'll talk to you next quarter.

This concludes today's conference. We thank you for your participation. You may disconnect your lines.

Greetings, and welcome to the Federal Signal Corporation Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Felix Boeschen, Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin.

Good morning, and welcome to Federal Signal's Third Quarter 2025 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website.

Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Ian will start today by providing details on our third quarter financial results. Jennifer will then provide her perspective on our performance, provide an update on our multiyear growth initiatives and update our guidance for 2025. After our prepared comments, we will open the line for any questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our consolidated third quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with 17% year-over-year net sales growth, double-digit operating income improvement, a 130 basis point increase in adjusted EBITDA margin and a record third quarter order intake. Consolidated net sales for the quarter were $555 million, an increase of $81 million or 17% compared to last year. Organic net sales growth for the quarter was $51 million or 11%. Consolidated operating income for the quarter was $94 million, up $18.1 million or 24% compared to last year. Consolidated adjusted EBITDA for the quarter was $116.2 million, up $23.2 million or 25% compared to last year. That translates to a margin of 20.9% in Q3 this year, up 130 basis points compared to last year. GAAP diluted EPS for the quarter was $1.11 per share, up $0.24 per share or 28% from last year.

On an adjusted basis, EPS for the quarter was $1.14 per share, up $0.26 per share or 30% from last year. Order intake was again strong in the quarter at $467 million, an increase of $41 million or 10% compared to last year. Backlog at the end of the quarter stood at $992 million, down 4% compared to Q3 last year. In terms of our group results, ESG's net sales for the quarter were $466 million, an increase of $67 million or 17% compared to last year. ESG's operating income for the quarter was $85.3 million, up $13.8 million or 19% compared to last year. ESG's adjusted EBITDA for the quarter was $104.9 million, up $17.7 million or 20% compared to last year. That translates to a margin of 22.5% in Q3 this year, up 60 basis points compared to last year.

ESG reported total orders of $371 million in Q3 this year, an increase of $18 million or 5% compared to last year. SSG's net sales for the quarter were $90 million this year, up $14 million or 18% compared to last year. SSG's operating income for the quarter was $21.9 million, up $5.1 million or 30% from last year. SSG's adjusted EBITDA for the quarter was $22.9 million, up $5.1 million or 29% from last year. That translates to a margin for the quarter of 25.6%, an increase of 220 basis points compared to last year. SSG's orders for the quarter were $96 million, up $23 million or 31% in comparison to order intake in Q3 last year. Corporate operating expenses for the quarter were $13.2 million compared to $12.4 million last year, with the increase primarily due to higher acquisition and integration-related expenses.

Turning now to the consolidated income statement, where the increase in sales contributed to a $21.1 million improvement in gross profit. Consolidated gross margin for the quarter was 29.1% compared to 29.6% in Q3 last year. As a percentage of net sales, our selling, engineering, general and administrative expenses for the quarter were down 160 basis points from Q3 last year. Other items affecting the quarterly results included a $1 million increase in acquisition and integration-related costs, a $700,000 increase in amortization expense, a $400,000 increase in other expenses and a $200,000 reduction in interest expense. Tax expense for the quarter was $22.4 million, up $3.7 million from the prior year, with the increase primarily due to higher pretax income levels. Our effective tax rate for the quarter was 24.8% compared to 25.8% last year.

At this time, we expect our fourth quarter effective tax rate to be between 25% and 26%, excluding any discrete items. On an overall GAAP basis, we therefore earned $1.11 per share in Q3 this year compared with $0.87 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for the quarter were $1.14 per share compared with $0.88 per share last year.

Looking now at cash flow. We generated $61 million of cash from operations during the quarter, bringing our year-to-date operating cash generation to $158 million, an increase of $17 million or 12% compared to the first 9 months of last year. With the improved cash flow, we paid down approximately $55 million of debt during the quarter, ending the quarter with $159 million of net debt and availability under our previous credit facility of $570 million.

Our current net debt leverage ratio remains low. Yesterday, we executed a new 5-year $1.5 billion credit facility, replacing the $800 million credit facility that was previously in place. The new credit facility increases our revolver to $1.1 billion and also includes a $400 million term loan facility, which is expected to be drawn down upon completion of the New Way acquisition. The new credit facility provides greater financial flexibility to invest in internal growth initiatives and pursue additional strategic acquisitions across our ESG and SSG groups. The terms of our new facility are more favorable to the company, reflecting our strong cash flow and balance sheet. This marks another important milestone for the company as we continue to execute on our strategic long-term growth objectives.

We also remain committed to investing in organic growth initiatives and returning cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $8.5 million during the quarter, reflecting a dividend of $0.14 per share, and we recently announced a similar dividend for the fourth quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. We reported another strong quarter of results, which included third quarter records across consolidated net sales, adjusted EPS and adjusted EBITDA margin, thanks to outstanding contributions from both of our groups. Within our Environmental Solutions Group, we delivered 17% year-over-year net sales growth and a 20% increase in adjusted EBITDA with higher production levels, strong demand for our aftermarket offerings, proactive management of price/cost dynamics and contributions from recent acquisitions representing meaningful year-over-year contributors. In what is typically a seasonally strong quarter, ESG's adjusted EBITDA margin expanded by 60 basis points year-over-year to 22.5%, a new third quarter record and performance in the upper half of our recently raised ESG margin target range of 18% to 24%. Driven by continued strong order levels and an extensive pipeline of internal market share expansion initiatives, we remain focused on building more trucks across our family of specialty vehicle businesses. These efforts to improve our throughput at our 2 largest ESG facilities contributed to double-digit percentage increases in revenue across our safe digging trucks sewer cleaners and street sweeper product lines.

From a capacity perspective, our access to labor remains good, supply chains are largely stable and our large-scale capacity expansions that we completed between 2019 and 2022 position us well to profitably absorb incremental volumes into our existing footprint. Additionally, within our CapEx outlook this year, we are investing in several productivity-enhancing projects, including planned automation initiatives at select facilities, including our dump truck body plant in Rugby, North Dakota and the additional incremental warehouse space at our SSG facility in University Park, Illinois. These growth initiatives will further improve our throughput efficiency within our existing facility footprint and set the foundation for future organic growth. For perspective, approximately 50% of our annual CapEx is focused on various growth initiatives with the other half focused on maintenance CapEx.

Within our product lines, we saw strong organic revenue growth across our metal extraction support equipment, dump truck bodies and industrial vacuum trucks as our teams continue to execute on various strategic growth initiatives within our industrial end markets, including geographic expansion and sales channel optimization. Shifting to aftermarkets, where demand remains strong.

For the quarter, aftermarket revenue were up 14% year-over-year, primarily driven by higher demand for aftermarket parts, increased service activity and rental income growth. Our teams are working to accelerate the growth of our parts businesses on numerous fronts, including the further integration of recent acquisitions such as Hog and Trackless across our aftermarket facility footprint and increasing parts capture within our existing population base.

Lastly, our most recent acquisitions also contributed positively to top line results in the quarter with Hog contributing approximately $20 million of net sales and Standard adding approximately $10 million of incremental net sales. Shifting to our Safety and Security Systems Group. The team delivered another impressive quarter with 18% top line growth, a 29% increase in adjusted EBITDA and a 220 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by volume growth within our public safety and warning system businesses, proactive price/cost management and realization of certain cost savings.

On that note, we successfully installed a fourth printed circuit board manufacturing line at our University Park facility in Illinois in this quarter. This addition marks the fourth PCB line installation since 2022, which allows our teams to in-source certain componentry previously sourced from Asia while providing financial and operational benefits in the form of cost savings, product quality improvements and expanded available capacity. We expect to realize incremental benefits from this fourth addition in 2026 and beyond as we scale production. Lastly, we are pleased with our cash conversion in the quarter, having generated $61 million of cash from operations, representing 90% of net income. On an annual basis, we continue to target 100% cash conversion levels, providing dry powder for organic and inorganic capital deployment opportunities.

Shifting now to current market conditions. Demand for our products and service offerings remains healthy with our third quarter order intake of $467 million, representing a 10% year-over-year increase and the highest ever third quarter order intake on record for Federal Signal. As Ian indicated, our backlog declined by 4% on a year-over-year basis. As expected, approximately 85% of this decline was driven by lower orders for third-party refuse trucks, mostly in Canada. As we move forward and transition our refuse truck offerings from the third-party supplier to New Way over time, we expect our existing third-party refuse backlog to decline in coming quarters as we deliver these third-party trucks in backlog, but stop taking new orders for these third-party trucks. Additionally, we are pleased that our various throughput initiatives have improved lead times and slightly reduced backlog for a certain extended product lines.

Looking ahead, consistent with our typical seasonal patterns, we are expecting orders within our Environmental Solutions Group to increase both on a year-over-year basis and on a sequential basis in the fourth quarter. To provide more detail on the composition of orders in the quarter, we are seeing particularly strong demand for our publicly funded safety and security products, both in North America and in Europe, including a major police contract win in Spain. In total, SSG orders increased 31% year-over-year, driven by strength in demand for public safety equipment and warning systems.

Within SSG, we continue to target surgical opportunities to gain market share across several U.S. law enforcement agencies and are seeing success with this particular strategy. While SSG is typically not a backlog-driven business, SSG's backlog at the end of September includes approximately $20 million earmarked for delivery in 2026. Within industrial end markets, orders were led by improved demand for our safe digging trucks compared to last year. Long term, we continue to see secular tailwinds from increased adoption of hydro excavation within the United States, and we believe we are well positioned to capitalize on that secular trend.

In summary, demand for our products remains strong, and our backlog for certain products provides excellent visibility well into 2026. Our teams are focused on executing on our growth initiatives, maintaining a healthy order intake and increasing production. I now want to provide an update on a number of multiyear strategic initiatives that support our through-the-cycle target of double-digit top line growth. Recall, over the long term, we expect a fairly balanced contribution between organic and inorganic growth as part of those targets.

First, we are pleased with the initial performance of the Hog Technologies acquisition, which we closed in February of this year. The team has been an excellent cultural addition to the Federal Signal family, and we are excited to more fully integrate Hog next year. Financially, both Hoag's year-to-date revenue and margin contribution have exceeded our initial estimates, primarily driven by operational throughput improvements, strong demand within Hoag's airport vertical and strong aftermarket parts growth. Consequently, we now expect Hog to contribute between $60 million and $65 million of net sales in 2025, up from our previous estimate of $50 million to $55 million.

As we head into next year, we've identified incremental synergy opportunities that we plan to execute in 2026, spanning operational efficiencies, including procurement, go-to-market strategy optimization across our various road marking and line removal brands, more efficiently utilizing our North American aftermarket footprint and the usage of Hog’s unique customer education technology across other Federal Signal products. As such, we see Hog well positioned to further expand its margins next year as we capitalize on more synergies.

Second, we continue to invest in scaling our internal centers of excellence, which combined with our scale within the niche specialty vehicle verticals we play and help form what we internally refer to as the power of the platform. These centers of excellence span several categories such as sourcing, supply chain optimization, our Federal Signal operational system, sales channel alignment, dealer development, aftermarket support, data analytics and new product development, and we are aimed at elevating our customer experience across our family of specialty vehicle brands. The power of this platform and execution on our strategic initiatives are important components of our long-term growth algorithm as we look to drive organic growth in excess of end market growth rates.

As we look ahead to 2026, we see particular opportunities to further accelerate growth through sales channel optimization and our dealer development efforts with particular geographic white space opportunities across our Trackless, Switch & Go and Ox Bodies brands. We have also identified opportunities to optimize our presence in previously underserved territories for our safe digging trucks.

Third, we are highly energized to accelerate our existing build more parts initiative in coming years, whereby we are vertically integrating certain parts production in order to drive increased recurring revenue streams, higher aftermarket share and margin expansion over time. While still in early stages with less than $10 million in annual net sales, we are expecting another double-digit percentage increase in net sales resulting from this initiative this year, predominantly comprised of certain street sweepers, vacuum truck and dump truck body parts.

Going forward, we see additional opportunities to expand this initiative across our other specialty vehicle categories and believe our entrance into the refuse space will present an additional untapped parts market opportunity. Importantly, given the essential nature of our products, associated high utilization levels through business cycles and stable aftermarket parts and service needs of our customers, the continued growth in the aftermarket business remains an important strategic pillar in our efforts to meet cyclicality.

Lastly, we continue to expect the acquisition of New Way to close in the fourth quarter of this year, pending regulatory approval. As we indicated at the time of the announcement, we expect our pro forma leverage to be less than 1.5x at the time of closing, leaving sufficient flexibility for additional capital deployment toward M&A. Consistent with our long-term growth framework and stated M&A criteria, we are actively reviewing potential opportunities, both in our ESG and SSG groups.

Turning now to our outlook for the rest of the year. Demand for our products and our aftermarket offerings remains high with our order intake this quarter contributing to a backlog, which provides us with excellent visibility for further net sales and profit growth in 2026. With our third quarter performance, our current backlog and continued execution against our strategic initiatives, we are raising our full year adjusted EPS outlook to a new range of $4.09 to $4.17 from the prior range of $3.92 to $4.10. We are also increasing our full year net sales outlook to a new range of $2.1 billion to $2.14 billion from the previous range between $2.07 billion to $2.13 billion. This outlook reflects our view of continued healthy demand for our new equipment, parts and aftermarket services. For clarification, this outlook does not include any contribution from the pending acquisition of New Way. Lastly, we are maintaining our CapEx outlook of $40 million to $50 million for the year.

In closing, given that this is our last earnings call of this year, as I sit here today, I believe we are well positioned to achieve another record year in 2026 with the traction of our strategic initiatives, new product development pipeline, throughput improvements we have achieved this year and M&A opportunities. At this time, I think we're ready for questions. Operator?

[Operator Instructions] Our first question comes from the line of Ross Sparenblek with William Blair.

Just to level set on the orders really quick. What was the M&A contribution from Hog and Standard at ESG in the quarter?

Yes. So Hog added, I think it's about $20 million in the quarter and Standard was about $10 million.

Okay. And then the SSG, any FX to call out there? Is that just all organic? It's all organic, right?

It was very -- FX was very nominal there.

Okay. All right. And then 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?

So we're transitioning from a third-party refuse manufacturer to New Way. We've stopped taking orders. I guess I'll reiterate that 85% of the year-over-year backlog reduction was driven by the decline of third-party refuse backlog, which we expect this dynamic to kind of continue in subsequent quarters as we work through the transition from the third-party refuse OEM to New Way. The other thing I would add is it could take well into 2026 for us to do this, and this should be margin accretive over time.

Yes. 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.

It will vary quarter-to-quarter, but we would expect that it would take the next 12 months to deliver the trucks that are currently in backlog.

Our next question comes from the line of Chris Moore with CJS Securities.

So maybe just stay with New Way for a second. I know that you guys and New Way share a number of exclusive dealers. 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?

Yes. The feedback has been overwhelmingly positive. As you stated, Federal Signal does share some dealers with New Way, but there's also a group of dealers that we don't share, and we're really excited to welcome those dealers to the Federal Signal family. And we think collectively, this gives us a lot of opportunity going forward. So really overwhelmingly positive reaction from the existing dealer channel and the new dealer channel.

Got it. Perfect. And maybe just one follow-up on New Way. So we're talking about $0.40 to $0.45 accretive to EPS in fiscal '28. '26 is roughly flat. Just trying to get a sense, is that -- will it be backloaded as the integration happens? Or is reasonable to expect that '27 will share a reasonable portion of that $0.40 to $0.45 accretion.

Yes. I think, Chris, we'll probably give more color on that when we close the acquisition. But I think, generally speaking, we have a synergy target number out there that we're going to be working with the teams on. And I think those will kind of be more gradual as opposed to straight out the gate. I think it's going to be more gradual with them being fully realized really by the end of that 2028.

What I'm really encouraged by is the teams are working together with respect to post-closing initiatives. And there's a lot of energy and commitment to the plan. And as soon as we get regulatory approval and close, I think that we'll be in a position to hit the ground running.

Our next question comes from the line of Mike Schulky with D.A. Davidson.

Can you maybe give us a little more commentary on the current federal government shutdown? I know that a lot of what you sell to local state agencies, but there is some support, obviously, that the federal government supply to those agencies. I'm curious whether you've seen any changes to funding or any delays with any orders or just any kind of issues that local players have been mentioning given what's been going on over in Washington, D.C.

Yes. So as we previously discussed, last year, we did about $10 million of direct business with the federal government. That was really a military comprised of 2 things, a military contract for one of our dump body businesses and then some military installations for one of our SSG businesses. So we don't expect any kind of meaningful disruption from the federal government shutdown. And our SSG orders were strong in Q3, and we haven't heard anything that we believe would change that.

So as far as federal government supporting state and local budgets that you haven't seen any kind of disruption or changes in the funding and the actual flow of cash? -- so far?

Yes. As you know, kind of the biggest single source of funding for us is water taxes. And then with respect to -- on the local level, there is some certain funding in terms of municipal sales tax for our street sweeper, for example, and certain trackless products. Canada is an important end market. Europe is an important end market for our publicly funded side of the business. So given that diversification and our lack of direct sales and the funding sources that we rely upon, we wouldn't expect any meaningful impact.

Okay. Great. Secondly, I wanted to ask a little bit about the broader environment for New Way. I'm a little out of breath this morning is because another large waste truck company just announced they also announced the merger. Curious whether -- I don't know if you had a chance to look at it yet. I just saw it myself for the first time a couple of hours ago. But curious whether you think one of the other players having some more cost synergies being taken out kind of makes the pricing environment a little sharper going forward maybe after that merger has been integrated over the next 12 months or so.

Yes. So the only area that we would compete with respect to the Terex Rev merger, as you noted, would be garbage trucks. We continue to believe that New Way is extremely well positioned with its ASL product line and the Canadian opportunity through our JJE team and frankly, the strength of its municipal channel. So we believe our view hasn't changed at all since we announced the acquisition. And we continue to be excited and energized by the New Way team and the opportunities ahead.

[Operator Instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

I know it's early for 2026 comments, but I do get a lot of questions about ESG going forward. 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, meaning everything in the portfolio right now, can you continue to drive solid top line growth?

Yes. I mean, I believe we're extremely well positioned to achieve another record year in 2026, and it's going to be a combination of execution on the strategic initiatives, continued throughput improvements, our new product development pipeline. And we've got good visibility through our backlog for about half of our businesses. I'm encouraged by the throughput improvements that our sewer cleaning team and our street sweeping team have achieved. And our road marking business, as I talked about in my prepared comments, has a number of opportunities that we're going to be executing on in 2026.

Our mineral extraction business, as I talked about in my prepared remarks, had a strong quarter. and we expect that to continue. So when I look at both the combination of the organic growth initiatives and the M&A opportunities, I feel like we're set up to achieve another record year in 2026.

Yes, I get it. I mean a record year seems like a lot even excluding NewWay. But I guess the question is, do you feel like some of the mid- to high single-digit organic growth momentum that you've had is still achievable just given the conditions, the backlog, the initiatives that you have?

We remain committed to our long-term growth algorithm in terms of low double-digit revenue growth split equally between M&A and our organic growth initiatives, and we'll update this in February.

Got it. Yes. That's fair. And you do also have a really nice track record of margin expansion in ESG over the past few years. You've talked about '26 being an investment year for New Way specifically when that closes. Can you just talk about how you think about the pace of margin expansion going forward? Or maybe what -- does it change the algorithm for incremental margin when you think about factoring New Way in, whether it's to ESG or on a consolidated basis?

Yes. I think, Steve, obviously, we have ESG margin targets that are really kind of long-term through-the-cycle margin targets. And I think when we talked about the New Way opportunity a couple of weeks back, we talked about the need to make some investments in the business. So I think I still think there's a lot of opportunity in the other areas, particularly if you think about the leverage we can get from increasing production at some of our main facilities, our larger facilities, I should say, where we have capacity, the growth in the aftermarket business, which is slightly more attractive from a margin profile. So there can be some various puts and takes as we -- in '26. But I think long term, we're still committed to that 18% to 24% margin target for the business.

Yes. And you know us well, and you can imagine that we have extremely detailed plans. And so as we look -- we've got a '26, '27 and '28 year plans for each of those years. We would expect, as you implied, that New Way would be margin dilutive in 2026. But we feel very confident in our ability, given the synergy opportunities that exist, both on the cost and the revenue side that this business long term will run within the EBITDA target margin ranges that we've given. And we've spent a lot of time studying this. And if anything, I'm more encouraged by the planning and work that the teams are doing now for post closing.

Our next question comes from the line of Greg Burns with Sidoti & Company.

On the -- now the build more parts initiative you mentioned, what percent of your parts are currently in-sourced or I guess, reflecting that kind of $10 million of sales that you called out?

Very small. There's a lot of untapped opportunity here, particularly with the addition of the refuse business. You're only group that doesn't have to go get orders. You got enough internal orders to last your lifetime.

Is there like a goal in terms of kind of what percent of your parts business you'd like to kind of vertically integrate? And what kind of margin uplift is there relative to outsourcing it?

Yes. We're still in early stages. I'm encouraged by the progress that the teams have made. We believe that as we move forward, build more parts can be multiples bigger over time. and particularly with the refuse opportunity. And I guess I'll say in kind of typical federal signal fashion, we pilot something, we get good at it, and then we start to accelerate. I think we're closing -- finishing our pilot phase. And again, a credit to that team. And we're really looking as we moved into '26 and '27 for opportunities to accelerate that initiative.

Okay. And could you just give us maybe a little bit more color on where the lead times stand relative to maybe some of your larger product lines, what your expectations are for next year, given some of the initiatives you have in place? And do you expect to be able to bring your backlog down next year?

Yes. So we talked about just reminding you the impact of the transition from the third-party refuse manufacturer will have during 2026. With respect to lead times, right now, sewer cleaners are running around 11 months. Our 3-wheel sweepers, we've made great progress and credit to the team are running in that 5- to 6-month range, which is where we'd like. And then our 4-wheel sweepers, we still have some work to do. They're running 12 to 18 months. And it really varies. Road marking equipment, we'd want again in that 5 to 6 months with some stock available. So it depends on the particular product line. But my expectation is that we would continue to reduce lead times for sewer cleaners and for our 4-wheel sweepers.

Okay. And then I guess, excluding the impact of the third-party refuse trucks, do you think you could -- do you think production rates will increase next year to where you will start to bring down the core backlog? Or I know it's going to depend on order input rates and all that. But just based on what you're seeing now and what you have planned in terms of maybe capacity or production expansion initiatives, do you think that's the case?

I think, Greg, we -- obviously, we've talked for a number of quarters now about wanting to increase production to leverage the capacity that's available to us. So I think that's -- the goal is to keep working those lead times down. Specifically as it relates to '26, I think we'll come back in February with the guide for '26.

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Jennifer Sherman for any closing remarks. In closing, as we enter this Thanksgiving season, I want to take a moment to thank our dedicated employees and loyal customers and dealers and distributors. Thank you for joining us today, and we will talk to you soon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Greetings, and welcome to the Federal Signal Corporation, New Way Trucks Investor Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Felix Boeschen, Vice President, Corporate Strategy and Investor Relations. Please go ahead.

Good morning, and welcome to Federal Signal's conference call to discuss the acquisition of New Way Trucks, which was announced yesterday after market close. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer.

On today's call, we will provide an overview of New Way and its competitive position, give some details on the economics of the transaction and discuss the strategic rationale inclusive of our expected synergies. We will refer to some presentation slides today as well as to the news release, which we issued yesterday afternoon. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon and signing into the webcast. We have also posted the slide presentation and the news release under the Investor tab on our website.

Before I turn the call over to Jennifer, I'd like to remind you that today's call and the related slides may contain forward-looking statements that are subject to the safe harbor language found in yesterday's news release, the slide presentation and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

With that, I would now like to turn the call over to Jennifer.

Thank you, Felix, and good morning from Scranton, Iowa. I'm delighted to announce that we have signed a definitive agreement to acquire New Way Trucks, a U.S.-based leader in the design and manufacture of refuse collection vehicles serving the solid waste industry.

New Way has 5 manufacturing facilities. Today, I'm sitting in the headquarters here in Scranton and they have additional facilities in Carroll, Iowa and Booneville, Mississippi. New Way employees over 750 people, and I'm pleased to welcome every one of these employees to the Federal Signal family today.

Before we get into the details of New Way and the transaction, I would like to provide a bit of context around the strategic rationale of the acquisition. As many of you know, we have been distributing third-party refuse trucks through our Joe Johnson Equipment network for almost a decade. Throughout that time frame, we've been able to intensely study the refuse collection vehicle industry and its players, and we believe we have identified the ideal anchor tenant in what is a new specialty vehicle vertical for us.

As a family-owned business, New Way has established itself as a leading refuse truck manufacturer dedicated to its employees, customers and the communities in which it operates. And given our track record of acquiring and growing privately owned companies, we believe Federal Signal is an excellent cultural fit to lead New Way into its next chapter. We also believe the unique value proposition of Federal Signal's specialty vehicle platform can help optimize New Way's operations, unlock incremental growth opportunities and further strengthen New Way's aftermarket service in the years to come.

A couple of important factors stood out to us when evaluating New Way's competitive position that ultimately drove our conviction in this transaction. First, New Way's leading position in automated side loaders within the United States. One of the fastest-growing subsectors in the refuse vehicle industry. Second, it's U.S.-based manufacturing footprint, including a recently expanded facility in Mississippi. Third, its proven history of strong organic growth and resilience through economic cycles. Fourth, its leadership in offerings to the U.S. municipal and non-CDL customers. Fifth, the opportunities that exist for further improvement as we are able to execute on our synergy plans. And 6 and critical the fantastic team at New Way.

On that note, we are excited that several key New Way management team members will continue in their roles with the company post-transaction. We believe the amalgamation of our internal refuse leadership team at Federal Signal, which has more than 100 years of combined refuse industry experience, our direct Joe Johnson distribution channel and the New Way's team's expertise strategically positioned the combined companies for outside growth going forward.

I will now turn the call over to Ian to discuss the key financial terms of the deal.

Thank you, Jennifer. In terms of the economics of the deal, Federal Signal will acquire New Way for an initial purchase price of $396 million on a cash-free debt-free basis. In connection with the acquisition, the company will also acquire New Way's manufacturing facilities and associated real estate rights in Iowa and Mississippi for additional consideration of $30 million. Additionally, there is a contingent earn-out opportunity of up to $54 million, which is based on the achievement of certain specified financial targets over a 2-year period.

When adjusted for the present value of anticipated tax benefits, which are currently estimated at approximately $60 million, the combined initial purchase price represents a multiple of approximately 11x New Way's projected EBITDA for 2026, of between $30 million and $35 million. This multiple includes the impact of various planned investments and integration and optimization initiatives, including deployment of Federal Signal's chassis and inventory management best practices.

Including anticipated synergies, the initial purchase price represents a multiple of approximately 7x New Way's projected EBITDA for 2028. We expect the transaction to be neutral to earnings per share in 2026, reflecting the impact of higher interest costs and the anticipated purchase accounting -- purchase accounting effects, including a preliminary estimate of intangible asset amortization expense.

We expect the transaction to be accretive to EPS in subsequent years, with anticipated accretion of between $0.40 per share and $0.45 per share in 2028. This outlook assumes debt paydown of approximately $100 million per year. We intend to finance the acquisition with a combination of cash on hand and availability under our existing credit facility.

We anticipate that our pro forma net debt leverage ratio upon completion of the acquisition will be less than 1.5x, leaving sufficient financial flexibility for additional acquisitions and other capital allocation priorities, such as organic growth initiatives and cash returns to stockholders.

Given the acquired facility footprint and consistent with our other specialty vehicle businesses, we expect annual capital expenditures at New Way will represent a low single-digit percentage of net sales in coming years, supporting strong cash generation. Lastly, we are expecting to close the transaction during the fourth quarter, subject to regulatory approval and customary closing conditions.

With that, I will now turn the call back to Jennifer to expand on the strategic rationale for the acquisition and to provide additional details around our expected synergies.

Thank you, Ian. As mentioned, we see the acquisition of New Way as a natural extension of our specialty vehicle portfolio that checks all of our target M&A criteria. In fact, one of the most attractive characteristics of the Refuse Vehicle Collection segment is its recession-resilient nature.

As many of you know, since launching our current growth strategy in 2016, one of our key strategic objectives has been to mute the cyclicality of Federal Signal's earnings stream. We believe the entrance into refuse collection vehicle manufacturing further fortifies this objective, given its stable funding mechanisms and essential service similar to the sewer cleaner industry.

As mentioned earlier, New Way's leadership in automated side loaders is especially exciting. Automated side loaders or ASLs for short, represent approximately 37% of the North American industry refuse collection vehicle industry today, up from approximately 29% ,5 years ago based on the National Waste Recycling Association.

In line with this shift toward ASL, New Way has been able to expand its share by approximately 500 basis points over that same time frame, given its leading U.S. position within ASL. This growing preference for ASLs within the refuse collection industry is underpinned by compelling labor and safety advantages associated with the equipment. Specifically, ASL require just a single operator compared to 2 to 3 operators for traditional rear loader refuse garbage trucks.

Not only does this automation reduce labor costs for haulers and municipalities, but it also substantially increases operator safety, as operators are able to remain inside the truck throughout the waste collection process, thereby eliminating ride-along crews where the bulk of injuries occur. Going forward, we see New Way well positioned to continue to capitalize on these secular automation tailwinds within waste collection.

As Ian noted, we expect the acquisition to be neutral to adjusted EPS in 2026. This is partially due to several investment opportunities that we've identified as well as working capital and inventory management optimization opportunities that we plan to complete next year. We also have a plan that will be driven by our voice of customer feedback to enhance New Way's technology offerings by leveraging our existing businesses, incremental R&D and third-party partnerships.

These initial investments, which will include our 80/20 operating principles, increased new product development and other operational initiatives will allow us to more efficiently achieve our 3-year synergy targets by 2028 and expand New Way's margins into our recently raised ESG margin range of 18% to 24% over time.

By harnessing the power of our specialty vehicle platform, we are targeting annual run rate synergies of between $15 million and $20 million. These synergies, coupled with core organic growth at New Way combined to form our $55 million EBITDA target for 2028.

Our identified synergies span 3 primary categories: number one, operational, including procurement and the application of our Federal Signal operational model; number two, enhancing customer service via expanded aftermarket service and dealer development; and number three, unlocking growth, including new product development and sales channel optimization. Across all 3 categories, we expect synergies to gradually ramp over the next 3 years with synergy targets expected to be substantially realized by the end of 2028.

Starting with the operational synergies. We expect operational synergies to be roughly evenly balanced between procurement savings and the application of our operational model, including supply chain optimization. Importantly, we believe the application of the Federal Signal operational model, including and intense focus on our deeply entrenched 80/20 principles will form the foundation of additional growth and margin expansion opportunities well beyond the next 3 years.

Additionally, we see opportunities to optimize manufacturing efficiencies via a combination of labor productivity gains, safety improvements and targeted automation opportunities. A great example of how effective this process can be is our Ox Bodies dump body business based in Fayette, Alabama, with the same operating team in 2023 was able to drive a 90% reduction in standard dump body SKUs through its 80/20 initiatives. This initiative helps expand Ox EBITDA margins by more than 800 basis points over a 2-year time frame, while Ox meaningfully expanded its market share.

Shifting to best-in-class customer service. We expect to realize synergies primarily through the optimization of New Way's aftermarket business and dealer development opportunities aimed at driving targeted growth. In short, Federal Signal's North American aftermarket footprint of more than 35 locations will materially increase New Way's reach, driving more robust parts coverage, closer proximity to customers and ultimately allow New Way to penetrate historically underserved regions.

One of those examples is in Canada, where New Way has historically not been a major player. Utilizing our footprint of 10 Canadian service center locations and the experience of our Joe Johnson team in the refuse distribution space, we believe we can drive meaningful share growth for New Way similar to the playbook we deployed after acquiring Trackless in 2023.

Within the aftermarket expansion opportunity, we are particularly excited about parts. As New Way's growing installed base of trucks reaches more optimal part consumption ages over the next 3 years, we see us well positioned to use our combined aftermarket footprint to drive a higher capture rate for this expanded opportunity set. Additionally, we plan to further accelerate our existing build more parts initiative, whereby we have chosen to vertically integrate certain parts production in order to drive increased recurring revenue streams and higher aftermarket share.

While the initiative is only a few years old, we have seen consistently strong double-digit growth from this initiative and the acquisition of New Way further expands our build more parts opportunity set. Owing to a combination of these strategic initiatives, we see opportunity to increase New Way's aftermarket sales mix into the mid- to high teens range, as a percentage of net sales by 2028.

Lastly, we expect to realize additional revenue growth synergies by unlocking incremental opportunities through new product development, sales channel optimization and market intelligence tools. Key new product development priorities include enhancing New Way's front loader product line, fortifying its leadership with a non-CDL and ASL offerings and accelerating other technology initiatives, all areas where we see meaningful growth potential and strong customer interest.

Additionally, similar to other specialty vehicle acquisitions that we've completed in recent years, we also see sales channel alignment opportunities. In particular, we will aim to scale direct sales into private haulers, an important customer group that has been historically underserved by New Way. We also see incremental cross-selling opportunities across our other specialty vehicle offerings including street sweepers, vacuum trucks, municipal maintenance tractors and certain specialty dump bodies and trailers.

In closing, Federal Signal has a long track record of acquiring niche specialty vehicle leaders and delivering sustainable growth through a disciplined operating model. We have been steadfast in our commitment to growing profitability, while diversifying both our revenue stream and end market exposures as we seek to mute the impact of market cyclicality.

The acquisition of New Way is another highly strategic opportunity to add to our platform of specialty vehicle companies and for Federal Signal to further diversify into the recession-resilient waste and recycling industry. We see New Way as the ideal anchor tenant for this new growth vertical within Federal Signal that will create both organic and inorganic growth opportunities going forward.

We will now open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Tim Thein with Citi.

My Citi days are over. But anyways, the question -- the first one, Jennifer, is -- I was hoping maybe you could expand a bit on the distribution strategy, just given the kind of the cross-pollination of brands that exist across yours as well as your competitive -- or your competitor dealers. And I'm just thinking about the potential risk that you get some churn through the process as you go through this? So maybe you could speak to that. That's question one.

Sure. Thank you. This is something that we thought a lot about. And what's exciting here is we have a lot of different options. So we have our exclusive ESG distribution network. And we respect the fact that some of our ESG dealers represent competitive line. And so we don't plan on disrupting that. There will be opportunities for some ESG dealers in underserved New Way territories, if they're interested to bid on those territories. So given the exclusive nature of this dealer network and the go-to-market strategy, we feel that we plan on continuing that and we can minimize conflict.

Going forward, we plan on leveraging our JJE distribution network, with a particular focus on Canada, which has been a historically underserved market for New Way. So we think we're in an ideal position in terms of -- we're going to have a lot of optionality by leveraging the strong partners that New Way has in place, bringing some new partners into the equation, either through our ESG network or otherwise, and then most critically leveraging our JJE team with a specific focus in Canada.

Okay. All right. And then just on the parts penetration, I think, 11% -- 10%, 11% of sales, the last area or last example I saw in this space about a year ago and another transaction in the space. In fact, that specific OEM was almost 20%. So again, not all these manufacturers are the same, but quite a big difference. And I'm just curious what -- is there something structural that you just think about kind of the high wear and tear of a garbage truck, I would think inherently the parts penetration should be higher than 10%, 11%. Was it a lack of focus? Or what gave rise to -- it certainly seems like a big opportunity, but maybe there's something we're missing that precludes the parts capture for New Way.

Yes. I'll start with -- this is a synergy area that we've spent a lot of time and focused on. And frankly, it was one of the reasons -- the many reasons that New Way was so attractive to us, because we have the infrastructure in place to grow that parts business.

So a couple of things I would say. One is there are -- they've had so much growth over the last couple of years. So as those trucks enter into the kind of sweet spot of 2-plus years. There's just by definition, going to be more parts opportunities for New Way. Second, the New Way team would tell you that it wasn't an area of focus, and it will be a critical area of focus for us.

I think what also is important is we referenced our build more parts initiative that we're in early days of in this New Way acquisition and refuse in general creates a new opportunity set for the build more parts of initiatives.

I guess what I'll end on is we have a lot of confidence in our ability to grow these parts, and we don't see any structural reason that we can't hit those high teens 20% number.

Understood.

Our next question comes from the line of Ross Sparenblek with William Blair.

Jennifer, it's Sam Karlov on for Ross.

Absolutely.

I guess -- so can you help us size New Way's revenue growth in '24, '25, and then your expectations for '26? And then touch on how New Way's current revenue growth profile compared to the double-digit growth the company has seen over the past decade or so?

Yes. So Sam, I think in our prepared remarks, we talked about the growth they've experienced over the last few years. That growth has been organic in 2024, which is the last full year of operations. Their revenue is about $250 million. And so that's over the -- that's for the annual period 2024.

As we move forward, I think, obviously, there's embedded within our guidance for 2024. You can -- essentially, you can back into some of the numbers there. So I think we are expecting to be a little down versus 2024. As we -- in 2026, that is, as we have some inventory in the system will work through. But as we move forward and start to realize some of those synergies, I think we would be expecting a nice growth rate going forward.

Yes. I guess I'll add a couple of things, too. 2026 is going to be a year of investment. And then as Ian mentioned, there's some inventory optimization. We're really going to focus heavily on 80/20. And as I mentioned in my prepared remarks, we feel confident with these investments that we will be able to grow from $30 million to $35 million in 2026 to $55 million in '28. And a lot of that's going to be synergies we talked about.

But we've never worked on a transaction where we have a more detailed plan, and the teams are raring to go in terms of what do we need to do in '26 and the growth opportunities going forward. Longer term, we would expect this to be kind of very similar to our other ESG assets, mid-single-digit organic growth. What's unique here is the synergy opportunities over the next 3 years and the size of those synergy opportunities.

And frankly, I'll say the confidence we have regarding what we can bring to the table. New Way has got a great foundation and through leveraging our aftermarket group through our 80/20 initiatives, procurement, we think there's a tremendous opportunity here going forward. And parts will be an important part of that, as I discussed earlier.

Got it. That's super helpful. And then kind of touching on the investments you just talked about. Can you help us size those investments in 2026, just so we can get a sense of what the headwind looks like next year?

Yes. I think it's -- we're still working through the numbers, but it will be at least a couple of million dollars. But I want to remind everybody, there will be, as I mentioned in my prepared remarks, a laser focus on 80/20 and we're also looking at some inventory optimization and other tools that we have in the toolbox going forward.

Got it. And one quick follow-up. I mean, can you help us size New Way's backlog, just so we have a sense of how much inorganic order growth we can expect in the fourth quarter?

Yes. I think Sam, that's probably something we will -- when we close, we'll have more clarity on the size of the backlog. Obviously, we have a period of time between signing and closing where we're going to be waiting for regulatory approval and some of those things. So I think we'll come back to you with an updated number on the backlog there.

Our next question comes from the line of Walter Liptak with Seaport Research.

So I guess my first question is about 80/20, and it's great that you've got those tools to go get profit improvement within this acquisition. So when you're calling out the goal of the $55 million EBITDA, is that -- is there some revenue growth -- some organic revenue growth in that number, or is that all based on 80/20 aftermarket other synergies?

Yes. There's absolutely organic revenue growth. I'll start there. The synergies of $15 million to $20 million are incremental and embedded in that $55 million, and they're kind of split equally between cost and revenue. And I just wanted to highlight the success our teams have had with 80/20. We -- it wasn't a coincidence. We highlighted the Ox team that same team members who have 100-plus years' experience in refuse. We'll be working on this particular transaction. We've identified that particular team. And what's really important, as you know, is that the 80/20 really sets us up for growth beyond 2028. We're in this for the long run.

And one of the reasons we were so attracted to New Way is they have a great foundation, and we feel like we were the ideal partner with respect to our specialty vehicle platform, and the synergies and experience that we can bring to the table to grow revenue. And frankly, there'll be a laser focus on growing their EBITDA margin targets.

Okay. Great. Yes. That's excellent. And the Ox body team, there's no doubt those -- the data that you pointed out, 90% reduction in SKUs and the profit improvement is really impressive. How -- is it a similar sort of a product offering to Ox Bodies where you could go through and over time doing the similar sorts of programs to reduce SKUs and improve the profitability?

Each business is different. And -- but the team has, through our diligence process, identified some opportunities through 80/20, and we've embedded those opportunities in our $15 million to $20 million of synergies. And we're really fortunate to have those team members who are energized about the opportunities of working with the New Way team.

Okay. Great. Okay. Well, congratulations.

Thank you.

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

I just want to talk about market dynamics first. So my understanding is there are 2 big competitors that have sizable market share and then maybe a more fragmented, but still relatively small pool of OEMs. So first, is that correct? And then second, how do you think about the TAM?

Yes. So we would say that there are 4 major players, each player has expertise. And we've really focused on New Way because of its leading market position for non-CDL and for the ASL product and what we can bring to the equation. We're also, frankly, very attracted because of its high percentage of municipal sales.

So it goes back to kind of the fundamental premise of your question of how do you define the market? And for us, it's really focused on this, obviously, growth of all products, but with the focus on the ASLs, the non-CDL. And we understand, and we pointed out in our materials that on the front loader, for example, there's work to be done, and we think there's great opportunity there. So -- and that's really our view of the market and the opportunities.

And as we talked about on the call, New Way does very little in Canada right now. And with our distribution footprint in Canada and the expertise we have, we think that, that is a tremendous opportunity.

So if you think about Canada and what the opportunity is in America, like how do you size it in terms of what you consider the addressable market?

Yes, Steve, I think when you think about it, it's probably a good way to think about the split on U.S. versus Canada on a population basis. So certainly, when you think about Canada, it's a very large untapped opportunity for New Way. And again, given their leadership in automated side loaders, we think we're the right player to penetrate that Canadian market.

Okay. How -- you kind of alluded to this, Jennifer, like how have companies differentiated in this market? Is it by technology? Is it by relationship? And is pricing historically rational?

Yes. So this company is -- New Way has distinguished itself by its leading market position in the U.S. in automated side loaders, non-CDLs and its relationship with customers. It is a very strong relationship-based company. It has good dealers, as I talked about earlier in some of my prepared remarks. And we believe that pricing has been pretty rational as -- it is a recession resilient end market.

Got it. And then just one quick follow-up. If I look at the website, I see a lot of different models across the product categories. Without naming models, can you just give us an idea of average selling price from the high end to the low end? And given your 80/20 process, do you want to participate in all those categories going forward?

The average selling price would range somewhere between $85,000 and $175,000, and part of our 80/20 initiative will be -- and that's excluding the chassis, obviously. And part of our 80/20 initiative, we'll be focused on that very question.

And Steve, the other comment on that automated side loaders would be on the high end of that average selling price.

Yes. Understood. Congratulations.

Thank you.

Our next question comes from the line of Chris Moore with CJS Securities.

Congrats. It looks very interesting. I'm always interested in the processes in terms of why New Way was selling at this point in time. And is this a relationship that you've been tracking for a while, or just any thoughts there?

Yes. This is a family business owned by siblings. We've gotten to know them, and there was just a strong cultural fit between how they've grown this business, how they treat employees, their investment in the communities where they live and operate. That was very important to the family.

We had dinner with them last night, and one of many dinners and the whole management team and just the energy and the similarities that we see with the culture here at New Way and the culture at our Federal Signal businesses. That was an important part of -- on the fit and particularly for the family, because as they said last night in their toast, they're trusting us. And we couldn't be more thrilled to build on the legacy that the McLaughlin family has created.

Very helpful. Is there any rental revenue currently at New Way? And is that -- is that an opportunity moving forward?

There is no rental revenue in terms of what we're buying, and we will be evaluating all opportunities as we move forward.

Got it. And maybe just the last one is maybe more of an FSS question, but you talked about the current use of AI in the bid process and being able to leverage that at New Way. Can you maybe just expand a little bit on kind of the use of AI currently?

Yes. We're -- we've got a number of projects that we are piloting right now. So we're in early stages. But that is, as we've talked about, part of the harnessing the power of our specialty vehicle platform, and we will plan on applying those same tools over time to New Way.

Sounds good.

Thank you, Chris.

Our next question comes from the line of Mike Shlisky with D.A. Davidson.

Maybe a follow-up on the last question. We started to see fully autonomous waste trucks from some of the other players in the industry as well as new technology, not necessarily fully autonomous, but they at least sense the bin as they go along. And that's more than just an automated waste truck that's a different system. We started to see other companies introduce EV waste trucks. I was kind of wondering where does New Way stand in the area of making its trucks autonomous or adding more autonomy to them and going electric where sub [indiscernible] are going to start to require that in the near future?

Yes. So New Way has been building EV trucks since 2018. Their strategy is in line with Federal Signal strategy. They're agnostic with respect to chassis. They build on a variety of EV chassis. So they've sold 50-plus EV trucks since 2020. And we believe that we can leverage, as we've talked about, kind of Federal Signal's team that's focused on this to continue to grow that going forward.

And on the question of adding more autonomy to the vehicles?

Yes. So with respect to one of the things that we have planned is a voice of customer project to really understand and enhance new waste technology offerings. One of the very first things we're doing, going to do. And so through a combination of leveraging our own existing businesses, incremental R&D, which we've built into our model and third-party partnerships that could be an important opportunity for New Way. But again, really, we're going to start with that voice of customer research.

Great. And I also wanted to ask about the process to start to integrate the company. Because there's an earn-out, how do with Hog, do you have -- do you plan to give the company a time within it as a stand-alone company first, so that management can earn the earn-out? Or do you plan to -- on the first day post-closing dive right in with the integration process? I'm just curious as to how this might differ from the Hog deal.

Yes. This is very different from the Hog deal. In that we have a plan. We've got a team. We have process leaders already identified. As I mentioned in my prepared remarks, we have a group within our TBEI business that is 100-plus years of refuse experience that will be working with the New Way team. This will be a major focus of our CTO in the -- aligning with the questions you asked at the beginning.

And what's critical is we will be aligning as we've done in other deals, the Federal Signal employees who work in this transaction with the same metrics that's in the earnout. So we -- and that's what we've done in several transactions, and we found it to be very powerful. So we are -- we've got a big team here today in Iowa. We've got a big team in Mississippi right now.

And we are very prepared when we close this transaction to start to create the foundation for future growth going forward and capture those synergies. And both the New Way shareholders and our Federal Signal team members, again, the incentives will be aligned, and they will be highly motivated to achieve those results.

Okay. Congratulations.

Thank you.

Our next question comes from the line of Greg Burns with Sidoti & Company.

Just wanted to maybe kind of understand -- better understand the organic growth opportunity a little bit as you're looking to enter Canada and maybe further penetrate the U.S. I was just wondering if municipalities or customers, do they operate like mixed fleets, or do they standardize across the brand? Like how easy is it to penetrate different customer bases?

And then maybe if you could give us a sense of what New Way's installed base looks like, and what are replacement cycles like in this market?

Yes. So to answer your question, typically, customers operate mix fleet. Our focus on the growth areas are really going to be around continued growth of the automated side loader of the non-CDL, and then also, we have R&D projects focused around the front loader in addition to that. And then there's some product -- important product variations. As we move forward with respect to the installed base, Felix will walk you through that.

Yes. I think the answer is sort of the installed base replacement cycle question, think about replacement cycles as being certainly less than 12 years and ASLs are sub 10 years, which was one of the attractive factors to us about New Way. We talked about the installed base a little bit earlier. New Way has been a material market share gainer in the space.

And so when you think about all of those units that have been out in operation, they're probably not yet in what we would consider the optimal parts consumption age. And so obviously, as those trucks are out in operation and aging, we think there's an attractive aftermarket opportunity for us to capture.

Our next question is a follow-up from the line of Tim Thein with Raymond James.

I just -- there's been lots of Canada referenced here this morning and the opportunity there and the relationship, leveraging Joe Johnson foothold there. But if memory serves, they distribute a competitive line of trucks. And so I guess, in some ways, this goes back to my initial question, and I apologize, maybe not the ideal forum for this kind of question, but what happens in that kind of situation?

Yes. So the answer is complicated because you're correct. In some areas, they do distribute competitive trucks and there'll be some period of transition. But there are some large areas where they don't distribute refuse trucks at all, and they've been very anxious, and we have infrastructure there because we distribute other Federal Signal products in Calgary, Edmonton would be good examples. And we have high market share. So there's also white space for our Canadian team. It's our intention to kind of fulfill our existing backlog and service those trucks and enhance the service footprint in Canada and in other areas where we may go direct.

Okay. All right. That helps. And then maybe someone else had asked about the competitive dynamics and pricing discipline. I'm just thinking back, I guess, I think before your -- well, certainly before your start as CEO of the company, Federal had been involved in this space, and it didn't go well. And I know there were currency swings and other things that impacted that.

But consolidation, I'm guessing, is going to be one answer, but is there -- are there other factors that you would point to that have made this industry and you see it in the margins and returns of others, but that you'd point to that make this a more attractive industry today versus 20 years ago? I'm sure it's true in a lot of industries. But is there anything else you would point to other than there's just been a lot of consolidation that's occurred?

Yes. I was in a very junior role at Federal Signal and didn't have a lot of visibility in terms of its previous ownership of refuse trucks, obviously, familiar with it. But this is a very different business, very different end market dynamics given the consolidation that has occurred.

Yes.

We studied the industry back to 2000, and we're encouraged by kind of the recession-resilient nature of that industry. And we think that New Way has the kind of leading market positions, and we can bring a lot to the equation. It was frankly one of the things that was pretty attractive about this acquisition opportunity with the synergies and how we can build and harness that power of the Federal Signal platform.

So we studied hard. We have an execution plan in place to go after the synergies, and we're really excited.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session, and we'll conclude our call today. Thank you for your interest and participation. You may now disconnect your lines.

Greetings, and welcome to the Federal Signal Corporation Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Felix Boeschen, Vice President, Corporate Strategy and Investor Relations. Please go ahead.

Good morning, and welcome to Federal Signal's Second Quarter 2025 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We've also posted the slide presentation and the earnings release under the Investor tab on our website.

Before I turn the call over to Ian, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Ian will start today with more detail on our second quarter financial results. Jennifer will then provide her perspective on our performance, our revised margin targets and go over our increased guidance for 2025 before we open the line for any questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our consolidated second quarter financial results are provided in today's earnings release. In summary, in what is typically a seasonally strong period, our businesses were able to deliver 15% year-over-year net sales growth, 20% operating income improvement, gross margin expansion, a 100 basis point improvement in adjusted EBITDA margin and continued momentum in orders during a record-setting second quarter.

Consolidated net sales for the quarter were $565 million, an increase of $74 million or 15% compared to last year. Organic sales growth for the quarter was $42 million or 9%. Consolidated operating income for the quarter was $97.7 million, up $16.6 million or 20% compared to last year. Consolidated adjusted EBITDA for the quarter was $118.2 million, up $20.5 million or 21% compared to last year. That translates to a margin of 20.9% in Q2 this year, up 100 basis points compared to last year.

GAAP diluted EPS for the quarter was $1.16 per share, up $0.17 per share or 17% compared to last year. On an adjusted basis, EPS for the quarter was $1.17 per share, an increase of $0.22 per share or 23% from last year. Customer demand remained strong during the quarter with orders of $540 million, representing an increase of $67 million or 14% compared to last year. Backlog at the end of the quarter was $1.08 billion, an increase of $4 million compared to Q2 last year.

In terms of our group results, ESG's net sales for the quarter were $481 million, up $72 million or 18% compared to last year. ESG's operating income for the quarter was $91.9 million, up $19 million or 26% compared to last year. ESG's adjusted EBITDA for the quarter was $110.8 million, up $22.6 million or 26% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 23.1%, an improvement of 150 basis points compared to last year.

ESG reported total orders of $441 million in Q2 this year, an increase of $45 million or 11% compared to last year.

SSG's net sales for the quarter were $84 million this year, up $3 million or 3% compared to last year. SSG's operating income for the quarter was $21.5 million, up $3.2 million or 17% compared to last year. SSG's adjusted EBITDA for the quarter was $22.6 million, up $3.3 million or 17%. That translates to a margin for the quarter of 26.9%, up 320 basis points compared to last year.

SSG's orders for the quarter were $99 million, up $22 million or 28% from last year. Corporate operating expenses for the quarter were $15.7 million compared to $10.1 million last year, with the increase primarily due to higher post-retirement expenses and increased stock compensation costs.

Turning now to the consolidated income statement, where the increase in net sales contributed to a $25.6 million improvement in gross profit. Consolidated gross margin for the quarter was 30%, a 60 basis point increase over last year. As a percentage of net sales, our selling, engineering, general and administrative expenses for the quarter were down 10 basis points from Q2 last year.

Other items affecting the quarterly results include a $700,000 increase in amortization expense, a $300,000 reduction in acquisition-related expenses, a $400,000 increase in other expense and a $300,000 increase in interest expense.

Tax expense for the quarter was $22 million compared to $16.7 million in Q2 last year, with the increase primarily due to the effects of higher pretax income and the nonrecurrence of a $2.6 million discrete tax benefit recognized in the prior year quarter, partially offset by a $700,000 increase in excess tax benefits associated with stock-based compensation activity.

Our effective tax rate for Q2 this year was 23.6% compared to 21.5% in Q2 last year. At this time, we are expecting our full year effective tax rate to be between 24% and 25%, excluding additional discrete tax benefits. On an overall GAAP basis, we, therefore, earned $1.16 per share in Q2 this year compared with $0.99 per share in Q2 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters.

In the current and prior quarters, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses, purchase accounting expense effects and certain special tax items where applicable.

On this basis, our adjusted earnings for the quarter were $1.17 per share compared with $0.95 per share last year. Looking now at cash flow. We generated $60 million of cash from operations during the quarter, an increase of $19 million or 47% from Q2 last year. That brings the total cash generated from operations in the first half of this year to $96 million, an increase of 34% over the first half of last year.

We ended the quarter with $204 million of net debt and availability under our credit facility of $515 million. Our current net debt leverage ratio remains low. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions and return cash to stockholders through dividends and opportunistic share repurchases.

On that note, we paid dividends of $8.5 million during the quarter, reflecting a dividend of $0.14 per share, and we recently announced a similar $0.14 per share dividend for the third quarter. During the quarter, we also repurchased approximately $20 million of shares, buying back around 280,000 shares at an average price of $71.16 per share. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. We are proud of our second quarter financial results, which included new quarterly records in net sales, operating income, adjusted EBITDA, adjusted EBITDA margin and adjusted EPS, thanks to outstanding contributions from both of our groups. One of our core competitive advantages enabling such growth within the ESG Group is the scale and power of our specialty vehicle platform.

This platform spans several operational categories such as sourcing, supply chain optimization, our Federal Signal operational system, sales channel alignment, dealer development, aftermarket support, data analytics and new product development.

As I review our financial results in more detail, I will highlight certain platform benefits that we are continuing to realize. Within our Environmental Solutions Group, we delivered 18% year-over-year net sales growth and a 26% increase in adjusted EBITDA with higher production levels, growth in sales of our aftermarket offerings, proactive management of price/cost dynamics and contributions from recent acquisitions representing meaningful year-over-year contributors.

In what is typically the seasonally strongest quarter of the year, ESG's adjusted EBITDA margins expanded by 150 basis points year-over-year to approximately 23%. Given continued strong order levels and an extensive pipeline of internal market share expansion initiatives, our teams remain focused on building more trucks across our family of specialty vehicle businesses. These efforts to increase production at 2 largest ESG facilities contributed to increases in sales of street sweepers and safe digging trucks with each up by approximately $10 million year-over-year. From a capacity perspective, our access to labor remains good, supply chains are largely stable and our large-scale capacity expansions that we completed between 2019 and 2022 position us well to profitably absorb incremental volumes into our existing footprint.

I am specifically encouraged by the progress we are making at our Elgin Street Sweeper plant, where we have successfully completed a host of capacity investments spanning fabrication process optimization, expansion of our workforce and several new management hires. These structural changes will enable us to capitalize on the strong demand we see for our RegenX product, a mid-dump regenerative air sweeper that will enable us to expand market share in the historically underserved air sweeper market for Elgin.

Shifting now to aftermarkets, where demand remains strong with revenues up 13% year-over-year. Our teams continue to drive higher parts penetration rates across our specialty vehicle businesses, which contributed to a 13% year-over-year increase in parts sales.

Additionally, given strong rental utilization levels, our teams are diligently managing between ensuring sufficient rental equipment availability and used equipment sales to best serve our customers' needs. In the quarter, rental revenue again drew -- grew double digits year-over-year. In the aggregate, aftermarket represented approximately 24% of ESG revenue in Q2 of this year.

In the quarter, we also reported double-digit growth in net sales of metal extraction support equipment driven by healthy end market demand, our reputation for high-quality products and continued channel optimization efforts at Ground Force and TowHaul. In fact, since we completed the acquisition of TowHaul in the fourth quarter of 2022, our teams have grown our distribution partner network for metal extraction support equipment by approximately 15%. These ongoing channel optimization efforts, coupled with the application of our Federal Signal operating model have helped contribute to more than a 70% increase in combined net sales for Ground Force and TowHaul over that same time frame while expanding margins.

As we look ahead, we see further channel optimization opportunities across this platform, and we are energized by an accelerating new product development pipeline, both of which we believe will unlock further share expansion opportunities. Our most recent acquisitions also contributed positively to top line results in the quarter, with Hog contributing approximately $21 million of net sales and Standard adding approximately $12 million of incremental net sales.

Shifting to our Safety and Security Systems Group. The team delivered another outstanding quarter with 3% top line growth, a 17% increase in adjusted EBITDA and a 320 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by a combination of proactive price/cost management, volume increases in our Warning Systems business and the realization of certain cost savings.

As we shared on our last earnings call, in-sourcing certain componentry from Asia has been an important strategic lever within our SSG business for several years, including the addition of 3 printed circuit board manufacturing lines at our University Park facility in Illinois since 2022. We continue to see benefits associated with these actions in our financial results in the form of cost savings realization, product quality improvements and expanded available capacity.

We are on track to add a fourth printed circuit board manufacturing line before the end of this year, which we expect to provide incremental benefits in 2026 and beyond. Lastly, we had another strong quarter of cash generation with $60 million of cash generated from operations, up 47% over the prior year. As a reminder, on a full year basis, we target 100% cash conversion on a net income basis.

Shifting now to current market conditions. Demand for our products and aftermarket offerings remain strong with our second quarter order intake of $540 million, representing a 14% year-over-year increase and the highest ever second quarter order intake on record for Federal Signal. In fact, our SSG team had a record order intake of $99 million during the quarter, an increase of 28% compared to last year. Our backlog at the end of the quarter provides excellent visibility for certain key product lines for the remainder of this year and into the first half of 2026.

Within our end markets, orders for our publicly funded offerings were up double digits year-over-year with broad-based strength across product categories at both ESG and SSG. Within SSG, we continue to target opportunities to gain share access across several U.S. law enforcement agencies. Similarly, we are seeing strong market demand for our domestic warning systems and within our European public safety business.

We also saw broad-based demand for our industrial offerings with industrial orders also up double digits year-over-year, notwithstanding a $25 million year-over-year decline in third-party refuse truck orders associated with the anticipated nonrecurrence of certain regulatory-driven fleet orders received from customers in Ontario, Canada during Q2 of last year.

We are particularly encouraged by the momentum we are seeing in demand for our safe digging trucks with orders up more than $20 million year-over-year. As safe digging adoption across the United States continues to increase, we see future volume opportunities, both across our external dealer network and through our expanded direct sales team. In short, demand for our products and services remain strong. Our teams continue to remain focused on reducing lead times for certain product categories while maintaining a healthy order intake.

I would now like to spend a moment discussing our progress on several strategic growth initiatives and provide an update on our through-cycle margin targets. As a reminder, through cycles, we target annual low double-digit top line growth split roughly evenly between inorganic and organic growth.

Execution on our strategic initiatives is an important component of that long-term growth algorithm as we look to drive organic growth in excess of end market growth rates. As part of our strategic initiatives, we have been actively accelerating our good, better, best product strategy across several specialty vehicle businesses with the scaling of certain entry-level products aimed at penetrating historically underserved market subsegments for Federal Signal.

Examples of such offerings include our Vactor Impact, Elgin Broom Badger and the TRUVAC Paradigm. These products not only unlock deeper penetration of new customer cohorts at different price points, but also represent non-CDL options for customers, thereby expanding their available labor pool.

Looking ahead, as we begin to fully integrate Hog in 2026, we see incremental opportunities to advance this strategy across road marking offerings. Secondly, similar to the success we are seeing at Ground Force and TowHaul, we are pursuing several other cross-selling and sales optimization efforts across our specialty vehicle platform. One such example is our Switch-N-Go product line that we are actively pushing through our company-owned sales channel in Canada. While this initiative remains in early stages today, we are pleased with the progress we are seeing as we look to expand Switch-N-Go brand into Canada.

Thirdly, as we continue to execute on our acquisition strategy, each additional acquisition should further strengthen our platform and widen our value proposition in the marketplace. Hog is an excellent example of this. We are encouraged by Hog's first full quarter under Federal Signal ownership and have already identified substantial future synergy opportunities spanning operational efficiencies, go-to-market strategy, aftermarket optimization and the usage of Hog's unique customer education technology across other Federal Signal products. We remain committed to expanding Hog's margin profile as initial synergies are realized in 2026 and beyond.

Looking ahead, our teams continue to work through our pipeline of M&A opportunities spanning both operating groups. We are currently experiencing one of the most active M&A environments since we embarked on our growth strategy in 2016 and believe that Federal Signal is well positioned to continue driving shareholder value via accretive M&A in coming years.

Turning now to our revised EBITDA margin targets. Shortly after I became CEO, we implemented a set of strategic objectives with associated EBITDA margin targets for our groups and the company overall. In setting these targets, our intention was to operate within the range on an annual basis through different business cycles. As demonstrated by our past performance, these margin targets have served as the cornerstone of our business operations, and we have aligned our internal compensation practices accordingly.

Last year, we raised the EBITDA margin targets for our Safety and Security Systems Group to a range of 18% to 24% from the previous range of 17% to 21%. Today, building on the success that our teams have driven, we are raising our EBITDA margin target for our Environmental Solutions Group to a new range of 18% to 24% from the previous range of 17% to 22%.

As a result of increasing the margin targets for ESG, we are also increasing our consolidated EBITDA margin target to a new range of 16% to 22% from the previous range of 14% to 20%. Similar to our past approach, these targets do not present any sort of long-term ceiling, and we remain committed to driving profitable growth going forward.

Turning now to our outlook for the remainder of 2025. With our record-setting second quarter performance, our current backlog and continued execution against our strategic and operational initiatives, we are raising our full year adjusted EPS outlook to a new range of $3.92 to $4.10 from the prior range of $3.63 to $3.90. We are also raising our net sales outlook to a range of $2.07 billion and $2.13 billion from the prior range of $2.02 billion and $2.10 billion.

This updated outlook assumes that the current trade agreements and tariff policies remain in place. Lastly, we are reaffirming our CapEx guidance of between $40 million and $50 million for the year. With that, we are ready to open the line for questions. Operator?

[Operator Instructions]

First question comes from Tim Thein with Raymond James.

I had 2 questions. The first is on the specifics within the margins in the quarter for ESG, you highlighted a few dynamics in the release. I'm just curious if you would highlight -- you mentioned price cost, obviously, the aftermarket growth, though that wasn't as large as the whole goods -- the increase in the whole goods volume. So I don't know, maybe, Ian, is there a notable highlight that you would call out in terms of a particular driver of the improved margins in the quarter?

I think probably the largest component, Tim, is, as you mentioned, the increased production at our 2 largest ESG facilities, we've had the objective to really reduce lead times for quite a while now. And as we've had success kind of increasing production at those facilities, that has some attractive drop-through in terms of leverage.

So that, in addition to, as you mentioned, the other components we alluded to in the release, the growth in the aftermarket business, which has a slightly more attractive margin profile. That grew 13% year-over-year.

The favorable price/cost dynamics as we've managed through that as well as just some of the underlying operating efficiencies that we generate through the 80/20 principles. So that's probably in order of magnitude as I listed those off. But yes, the biggest component would be just the efficiencies from the increased production levels.

Okay. And maybe just, I guess, more of a big picture question, just with respect to the recently signed tax reform that can have a myriad of impacts. But I was just thinking, Jennifer, in terms of conversations with customers in terms of maybe from a depreciation standpoint, does it start to maybe move the needle a bit more, probably not so much for your publicly funded customers.

But I'm curious about impacts and how you're thinking about it from a demand perspective. And then I guess, secondarily, do you think that has any impact on just the M&A landscape? Does it maybe bring more properties to the table or not? I'm just curious if you think that has any meaningful impact either way in terms of more M&A volume?

Yes. We believe that the bonus depreciation provisions in the big beautiful bill could be a benefit for our industrial customers and provide some incentives for those customers to purchase new equipment given that these bonus depreciation rules make the economics of the equipment purchases more attractive. With respect to the M&A landscape, I guess I'll restate what I said on the call in terms of it is a very active environment that we're in right now. We have a number of opportunities that we're reviewing both for our SSG team and for our ESG team. I don't expect it to have any kind of meaningful impact this particular year.

And Tim, just on the bill itself, we aren't expecting a significant impact on our effective tax rate in '25 or '26. However, we are expecting to get some benefit from a cash tax savings standpoint just as a result of the bonus depreciation rules. So yes, so we're pleased that those tax benefits that we've had in the past have been restored.

Next question, Ross Sparenblek with William Blair.

This is Sam Karlov on for Ross. I guess I'll start with margins. I mean, outside of the expected overhead absorption from the underutilized manufacturing capacity, can you talk about what other factors led you to increase your through-cycle margin targets?

Yes. I think it really comes down to -- we examined the pipeline of our internal initiatives that we believe can prove margin additive, and those include several things. kind of first, continuing to raise production and continuing to leverage our capacity expansions, our growing aftermarket business, we are really pleased with the year-over-year growth in parts, continuing to realize the synergies from acquisitions that we've done.

We talked about the SSG in-sourcing that we've done. We believe that provides further opportunities and execution of the Federal Signal operating model. So as we move forward, we have a high degree of confidence of our execution of these initiatives in the long term.

And again, these margin targets are meant to be kind of through the cycle. They're not aspirational targets. And internally, we take them very seriously because they are an integral part of our annual compensation system at each of our businesses.

Got it. That's super helpful. And then as a follow-up, can you give us an update on what you're seeing in the territories you reassigned earlier this year? Have you seen any disruption? And have you been able to successfully retain customers in the region?

Yes. I would say that the order intake for that particular territory was in line with expectations. We understand that it takes time to gain traction as the new dealers expand their sales teams to serve these territories. They're also making investments in the infrastructure needed to serve these particular territories, and that takes time. But long term, we believe there's opportunity for increased market share for our products. So the short answer is we're very pleased with what we've seen thus far.

Next question, Walt Liptak with Seaport Global Securities.

Congratulations on a nice quarter. So I just wanted to go over these margin target ranges again and just to get a clarity. So you increased the ESG margin range, and you went over why that was. But SSG, did you increase margin targets there?

Yes. I mean we had increased the margin targets for SSG in the second half of last year. And the team's had a fantastic quarter, as we talked about in the prepared remarks. But given that recency, also that particular team we've talked about has 1% of Federal Signal COGS is exposed to China. It's really the predominant source of that is our SSG team.

So we're monitoring the tariff situation as we move forward. We have an internal initiative to in-source additional printed circuit board lines that we're on track to do. So given the recency of our raise of the EBITDA margins for SSG, we'll continue to monitor it. But again, I'll emphasize that we are committed to raising those ranges longer term and very pleased with the progress the teams at both SSG and ESG made during the quarter.

Okay. Great. Yes, it sounds like that in-sourcing of sourced components is going great, and you mentioned the fourth PCB line going in. What -- like where -- how far along are you in that in-sourcing? Is this like the final production line? Or is there more to go after this?

Yes. I think we're on track, and we expect for it to be fully operational by the end of the year. I think it's important to understand that there are several benefits for our SSG team regarding this in-sourcing initiative. One is that it supports the higher growth volumes, but it provides a lot of flexibility for us as we launch new products. We found that it's really accelerated our new product development efforts. We think it could have potential benefits as we expand the SSG platform through M&A. And so we believe there's future opportunity beyond the fourth printed circuit board line.

Okay. All right. Great. And just to follow up on that first question again. So the profit margins in SSG were really good this quarter. Is that something where we're just being cautious on it? Or is that sort of a sustainable margin in the back half of the year? Is that in the guidance, I guess?

Yes. I think, well, obviously, the team had an outstanding quarter, and there was a couple of things that helped on the margin front. We had some favorable changes in inventory reserves, which -- that's not necessarily baked into the guidance that that's going to repeat in the second half of the year. We also had some of the benefits from the in-sourcing initiatives, and that would be something that would be -- we would expect to continue to realize going forward.

As Jennifer mentioned, while we do have kind of a fairly limited exposure on the tariff front, the business that does have most of that exposure is SSG. And so we're waiting to see how that really plays out. We've baked into the guide kind of the current state. But I think that was probably in terms of the outlook or the -- not raising the targets, for example, for SSG, we want to kind of wait and see how that plays out just to get some additional time behind us.

Okay. Okay. Good. And maybe one last one around this in-sourcing. You've done great with the PCB lines. Have you started looking at other things that you might want to in-source and just make yourself? Like is this a longer opportunity? Or do you think the PCB is just a unique opportunity that you had?

I would say across all of Federal Signal, our businesses are constantly evaluating that in-sourcing, outsourcing balance and looking for opportunities when it makes sense to bring particular componentry in-house.

Next question, Steve Barger with KeyBanc Capital Markets.

It's really good to see the product strategy generating strong results. How do you think about the good, better, best approach, increasing the ESG TAM? Or what could that add to the growth algorithm?

Yes. So this has been an effort that we've really been working on over the last couple of years. And going back to our long-term growth algorithm, as you know, we want to -- we target low double-digit growth, about half of that coming from organic growth initiatives.

And this is one of the strategies that helps us get those kind of extra points beyond kind of regular end market growth. So we're able to leverage the -- our NPD teams. We're able to leverage channel. It really opens up new customer base for us and kind of given the strength of our brands in those particular end markets, we're encouraged by the success that we've seen thus far. In summary, when we talk about how do we outgrow the market, this is an important part of that particular strategy long term.

Do you have enough data to really be able to quantify the share gains at the low end where you didn't participate before, I guess?

Yes. As part of our data analytics team, our teams are getting more granular in terms of understanding market share. And as we look across the various businesses, our market shares range somewhere between 20% and 50%. Part of it is how you define it. So that gives us a lot of opportunity in different categories to continue to expand and grow.

Got it. And you had a line in the prepared remarks about Hogs internal tech that you're spreading across other product lines. What is that specifically? And can you talk about any other technology initiatives that you have in place that are helping widen competitive advantages?

Sure, absolutely. Last week, we had our Board meeting down at Hog. And one of the things that we took a look at to demonstrate for our Board is their virtual reality training modules. And it does everything, kind of 3 parts to it. One is the, how to operate the equipment, which provides very important training, particularly when several of our customers have labor constraints.

Number two, provides different live training regarding repairing equipment. And then finally, it provides access to historical manuals. And it is something that we were impressed by the Hog team. And we look to leverage that training for other Federal Signal products.

Another example would be their control systems. They've developed very sophisticated control systems that simplify operation of the equipment. And we know in our voice of customer studies that, that's something that's very important with -- particularly as labor has turned over for several of our customers. So as we move into '26, we'll be looking for opportunities to leverage that technology across the Federal Signal Specialty vehicle platform.

Got it. Okay. And if I can just sneak one more in. On the M&A front, it seems like you've become kind of a preferred buyer. Can you talk about what you're seeing for multiples in the specialty vehicle market broadly and what you're seeing on the books that are crossing your desk?

Yes, absolutely. Kind of 2 parts to it. One is we continue to proactively source deals, and we have developed a reputation as a buyer of choice. And in those deals, just repeating, we're really developing a solid pipeline for our SSG business that we -- our intent is to grow that business both organically and through M&A.

On the ESG side, we're continuing to grow that internal pipeline. We also see deals that are brought just by various bankers. I guess I would say that depending on the asset, the interest in the asset, kind of the multiples are all over. And it would be hard to quantify because there really is kind of a wide range of multiple expectations out there.

Next question, Chris Moore with CJS Securities.

Congrats on a terrific quarter...

It is a good morning.

That's right. So orders strong, $450 million, up 14%, especially impressive given the exceptionally strong Q1, $568 million when you had to wonder if maybe there was some pull-through from the tariffs. I guess it's the same question there. How would you view Q2 from that perspective? Is likely much pull forward from what you can tell?

Yes. I guess a couple of things I'll comment on. First of all, when we look at the order composition between publicly funded and industrial, it was pretty broad-based across the board, which was encouraging. Our metal extraction support, vacuum trucks, particularly led by safe digging, sweepers, SSG were all up double digits year-over-year.

And we don't believe that we saw any kind of significant pull forward in orders from tariffs. And if you think about our business, 50% plus is from publicly funded customers. They typically don't pull forward orders given the nature of the RFP or bid board type processes.

Got it. Very helpful. During the Q1 call, you talked about some SSG competitors sourcing quite a bit from China and that being potentially helpful down the line. Are you seeing much from that? Or just any thoughts there?

Yes. I think that it's probably too early to comment on that particular issue. But I'd just be remiss if I didn't give a shout out to our SSG team. The public safety equipment orders were up $11.4 million domestically and internationally were up $5.2 million.

So just really strong across the board. Our warning systems business was up $2.3 million, mostly domestic. So as I mentioned, they had a record order intake of $99 million in the quarter. And what I want to emphasize here is the teams are really driving strategic initiatives to expand their market share.

Got it. I was going there next. So maybe just my last one. Just cash flow overall, terrific first half, cash flow from operations. Just any more thoughts on kind of the balance of '25 moving forward?

Yes. I think, Chris, we continue to target on an annual basis, 100% cash conversion. That's operating cash flow over net income. So I think if you look at where we are year-to-date, we're at just over 80%. So we think there's still room for some improvement in the second half of the year. I would also note that when you look at the year-over-year improvement in cash generation, we had $60 million in Q2 this year, and that was up nicely over last year.

And that's despite some -- an increase in tax payments year-over-year because in Q2 last year, we received a refund of about $14 million back. So that increase was notwithstanding the fact that, that didn't repeat. So we were really pleased with the cash generation during the quarter. And we think second half of the year, we'll continue to see strong cash generation.

Next question, Mike Shlisky with D.A. Davidson & Company.

Can I ask about how orders are progressing so far in the first month of the quarter here in July? And if you got any phone calls maybe after the first week of July with some folks who -- on the industrial side that felt they could have come out of the work with some one big beautiful bill order that they've been holding off on until they had some certainty. Has that been a factor at all in the orders in July thus far?

Yes. We don't typically comment on kind of pending quarter orders. We haven't heard a lot yet because it's relatively new on the impact of the bonus depreciation benefits for industrial customers. But we would expect kind of as we move forward, that could be a possible benefit.

Great. Also wanted to ask a little bit more about the good, better, best strategy and the margin impact. As you introduce new products there to kind of fill in spot, some of them -- it sounds like the lower -- the smaller chassis side without CDLs, is there a margin impact we should be thinking about there? Or is kind of having your ATI initiatives enough to keep the overall margins for those products halfway decent here?

Yes. So I think it's really important to go back to that each one of our business units has EBITDA margin targets as part of their annual compensation system. So we take these targets that we set with the Street very seriously. And as we develop new products, as we acquire companies, we look through the lens of those margin targets in terms of continuing to increase our EBITDA margins over the long run.

With respect to these particular products, there's an important factor, it's also important to look at that we have available capacity. And these particular products would continue to utilize some of that capacity, which has favorable economics. And we've also found that some of these products too can be particularly on the industrial side, in addition to opening up new markets, they might buy a good or better product.

And then over time, they would move kind of up into the best product. And finally, it creates stickiness and opportunities for our aftermarket team long run. And so it really has been in the products that I cited, the Paradigm, the RegenX, the Badger product, we're really encouraged by the results that we're seeing to date.

Next question, Greg Burns with Sidoti & Company.

In the SSG segment, when we look at the revenue recognition this quarter versus maybe the strong orders and backlog, was that just a timing issue in terms of when the orders came in? And -- or was there any production bottlenecks, which caused some of that order intake to be pushed out to later quarters? And then within the orders, was there any particularly large fleet type orders or anything to -- worth calling out there? Or was it just broad-based order demand?

Yes. The order versus sales disparity, Greg, that again, as you mentioned, is mostly timing just in terms of when it came in because typically, within that business, it's -- we can receive the order and ship it within the same quarter sometimes.

The backlog for SSG, as you probably would have seen, is at a record level. So backlog typically isn't as relevant a metric for SSG as it is for some of our ESG businesses. And that's really just a reflection of just the timing of when the orders are received. There wasn't anything of a material nature in terms of large fleet orders. We had some larger orders from certain customers, but nothing I would necessarily call out in terms of an unusually large fleet order on the SSG side.

Okay. Great. And then in terms of M&A, are there any new markets that you're looking at or interested in potentially entering? And within your existing markets, are there any that offer particularly good opportunities for you where you think you're subscale and you'd like to get bigger in those markets given the opportunities that you see ahead for maybe some of those areas?

Yes. I'll reiterate that our pipeline is about as active as it's been. And one of the areas that we're encouraged by is the opportunities for our SSG business. We've been working on developing that pipeline over the last couple of years.

And we think there's a number of opportunities, both currently and in the long run. With respect to the ESG side, we're continuing to look at kind of new verticals. We're looking at filling in holes within existing verticals, geographic expansion, particularly for our aftermarket team. So a lot of opportunity out there. And again, that being that buyer of choice proves to be valuable in many of those acquisitions.

Thank you. I would like to turn the floor over to Jennifer for closing remarks.

Thank you. In closing, I would like to note that during the quarter, we published our sixth annual sustainability report, which is available on our website. The report highlights our progress against our natural resource reduction goals and our ongoing community engagement efforts.

It is our people that define the unique culture at Federal Signal, and we remain committed to investing in the local communities in which we operate. We would also like to express our thanks to our stockholders, distributors, dealers and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.