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Date
Thursday, October 30, 2025 at 10 a.m. ET
Call participants
President and Chief Executive Officer — Jennifer L. Sherman
Senior Vice President and Chief Financial Officer — Ian A. Hudson
Vice President, Corporate Development and Investor Relations — Felix M. Boeschen
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Takeaways
Consolidated net sales -- $555 million, an increase of $81 million or 17% year-over-year, including $51 million from organic growth (11%) during the quarter.
Operating income -- $94 million, up $18.1 million or 24% year-over-year.
Adjusted EBITDA -- $116.2 million adjusted EBITDA, up $23.2 million or 25% year-over-year; margin was 20.9%, up 130 basis points year-over-year.
GAAP diluted EPS -- $1.11 EPS for the quarter, an increase of $0.24 or 28% year-over-year; adjusted EPS was $1.14, up $0.26 or 30%.
Order intake -- $467 million, an increase of $41 million or 10% year-over-year, setting a new record for third-quarter order intake.
Backlog -- $992 million backlog at the end of the quarter, down 4% year-over-year. Management stated that approximately 85% of this decrease resulted from lower third-party refuse truck orders, mostly in Canada.
Environmental Solutions Group (ESG) net sales -- $466 million, up $67 million or 17% year-over-year.
ESG adjusted EBITDA -- $104.9 million adjusted EBITDA, up $17.7 million or 20%, with a margin of 22.5%, up 60 basis points year-over-year.
ESG orders -- $371 million, up $18 million or 5% year-over-year.
Safety and Security Systems Group (SSG) net sales -- $90 million, up $14 million or 18% year-over-year; all growth was organic.
SSG adjusted EBITDA -- $22.9 million in adjusted EBITDA, an increase of $5.1 million or 29%, with a margin of 25.6%, up 220 basis points.
SSG orders -- $96 million, up $23 million or 31% year-over-year.
Operating cash flow -- $61 million generated in the quarter, bringing year-to-date total to $158 million, a 12% increase compared to the first nine months of last year.
Debt reduction -- $55 million of debt paid down in the quarter; net debt was $159 million at quarter end, with $570 million available under the prior credit facility.
New credit facility -- Executed a new five-year $1.5 billion facility, increasing the revolver to $1.1 billion and adding a $400 million term loan targeted for the New Way acquisition.
Dividend -- $8.5 million paid, or $0.14 per share, with a similar dividend declared for the next quarter.
Aftermarket revenue -- Up 14% year-over-year, primarily due to increased demand for parts, service, and rental income.
Hog acquisition contribution -- $20 million net sales; Standard Acquisition contributed $10 million in net sales.
Hog guidance revision -- Hog expected to contribute $60 million to $65 million in net sales for 2025, raised from a prior range of $50 million to $55 million.
Updated full-year outlook -- Adjusted EPS range raised to $4.09-$4.17 from prior $3.92-$4.10; net sales outlook increased to $2.1 billion to $2.14 billion from previous $2.07 billion to $2.13 billion.
CapEx outlook -- Maintained at $40 million to $50 million, with approximately half allocated to growth initiatives.
SSG printed circuit board (PCB) expansion -- Fourth PCB line installed at University Park, IL facility, with anticipated incremental benefits in 2026 and beyond.
Lead times -- Sewer cleaners at approximately 11 months, three-wheel sweepers at 5 to 6 months, and four-wheel sweepers at 12 to 18 months, with ongoing efforts focused on reducing lead times as of fiscal Q3 2025 (period ended September 30, 2025).
Build More Parts initiative -- Less than $10 million in annual net sales; another double-digit percentage increase in net sales is expected from this initiative this year, with potential to become "multiples bigger," according to Jennifer L. Sherman, as the refuse business is integrated.
Summary
Federal Signal (FSS 10.78%) reported record-setting quarterly performance in fiscal Q3 2025 (period ended September 30, 2025), including all-time highs in net sales and adjusted EBITDA margin, as both the Environmental Solutions Group and Safety and Security Systems Group achieved double-digit revenue growth. Management cited successful execution on throughput initiatives, margin expansion, strong aftermarket demand, and benefits from their recent acquisitions. Major financing activity included replacing the prior credit facility with a new five-year, $1.5 billion facility, executed in fiscal Q3 2025, to support growth and the pending New Way acquisition.
Jennifer L. Sherman stated: "We are transitioning from a third-party refuse manufacturer to New Way. We stopped taking orders. To reiterate, 85% of the year-over-year backlog reduction in fiscal Q3 2025 was driven by the decline of third-party refuse backlog. We expect this dynamic to continue in coming quarters as we work through the transition from the third-party refuse OEM to New Way."
According to management, about 50% of annual CapEx is focused on productivity and growth initiatives, supporting strategic facility expansions and efficiency gains.
Ian A. Hudson clarified that SSG's sales and growth were "all organic," with foreign exchange effects described as "very nominal."
Management confirmed the pending New Way acquisition is expected to close in fiscal Q4 2025, emphasizing that no disruption is anticipated from the federal government shutdown due to the company's limited direct exposure to U.S. federal contracting.
Jennifer L. Sherman described the dealer response to the New Way announcement as "overwhelmingly positive," indicating expanded opportunity via dealer network integration.
Guidance for Hog Technologies was revised upward for 2025 based on "operational throughput improvements, strong demand within Hog's airport vertical, and strong aftermarket parts growth," according to Jennifer L. Sherman.
Industry glossary
ESG (Environmental Solutions Group): Segment providing environmental maintenance vehicles and equipment, including street sweepers, sewer cleaners, and specialized trucks.
SSG (Safety and Security Systems Group): Segment focused on public safety, emergency communications, and signaling equipment for emergency vehicles and municipal applications.
Aftermarket: Revenue stream generated from parts, service, repair, and rental of products already placed with customers, contributing to recurring sales.
PCB (Printed circuit board) line: Production line used for manufacturing circuit boards, essential for electronics in safety and security products.
Build More Parts initiative: Federal Signal's vertical integration strategy to increase in-house production of key parts, aiming to drive recurring revenue and improve margin.
Full Conference Call Transcript
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.
Ian A. Hudson: 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 $20.1 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 pre-tax 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 25-26%, 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, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior 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 nine months of last year.
With the improved cash flow, we paid down $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 five-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.
Jennifer L. Sherman: 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, made 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 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 two 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 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 team continues to execute on various strategic growth initiatives within our industrial end markets, including geographic expansion and sales channel optimization. Shifting to Aftermarket, where demand remains strong, for the quarter, aftermarket revenues 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 part 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 in 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 this quarter.
This addition marks the fourth PCB line installation since 2022 and allows our teams to insource 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 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 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 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. 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 Hog's year-to-date revenue and margin contribution have exceeded our initial estimates, primarily driven by operational throughput improvements, strong demand within Hog'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 have 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 in, 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-N-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 mute 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 1.5 times 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. 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.
Felix M. Boeschen: Lastly, we are maintaining our CapEx outlook
Jennifer L. Sherman: 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 are ready for questions. Operator?
Operator: Thank you. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. It may be necessary to pick up your handset before pressing the star key. One moment please while we poll for your questions. Our first question comes from the line of Ross Fairblack with William Blair. Please proceed with your question.
Jennifer L. Sherman: Good morning, Ross.
Ross Fairblack: Good morning. Hey, Jennifer. Thanks for taking the question. Just to level set on the orders really quick, what was the M&A contribution from Hog and Standard at ESG in the quarter?
Ian A. Hudson: Yeah. So Hog added I think about $20 million in the quarter and Standard was about $10 million.
Ross Fairblack: Okay. And then the SSG, that's any FX to call out there, is that just all organic?
Ian A. Hudson: It's all organic. Right? So FX is very nominal there.
Ross Fairblack: Okay. Alright. Alright. And then maybe just to, you know, for the third party within your network. Can you just help us kind of, you know, frame the backlog contribution from that and then kind of expectations for margin lift going forward as you know, those kind of step away. And hopefully New Way builds it in.
Jennifer L. Sherman: We are transitioning from a third-party refuse manufacturer to New Way. We stopped taking orders. I guess I will reiterate that, you know, 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 quarters as we work through the transition from the third-party refuse OEM to New Way.
Ross Fairblack: Yeah. That's helpful. I do see what I am trying, you know, the other thing I would add is it could take, you know, well into 2026 for us to do this. And this should be margin accretive over time.
Ross Fairblack: Yeah. That's what I am trying to get at, I guess. It's just we should expect somewhere in the range of that 85% number over the next three quarters impacting orders as well.
Jennifer L. Sherman: Yes. It will vary quarter to quarter. But we would expect it would take, you know, the next twelve months to deliver the trucks that are currently in backlog.
Ross Fairblack: Alright. Very helpful. Thank you. I will hop back in queue.
Jennifer L. Sherman: Thank you.
Operator: Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.
Jennifer L. Sherman: Good morning, Chris.
Chris Moore: Good morning. Thanks for taking a couple. 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 have made the announcement, just wondering kind of what you are hearing from the dealer channel. You know, is there any potential negative from the combination or just, you know, kind of big picture, what you are hearing at this stage?
Jennifer L. Sherman: Yeah. You know, the feedback has been overwhelmingly positive. As you stated, Federal Signal does share some dealers with New Way. But there is also a group of dealers that we do not share. We are 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, you know, really overwhelmingly positive reaction from the existing dealer channel and the new dealer channel.
Chris Moore: Got it. Perfect. And maybe just one follow-up on New Way. So we are talking about, you know, 40 to 45 cents accretive to EPS in fiscal 2028. 2026 is roughly flat. Just trying to get a sense, is that will it be back-loaded as the integration happens? Or, you know, is it reasonable to expect that 2027 will share, you know, a reasonable portion of that 40 to 45% accretion?
Ian A. Hudson: Yeah. I think Chris will probably give more color on that when we close the acquisition, but I think generally speaking, you know, we have a synergy target number out there that we are going to be working with the teams on. And I think those will kind of be more gradual as opposed to, you know, straight out the gate. So I think it is going to be more gradual with them being fully realized really by the end of 2028.
Jennifer L. Sherman: What I am really encouraged by is the teams are working together with respect to, you know, post-closing initiatives. And there is a lot of energy and commitment to the plan. And as soon as we get regulatory approval and close, you know, I think that we will be in a position to hit the ground running.
Chris Moore: Perfect. I will leave it there. Appreciate it, guys.
Operator: Thank you. Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.
Mike Shlisky: Thank you, and good morning.
Jennifer L. Sherman: Good morning.
Mike Shlisky: Could you let me give us a little more commentary on the current federal government shutdown? I know that a lot of what you sell to, you know, local state agencies, but there is some support, obviously, that the federal government supplies to those agencies. I am curious whether you have seen any changes to funding or any delays with any orders or just any kind of issues that the local players have been mentioning what has been going on over in Washington, D.C.
Jennifer L. Sherman: Yeah. So as we previously discussed, last year, we did about $10 million of direct business with the federal government. That was really comprised of two things, a military contract for one of our dump body businesses and then some military installations for one of our SSG businesses. So we do not expect any kind of meaningful disruption from the federal government shutdown. And, you know, our SSG orders were strong in Q3. And we have not heard anything that we believe would change that.
Mike Shlisky: So as far as the federal government supporting these municipal budgets, you have not seen any kind of disruption or changes in the funding and the actual flow of cash?
Jennifer L. Sherman: Yeah. So far, 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, you know, certain funding in terms of municipal sales tax for our street sweeper, for example, and certain trackless part of 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 would not expect any meaningful impact.
Mike Shlisky: Okay. Great. Secondly, I wanted to ask a little bit about the broader environment for New Way. Getting a little out of breath this morning. It is because another large waste truck company just announced that they also announced the merger. Curious whether I know if you guys had a chance to look at it yet. I just saw it myself for the first time a couple of hours ago. Well, I am curious whether you think, you know, 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 twelve months or so?
Jennifer L. Sherman: Yeah. So the only area that we would compete with respect to the Terex-Rev merger, as you noted, would be garbage trucks. You know, we continue to believe that New Way is extremely well-positioned with its ASL product line and the Canadian opportunity through our JJE team. Frankly, the strength of its municipal channel. So, you know, we believe our view has not changed at all since we announced the acquisition. And, you know, we continue to be excited and energized by the New Way team and the opportunities that lie ahead.
Mike Shlisky: Thank you so much. I will pass it along.
Jennifer L. Sherman: Thank you.
Operator: Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.
Jennifer L. Sherman: Hey. Good morning, Steve.
Steve Barger: Good morning. I know it is 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, you know, everything in the portfolio right now, can you continue to drive solid top-line growth?
Jennifer L. Sherman: Yeah. I mean, you know, I believe we are extremely well-positioned to achieve another record year in 2026, and it is going to be a combination of execution on the strategic initiatives, you know, continued throughput improvements, our new product development pipeline, and, you know, we have got good visibility through our backlog for about half of our businesses. I am 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 are 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 are set up to achieve another record year in 2026.
Steve Barger: Yeah. I know you mentioned New Way. But I guess the question is, do you feel like some of the mid to high single-digit organic growth momentum that you have had is still achievable just given the conditions, the backlog, the initiatives that you have?
Jennifer L. Sherman: No. 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 will update this in February.
Steve Barger: Got it. Yep. That is fair. And you do also have a, you know, a really nice track record of margin expansion in ESG over the past few years. You have talked about 2026 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 is to ESG or on a consolidated basis?
Ian A. Hudson: Yeah. 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, you know, the need to make some investments in the business. So I think still think there is 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 would I should say, 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, you know, in 2026. But I think long-term, we are still committed to that, you know, that 18-24% margin target for the business.
Jennifer L. Sherman: Yeah. And you know, as well, and you can imagine that we have extremely detailed plans. And so if, you know, we look, you know, we have got a 2026, 2027, and 2028 year plans for each of those years. You know, we would expect, as you implied, that New Way would be margin dilutive in 2026. But you know, 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 have given.
And we have spent a lot of time studying this, and if anything, I am more encouraged by the planning and work that the teams are doing now for post-closing.
Steve Barger: I really appreciate the detail. Thank you.
Jennifer L. Sherman: Thank you.
Operator: Thank you. Our next question comes from the line of Greg Burns with Sidoti and Company. Please proceed with your question.
Jennifer L. Sherman: Good morning, Greg.
Greg Burns: Good morning. On the Build More Parts initiative you mentioned, what percent of your parts are currently insourced? Or, I guess, reflecting that kind of $10 million of sales that you called out?
Jennifer L. Sherman: Very small. There is a lot of untapped opportunity here. Particularly with the addition of the refuse business. It is the first you are our only group that does not have to go get orders. You have got enough internal orders to last your lifetime.
Greg Burns: Is there, like, a goal in terms of kind of what percent of your parts business you would like to kind of vertically integrate? And what kind of margin uplift is there relative to outsourcing it?
Jennifer L. Sherman: Yeah. We are still in early stages. I am encouraged by the progress that the teams have made. You know, we believe that, you know, as we move forward, Build More Parts can be multiples bigger over time. Particularly with the refuse opportunity. And, you know, I guess I will 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 are closing finishing our pilot phase. And it is, again, a credit to that team. And we are really looking as we moved into 2026 and 2027 for opportunities to accelerate that initiative.
Greg Burns: 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?
Jennifer L. Sherman: Yeah. So we talked about, you know, just reminding you the impact that the transition from the third-party refuse manufacturer will have during 2026. With respect to lead times, right now, sewer cleaners are running around eleven months. Our three-wheel sweepers, we have made great progress and credit to the team are running in that five to six-month range, which is where we would like. And then our four-wheel sweepers we still have some work to do. They are running twelve to eighteen months. And it really varies. You know, road marking equipment, we would want again in that five to six months. With some stock available. 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 four-wheel sweepers.
Greg Burns: Okay. And then, I guess, excluding the impact of the third-party refuse trucks, do you think you could production rates will increase next year to where you will start to bring down the core backlog? Or I know it is going to depend on order input rates and all that, but just based on what you are seeing now, and what you have planned in terms of maybe capacity or production expansion initiatives. Do you think that is the case?
Ian A. Hudson: I think, Greg, we have obviously, we have talked for a number of quarters now about wanting to increase production, you know, to leverage the capacity that is available to us. So I think that is the goal is to, you know, to keep working those lead times down. Specifically, it relates to 2026, I think we will come back in February with the guide to 2026.
Greg Burns: Okay. Alright. Great. Thank you.
Operator: Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Jennifer Sherman for any closing remarks.
Jennifer L. Sherman: In closing, as we enter this Thanksgiving season, I want to take a moment to thank our dedicated employees, loyal customers, and dealers and distributors. Thank you for joining us today, and we will talk to you soon.
Operator: 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.