FSS Earnings Call

OperatorGreetings. Welcome to the Federal Signal Corporation's Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Felix Boeschen, Vice President, Corporate Strategies and Investor Relations. Thank you, Felix. You may begin.

Felix BoeschenGood morning and welcome to Federal Signal's Second 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'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 Signals filings with the Securities and Exchange Commission.

Felix BoeschenThese 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, current market conditions, and go over our increased guidance for 2026 before we open the line for any questions. With that, I would now like to turn the call over to Ian.

Ian HudsonThank you, Felix. Our consolidated second quarter financial results are provided in today's earnings release. In summary, in what is typically a seasonably strong period, our businesses were able to deliver 19% year-over-year net sales growth, 21% operating income improvement, an 18% increase in orders, gross margin expansion, and a 60 basis point improvement in adjusted EBITDA margin during the record-setting second quarter. Consolidated net sales for the quarter was $670 million, an increase of $106 million or 19% compared to last year. Organic sales growth for the quarter was $31 million or 6%. Consolidated operating income for the quarter was $118.2 million, up $20.5 million or 21% compared to last year. Consolidated adjusted EBITDA for the quarter was $144.4 million, up $26.2 million or 22% compared to last year. That translates to a margin of 21.5% in Q2 this year, up 60 basis points compared to last year.

Ian HudsonGAAP diluted EPS for the quarter was $1.40 per share, up $0.24 per share or 21% compared to last year. On an adjusted basis, EPS for the quarter was $1.42 per share, an increase of $0.25 per share or 21% from last year. Customer demand remained strong during the quarter with orders of $637 million representing an increase of $97 million or 18% compared to last year. Backlog at the end of the quarter was $1 billion, compared to $1.08 billion last year. In terms of our group results, ESG's net sales for the quarter were $578 million, up $97 million or 20% compared to last year. ESG's operating income for the quarter was $113.9 million, up $22 million or 24% compared to last year. ESG's adjusted EBITDA for the quarter was $138.3 million, up $27.5 million or 25% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 23.9%, an improvement of 80 basis points compared to last year.

Ian HudsonESG reported total orders of $548 million in Q2 this year, an increase of $107 million or 24% compared to last year. SSG's net sales for the quarter were $93 million this year, up $8 million or 10%. SSG's operating income for the quarter was $22.1 million, up $600,000 or 3% compared to last year. SSG's adjusted EBITDA for the quarter was $23.2 million, up $600,000 or 3%. That translates to an adjusted EBITDA margin for the quarter of 25.1% compared to 26.9% last year. SSG's orders for the quarter were $89 million compared to $99 million last year. Corporate operating expenses for the quarter were $17.8 million compared to $15.7 million last year, with the increase primarily due to higher post-retirement expenses and increased medical costs. Turning now to the consolidated income statement, where the increase in net sales contributed to a $34.2 million improvement in gross profit. Consolidated gross margin for the quarter was 30.4%, a 40 basis point increase over last year.

Ian HudsonAs a percentage of our 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 $2.1 million increase in amortization expense, a $200,000 increase in acquisition-related expenses, and a $2.5 million increase in interest expense. Tax expense for the quarter was $25.3 million compared to $22 million in Q2 last year, with the increase primarily due to the effects of higher pretax income levels partially offset by a $1.1 million increase in excess tax benefits associated with stock-based compensation activity. Our effective tax rate for Q2 this year was 22.7% compared to 23.6% in Q2 last year. At this time, we expect that our full-year effective tax rate will be approximately 24%, excluding additional discrete tax benefits. On an overall GAAP basis, we therefore earned $1.40 per share in Q2 this year compared with $1.16 per share in Q2 last year.

Ian HudsonTo facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarters. In the current and prior quarters, 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 $1.42 per share compared with $1.17 per share last year. Looking now at cash flow, we generated $113 million of cash from operations during the quarter, an increase of $53 million or 89% from Q2 last year. That brings the total cash generated from operations in the first half of this year to $214 million, an increase of 122% over the first half of last year. During the quarter, we paid down approximately $97 million of debt, ending the period with $391 million of net debt and availability under our credit facility of $1.04 billion. Our current net debt leverage ratio remains low.

Ian HudsonWith 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 $9.1 million during the quarter, reflecting a dividend of $0.15 per share, and we recently announced a similar $0.15 per share dividend for the third quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Jennifer ShermanThank you, Ian. We are proud of our second quarter financial results, which included new second quarter records across net sales, adjusted EBITDA, adjusted EPS, and orders, thanks to outstanding contributions from both of our groups. These results underscore the resilience and durability of our business model, the momentum behind our growth initiatives, and the unwavering commitment of our teams. Over the last several years, we have continued to diversify our revenue streams and our end market exposure to different funding sources. As a result of these efforts, we have strengthened the core of our business while muting cyclicality and driving growth over a prolonged period. Within our Environmental Solutions Group, we delivered 20% year-over-year net sales growth, a 25% increase in adjusted EBITDA and an 80 basis point improvement in adjusted EBITDA margin. Growth in our aftermarket business, leveraging the power of our platform to drive internal margin initiatives and proactive price cost management were all meaningful organic contributors.

Jennifer ShermanAcquisitions also contributed approximately $75 million of net sales during the quarter, with New Way and Mega driving notable increases in sales of refuse trucks and mineral extraction support equipment. Organic net sales growth was also broad-based across several of our ESG vehicle categories, including vacuum trucks, dump truck bodies, and other specialty 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 absorb more volume into our existing footprint. Consistent with prior years, in 2026, we expect approximately half of our annual capital expenditures to be focused on various growth initiatives with the other half focused on maintenance investments. Shifting to aftermarket, demand for our aftermarket offerings remained strong, aided by contributions from recent acquisitions.

Jennifer ShermanFor the quarter, aftermarket revenue increased 24% year over year, primarily driven by higher demand for aftermarket parts, higher used equipment sales, and rental income growth. We are experiencing strong rental demand as rental income grew by 16% year over year, led by growth in our Safe Digging and combination sewer cleaners. As a reminder, our aftermarket ecosystem spanning parts and service, rental, rent-to-own, and used equipment offerings further unlocks previously underserved customer cohorts for Federal Signal. Our teams are diligently focused on driving more parts revenue across the enterprise This is a multifaceted approach. First, our Build More Parts initiative, whereby we are vertically integrating certain parts production, remains in early innings. We are investing in manufacturing capacity dedicated to this initiative in the second half of the year. Second, as our addressable install base of vehicles has grown, we are expanding our geographic footprint of aftermarket parts and service locations to better serve our customers and capture more parts opportunity.

Jennifer ShermanFor perspective, since 2019, we have added approximately 20 service centers and we see additional footprint expansion opportunities. Third, as we integrate acquisitions, this aftermarket ecosystem becomes a powerful flywheel. As part of these plans, our teams are currently pursuing aftermarket growth opportunities across Trackless, New Way and Mega. In the aggregate, aftermarket represented approximately 25% of ESG revenue in Q2 this year. Shifting to our Safety and Security Systems Group, where the team delivered another quarter of solid results with 10% top line growth, a 3% increase in adjusted EBITDA and an adjusted EBITDA margin of 25.1% toward the midpoint of our recently raised target range of 22% to 28%. This performance 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, somewhat offset by mix headwinds.

Jennifer ShermanLastly, we had another outstanding quarter of cash generation with $113 million of operating cash flow representing cash conversion of 131% of net income. On an annual basis, we continue to target 100% cash conversion. Before I comment on current market conditions, I would like to provide some additional context around our end market exposure. As referenced earlier, when I first became CEO in 2016, one of our main objectives was to reduce the cyclicality of earning streams by decreasing our reliance on any single funding mechanism, economic end market, or customer cohort. The result is a substantially more durable revenue profile today compared to 10 years ago, including less reliance on traditional municipal budgets, a significantly larger aftermarket presence, and increased exposure to various niche industrial markets such as road marking, metal extraction support, hydro-excavation, and dump trucks.

Jennifer ShermanWe have also strategically diversified funding mechanisms within our publicly funded verticals. These funding sources include water taxes, Canadian provincial and local budgets, law enforcement and police budgets, trash collection fees, airports, US— state budgets, military, and European local and federal exposure. To provide some perspective on this, while a little more than half of our revenue base is tied to some sort of publicly funded mechanism, the largest publicly funded source, U.S. water taxes, impacts less than 15% of our total net sales. Shifting now to current market conditions. On an underlying basis, excluding the impact of third-party Labrie refuse orders received in Q2 last year. Our orders this quarter increased by $103 million, or 19% year over year, with healthy demand across both our Safety and Security Systems Group and our Environmental Solutions Group. Within our Environmental Solutions Group, orders were up 24% year over year, including high single-digit organic growth.

Jennifer ShermanWithin product lines, we experienced strength in organic demand for vacuum trucks, led by strong increases in orders for safe digging trucks, dump truck bodies and trailers, and aftermarket offerings. Lastly, our backlog stood at $1 billion at the end of the first quarter, down approximately $80 million or 8% year over year, with $75 million of this reduction associated with the planned decline in 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 $44 million. As a reminder, net sales of our backlog-intensive products represented approximately 45% of net sales last year. With that said, given the size of our backlog, we continue to enjoy strong forward visibility for our backlog-driven product lines. In fact, while we are making progress, lead times for certain of our products remain elevated compared to our target levels.

Jennifer ShermanAs I reflect on our performance through the first half of 2026, I am most pleased with the early financial benefits we are starting to realize from the collective power of the growth platform that we have built over the past decade. The power of this platform spanning several key centers of excellence including procurement, our Federal Signal operational system, supply chain optimization, aftermarket, dealer development, sales channel alignment, data analytics, and new product development underpins my confidence in our ability to achieve continued earnings growth in 2027 and beyond. Going forward, it is our intent to further invest in scaling these centers of excellence which will support both our M&A integration engine and unlock incremental margin expansion opportunities across the enterprise that we have identified. We expect to incur additional expenses in the second half of this year as we scale these centers of excellence.

Jennifer ShermanSimply put, as we contemplate the next phase of growth at Federal Signal, this platform is what will allow our teams to pursue more strategic market share and operational improvement initiatives at a faster pace each year, driving an increasingly unique customer value proposition and an increasingly idiosyncratic earnings growth opportunity through various economic conditions. As a reminder, through cycles, we target annual 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've increased several times over the past years. A couple of highlights, starting with margins. As I just noted, we are excited by a number of initiatives that we believe will drive further margin expansion as we begin to leverage the power of our platform more deliberately.

Jennifer ShermanWe've identified 4 categories of expansion opportunities over a multi-year timeframe. First, the continued growth of our aftermarket business, which carries an attractive margin profile. Through cycles, we expect aftermarket revenue to grow slightly faster than the overall company. Second, execution on several operational initiatives. Some of the largest untapped categories we have identified are focused on optimizing our procurement spend across our specialty vehicle verticals and scaling our 80/20 processes as we internalize our Federal Signal operating system across the broader enterprise. Third, driving increased volumes through our expanded footprint while investing in select automation opportunities. And fourth, the successful execution and integration of acquisitions. Over a multi-year timeframe, all four of these categories Aftermarket, operational initiatives, leveraging our capacity, and M&A will be important contributors to margin expansion.

Jennifer ShermanOn that note, in early July, we completed the acquisition of Western Technology, a manufacturer of proprietary portable explosion-protected lighting solutions for niche end markets such as industrial processing, petrochemical, or aerospace. We see strong synergy opportunities as Western will expand our industrial signaling product portfolio, allowing our teams to utilize our existing sales channel and manufacturing operations. Going forward, we see further opportunities to grow SSG through strategic M&A. We have also been pleased with the integration progress our teams are making at New Way and Mega. We are still in the early stages of our multi-year integration plans, but so far both acquisitions have exceeded our internal margin and profit contribution expectations in the first half of 2026. Recall in September of last year when we announced the New Way transaction, we outlined $15 to $20 million of annual synergies to be achieved by the end of 2028, with synergies split roughly even between cost and revenue.

Jennifer ShermanAt this time, we are pleased to share that we are tracking ahead in the realization of our cost synergy targets, and we continue to identify incremental opportunities. The early successes of both of these integrations is a testament to our best-in-class record of achieving or exceeding our targeted synergies in the vast majority of the 17 acquisitions we have completed during my tenure as CEO. With each acquisition, we continue to learn and improve, and I want to acknowledge the outstanding efforts of our teams whose collective accomplishments have created significant shareholder value. Looking ahead, there's more to come. We are energized by an active M&A pipeline as we continue to evaluate strategic opportunities across both of our operating groups. Turning now to our outlook for the remainder of 2026. 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 $5.12 to $5.30 from the prior range of $4.80 to $5.05.

Jennifer ShermanWe are also raising our full-year net sales outlook to a new range of between $2.58 billion and $2.67 billion from the prior range of $2.57 billion to $2.66 billion. Lastly, we are reaffirming our CapEx outlook of between $45 million and $55 million for the year. With that, we are ready to open the line for questions. Operator?

OperatorThank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

OperatorOur first question is from Steve Barger at KeyBanc Capital Markets.

OperatorPlease proceed with your question.

Steve BargerGood morning.

Jennifer ShermanThanks. Good morning, Steve.

Steve BargerGood morning. Yeah, that was a lot. Really appreciate the commentary about diversity of funding mechanisms, just because visibility into that has been a big investor topic for the past month or two. Overall, how would you characterize funding across those different sources and just visibility for the back half and into next year?

Jennifer ShermanYeah, thank you, Steve. You know, as I mentioned in my prepared remarks, we've been very purposeful in terms of diversification of those funding sources, really with the objective of creating a very resilient and durable business model. So as we look across that, we say, you know, plus or minus 55-ish percent comes from public revenue. And as I talked about in my prepared remarks, the largest portion of that would be water taxes, which is less than 15%. Within that public revenue, there's also, you know, Canada, which is an important end market for us. There's also the European market. There's a little piece of the US and military portion of that. And then there's a little piece of refuse fees in there. But there's also, you know, we get a lot of questions about you know, the municipal piece. You know, and probably the way to think about it is the way that we think about how do we categorize our businesses.

Jennifer ShermanSo you think about the other specialty equipment category where our pure-play municipal business resides. That other special equipment category is about 25% of our overall business. Within that category, You've got refuse, which is the largest portion in that category. You have our metal extraction business. You've got our road marking and high-pressure water blasting business. And you have our Elgin Street Sweeper businesses. And those 3 businesses, um, each one of them is kind of mid- to high single-digit percentage of our overall net sales. So we get a lot of questions about the municipal exposure. And our truly only pure-play municipal exposure would be street sweepers. And, you know, those are— those budgets have been holding. You know, they're funded primarily through property taxes and sales taxes. And when you look at the external data, it continues to grow consistent with GDP type rates. And although our street sweeper orders were down, Q2, you know, there were other parts of that other specialty equipment that were strong.

Jennifer ShermanSo our metal extraction orders were up, our road marking and jet streams were solid, and our refuse orders were slightly above where we had planned. And I think we talked about last September that we thought in 2026 that that refuse market would be down. But overall, we feel very good about those diversification of funding sources and then the outlook going forward. The last thing I would say is 45% of our backlog— 45% of our business is backlog-driven, and that gives us pretty good visibility. And that billion dollars of backlog sets us up for a good second half and a strong beginning to 2027.

Steve BargerReally comprehensive answer. I appreciate that. And I guess just to recap, if I look at that in aggregate, the funding mechanisms look secure as you go into the back half and next year.

Jennifer ShermanYes.

Steve BargerPerfect. And then you talked about investing in aftermarket capacity, which, you know, obviously makes sense as that approaches 25% of ESG revenue. What dollar level are you investing toward? And as you've grown that business, what's the incremental return on capital for those aftermarket investments?

Ian HudsonYeah, I think, Steve, you know, we've maintained the CapEx guide of $45 to $55 million for the year. So we're not talking about significant CapEx in terms of these investments that we're making. They're relatively modest investments that we're making to mainly existing facilities, just primarily to drive the Build More Parts initiative. So in terms of, you know, the increment— I think Jennifer mentioned in her prepared remarks that the margin on the aftermarket business is— it's more attractive. The delta isn't quite as significant as you may see in some other industries for a couple of reasons. Primarily, you know, we command some pretty good margins on our existing equipment sales as well. But it is a slightly more attractive return. And as we go go forward, that's one of the things that we think about when we see the opportunity to drive further margin expansion is just the continued growth of that aftermarket business.

Ian HudsonSo the returns are, you know, they're attractive, certainly when you look at the relatively low level of investment in the facility that we're referring to here.

Jennifer ShermanYeah, just to add a little bit of color to that, you know, the team is— I was with the team at their offsite up in Canada last month, and the team has identified geographic expansion opportunities. And, you know, we will be opening up some new offices, again, very low CapEx. Number 2 is in my prepared remarks, I talked a lot about Build More Parts, and that's an area we will be investing and we see a lot of growth potential. And then, you know, again, we really like the durability and resilience of this aftermarket segment. And, you know, we manufacture work trucks, and they need parts, and they need service. And, you know, rental income was up year over year. Used equipment sales were up. You know, this continues to be a very important part of the Federal Signal family.

Steve BargerUnderstood. Thank you for all the detail.

Jennifer ShermanThank you.

OperatorOur next question. Next question is from Ross Sparenblek with William Blair. Please proceed with your question.

Ross SparenblekHey, good morning, guys.

Jennifer ShermanGood morning, Ross.

Ross SparenblekHey, you know, it looks like some strong order growth in the quarter. I believe, you know, organic ESG orders look like they're up around 9%, although you noted that, you know, street sweepers were down in the second quarter. When we think about the muni channel overall, can you just give us a sense of what, you know, the inventory channels look like? Do you think it's kind of balanced? Was there potentially some pre-buy and destocking now?

Jennifer ShermanYeah.

Ross SparenblekOr just any other dynamics you can—.

Jennifer ShermanYeah, so, you know, we didn't see a lot of prebuys this quarter, and we haven't built in prebuys for the rest of the year in terms of our projections. You know, we continue to monitor the EPA regulations, understanding that they're not finalized.

Jennifer ShermanYou know, if something does change there, it could potentially be upside. With respect to refuse, you know, as we announced— when we announced the transaction last year, we expected that refuse would be down this year, and that's what we built into our valuation model and the price that we paid. And right now, refuse is on the order side, is operating slightly ahead of our model. And as I mentioned on the call, you know, with respect to integration and some of the cost synergies, we've been, you know, we've realized some of those earlier than we anticipated. With respect to inventory in the channel, many of our specialty vehicle category, categories don't really carry a lot of channel inventory. So we feel really good about, you know, what we're seeing right now.

Jennifer ShermanAnd again, you know, kind of building what I said earlier, you know, aftermarket represented about 25% of ESG's revenue this quarter. And then we saw very strong performance there. You know, they were up 24% year over year. And each of those, you know, rentals was up, used equipment was up, and parts was up. So again, as we look at kind of those different end markets and the different pieces, we feel really good. And that's what led to, you know, the significant increase in our guidance for the second half of the year.

Ross SparenblekOkay. No, that's helpful. So the expectation then is, you know, chassis disruption that started to alleviate in 2024? I mean, that's in the rearview, and, you know, potentially going into the next year, we'll have smoother comps and just kind of a normal GDP-plus type of, uh, you know, activity in the channel?

Jennifer ShermanOkay, based on what we know today, the answer is yes.

Ross SparenblekOkay, that's helpful. And then just on the margin side, uh, you know, nice lift in the EPS guide, uh, some interest there, uh, but SG&A stepping up. So maybe just some watch this moving parts there, higher SG&A in the second half potentially, maybe what type of incrementals we should be underwriting. And I get the sense of the confidence here is coming from just the progress making on the aftermarket side.

Ian HudsonYeah, I think a couple of things, Ross. I think obviously the momentum that we're seeing on the aftermarket side of the business and also some of the traction we're seeing on the integration of the acquisitions They're tracking— both Mega and New Way are tracking slightly ahead of where we thought they would be. So that has, you know, some margin upside for the year. I think when we went into the year, we were expecting, you know, those acquisitions to be slightly dilutive. But I think where we sit today, we actually think that dilution is not going to be there. So I think if you look at the guide for the year, that would imply that we're expecting margin improvement on a year-over-year basis. So yeah, the investments that we refer to, they are in the second half of the year, but you know, not overly material in the sense that when you look at the context of the raise for the rest of the year that's implied in the guide.

Ross SparenblekOkay. So on the SG&A side, the expectation is that, you know, as a percentage of sales, they should be stepping down year over year in the back half?

Ian HudsonEven with the investment? I think more of the upside is probably in the gross margin area, you know, as opposed to SG&A. I mean, we're not adding significant costs from an SG&A standpoint. They're really not relatively nominal investments that we're referring to. So most of the uplift, I think, would be on the gross margin front.

Jennifer ShermanYeah, we are adding some people though to drive some of the longer-term benefits that I identified, you know, with respect to the power of the platform.

Ross SparenblekAll right. Well, nice quarter, guys. Thank you. I'll pass along.

Jennifer ShermanThank you, Ross.

OperatorOur next question is from Tim Thein with Raymond James. Please proceed with your question.

Jennifer ShermanGood morning, Tim.

Tim TheinGood morning.

Ian HudsonGood morning.

Tim TheinThe question is on aftermarket. And thinking about the initiatives you're putting in place to expand that, and obviously real nice growth in the quarter. I think in the past we've talked about maybe a long-term target that of that part of the portfolio getting to 30-ish percent of ESG revenues. And I recognize that year to year there can be fluctuations depending on where those OEM volumes are coming in. And how that impacts the overall kind of percentage. But, you know, as you've now integrated New Way and you think about some of these, you know, company-specific initiatives, how are you still thinking about that as kind of a realistic target and any sort of— I know a timeline is hard to put on it, but is 30% of segment revenue still a kind of achievable target to put out there?

Jennifer ShermanYeah, I think I have a couple things to add to that. One is, you know, as I stated in my prepared remarks, we would expect aftermarkets to grow faster than the company. Um, you know, my objective is I want to grow both the numerator and the denominator. Um, so, um, and a couple critical things are going to contribute to the growth of aftermarket. One, it's going to be somewhat dependent on what acquisitions we do. New Way, as we talked about when we purchased the company, we're 2 full quarters in, but parts are about 11% of their overall revenue. So we see some upside as we move forward, and that's an important synergy that the teams are working on. Many of our businesses right now are running at 30% on the parts side. But there's no structural reason why it can't be 30%. And as I mentioned earlier, a lot of it's gonna depend on the M&A and the mix of the businesses that we buy. But we are fully committed to growing aftermarkets.

Jennifer ShermanAgain, what I talk about internally all the time is the durability and resilience of our business model. And aftermarkets is an important part of that.

Tim TheinGot it. Okay. And maybe just to make sure I got what Ian was going through. So the net income guide goes up, I don't know, $17, $18 million on a pretty marginal change in revenue. Is it the traction on the growth in aftermarket and some of the M&A integration performing better than expected? Are those kind of the two big drivers?

Ian HudsonYeah, Tim, there's a lot of pieces, as you can probably imagine. But if you think about the big-ticket items, you know, the growth in the aftermarket business and then the traction on the recent acquisitions, I think Jennifer mentioned that we're tracking ahead of the cost synergies that we originally kind of communicated at the time of the New Way transaction. So those would be kind of the two bigger pieces.

Jennifer ShermanI think some of the operational improvements that our teams are working on. And again, you know, what I think is important to understand here is it's not any one thing. We have a number of initiatives and we don't need every single one of them to hit. We just need enough of them to hit. And so, you know, as we looked at the second half of the year and we looked at where we stand, you know, we have a lot of confidence of our teams to execute on those initiatives and set us up for, you know, a strong 2027.

Tim TheinGot it. Thank you very much.

OperatorOur next question is from Walt Liptak with Seaport Research. Please proceed with your question.

Walt LiptakGood morning, guys. Hey, great quarter. Hey, I'd like to ask one from 50,000 feet. So you've been beating your EPS numbers and raising guidance so far this year. And the orders this quarter looked really good. So when you think about how your year is progressing, is it execution on the Build More Parts initiative that's resulting in the EPS upside, or is it something else?

Jennifer ShermanYou know, one of the things about Federal Signal is that, you know, we're not overly reliant on any one initiative. As I mentioned earlier, we've got a number of different initiatives. So, you know, in this quarter and for the rest of the year, it's, you know, strong year-over-year growth in aftermarket. They're up 24%, you know, strong performance by the acquisitions, strong performance by our mineral extraction group, solid performance by the road marking group. Strong performance by the Vacuum Truck Group. SSG had another solid quarter. Our TBEI businesses had a very solid quarter. I go through all that detail to say, you know, we've got just broad-based strength, and that's really what gave us confidence in terms of the guidance raise for the second half of the year. And as you know, we're very focused on 2027 and, you know, what do we need to do to continue to drive these many initiatives across Federal Signal in order to continue to build both the resiliency and durability of this business model, the diversification around the end market of the business model, and set us up for not only a strong second half of the year, but a strong 2027.

Walt LiptakOkay, that sounds great. So kind of along those lines, you know, you provided sales and EPS guidance range that's fairly broad. What's— and maybe this is an Ian Hudson question— what's the difference between sort of the high end of the sales and EPS guidance and the low end? What's assumed in the low end?

Ian HudsonYeah, I think in the low end, Walt, we talked about, you know, we still have 45 million of third-party refuse trucks to deliver. You know, we don't necessarily control the timing of when those come to us, so that would probably be something that if that didn't materialize, that would kind of lead us towards the lower end of the revenue guide. On the flip side, I think, you know, the continued momentum of some of the strategic initiatives would probably take us towards the upper end. So those are probably the variables on the top line guide.

Walt LiptakOkay, great. And then maybe the last one for me. I wanted to ask about— you kind of commented that the New Way business is ahead of expectations, I think, on some of those new orders that you were thinking were going to decline. Why do you think that is? Is it because you're integrating New Way into your dealer channel? You know, what's going on there?

Jennifer ShermanYeah. You know, when we did our extensive diligence on this transaction last year, one of the issues we identified is excess inventory in the system, not just of New Way, across the refuse.

Jennifer ShermanIndustry. And so our expectation is that the refuse industry was going to be down in 2026. And so when we built our model and our valuation, that's what we reflected. And I think frankly, you know, listening to other OEMs, that's turned out to be accurate. So from a revenue standpoint, we're kind of spot on our model. From an order standpoint, we're slightly ahead. From, you know, we identified that $15 to $20 million of synergies that we expected to achieve by the end of 2028. And on the cost side, we've achieved some of that earlier than we anticipated. We've identified a number of, you know, opportunities. And so we're running ahead. Of our plan right now. You know, 2 quarters, we're only 2 quarters into this, but, you know, I'm really pleased with the kind of strength of our integration team. And I would add that on the Mega side, you know, the teams are doing a super job. You know, we were just out at Ground Force earlier this week for our board meeting, and we had a great conversation with that team and, Again, it really is a testament to, you know, the integration successes that we've had during my tenure as CEO.

Jennifer ShermanSo more to come, very early days, but I'm pleased with our progress.

Walt LiptakOkay, great. And maybe just a final, final one for me. The acquisition that you announced, could you provide us with more details? What's the name of it? How big are the revenues? Is there going to be accretion?

Jennifer ShermanIt's Western Technologies. It's very small. You know, it's the first acquisition that SSG did. You know, we're not expecting anything material in 2026. More to come as we move forward, but it's small.

Walt LiptakOkay, great. Thank you.

Jennifer ShermanThanks, Will. Thank you.

OperatorOur next question is from Chris Moore with CJS Securities. Please proceed with your question.

Jennifer ShermanGood morning, Chris.

Chris MooreGood morning, guys. Just a quick one. The 6% organic growth, just maybe I missed it, just a rough breakdown on price and volume there.

Ian HudsonYes, the price, Chris, was about 3, 3.5% of that. And then the volume in chassis would be the rest.

Chris MooreGot it. I know you've already talked a lot about New Way. So it sounds like you're ahead of plan on the cost side. And as you said, it's still early in the mix. I know you were talking about '28 is where you really would see the full benefits and, you know, that 40% to 45% of accretion in '28. So I think what I'm hearing is '28 is still the year where you see the full benefits. It's just perhaps the curve to get there is, you know, a little bit quicker, a little bit steeper earlier than you anticipated. Is that fair?

Ian HudsonI think that's correct, Chris. If you think about the earlier achievement of some of the cost synergies, I think the revenue synergies are probably more gradual as we get through '28. As we look to, you know, one of the initiatives is to the expansion really in growth into Canada. That's something that will likely take some time as we build up that channel. But so the revenue synergies will likely be kind of more gradual through that timeframe. But we're, yeah, we're slightly ahead on the cost side.

Jennifer ShermanWe're very pleased with the progress to date, understanding that we're only 2 full quarters in.

Chris MooreGot it. Okay. And maybe my last one, it just feels like you can't talk to any company these days without at least referencing AI. Are you spending any dollars there? Is there any obvious role for it within your ecosystem?

Jennifer ShermanAbsolutely. You know, during this quarter, we actually added an individual to our leadership team who's leading our efforts. We've been working on a number of projects over the last couple of years that Felix has led, and I'm going to let him walk you through them quickly.

Felix BoeschenYeah, Chris, absolutely. I mean, I think we're in the earlier innings, but we've identified a number of interesting opportunities. And again, when you kind of think about, you know, the power of the platform we've talked about, you know, data analytics is one of those core benefits that we're starting to build out. So a little bit early in terms of sizing it. But over time, we think it'll be additive to some of our organic revenue growth initiatives.

Chris MooreGot it. I appreciate it, guys. I will leave it there.

Jennifer ShermanThank you, Chris.

OperatorOur next question is from Mike Shlisky with DA Davidson. Please proceed with your question.

Jennifer ShermanGood morning, Mike.

LindaHi, guys. This is Linda on for Mike.

Jennifer ShermanHi, Linda.

LindaHi, Jennifer. So question, I want to follow up on the New Way commentary about the orders. So we've heard commentary from the other two waste truck companies the last few days that seem to— they seem to say different things. And so basically I want to know like what's driving the difference between what you're seeing and what some other positive and negative commentary that is elsewhere in the industry. Is it product mix, customer exposure? If you could give me some more color, that would be helpful.

Jennifer ShermanYeah. So I think I need to start to go back to September when we announced the acquisition. We were very clear based on our research that we thought that, you know, the industry was going to be down overall. The refuse truck industry would be down in 2026 because we thought there was, kind of excess inventory in the system as lead time started to reduce. So we built our model, we anticipated it and built our model for the transaction around the, with the assumption that the industry was gonna be down in 2026. So, you know, what I said is, look, our revenue, we're kind of spot on our model. And our orders, which we said, you know, we believe the industry would be down, we're slightly ahead of where we thought we were going to be from an order standpoint. So, you know, I'd be remiss if I didn't give a shout out to our team who said, listen, we think this industry is going to be down and we built a model around that and we're tracking, you know, right in accordance with that model.

Jennifer ShermanAnd, you know, we anticipate as we move forward as we get tractions on our dealer development initiative, our Canadian initiative, some of our NPD that we're investing in other things that, you know, will, will have share gain and will continue to grow. So, you know, very pleased with kind of where we are, understanding that we're only 2 quarters in.

LindaVery helpful. And yeah, I also want to follow up on the commentary on the municipal, uh, budget, uh, situation. Uh, so I, uh, you mentioned that there are mixed order activity this quarter. Uh, do you expect the same trends going into the second half and 2027 as well, or do you expect things to change?

Jennifer ShermanYeah, I guess, you know, what I want to point out is of that, you know, 55%-ish that comes from public funds, you know, our only pure play US municipal business is street sweepers. And as I talked about earlier in my remarks, you know, it's mid to high single digits for overall revenue. And as we look at the fundamentals of the funding mechanisms for local municipalities for our products, which would be sales tax and property taxes, you know, they continue to remain steady. But we have worked very diligently and been successful in diversification of those public revenue sources. Um, you know, so we're exposed to water taxes, we're exposed to refuse collection fees, police budgets, the Canadian provincial and federal governments, some of the US government, state governments. So it is, um, a really nice mixture of funding sources with our only kind of pure-play US The municipal piece being street sweepers, which is a relatively small portion of Federal Signal's overall revenues.

LindaGot it. And my last question, could you discuss the corporate costs for the quarter? I think they were up a little over $2 million from the prior year. And yeah, I would like to get some more color on that.

Ian HudsonYeah, so, so, yeah, you're right, Linda. They were up year over year. The biggest drivers The two main drivers are just higher post-retirement expenses, and then we also saw some increased medical costs on a year-over-year basis.

LindaGot it. Yeah, thank you for your time. Thank you.

Jennifer ShermanLinda.

OperatorOur next question is from Greg Burns at Sidoti and Co. Please proceed with your question.

Jennifer ShermanGood morning, Greg.

Greg BurnsGood morning.

Ian HudsonMorning.

Greg BurnsThe decline in the SSG margin, what was the driver there? I guess maybe relative to mix.

Ian HudsonYeah, it was mostly mix, Greg. It was just certain shipments to— we had some larger shipments that went to some customers. There was some on the system side that were just— on a year-over-year basis, it was just slightly diluted from a margin standpoint. But still, the 25% margin, it's right at the midpoint of our recently increased range of 22% to 28%. I think the 26.9% comp in Q2 of last year was a record. So we still feel very good about SSG's performance in the quarter. And, you know, the 25%, as I said, is right at the midpoint of that recently increased target range.

Greg BurnsOkay. Sorry, go ahead.

Jennifer ShermanNo, go ahead, please.

Greg BurnsOh, I was just going to ask another question around the Western acquisition. I know most of your acquisition activities obviously happened on the ESG side of the business. This is the first on the SSG side, obviously very small, but I just wanted to kind of understand the broader opportunity for, for SSG to leverage M&A, kind of that platform model that you've used on the ESG model. What's the opportunities there and How might Western inform how you're looking at the opportunity on that side of the business?

Jennifer ShermanYeah, there's a number— this is a very fragmented industry, and there are a number of opportunities to leverage audible and visual technologies for different end markets. The other area— so we are looking at several acquisitions. Both here in the US and outside the US. We also, in addition to that, you know, police is the largest piece of SSG. And as we look at kind of outfitting police cars, there's some ancillary equipment that would be very attractive. You know, again, it really falls in that same category as ESG, these niche end market where there's some type of pretty significant motor barrier to entry around certifications or operating in hazardous environments. So we're pleased by the, you know, first acquisition the team has done. We got a number of other ones in the pipeline that we're working on and excited about the outlook on the M&A side for both SSG and ESG.

Jennifer ShermanASG.

Greg BurnsOkay, great. Thank you.

Jennifer ShermanThank you.

OperatorWe have reached the end of the question and answer session. I'd like to turn the floor back over to Jennifer Sherman, President and Chief Executive Officer, for closing comments.

Jennifer ShermanIn closing, I would like to note that during the quarter we published our latest annual sustainability report, which is available on our website. The report highlights our progress against our emission reduction our new targets, 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.

OperatorThis concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.