Safety and security company Federal Signal (NYSE: FSS) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 17% year on year to $555 million. The company expects the full year’s revenue to be around $2.12 billion, close to analysts’ estimates. Its non-GAAP profit of $1.14 per share was 5.6% above analysts’ consensus estimates.

Is now the time to buy FSS? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Federal Signal’s third quarter saw revenue and non-GAAP profit both come in ahead of Wall Street expectations, yet the market reaction was notably negative. Management attributed the quarter’s performance to strong order intake in the Safety and Security Systems Group and robust demand for aftermarket parts and services. CEO Jennifer Sherman emphasized record results in net sales and adjusted EBITDA margin, with particular strength in specialty vehicle production and recent acquisitions. However, the company’s backlog declined year over year, largely due to the planned phase-out of third-party refuse trucks, a transition that management acknowledged would impact order trends for several quarters.

Looking to the remainder of the year and into 2026, Federal Signal’s guidance is shaped by ongoing integration of recent acquisitions, substantial investments in productivity enhancements, and the anticipated closing of the New Way acquisition. Management highlighted opportunities for margin expansion through vertical integration of parts manufacturing and continued strength in aftermarket sales. Sherman stated, “We believe we are well positioned to achieve another record year in 2026,” while cautioning that the transition in refuse trucks and backend integration work could weigh on growth rates in the near term.

Key Insights from Management’s Remarks

Management credited Q3 outperformance to strong execution in aftermarket expansion and integration of recent acquisitions, while noting that the decline in backlog was a result of strategic shifts in refuse truck offerings.

• Aftermarket demand accelerated: Management reported a 14% year-over-year increase in aftermarket revenue, citing higher demand for parts, increased service activity, and rental income growth, especially in the Environmental Solutions Group.
• Acquisitions contributed to growth: The integration of Hog Technologies and Standard brought incremental sales, with Hog’s airport vertical and aftermarket parts performing above initial estimates. Management now expects Hog to contribute more than previously forecasted in 2025.
• Capacity and productivity investments: Ongoing capital expenditures focused on automation and warehouse space are aimed at improving throughput and supporting future organic growth, with about half of annual CapEx directed at growth initiatives.
• Backlog composition shift: The backlog decline was attributed primarily to the planned exit from third-party refuse truck orders, which will take several quarters to complete. Management indicated this shift should be margin-accretive as New Way is integrated.
• Public safety and international wins: Safety and Security Systems Group saw strong order growth, including a major police contract in Spain, and continued targeting of U.S. law enforcement agencies for market share gains.

Drivers of Future Performance

Federal Signal’s outlook relies on the integration of New Way, expansion of aftermarket initiatives, and improved production efficiency, balanced by the impact of transitioning away from third-party refuse truck orders.

• Integration of New Way acquisition: Management expects the pending New Way acquisition to drive long-term margin improvement but cautioned that integration investments will initially dilute margins before synergies are realized by 2028.
• Aftermarket parts expansion: The company is prioritizing vertical integration and expansion of its build-more-parts initiative to increase recurring revenue and improve margin profile, particularly as refuse truck opportunities expand.
• Lead time and production improvements: Efforts to reduce lead times and leverage available production capacity are expected to enable higher volumes and bring down backlog, though the impact of the refuse business transition will moderate near-term order and production trends.

Catalysts in Upcoming Quarters

In the coming quarters, our team will watch (1) progress on the New Way acquisition and the pace of integration, (2) further expansion and vertical integration of the aftermarket parts business, and (3) success in capturing new public safety and international contracts. Execution on throughput improvements and the shift in backlog composition will also be key indicators of Federal Signal’s ability to sustain growth.

Federal Signal currently trades at $120.57, down from $129.85 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free for active Edge members).

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