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.
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Federal Signal (FSS) Q3 CY2025 Highlights:
- Revenue: $555 million vs analyst estimates of $544.8 million (17% year-on-year growth, 1.9% beat)
- Adjusted EPS: $1.14 vs analyst estimates of $1.08 (5.6% beat)
- Adjusted EBITDA: $116.2 million vs analyst estimates of $112.7 million (20.9% margin, 3.1% beat)
- The company slightly lifted its revenue guidance for the full year to $2.12 billion at the midpoint from $2.1 billion
- Management raised its full-year Adjusted EPS guidance to $4.13 at the midpoint, a 3% increase
- Operating Margin: 16.9%, in line with the same quarter last year
- Backlog: $992 million at quarter end, down 4% year on year
- Market Capitalization: $6.88 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Federal Signal’s Q3 Earnings Call
- Ross Sparenblek (William Blair) asked about the backlog contribution from third-party refuse trucks and expectations for margin lift as New Way is integrated. CEO Jennifer Sherman affirmed the transition would take about 12 months and be margin accretive.
- Christopher Moore (CJS Securities) questioned potential dealer channel disruption from the New Way acquisition. Sherman said feedback had been overwhelmingly positive and that new dealer relationships present growth opportunities.
- Michael Shlisky (D.A. Davidson) probed risks related to a federal government shutdown and its impact on funding. Sherman noted minimal direct federal exposure and stable funding sources from water taxes and municipal sales taxes.
- Steve Barger (KeyBanc Capital Markets) asked if Federal Signal could sustain growth momentum in its core Environmental Solutions Group excluding New Way. Sherman expressed confidence in organic growth and M&A, pointing to strong backlog and throughput improvements.
- Gregory Burns (Sidoti & Company) sought details on the vertical integration of parts and expectations for lead times and backlog reduction. Sherman explained the initiative is in early stages but poised for acceleration, with targeted reductions in lead times for major product lines.
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 $113.07, down from $129.85 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).
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