Federal Signal Corp: Form 10-Q for the period ended Mar 31, 2026

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the condensed consolidated financial statements and the accompanying notes contained in this Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. Information in MD&A is intended to provide an analysis of our financial condition and results of operations from management’s perspective and assist the reader in obtaining an understanding of (i) the condensed consolidated financial statements, (ii) the Company’s business segments and how the results of those segments impact the Company’s results of operations and financial condition as a whole, and (iii) how certain accounting principles affect the Company’s condensed consolidated financial statements, and to provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition. The Company’s results for interim periods should not be regarded as necessarily indicative of results that may be expected for the entire year, which may differ materially due to, among other things, the risk factors described under Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on February 25, 2026.

Executive Summary

The Company is a leading global manufacturer and supplier of (i) vehicles and equipment for maintenance and infrastructure end-markets, including vacuum trucks (i.e., sewer cleaners, vacuum- and hydro-excavation (“safe-digging”) trucks, and industrial vacuum loaders), dump truck bodies and trailers, and other specialty equipment (i.e., street sweepers, waterblasting equipment, refuse collection vehicles, road-marking and line-removal equipment, metal extraction support equipment, and multi-purpose maintenance vehicles), and (ii) public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems, and general alarm/public address systems. Product offerings also include certain products manufactured by other companies. In addition to vehicle and equipment sales, the Company engages in the sale of parts, service and repair, equipment rentals, and training as part of a comprehensive aftermarket offering to its customers. The Company operates 21 principal manufacturing facilities in the U.S., three in Canada, two in Europe, and one in South Africa and provides products and integrated solutions to municipal, governmental, industrial, and commercial customers in all regions of the world.

As described in Note 12 – Segment Information to the accompanying condensed consolidated financial statements, the Company’s business units are organized in two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group.

Operating Results

Net sales for the three months ended March 31, 2026 increased by $161.8 million, or 35%, compared to the prior-year quarter, primarily due to higher sales volumes, inclusive of the effects of acquisitions, and pricing actions. Our Environmental Solutions Group reported a net sales increase of $145.3 million, or 38%, due to increases in sales of other specialty equipment of $106.6 million, aftermarket offerings of $17.2 million, vacuum trucks of $10.3 million, dump truck bodies and trailers of $8.2 million, as well as a $3.0 million favorable foreign currency translation impact. Within our Safety and Security Systems Group, net sales increased by $16.5 million, or 22%, primarily due to improvements in sales of public safety equipment of $13.1 million and industrial signaling equipment of $1.4 million, as well as a $1.9 million favorable foreign currency translation impact.

Operating income for the three months ended March 31, 2026 increased by $34.0 million, or 52%, compared to the prior-year quarter, primarily driven by a $48.6 million improvement in gross profit, partially offset by a $11.8 million increase in Selling, Engineering, General and Administrative (“SEG&A”) expenses, a $2.2 million increase in amortization expense, and a $0.6 million increase in acquisition and integration-related expenses, net. Consolidated operating margin for the three months ended March 31, 2026 was 15.9%, compared to 14.2% in the prior-year quarter.

Income before income taxes for the three months ended March 31, 2026 increased by $30.2 million, or 49%, compared to the prior-year quarter. The increase resulted from the higher operating income and a $0.1 million reduction in other expense, partially offset by a $3.9 million increase in interest expense, net.

Net income for the three months ended March 31, 2026 increased by $24.1 million compared to the prior-year quarter, largely due to the aforementioned increase in income before taxes, partially offset by a $6.1 million increase in income tax expense.

Total orders for the three months ended March 31, 2026 were $623 million, an increase of $55 million, or 10%, compared to the prior-year quarter. Our Environmental Solutions Group reported total orders of $534 million in the three months ended March 31, 2026, an increase of $54 million, or 11%, in comparison to the prior-year quarter. Orders in the three months ended March 31, 2026 within our Safety and Security Systems Group were $89 million, an increase of $1 million, or 1%, compared to the prior-year quarter.

Our consolidated backlog at March 31, 2026 was $1.04 billion, compared to $1.10 billion at March 31, 2025.

Results of Operations

The following table summarizes our Condensed Consolidated Statements of Operations and illustrates key financial indicators used to assess our consolidated financial results:

($ in millions, except per share data)

Net sales

Net sales for the three months ended March 31, 2026 increased by $161.8 million, or 35%, compared to the prior-year quarter, primarily due to higher sales volumes, inclusive of the effects of acquisitions, and pricing actions. The Environmental Solutions Group reported a net sales increase of $145.3 million, or 38%, due to increases in sales of other specialty equipment of $106.6 million, aftermarket offerings of $17.2 million, vacuum trucks of $10.3 million, dump truck bodies and trailers of $8.2 million, as well as a $3.0 million favorable foreign currency translation impact. Within the Safety and Security Systems Group, net sales increased by $16.5 million, or 22%, primarily due to improvements in sales of public safety equipment of $13.1 million and industrial signaling equipment of $1.4 million, as well as a $1.9 million favorable foreign currency translation impact.

Cost of sales

Cost of sales increased by $113.2 million, or 34%, for the three months ended March 31, 2026 compared to the prior-year quarter, largely due to an increase of $105.4 million, or 37%, within the Environmental Solutions Group, primarily related to higher sales volumes and the addition of cost of sales from recent acquisitions. Within the Safety and Security Systems Group, cost of sales increased by $7.8 million, or 17%, primarily related to higher sales volumes.

Gross profit

Gross profit increased by $48.6 million, or 37%, for the three months ended March 31, 2026 compared to the prior-year quarter, primarily due to a $39.9 million improvement within the Environmental Solutions Group and a $8.7 million improvement within the Safety and Security Systems Group. Gross profit as a percentage of revenues (“gross profit margin”) for the three months ended March 31, 2026 was 28.7%, compared to 28.2% in the prior-year quarter, primarily due to a 200 basis point improvement within the Safety and Security Systems Group and a 50 basis point improvement within the Environmental Solutions Group.

SEG&A expenses

SEG&A expenses for the three months ended March 31, 2026 increased by $11.8 million, or 20%, compared to the prior-year quarter, primarily due to an $8.4 million increase within the Environmental Solutions Group, a $0.9 million increase within the Safety and Security Systems Group, and a $2.5 million increase in Corporate SEG&A expenses. As a percentage of net sales,

SEG&A expenses were 11.5% in the current-year quarter, compared to 13.0% in the prior-year quarter.

Operating income

Operating income for the three months ended March 31, 2026 increased by $34.0 million, or 52%, compared to the prior-year quarter, primarily driven by a $48.6 million improvement in gross profit, partially offset by a $11.8 million increase in SEG&A expenses, a $2.2 million increase in amortization expense, and a $0.6 million increase in acquisition and integration-related expenses, net. Consolidated operating margin for the three months ended March 31, 2026 was 15.9%, compared to 14.2% in the prior-year quarter.

Interest expense, net

Interest expense, net, for the three months ended March 31, 2026 increased by $3.9 million compared to the prior-year quarter, largely due to higher average debt levels.

Other expense, net

Other expense, net, for the three months ended March 31, 2026 decreased by $0.1 million compared to the prior-year quarter, primarily due to higher foreign currency transaction gains.

Income tax expense

The Company recognized income tax expense of $21.8 million for the three months ended March 31, 2026, compared to $15.7 million in the three months ended March 31, 2025, with the increase primarily due to the effects of higher pre-tax income levels, partially offset by a $1.1 million increase in excess tax benefits associated with stock-based compensation activity. The Company’s effective tax rate for the three months ended March 31, 2026 was 23.6%, compared to 25.3% in the prior-year quarter.

Net income

Net income for the three months ended March 31, 2026 increased by $24.1 million compared to the prior-year quarter, largely due to the $34.0 million increase in operating income and the $0.1 million reduction in other expense, partially offset by a $6.1 million increase in income tax expense and a $3.9 million increase in interest expense, net.

Environmental Solutions

The following table summarizes the Environmental Solutions Group’s operating results as of and for the three months ended March 31, 2026 and 2025:

($ in millions)

Total orders for the three months ended March 31, 2026 increased by $54.2 million, or 11%, compared to the prior-year quarter, inclusive of the effects of acquisitions. U.S. orders increased by $69.2 million, primarily due to improvements in orders for other specialty equipment of $67.1 million, inclusive of higher refuse truck orders associated with the New Way acquisition and the acquisition of a $15.8 million U.S. order backlog attributable to the Mega transaction, as well as a $12.9 million increase in orders for aftermarket offerings. Partially offsetting these improvements were reductions in orders for vacuum trucks of $8.6 million and dump truck bodies and trailers of $2.2 million. Non-U.S. orders decreased by $15.0 million, largely due to reductions in orders for other specialty equipment of $19.0 million, primarily driven by lower third-party refuse truck orders, and vacuum trucks of $2.6 million. Partially offsetting these reductions were improvements in orders for aftermarket offerings of $2.5 million, dump truck bodies and trailers of $1.8 million, and a $2.3 million favorable foreign currency translation impact.

Net sales for the three months ended March 31, 2026 increased by $145.3 million, or 38%, compared to the prior-year quarter, primarily due to higher sales volumes, inclusive of the effects of acquisitions, and pricing actions. For the three months ended March 31, 2026, U.S. sales increased by $123.2 million due to increases in sales of other specialty equipment of $93.1 million, primarily driven by higher sales of refuse trucks due to the New Way acquisition and higher sales of metal extraction support equipment due to the Mega acquisition, as well as increases in sales of aftermarket offerings of $12.9 million, vacuum trucks of $8.7 million, and dump truck bodies and trailers of $8.5 million. Non-U.S. sales increased by $22.1 million, primarily due to increases in sales of other specialty equipment of $13.5 million, aftermarket offerings of $4.3 million, vacuum trucks of $1.6 million, and a $3.0 million favorable foreign currency translation impact.

Cost of sales for the three months ended March 31, 2026 increased by $105.4 million, or 37%, compared to the prior-year quarter, primarily related to higher sales volumes, the addition of cost of sales from recent acquisitions, and a $1.5 million increase in purchase accounting expense effects. Gross profit margin for the three months ended March 31, 2026 was 26.1%, compared to 25.6% in the prior-year quarter.

SEG&A expenses for the three months ended March 31, 2026 increased by $8.4 million, or 24%, compared to the prior-year quarter, primarily due to the addition of SEG&A expenses from recent acquisitions, higher employee-related costs, and increased sales commissions. As a percentage of net sales, SEG&A expenses were 8.1% in the current-year quarter, compared to 9.0% in the prior-year quarter.

Operating income for the three months ended March 31, 2026 increased by $29.4 million, or 49%, compared to the prior-year quarter, largely due to a $39.9 million improvement in gross profit, partially offset by the $8.4 million increase in SEG&A expenses and a $2.2 million increase in amortization expense.

Backlog was $966 million at March 31, 2026, compared to $1.03 billion at March 31, 2025.

Safety and Security Systems

The following table summarizes the Safety and Security Systems Group’s operating results as of and for the three months ended March 31, 2026 and 2025:

($ in millions)

Total orders for the three months ended March 31, 2026 increased by $0.7 million, or 1%, compared to the prior-year quarter. U.S. orders increased by $6.4 million, primarily due to improvements in orders for warning systems of $3.3 million, public safety equipment of $1.9 million, and industrial signaling equipment of $1.2 million. Non-U.S. orders decreased by $5.7 million, primarily due to decreases in orders for public safety equipment of $6.2 million and warning systems of $1.4 million, partially offset by a $1.3 million favorable foreign currency translation impact.

Net sales for the three months ended March 31, 2026 increased by $16.5 million, or 22%, compared to the prior-year quarter, inclusive of the effects of higher sales volumes and pricing actions. U.S. sales increased by $13.8 million, driven by increases in sales of public safety equipment of $13.2 million and warning systems of $0.6 million. Non-U.S. sales increased by $2.7 million, primarily due to a $1.4 million increase in sales of industrial signaling equipment and a $1.9 million favorable foreign currency translation impact.

Cost of sales for the three months ended March 31, 2026 increased by $7.8 million, or 17%, compared to the prior-year quarter, primarily related to higher sales volumes. Gross profit margin for the three months ended March 31, 2026 was 43.6%, compared to 41.6% in the prior-year quarter, with the improvement primarily attributable to improved operating leverage from higher sales volumes and benefits from pricing actions.

SEG&A expenses for the three months ended March 31, 2026 increased by $0.9 million, or 6%, compared to the prior-year quarter, primarily due to higher employee-related costs and marketing expenses. As a percentage of net sales, SEG&A expenses were 18.2% in the current-year quarter, compared to 20.9% in the prior-year quarter.

Operating income for the three months ended March 31, 2026 increased by $7.8 million, or 49%, compared to the prior-year quarter, primarily due to a $8.7 million improvement in gross profit, partially offset by the $0.9 million increase in SEG&A expenses.

Backlog was $72 million at March 31, 2026, compared to $69 million at March 31, 2025.

Corporate Expenses

Corporate operating expenses for the three months ended March 31, 2026 were $13.0 million, compared to $9.8 million in the prior-year quarter, with the increase primarily due to a $0.7 million increase in acquisition and integration-related expenses, net, as well as higher legal, stock compensation, and incentive-based compensation costs.

Seasonality of Company’s Business

Certain of the Company’s businesses are susceptible to the influences of seasonal factors, including buying patterns, delivery patterns, and productivity influences from holiday periods and weather. In general, the Company tends to have lower equipment sales in the first calendar quarter of each year compared to other quarters as a result of these factors. In addition, rental income and parts sales are generally higher in the second and third quarters of the year, because many of the Company’s products are used for maintenance activities in North America, where usage is typically lower during periods of harsher weather conditions.

Financial Condition, Liquidity and Capital Resources

The Company uses its cash flow from operations to fund growth and to make capital investments that sustain its operations, reduce costs, or both. Beyond these uses, remaining cash is used to pay down debt, repurchase shares, fund dividend payments, and make pension contributions. The Company may also choose to invest in the acquisition of businesses, like the acquisition of all of the outstanding equity interests of Mega that was completed on January 16, 2026. In the absence of significant unanticipated cash demands, we believe that the Company’s existing cash balances, cash flow from operations, and borrowings available under the 2025 Credit Agreement will provide funds sufficient for these purposes. The net cash flows associated with the Company’s rental equipment transactions are included in cash flow from operating activities.

As of March 31, 2026, there was $150.6 million of cash drawn under the revolving credit facility, $400.0 million outstanding under the term loan facility, and $10.7 million of undrawn letters of credit under the 2025 Credit Agreement, with $938.7 million of availability for borrowings.

The Company’s cash and cash equivalents totaled $71.4 million as of March 31, 2026 and $63.7 million as of December 31, 2025. As of March 31, 2026, $25.6 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside the U.S. typically are held in the currency of the country in which it is located. The Company uses this cash to fund the operating activities of its foreign subsidiaries and for further investment in foreign operations. Generally, the Company has considered such cash to be permanently reinvested in its foreign operations and the Company’s current plans do not demonstrate a need to repatriate such cash to fund U.S. operations. However, in the event that these funds are needed to fund U.S. operations or to satisfy U.S. obligations, they generally could be repatriated. The repatriation of these funds may cause the Company to incur additional tax expense, dependent on income tax laws and other circumstances at the time any such amounts are repatriated.

Net cash of $101.3 million was provided by operating activities in the three months ended March 31, 2026, compared to $36.7 million in the prior-year period, with the year-over-year increase primarily due to higher net income and favorable changes in net working capital.

Net cash of $51.6 million was used for investing activities in the three months ended March 31, 2026, compared to $87.7 million in the prior-year period. During the three months ended March 31, 2026, the Company funded $6.7 million of capital expenditures and made an initial payment of $45.0 million to acquire Mega. During the three months ended March 31, 2025, the Company funded $5.6 million of capital expenditures and made an initial payment of $82.1 million to acquire Hog.

Net cash of $41.7 million was used for financing activities in the three months ended March 31, 2026, whereas in the prior-year quarter, net cash of $16.9 million was provided by financing activities. In the three months ended March 31, 2026, the Company paid down $12.8 million of borrowings under its revolving credit facility, funded cash dividends of $9.2 million, and redeemed $8.2 million of stock in order to remit funds to tax authorities to satisfy employees’ tax withholdings following the vesting of stock-based compensation and the exercise of stock options. Additionally, the Company funded payments of $11.5 million relating to the Hog acquisition. In the three months ended March 31, 2025, the Company increased net borrowings under its revolving credit facility by $64.2 million, paid $11.5 million to acquire a previously-leased manufacturing facility, funded cash dividends of $8.6 million and share repurchases of $18.5 million, and redeemed $8.6 million of stock in order to remit funds to tax authorities to satisfy employees’ tax withholdings following the vesting of stock-based compensation and the exercise of stock options.

On October 29, 2025, the Company entered into the 2025 Credit Agreement, which amended and restated the 2022 Credit Agreement. The 2025 Credit Agreement increased the Company’s revolving credit facility from up to $675 million to up to $1.1 billion, and includes a delayed draw term loan facility in an amount of up to $400 million. In addition, the Company may expand its borrowing capacity under the 2025 Credit Agreement by an aggregate amount of up to the sum of (x) the greater of (i) $500 million and (ii) 100% of Consolidated EBITDA for the applicable four-quarter period preceding such expansion, and (y) the amount of additional indebtedness (if any) that could be incurred without causing the Consolidated Total Net Leverage Ratio for the applicable four-quarter period preceding such expansion, on a pro forma basis, to exceed 2.75 to 1.00, subject to the approval of the applicable lenders providing such additional borrowings.

The Company is subject to certain net leverage ratio and interest coverage ratio financial covenants under the 2025 Credit Agreement that are to be measured at each fiscal quarter-end for the most recently ended four-quarter period. The Company was in compliance with all such covenants as of March 31, 2026.

The Company anticipates that capital expenditures for 2026 will be in the range of $45 million to $55 million.

The Company believes that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will be adequate to meet its operating needs, capital needs, and financial commitments.

Contractual Obligations and Off-Balance Sheet Arrangements

During the three months ended March 31, 2026, there have been no material changes in the Company’s contractual obligations and off-balance sheet arrangements as described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. During the three months ended March 31, 2026, there have been no significant changes in our exposure to market risk.

As required by Rule 13a-15 under the Exchange Act, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of March 31, 2026. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2026.

As a matter of practice, the Company’s management continues to review and document internal control and procedures for financial reporting. From time to time, the Company may make changes aimed at enhancing the effectiveness of the controls and ensuring that the systems evolve with the business. SEC guidance permits management to omit an assessment of internal control over financial reporting for an acquired business from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. During the three months ended March 31, 2026, the Company completed the acquisition of Mega. The Company also completed the acquisition of New Way and certain assets and liabilities of Kinloch Equipment & Supply, Inc. (“Kinloch”) in the fourth quarter of 2025. As of March 31, 2026, management has not yet fully assessed Mega, New Way, or Kinloch’s internal controls over financial reporting. Excluding the acquisitions of Mega, New Way, and Kinloch, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the three months ended March 31, 2026.

There have been no material changes in the Company’s risk factors as described in Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.