Federal Signal delivered record second-quarter net sales of $670 million (up 19%) and Adjusted EBITDA of $144.4 million (up 22%), lifting margin 60 basis points to 21.5% and Adjusted EPS 21% to $1.42. Cash generation was strong at $113 million (131% conversion), enabling a roughly $97 million debt paydown, and management raised full-year 2026 guidance. ESG led results with 20% sales growth and 24% aftermarket growth, while SSG was softer, with margin down to 25.1% and orders declining year-over-year on mix headwinds. Organic growth moderated to 6% and backlog eased 8%, largely reflecting the planned run-off of third-party Labrie refuse orders.
Good morning. 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 in to 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 Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with the 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.
Thank 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 were $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.
GAAP 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. ESG 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. As 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 pre-tax 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. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current and prior year 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. With 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.
Thank 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. Acquisitions 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. For 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 opportunities. For 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% towards the midpoint of our recently raised target range of 22%-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 mixed headwinds. Lastly, 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 earnings 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. We 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, U.S. state budgets, military, and European local and federal exposure. To provide some perspective on this, while 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. Within 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. As 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.
Simply 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.
We've identified four 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 operational system across the broader enterprise. Third, driving increased volumes through our expanded footprint while investing in select automation opportunities. 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.