SPX Technologies, Inc (SPXC) Q3 2025 Earnings Call Transcript

SPX Technologies, Inc (NYSE: SPXC) Q3 2025 Earnings Call dated Oct. 30, 2025

Corporate Participants:

Mark Carano — Vice President, Chief Financial Officer and Treasurer

Gene Lowe — President and Chief Executive Officer

Analysts:

Bryan Blair — Analyst

Damian Karas — Analyst

Andrew Obin — Analyst

Ross Sparenblek — Analyst

Joe ODea — Analyst

Brad Hewitt — Analyst

Jamie Cook — Analyst

Jeff Vansinderen — Analyst

Steve Ferazani — Analyst

Presentation:

Operator

Good day and thank you for standing by. Welcome to the Q3 2025 SPX Technologies Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today.

Mark Carano — Vice President, Chief Financial Officer and Treasurer

Thank you, Operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. A press release containing our third-quarter results was issued today after market close. You can find the release and our earnings slide presentation, as well as a link to a live webcast of this call, in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website.

As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today’s presentation. Our adjusted earnings per share exclude amortization expense, acquisition-related costs, non-service pension items, mark-to-market changes and other items, and with that I’ll turn the call over to Gene.

Gene Lowe — President and Chief Executive Officer

Thanks, Mark. Good afternoon, everyone and thank you for joining us. On the call today, we’ll provide you with an update on our consolidated and segment results for the third quarter of 2025 as well as an update on our outlook for the remainder of the year. Our Q3 performance was strong. We grew third-quarter adjusted EPS by 32% and drove significant profit and margin growth in both segments. To reflect our strong performance in Q3 and outlook for the fourth quarter, we are raising our full-year guidance range. We now anticipate adjusted EBITDA to exceed $500 million at the midpoint of our updated range, implying approximately 20% growth year over year.

During Q3, we raised additional capital through an equity offering and increased the capacity of our revolving credit facility. These actions provide us with more than $1 billion of additional liquidity to support our organic and inorganic value creation initiatives and do not have a dilutive effect on our 2025 EPS. We also continue to progress on several key organic initiatives, including the expansion plans for our engineered air movement businesses and launch of the Olympus Max product, a new large-scale cooling solution. Inorganically, our M&A pipeline remains robust with several attractive opportunities. Turning to our high-level results. In the third quarter, we grew revenue by 23% driven by strong organic growth in both segments and the benefit of recent acquisitions.

Adjusted EBITDA increased by approximately 31% year over year with 150 basis points of margin expansion. As always, I’d like to update you on our value creation initiatives. Over the past quarter, we’ve continued to gain traction on our growth and new product initiatives. We’re making meaningful progress on expansion plans for our engineered air movement businesses, where we see significant demand in excess of our current production capacity. We closed on a leased facility in Tennessee for US production of our TAMCO actuated dampers. We expect production in this facility to begin in the latter half of next quarter.

We’re also progressing on our expansion plans to produce Ingenia custom air handling units in the US. We are currently targeting a location in the Southeast and will provide more detail next quarter. On the new product front, our Olympus Max product, a dry and adiabatic cooling solution focused on the large-scale needs of data center customers, continues to receive excellent feedback and engagement from customers. We are on track to achieve our objective of booking $50 million of Olympus Max orders in 2025 for revenue in 2026. Now I’ll turn the call back to Mark to review our financial results.

Mark Carano — Vice President, Chief Financial Officer and Treasurer

Thanks, Gene. Our third-quarter results were strong. Year over year, adjusted EPS grew by 32% to $1.84. For the quarter, total company revenue increased 23% year over year, primarily driven by higher project sales in detection and measurement as well as inorganic growth from the acquisitions of KTS, Sigma & Omega. Consolidated segment income grew by $32 million or 28% to $146 million while consolidated segment margin increased to 110 basis points. In our HVAC segment, revenue grew by 15.5% year over year with 6.7% inorganic growth and a nominal FX impact. On an organic basis, revenue increased 9% with solid growth from both cooling and heating.

Segment income grew by $14 million or 18%, while segment margin increased 50 basis points. The increases in segment income and margin were largely driven by higher volume and associated operating leverage. Segment backlog at quarter end was $579 million, up 7% sequentially from Q2 all organic. In our detection and measurement segment, revenue increased 38.4% year over year with strong organic growth of 26.5%. The KTS acquisition accounted for an increase of 11.6% and FX was a modest tailwind. The increase in organic revenue was predominantly driven by higher Comtech project volumes. Segment income grew by $18 million or 53% and margin increased by 240 basis points.

The increases in segment income and margin were primarily driven by operating leverage on higher organic sales and the KTS acquisition. Segment backlog at quarter end was $366 million, flat sequentially. Turning now to our financial position at the end of the quarter, during the third quarter we accessed the capital markets to further strengthen our balance sheet and support our growth strategy. We completed a $575 million offering of our common stock. A portion of the net proceeds from this offering was used to repay the outstanding amounts under our revolving credit facility. As a result, there is no dilutive impact to 2025 EPS.

We also amended our credit agreement to increase the capacity of our revolving credit facility by $500 million to $1.5 billion and extended the maturity of our credit facilities to 2030. Following these actions, our liquidity increased by more than $1 billion and our available capacity now exceeds $1.6 billion. We ended Q3 with cash of approximately $232 million and total debt of $502 million. Our leverage ratio is calculated under our bank credit agreement at approximately 0.5 times at quarter end. Q3 adjusted free cash flow was approximately $91million. As is typical, we anticipate Q4 to be our highest cash flow-generating quarter of the year.

Moving on to our full-year 2025 guidance, we are updating adjusted EPS to a range of $6.65 to $6.80, reflecting our strong Q3 results and Q4 forecast. This represents an increase from our previous range of $6.35 to $6.65 and reflects year-over-year growth of approximately 21% at the midpoint. For our HVAC segment, we are maintaining revenue and margin guidance and remain confident in the fourth quarter forecast. In detection and measurement, we are increasing full-year margin guidance to a range of 23.25% to 23.75%, raising the midpoint to 23.5%. This represents year-over-year growth of 140 basis points.

We expect Q4 revenue for the D&M segment to be modestly lower sequentially due to the timing of project deliveries between Q3 and Q4. As always, you will find modeling considerations in the appendix to our presentation. And with that, I’ll turn the call back over to Gene.

Gene Lowe — President and Chief Executive Officer

Thanks, Mark. Market conditions support our increased full-year outlook for 2025. Within our HVAC segment, we continue to see solid demand in key end markets. Our strong backlog of highly engineered solutions and efforts to increase production capacity further reinforce our confidence in HVAC’s growth opportunities. In our detection and measurement segment, we are seeing steady run rate demand. For our project-oriented businesses, we have a strong backlog and feel confident in our forecast for the fourth quarter. Looking to next year, front log activity remains steady. However, as we highlighted last quarter, approximately $20 million of project sales shifted from early 2026 into 2025, creating a modest headwind for next year.

In summary, I’m pleased with our strong Q3 performance, including significant profit growth in both segments, an equity offering and expansion of our revolving credit facility, which together provides more than $1 billion of additional liquidity with no dilution to 2025 EPS and the continued progress on our US capacity expansion and new product initiatives. We are well positioned to achieve our increased full-year guidance, which implies 20% growth in adjusted EBITDA and adjusted EPS at the midpoint. We also see multiple opportunities to continue growing our businesses both organically through our robust M&A pipeline. Looking ahead, I remain excited about our future.

With a proven strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come. With that, I’ll turn the call back to Mark.

Mark Carano — Vice President, Chief Financial Officer and Treasurer

Thanks, Gene. Operator, we will now go to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] One moment while we compile the Q&A roster. The first question today will be coming from the line of Bryan Blair of Oppenheimer. Your line is open.

Bryan Blair

Thank you. Good afternoon, guys. Another very solid quarter, given we’re almost in November and you have supportive backlog in both segments. Maybe speak to your team’s visibility into 2026 and which platforms are across which end markets you’re most confident in sustained growth and to balance that where there may be some watch items as you look to the new year.

Operator

Is your line on mute?

Gene Lowe

Oh, okay. Can you guys like — I’ll assume you can hear us now.

Bryan Blair

We can hear you now.

Gene Lowe

Okay. Thanks for your question, Bryan. So yeah, I think if you step back and you look ahead to 2026, overall we feel very good. If you look across our HVAC businesses, you know we do have a diversity of product lines, and frankly, we’re feeling pretty positive across all of our business areas. If you look at the markets that we see the most strength, those really haven’t changed from what we talked about in the past couple of quarters, we’re seeing really sustained strength in data centers. We feel like we have some nice momentum there.

Same in healthcare, institutional. We’re also seeing a lot of activity. You know, I’d say the industrial markets are seeing a little bit, those have been kind of flattish. We’re seeing some modest growth there, which I think is a positive and we’re seeing more power activity in terms of some bidding and so forth, which could yield some opportunities. Some of the markets that have been relatively lower are also similar. More commercial buildings, more hotels, things like that. But net net we feel very good about the markets and then, you know, when I look at the markets I feel good.

But then I think about our initiatives on top of that. Probably the biggest one we’ve talked about is the Olympus Max. That’s our new data center cooling solution. That’s either dry or adiabatic. Very good product. Feel very good about that. That’s a whole new market for us that we have not served. So you know we see the opportunity, as we’ve said, to targeting 50 million of bookings this year, which is really revenue next year. We believe we’re on track for that. We also have some capacity expansions for some businesses that there’s just a lot more demand for our products, notably TAMCO, Ingenia, and Marley.

So you know, when I look at HVAC, I feel very good about the end markets and then our initiatives to drive further growth. I think if you look at some of the third-party people who track markets, they would predict for the non-resi market probably mid-single digits. Now, we would believe that we would target to be higher than that with our initiative-driven growth, as I just highlighted. On D&M, I would say the overall run rate is steady. We’re seeing some modest growth there and it is a little bit of, you know, very different geographically, where the US remains stronger and we are anticipating that into ’26.

See some good pockets and some areas that are really going nicely there. And then I’d say more flattish ex-US, you know talking about continental Europe. We are seeing an uptick in UK in some areas. But overall I would say steady modest growth in our run rate. And then in our projects we have very good activity. You know we did — and Mark can tie this. We did some of that which we had in ’26, which actually accelerated into ’25 and then we have a very high backlog. Now some of that backlog is more — is not only ’26, but we actually are having a lot more multi-year projects, which is really good.

But we have to make sure we understand what falls into the forward year of ’26. But overall now I would expect growth in D&M as well. So I think the backdrop for what we see positive, Mark. What color would you like to add overall on D&M?

Mark Carano

Yeah, I think I might just add across really both segments. Right. We’re in very strong backlog positions. They’re kind of for both segments really, both at or near all-time highs. So you know, a really good position from that perspective. As I look into ’26, and I think about how much of that backlog is scheduled to deliver in 2026, it’s about 40%, and that’s similar across both segments. So we’re in a nice position as we sit today looking out into next year. Gene did mention this one handful of projects that were originally in our ’26 backlog. They actually delivered in Q3 in our D&M segment.

I think we referenced that in our Q2 call. But they ultimately were delivered and the revenue was recognized in Q3.

Bryan Blair

Understood. I appreciate the walkthrough. Encouraging trends overall. Maybe offer a quick update on KTS and Sigma & Omega integration. How are those assets performing relative to deal model? And then, given your now quite significant balance sheet capacity, it’d be great to hear more about your M&A pipeline by platform. Where do you see the most attractive opportunities and of the — I believe you mentioned several attractive targets. Any that are potentially actionable over the near term? Thank you.

Gene Lowe

Yeah, I would say we feel very good about both KTS and Sigma & Omega. Sigma & Omega is a little bit newer so we haven’t — you know it’s at an earlier stage. KTS is already. It’s really kind of built in and operating. You know, to me, operating is one with our Comtech business. A couple of points there. We’re actually seeing some nice winds. You know they have gotten a few new things — proclamations from the government where they are becoming the basis of design and the standard. They’ve expanded into some different areas. So KTS we feel very positive about.

We love their technology. I believe we mentioned in our last call we’re launching a joint product with KTS and then the legacy TCI business in Q4 in this quarter and I think there’s a lot of excitement around that. So KTS, I would say we’re feeling very positive about. And then Sigma & Omega similarly, really good team, really nice win rate. That’s you know the way that we think about that market is really multi-level applications, you know hospitals or could be hotels or could be, you know, condos, things like that. And there’s typically a boiler and there’s typically a cooling tower. And so a key part of our thesis there was we — they’re very strong in Canada. We think we can help them grow more in the States, where we have an established channel. Particularly our Marley channel is very strong and then our Patterson-Kelly channel, that’s our commercial and boiler line. So we have already signed up. I don’t have the latest numbers in front of me but I know of three or four that have already picked up and are very excited about Sigma & Omega. And not only are we expanding geographically but they’ve launched some new products with coil and then within their self-contained units.

So they have some good innovation going on. So yeah, I think that that fits very nicely within our hydronics business. The teams are working well and I will say with both of those really good leaders and really good teams and really good cultural fit. So you know it’s still early but off to a very positive start. The second question you had on M&A, I would say — and I know we’ve said this, it is very, we have a very high level of activity, we have a number of processes underway and I would say as we look into 2026, we feel very good about strategic capital deployment.

You know we’re going to remain disciplined but there is a very attractive set of opportunities. On the HVAC side, I would say, you know, we’ve talked about engineered air movement as well as electric heat. In each of these areas, we see several opportunities that — very attractive opportunities. And then also on detection and measurement, we see some very interesting opportunities. I’d say a smaller number. We still see, have a — I’d say right now a more active pipeline on the HVAC side but some very good opportunities. So we feel very good as we think about moving into ’26 and as Mark alluded to on the call, I mean, we really, we got basically $1 billion almost for free.

There’s no EPS solution, so it’s kind of a really unique circumstance where you can expand your balance sheet so much and have the same level of earnings. And so you know that that gives us the opportunity to invest in growth opportunities and you know, we’re also going to be investing in some organic opportunities as well. So yes, overall I would say, feeling very good about the pipeline and the opportunities that we have in front of us.

Bryan Blair

Very helpful color. Thanks again.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Damian Karas of UBS. Please go ahead.

Damian Karas

Hey, good evening, everyone.

Mark Carano

Hey, Damian.

Damian Karas

I wanted to ask you first about the capacity expansion plans. Gene, you talked a little bit earlier about the TAMCO production going to be coming online later this year in Tennessee and you’re looking for a spot in the Southeast for Ingenia. Could you just maybe give us a sense for initial production capacity, how to think about that, how much you’re planning to bring online and then just, you know, in terms of the equity raise that you guys just did, like how much kind of investment outlay for these expansion plans are you expecting?

Gene Lowe

Yeah, I’ll give a little bit of color and then I think some of it we’re not prepared to talk to. I think the TAMCO one is basically done. We’ve signed a lease. We’re actually very excited about this. This is a 150,000-square-foot facility, very similar to our existing facility. We actually think we can ramp this up over time. So, you know, we’re very excited about that. And as we said, we’re, you know, we’re targeting to get some of the equipment commissioned and to start, you know, it takes a while to ramp up. But by the end of Q1 we should get going there.

But very good opportunity. That’s in Tennessee and we actually think that that will really give us the opportunity to grow quite a bit. That’s very capital light. I actually think most of the capital is, you know, it has already been deployed there.

Mark Carano

Some of them will be this year and then some into next year.

Gene Lowe

A little bit next year. The bigger one will be the expansion of Ingenia. That’s going to be a much larger site, probably in the neighborhood of, you know, could be three times as high. But again, we’re making great progress there, but we’re not at the point at which we can really say anything. What we are anticipating is by the end of — by our next earnings report, we should be able to kind of lay out very specifically what the investments as well as the revenue expansion capacity is for all of those. And Mark, would you like more color there?

Mark Carano

Yeah, I think we’re just working through the finer details of the site and you know, when that ultimately — we actually acquire that facility, you know, it’s going to drive a little bit of the timing and the timing of the capital spend. So as Gene mentioned, we’re going to be prepared to provide more color to you in, you know, at our Q4 call and we’ll really walk people through kind of the step function of what our plan is. Obviously it’s a much larger facility. So the capital…

Gene Lowe

There’s more capital in there. For those of you who’ve…

Mark Carano

Into Ingenia.

Gene Lowe

Yeah went to Ingenia. Think of them, Ingenia, now you’ll see the lasers, the punches, the night train, the robotics, you know, so it would be a similar level of capital equipment.

Damian Karas

Okay, gotcha. That makes sense. We look forward to getting that update in another few months. And then I wanted to ask you about the opportunity in nuclear. I think I asked you guys about that maybe a little over a year ago. But we’ve had a lot of developments in the market since then. So I was curious if you maybe started seeing some of those opportunities come the way of your HVAC business. What do you think your entitlement is in that specific market? Really appreciate any thoughts on just nuclear.

Gene Lowe

So nuclear, if you kind of take the existing nuclear market, rough order of magnitude, there’s about 100 nukes in the US; about half of them have cooling towers. The other half would have what’s called once-through cooling. That’s where you use a lake or an ocean or something to provide your cooling. Of those that have cooling towers, we have a very high percentage of those units. You could see natural draft towers. Those are the big towers people think of. When you think of nuclear power plants, they could be mechanical draft, There’s a variety of technologies, but we have a very strong position there.

So how does that affect us as people want to keep. Power is a scarce resource right now and there’s a lot of demands on power. So upgrading your cooling towers, oftentimes you can get an extra 50 or 80 megawatts out of your power plant very quickly. And so that could provide some opportunities for us in the existing infrastructure. Could be nuclear, could be gas, could be coal. You know, we’re seeing some of those types of opportunities. As it pertains to new nuclear, I would say that we haven’t seen, you know, we see a lot of combined cycle power plants that there’s a very active.

There’s a lot of combined cycles going all across the US; that seems to be the go-to — really if you want baseload power within the next few years, it looks like that’s really your only option. So you’re seeing a lot of activity there, sometimes paired with data centers. And we, you know, we do have an opportunity to go after the cooling towers there. Combined cycles tend to be a little smaller, but yeah, we see it as an opportunity, but the brand new nuclear, I don’t think we see anything in our planning horizon, I would say over the next two or three years.

Damian Karas

Okay, that’s helpful. Thanks a lot. I’ll pass it along.

Gene Lowe

Thanks.

Operator

Thank you. And one moment for the next question, please. The next question will be coming from the line of Andrew Obin of Bank of America. Please go ahead.

Andrew Obin

Hi guys, good afternoon.

Mark Carano

Hey, Andrew.

Andrew Obin

Hey, how are you?

Mark Carano

Good.

Andrew Obin

So first question, I guess, some of you. Well, I don’t know if they’re competitors per se, but some of the HVAC players have been talking about push out of large projects related to data centers. I would imagine it’s because the industry is sort of out of capacity across the value chain. Any comments that you see, any pushouts on large projects that you guys observe? Thank you.

Gene Lowe

Andrew. Not that we’ve seen. And we have a number of large accounts in US and Asia and Europe. I think when you get into some of the large projects, they tend to be imperfect in terms of planning. So you could take a large power project or a large automotive project or a large semiconductor and I would put data centers in that same capacity. So there’s always a little bit of uncertainty on timing, but I haven’t seen anything out of the ordinary. What I would say is this is a very high demand from our key customers.

They’re very open with us about the demand profile and they’re very much pushing us to make sure that we can meet their timelines. So to answer your question specifically, there’s always a little bit of pushout here and there, but I would say nothing out of the ordinary.

Andrew Obin

Gotcha. Thank you so much. And then just I know you have residential exposure and what we’ve seen is some pressure on consumers this summer. Are you observing any headwinds related to consumer and HVAC? Yeah, I’ll just leave it at that. Thank you.

Gene Lowe

Andrew, if you look at where we play in residential, it’s a pretty small part of our HVAC segment and it’s really the Weil-McLain boilers. And that is a very high percentage of replacement demand. If anything, we’re actually seeing nice growth there. That’s predominantly replacement demand. We think, any given year, it could be 80% to 90% replacement for the residential portion. I would say the commercial portion has a higher percentage of new. But yeah, we have not seen any slowdown or impact from the customer. I think it’s early in the heat season, but even — I spoke to the hydronics leader this morning. I believe we’re a little bit ahead of bookings plan so we’re actually feeling on target.

Anything else, Mark, you’d like to add?

Mark Carano

No, I mean it’s really that business, I think, as many of you know, is largely driven because it’s largely replacement by the weather cycle for good or bad. And last year was a tough year for that business. But this year is different. It started off in a much better place.

Gene Lowe

I think we have a little bit of an easy comp versus last year, that’s fair to say.

Andrew Obin

Well, we’re super excited to on board and thanks so much.

Gene Lowe

All right, welcome. Thanks.

Operator

Thank you. One moment for the next question. And the next question is coming from the line of Ross Sparenblek of William Blair. Your line is open.

Ross Sparenblek

Hey, good evening, gentlemen.

Gene Lowe

Hey, Ross.

Ross Sparenblek

Hey guys. Maybe just get a little bit more color on kind of your adoption expectations within the new Olympus product. What are you hearing from customers? We’re targeting 50 million this year, but what’s kind of the run rate? Maybe a base case for 2026?

Gene Lowe

Yeah, I think we would target to get 50 million into next year for the product. I would say — when I think about this, I actually have conviction on our value prop and our product. I think we have a very unique product on the dry and the adiabatic. I think it leverages a lot of our kind of core Marley strengths, where we tend to be known for our engineering, our industrial-grade products. I think it transfers very well. Having said that, what I would say is there’s four kinds of big kahunas for the hyperscalers. They all have different philosophies on how they design their data centers, do they want wet or dry or there’s many different variations? So it does take some time to break in there. But what I would say is we’re on track and we feel very good about this brand new product hitting 50 mil and I would expect it to kind of grow from there. And if we’re successful, it could grow very rapidly into ’27 and ’28. But we’re off to a nice start. There’s a lot of bidding activity and there’s a lot of discussions going on. There is in some of these markets, as we discussed in an earlier question, there’s a lot of also budget bidding where people are trying to get a site and trying to get funding.

So you get a lot of — what you’ll typically see on these larger projects, some of the lumpiness and the timing changing. But what I would say is there’s a very good set of opportunities in front of us and I think we have the right product set. So yeah, we’re very encouraged and excited to go into next year with our Olympus Max.

Ross Sparenblek

That’s really helpful. So it sounds like it’s kind of some big game hunting with the hyperscalers. Do you guys feel that you have a good seat at the table in that design phase?

Gene Lowe

As you know, the hyperscalers typically have confidentiality, so we can’t get into some of those. But what I would say is yeah, I do think we have a number of data center customers that we’ve been very proven with. As you know there’s some customers they say, we only want cooling towers and then you try to be some only want dry coolers. And I think what is going on at a macro level is you’re seeing a movement for its higher heat loads which tends to mean the easiest and the simplest is air-cooled chillers. If there’s an air-cooled chiller, that doesn’t really provide an opportunity for us because it’s an all-integrated unit.

As it goes to water-cooled chillers, we could either do the dry, the adiabatic or the cooling tower on that. And everything we’re hearing and seeing sees a trend moving toward that water-cooled chiller solution because you really can reject more heat, frankly. So yes, I think that’s a trend that I think is favorable. It doesn’t happen overnight, but it should be shifting over the next couple of years, which I think what it basically means for us is it can open up more, more addressable opportunity.

Ross Sparenblek

That’s a great color. Good. One last question here. Can I just put a finer point on the KTS acquisition? I thought the expectations there previously was more second-half weighted but it looks like it might have been down sequentially in the quarter. Is there anything to call out from a modeling perspective?

Mark Carano

Yeah, I don’t think so, Ross. No, it is second-half weighted, no doubt. And I think the fourth quarter will be its largest quarter, but maybe we can chat about that offline, just to sync up.

Ross Sparenblek

Yeah. Absolutely. Thanks, guys.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Joe O’Dea of Wells Fargo. Your line is open.

Joe ODea

Hi guys. Thanks for taking my questions.

Gene Lowe

Hey, how are you doing?

Joe ODea

Can you just touch a little bit more on detection and measurement in the quarter? I think you’re heading into the quarter anticipating that margin could have been down, clearly strong revenue, strong margin. I think this is an environment where we hear a little bit more about the potential for pushouts. It sounds like things came in and so just to elaborate a little bit more on what you saw over the course of the quarter, maybe why you saw it come forward a little faster than anticipated.

Mark Carano

Yeah, Joe, let me touch on that. First of all, I think we’re really, really pleased with the initiatives and the success and progress we’ve had on driving margins in our — across our D&M platform. But really, I would sort of break it down into three buckets. When you look at year over year, sort of 240 basis points of margin improvement at the segment income line. A part of that, probably 40, 50 basis points of it, really related to KTS. That business is performing at a higher margin level than we had originally forecasted. So that business is performing nicely. We saw very nice operating leverage in the quarter on the revenue and this is sort of net of a less favorable mix that we had signaled in the back half of this year, particularly relative to last year.

Now remember, we had 20 million of this project move up from 2026 that sort of added to the volume story here. That wasn’t originally in there. That really drove very nice operating leverage. Those contracts actually executed at a higher level than we thought. And then lastly, we did have some initiatives within D&M related to some NPI and a couple other initiatives that have actually shifted out of the year. They’re kind of shifting into 2026. And that’s really largely, I think, just prioritization of where the management team is spending their time and resources right now.

I think we probably had more slated than we could really accomplish during the year. Those are still projects that are going to continue. Those costs will be there, but they’re going to slip out into 2026 that cost. So the latter two, I didn’t give you that. It’s about — of the balance call it 200 basis points, splits about 50/50.

Joe ODea

That’s a helpful color. And then I wanted to ask on the HVAC backlog, up 7% sequentially. It seems like seasonally from year to year, maybe it tends to be flat or could even move down. And so not sure if you would observe that as a little bit better than normal seasonal trend there and anything that you would point to that’s contributing to that.

Mark Carano

I mean, on the backlog, a couple of things. One, when you look at it kind of year over year, right, it’s up 32%. Organically represents about two-thirds of that, so nice year over year. Sequentially, you have a couple things going on there. Obviously, we typically see backlog reduction at this time of the year related to our hydronics business. So as we work through what we call a kind of the preseason buy that takes place that will — that happens at this time of the year and then you’ll see it again in Q4 as we relieve inventory related to that. That’s a little bit what’s driving it. As I look to the end of the year, what I would tell you is, I think the backlog overall from where we are today will likely be higher.

Joe ODea

I appreciate it. Thank you.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Brad Hewitt of Wolfe Research. Your line is open.

Brad Hewitt

Hey, good afternoon. Thanks for the questions. So I guess on the M&A side, curious whether the billion dollars of additional balance sheet capacity that you’ve secured in recent months would indicate that perhaps the M&A funnel is more actionable than in recent months. And would it be fair to say your appetite for a larger deal has perhaps increased?

Gene Lowe

Brad? I’d say this is probably the number one question we got in the equity raise, and I think from some investors, it’s a good question. But the truth is nothing’s really changed. Our strategy is the same. I would say, to your point, we do have a very robust pipeline of opportunities.

You know, I think that really what predicated the raise was our EBITDA; we’d kind of outgrown our revolver. We’d gotten so no — we’d grown our EBITDA so much that we actually saw some opportunities that would have been challenging for us to be able to execute on. We didn’t want to get caught in that situation. So we actually feel like we’re in a very strong situation now, but yeah, very good activity, but no change in strategy. For us, we’ve typically said a smaller deal might be in the range of a 50 million enterprise value, a larger deal might be in the neighborhood of 500 million.

And that’s really where the bulk of our opportunities lie. I would say 90% plus fall in that range. And there are a couple smaller, and there are a couple larger. But yeah, that’s where we sit today.

Brad Hewitt

Okay, that’s helpful. And then curious what your latest thinking is around Ingenia capacity exiting the year. I think the previous expectation was around 140 million. And then when you mentioned the planned Ingenia facility in the southeast US, is that incremental to the 300 million of ultimate run rate capacity that you had previously cited?

Gene Lowe

Yeah. No, I think that we’re still on track for hitting a 140 million run rate in this quarter in Q4. But if you look at it, our revenue is going to be materially lower than that. Right. We’re kind of ramping up. And that’s really in our Mirabel facility. But no, and then previously when it was talked about the 300 million run rate, which we’re really talking about, is that run rate being Q4 of 2027. That is both facilities, that is both Maribel up in Canada outside of Montreal. And then the new facility, which we’re pretty close on and we should be able to announce here in our next earnings call. Yeah, it’d be both those put together.

Brad Hewitt

Great. Thanks, Gene.

Operator

Thank you. One moment for the next question. The next question will be coming from the line of Jamie Cook of Truist Securities. Your line is open.

Jamie Cook

Hi, good evening. Nice quarter, I guess. Just two questions. One, following up on Joe’s question about the profitability in D&M. Obviously it was strong in the quarter and there were some favorable items in the third quarter. But even if I look at the run rate of what’s implied in the fourth quarter, like just the run rate on D&M operating income is quite a bit higher than what we’ve seen in the first half of the year. Just wondering if that’s like a good cadence to think about, like the back half times two for base for 2026, just given what you’re seeing on the top line and in the margins.

And then I guess my second question, just any updated thoughts on your 2027, 2028 sort of EBITDA goals, just given again, where we should end up this year? And given how much EBITDA has grown per year since you’ve put that out, it just seems like that could get pulled forward or potentially it’s conservative. So. Thanks.

Mark Carano

Yeah, Jamie. I’ll start on the D&M topic. So you really have to kind of look back to our increase in our guide for the year, which was largely driven by D&M, the majority of it was and kind of understand what’s driving that as you look out to kind of what’s implied in Q4. And there’s really three things that we — that they’re similar to Q3, they’re connected to it. One is KTS margin improvement. You saw a little bit of that in Q3, you’re going to see more of it in Q4. These initiatives that I talked about that impact both Q3 and a little bit in Q4 less so.

And then the better leverage was really a Q3 element. So you think about KTS and the margin benefit from that, given that will be the largest quarter for the — did we lose someone? Okay. For that business performing this year. Does that clear it up for you?

Jamie Cook

Yeah, that’s helpful. Thank you. And then on the 2027, 2028 EBITDA targets.

Gene Lowe

Yeah, I mean, I think, why don’t I start there and then you can dive in? When we had our Investor Day in early 2024, so we kind of looked at 2023, which our EBITDA was 320 million. Is that right?

Mark Carano

310

Gene Lowe

310, okay. 310 million. And we said we think we can double this within a medium term, which would be four to five years. To your point, I think we’re tracking very, very favorably on that. So we went from 310 to 421 last year. I think we’re 505 at the midpoint this year. We’re seeing nice growth dynamics, particularly on our HVAC side, as well as some good inorganic opportunities. So, yeah, if I were to kind of say that was four to five years, I would say I’d be disappointed if we weren’t. The five feels too long. I do think we’re ahead of plan here. And Mark, I don’t know if you have any other comments you’d like to add to that.

Mark Carano

No, I mean, I feel good about where we sit. I mean, particularly as I look out into, at our end markets that are in some of the longer-term mega trends that are driving the business.

Gene Lowe

We very clearly say we want 15% growth every year. This year we’re penciling in around 20%. Last year we were at 29%. We think our model is tracking as we expected. So, we’d expect, assuming we stay on plan, we would exceed that well before the five years.

Jamie Cook

Thank you and congratulations.

Gene Lowe

Thanks.

Operator

Thank you. One moment for the next question. The next question will be coming from the line of Jeff Vansinderen of B Riley Securities. Your line is open.

Jeff Vansinderen

Hi, everyone. And let me add my congratulations. Just as a follow-up to the last question. As you plan for 2026, what are your thoughts on building incremental P&L leverage for the enterprise as a whole and maybe thoughts on the potential for EBITDA margin expansion just for next year? Are there any anomalous things that we need to keep in mind that might skew that either way?

Mark Carano

Yeah, I’ll start, Jeff. I mean, I want to be careful. We’re not in a position where we’re going to share 2026 guidance today.

Jeff Vansinderen

Right.

Mark Carano

But I don’t think of anything anomalous. I’m just sort of thinking through a couple things. I mean, when I think about our corporate structure that we have here in Charlotte, I mean, we’re scaled, I think, appropriately today and really not a need to continue to really add to that as we scale the business. Clearly, I think, next year we are going to have some startup costs related to HVAC.

We’ve got a little bit of that in this year with respect to some of the initiatives we have underway regarding the data center development of some of the new technologies there, the new plants that will be coming online. So that’s, while the first was kind of a positive, that’s something that has potential to be a bit of a potential drag, but it shouldn’t be a material number, really, when I think about the margin profile for next year. I mean, what I would say is I feel very good about what we’ve done over the last few years, whether it’s kind of driving the margin profile of the HVAC business up to where it is and similarly returning the D&M business to the margin profile that it once was a number of years ago. So as I look forward, you think about, as you continue to grow the top line, we should get operating leverage there.

Jeff Vansinderen

Okay, great. And then you touched on potential pushouts in the data center market. Given the nature of that data center beast, on the flip side, are you seeing any pull forwards in demand from any projects there?

Gene Lowe

Yeah, I would say it’s a very fast moving, fluid environment where, yeah, there are some things that accelerate and can move. Yeah, can definitely move up well earlier than planned. In some cases, you have some of these colos [Phonetic] that will get a facility and they’ll set up a location and then they want to get a customer or a major tenant and once they get it, all of a sudden they’re moving 90 miles an hour.

And so, yeah, we do see things moving in both directions there. It is a very fast-moving market with a lot of activity and a lot of — it’s a very dynamic market, as you might expect with the amount of growth that’s going on in that market. But yeah, we have seen it move forward as well as, you know, seeing some of the normal project delays.

Jeff Vansinderen

Okay, thanks for taking my questions and continued success.

Gene Lowe

Thanks.

Mark Carano

Thanks.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Steve Ferazani of Sidoti. Your line is open.

Steve Ferazani

Evening, Gene. Evening, Mark. It’s been a long call, so I’ll try to ask you a couple of easy ones. Very strong free cash flow in 3Q. I know you had already tipped off the fact that all the cash, the remaining cash costs were related to the long ago discontinued ops were taken last year. Nevertheless, much stronger cash flow this quarter. You’ve got the balance sheet in great shape now, but I’m looking at my model and 4Q if you get the typical working capital reversal that you usually get, you’re looking at a significant cash flow in 4Q. Given that you’ve already cleaned up that balance sheet. If you’re looking at a number, and I’m sure you, my number is not far off of yours. How are you thinking about using that 4Q cash?

Mark Carano

Yeah, I think your — well I don’t know your number, your presumption is correct.

Steve Ferazani

I don’t want to give it. But it’s sizable.

Mark Carano

Yeah, listen. I mean, it comes back to the M&A pipeline that we have in front of us. Right. We feel really good about the opportunities ahead of us. And you know that’s just part of the pool of capital that will be available to us to drive the value creation. And obviously we’ve got — the plan expansion, we haven’t sized that yet, but you know, well, certainly that will be part of the overall deployment of capital.

Steve Ferazani

And Gene, let me follow up on a question that was asked earlier because obviously you are getting asked about M&A opportunities and size. And I know you’ve talked previously and we’ve discussed this, that if you go larger, typical multiples get higher. I mean, so much of your success over the last few years has been paying very reasonable multiples for acquisitions. And I think investors want to hear that you’re going to maintain that kind of discipline around businesses you know really well, and paying that 10 to 12 times, given the balance sheet is so much cleaned up, given your access to capital, is there an itch to go higher to find the right deals, or do you expect to maintain that kind of discipline?

Gene Lowe

No, I think if you look at, I mean, it’s a great question. I think that our model has really worked. And I think our average multiple has been in the neighborhood of 11 times. We typically get one and a half, two turns. So you kind of get it under your roof at nine times, which is a really good, really good value. When you think of our average EBITDA that we’ve acquired is 20%. And these have also been accretive on growth rates. Not to mention the most important point, the whole purpose of how we do M&A is to really strengthen our competitive position to be able to expand.

So, yeah, I think I don’t see any deviation from our strategy. Typically, if you see a smaller deal in the $50 million range, something like that, there’ll be a turn or two lower. If you see a larger deal that has more established management teams, more established IT systems, products, channels, as lower risk, you typically see there’s always going to be a turn or two higher. But the flip side of that is you can get, you know, you can typically get some more leverage and some more synergy when you have a larger organization like that. So, yeah, I think that our model has not changed. We do see deals that — and this is probably more on the detection and measurement side. You can see deals going for 19 times, 20 times. That’s just not us. That’s not who we are. We really do focus on cash, on cash returns. And yeah, our model is going to stay. We’re executing the same strategy that we did a year ago, Steve.

Steve Ferazani

Great. Thanks, Gene. Thanks, Mark.

Mark Carano

Thanks.

Operator

Thank you. That concludes today’s Q&A session. I would now like to turn the call back over to management for closing remarks. Please go ahead.

Mark Carano

Thanks, Operator.

Operator

[Operator Closing Remarks]