SPX Technologies, Inc.SPXCNYSE
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Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 SPX Technologies Earnings Conference Call. [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: 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, nonservice pension items, mark-to-market changes and other items. And with that, I'll turn the call over to Gene.
Eugene Lowe: 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 with the 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 lease facility in Tennessee for U.S. 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 Ingénia custom air handling units in the U.S. We are currently targeting a location in the Southeast and we'll provide more detail next quarter. On 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: 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 & Measurement as well as inorganic growth from the acquisitions of KTS and Sigma & Omega. Consolidated segment income grew by $32 million or 28% to $146 million, while consolidated segment margin increased 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 & 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 CommTech 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 as calculated under our bank credit agreement was approximately 0.5x at quarter-end. Q3 adjusted free cash flow was approximately $91 million. 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 & 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.
Eugene Lowe: 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 & 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, an 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 U.S. 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 and 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: Thanks, Gene. Operator, we will now go to questions.
Operator: [Operator Instructions] The first question today will be coming from the line of Bryan Blair of Oppenheimer.
Bryan Blair: Another very solid quarter. Given you're almost in November and you have supportive backlog in both segments, maybe speak to your team's visibility into 2026 and which platforms or 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?
Eugene Lowe: [Technical Difficulty] Okay. Can you guys -- like I'll assume you can hear us now?
Bryan Blair: We can hear you now, yes.
Eugene Lowe: Okay. Thanks for your question, Bryan. So yes, I think if you step back and you look ahead to 2026, overall, we feel very good. If you look across our HVAC businesses, 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've talked about in the past couple of quarters. We're seeing really a sustained strength in data centers. We feel like we have some nice momentum there. Same in health care, institutional, we're also seeing a lot of activity. I'd say in the industrial markets, we're 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 some of the more commercial buildings, more hotels, things like that. But net-net, we feel very good about the markets. And then 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 we see the opportunity, as we've said, 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, Ingénia and Marley. So 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 digit. We would believe that we would target to be higher than that with our initiative-driven growth that I just highlighted. On D&M, I would say overall run rate is steady. We're seeing some modest growth there. And it is a little bit of very different geographically where the U.S. 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 U.S., talking about Continental Europe. We are seeing an uptick in U.K. in some areas. But overall, I would say, steady, modest growth in our run rate. And then our projects, we have very good activity. We did, and Mark can tie this out, we did some of that, which we had in '26, it actually accelerated into '25. And then we have a very high backlog. Now some of that backlog is more -- it's not only '26, but we actually are having a lot more multiyear projects, which is really good, but we have to make sure we understand what falls into the forward year of '26. But overall, I would expect growth in D&M as well. So I think the backdrop for what we see is positive. Mark, what color would you like to add overall on D&M?
Mark Carano: Yes. I think I might just add across really both segments, right, we're in very strong backlog positions there kind of -- for both segments really, both at or near all-time highs. So 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 walk-through. 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, that would 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?
Eugene Lowe: Yes. I would say we feel very good about both KTS and Sigma & Omega. Sigma & Omega is a little bit newer, so we haven't -- it's at an earlier stage. KTS is already -- it's really kind of built in and operating, to me, operating as one with our CommTech business. A couple of points there. We're actually seeing some nice wins. 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. 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. The way that we think about that market is really multilevel applications, hospitals, or could be hotels or it could be 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-Kelley channel, that's our commercial boiler line. So we have already signed up, I don't have the latest numbers in front of me, but I know of 3 or 4 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 yes, 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 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. We're going to remain disciplined, but there is a very attractive set of opportunities. On the HVAC side, I would say we've talked about engineered air movement as well as electric heat. In each of these areas, we see several opportunities that are very attractive opportunities. And then also on Detection & Measurement, we see some very interesting opportunities. I'd say a smaller number. We still see -- have, 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 dilution. 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 that gives us the opportunity to invest in growth opportunities. And 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 opportunity set we have in front of us.
Operator: And the next question will be coming from the line of Damian Karas of UBS.
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 Ingénia. 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 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?
Eugene Lowe: Yes, 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 the lease. We're actually very excited about this. That is a 150,000 square foot facility, very similar to our existing facility. We actually think we can ramp this up over time. So we're very excited about that. And as we said, we're targeting to get some of the equipment commissioned and to start. 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 -- has already been deployed there.
Mark Carano: Some of it will be this year and then some into next year.
Eugene Lowe: A little bit next year. The bigger one will be the expansion of Ingénia. That's going to be a much larger site, probably in the neighborhood of -- it could be 3x 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: Yes. I think we're just working through the finer details of the site. And when that ultimately -- we actually acquire that facility, yes, 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 -- at our Q4 call, and we'll really walk people through kind of the step function of what our plan is there. Obviously, it's a much larger facility. So the capital...
Eugene Lowe: Therefore, it's more capital in there, for those of you who've...
Mark Carano: Know Ingénia.
Eugene Lowe: Yes, who went to Ingénia. Think of an Ingénia now, and you'll see the lasers, the punches, the night train, the robotics. So it would be a similar level of capital equipment.
Damian Karas: Okay. Got you. 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.
Eugene Lowe: So nuclear, if you kind of take the existing nuclear market, rough order of magnitude, there's about 100 nukes in the U.S. 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 it's 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, it could be gas, could be coal. We're seeing some of those types of opportunities. As it pertains to new nuclear, I would say that we haven't seen -- we see a lot of combined-cycle power plants. There's a very active -- there's a lot of combined cycles going all across the U.S. 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 do have an opportunity to go after the cooling towers there. Combined cycles tend to be a little smaller. But yes, 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 2 or 3 years.
Operator: The next question will be coming from the line of Andrew Obin of Bank of America.
Andrew Obin: So first question, I guess, some of your -- well, I don't know if they're competitors per se, but some of the HVAC players have been talking about pushout of large projects related to data centers. I would imagine it was because the industry is sort of out of capacity across the value chain. Any comments if you see any pushouts on large projects that you guys observe?
Eugene Lowe: Andrew, not that we have seen -- and we have a number of large accounts in U.S. 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 there's 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 time lines. So to answer your question specifically, there's always a little bit of pushouts here and there, but I would say nothing out of the ordinary.
Andrew Obin: Got you. And then just I know you have residential exposure, and what we've seen is some pressure on consumer this summer. Are you observing any headwinds related to consumer and HVAC? And yes, I'll just leave it at that.
Eugene 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 yes, 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 our 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.
Eugene Lowe: Yes, I think we have a little bit of an easy comp versus last year, that's fair to say.
Mark Carano: Exactly.
Andrew Obin: Well, we're super excited to be onboard, and thank you so much.
Operator: And the next question is coming from the line of Ross Sparenblek of William Blair.
Ross Sparenblek: Maybe just give a little more color on kind of your adoption expectations within the new Olympus product. What are you hearing from customers? You're targeting $50 million this year, but what's kind of the run rate maybe base case for 2026?
Eugene Lowe: Yes. I think we would target to get $50 million into next year for the product. I would say the -- when I think about this, I actually have conviction on our value prop and our product. I think we have a very unique product in 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 4 kind of big kahunas for the hyperscalers. They all have different philosophies on how they design their data centers. Do they want wet or dry? 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 million. 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, some of 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 yes, 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?
Eugene Lowe: Yes. And as you know, the hyperscalers typically have confidentiality. So we can't get into some of those. But what I would say is, yes, 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 do that. Some only want dry coolers. And I think what is going on at a macro level is you're seeing a movement towards 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 towards 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 addressable opportunity.
Ross Sparenblek: That's great color. One last question here, just to 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: Yes. 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 we can chat about that offline just to sync up what you're [ seeing ].
Operator: And the next question will be coming from the line of Joe O'Dea of Wells Fargo.
Joseph O'Dea: Can you just touch a little bit more on Detection & 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. 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: Yes, Joe, let me touch on that. And first of all, I think we're 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 3 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. So 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 of 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. So 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 2, I didn't give you that, it's about, of the balance, call it, 200 basis points, it splits about 50-50.
Joseph O'Dea: That's 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: Yes. I think -- 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 2/3 of that. So nice year-over-year. Sequentially, you have a couple of things going on there. You 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 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. So 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 backlog overall from where we are today will likely be higher.
Operator: And the next question will be coming from the line of Brad Hewitt of Wolfe Research.
Bradley Hewitt: So I guess on the M&A side, curious whether the $1 billion of additional balance sheet capacity that you've secured in recent months would indicate that perhaps M&A funnel is more actionable than it had been in recent months? And would it be fair to say your appetite for a larger deal has perhaps increased?
Eugene Lowe: Brad, I'd say this is probably the #1 question we got in the equity raise and I think from some investors. It's a good question. But the truth is nothing has really changed. Our strategy is the same. I would say, to your point, we do have a very robust pipeline of opportunities. I think that really what predicated the raise was our EBITDA, we've kind of outgrown our revolver. We've gotten so -- we've 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 yes, very good activity and -- but no, no change in strategy. As you know, we -- 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 of smaller, there are a couple of larger. But yes, that's where we sit today.
Bradley Hewitt: Okay. That's helpful. And then curious what your latest thinking is around Ingénia capacity exiting the year. I think the previous expectation was around $140 million. And then when you mentioned the planned Ingénia facility in the Southeast U.S., is that incremental to the $300 million of ultimate run rate capacity that you had previously cited?
Eugene Lowe: Yes. 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 Mirabel 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. So yes, it'd be both those put together.
Operator: The next question will be coming from the line of Jamie Cook of Truist Securities.
Jamie Cook: Nice quarter. I guess just 2 questions. One is 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. So just wondering if that's like a good cadence to think about like the back half times 2 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.
Mark Carano: Yes, 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 3 things that we -- that are similar to Q3, they're connected to it. One is KTS margin improvement. We 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 impacts 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: Yes, that's helpful. And then on the 2027, 2028 EBITDA targets?
Eugene Lowe: Yes. 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? Yes, so...
Mark Carano: It was $310 million.
Eugene Lowe: 310, okay. $310 million. And we said we think we can double this within the medium term, which would be 4 to 5 years. To your point, I think we're tracking very, very favorably on that. So we went from $310 million to $421 million last year. I think we're $505 million at the midpoint this year. We're seeing nice growth dynamics, particularly on our HVAC side, as well as some good inorganic opportunities. So yes. If I were to kind of say that was 4 to 5 years, I would say I'd be disappointed if we weren't -- the 5 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 megatrends that are driving the business.
Eugene Lowe: As 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 yes, we'd expect, assuming we stay on plan, we would exceed that well before the 5 years.
Operator: The next question will be coming from the line of Jeff Van Sinderen of B. Riley Securities.
Jeff Van Sinderen: 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 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: Yes, 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. But I don't think of anything anomalous. I'm just sort of thinking through a couple of 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. So clearly, I think next year, we are going to have some start-up 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 Van Sinderen: Okay. Great. And then you've 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?
Eugene Lowe: Yes. I would say it's a it's a very fast-moving, fluid environment where, yes, there are some things that accelerate and can move, yes, can definitely move up well earlier than planned. In some cases, you have some of these colos 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 yes, 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 yes, we have seen it move forward as well as seeing some of the normal project delays.
Jeff Van Sinderen: Thanks for taking my question, and continued success.
Operator: And the next question will be coming from the line of Steve Ferazani of Sidoti.
Steve Ferazani: 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 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, in 4Q, if you get the typical working capital reversal that you usually get, you're looking at significant cash flow in 4Q given that you've already cleaned up that balance sheet. 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: Yes. 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: Yes. Listen, I mean, it comes back to the M&A pipeline that we have in front of us, right? I mean we feel really good about the opportunities ahead of us. And 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 plant expansion. We haven't sized that yet, but we'll certainly -- that will be part of the overall deployment of capital.
Steve Ferazani: Okay. And Gene, let me follow up 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 the 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 12x. 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?
Eugene 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 11x. We typically get 1.5, 2 turns. So you kind of get it under your roof at 9x, which is a 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 and to be able to expand. So yes, 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, it will be a turn or 2 lower. If you see a larger deal that has more established management teams, more established IT systems, products, channels, is lower risk, you typically see is always going to be a turn or 2 higher. But the flip side of that is you can typically get some more leverage and some more synergy when you have a larger organization like that. So yes, I think that our model has not changed. We do see deals that -- and this is probably more in the Detection & Measurement side, you can see deals going for 19x, 20x. That's just not us. That's just not -- that's not who we are. We really do focus on cash returns. And yes, I would -- our model is going to stay. We're executing the same strategy that we did a year ago, Steve.
Operator: 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: That concludes today's conference call. You may all disconnect.