Earnings Call Transcript - SPXC Q1 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the First Quarter 2025 SPX Technologies Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Clegg, Vice President of Investor Relations. Please go ahead.

Paul Clegg, Vice President of Investor Relations

Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Mark Carano, our Chief Financial Officer. A press release containing our first 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. Finally, we will be meeting with investors at various events over the quarter, including the Oppenheimer Industrial Growth Conference on May 8, the BofA Securities, Industrial, Transportation and Airlines Key Leaders Conference on May 14, the Wolfe Research Small and Mid-Cap Conference on June 3, and the William Blair Growth Stock Conference on June 4. And with that, I'll turn the call over to Gene.

Eugene Lowe, President and CEO

Thanks, Paul. 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 first quarter of 2025, as well as an update on our full year outlook. We had a strong start to the year. We grew first quarter adjusted EBITDA by 12% and adjusted EPS by 10%. Our company continued to execute well, driving strong margin performance across both segments and making progress on several key initiatives. Recently, we made another attractive addition to our HVAC segment with the acquisition of Sigma and Omega, which enhances the value we provide to customers in our HVAC segment while positioning us for further growth. Today, we're raising our full-year adjusted EPS guidance range to reflect our strong Q1 and the acquisition of Sigma and Omega, partially offset by the impact of the current tariff environment. We now anticipate growth in adjusted EBITDA of 15% at the midpoint of our range. Looking ahead, we remain well positioned to manage through a range of economic conditions. We have a high level of replacement sales and diverse demand drivers across our end markets. Our critical solutions are often government-mandated or required, and we have a strong playbook that has proven effective in adapting throughout the change. Turning to our high-level results. For the first quarter, we grew revenue by 3.7%, driven by a solid performance in our HVAC segment and the benefit of recent acquisitions. Adjusted EBITDA increased by approximately 12% year-on-year with 150 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. We continue to leverage our business system to manage a dynamic tariff environment, remaining nimble and redeploying resources as needed. We are also closely managing price and our sourcing relationships to mitigate the impact of tariffs. During the quarter, we continued to gain traction on our continuous improvement and value engineering initiatives. In our HVAC segment, we identified additional opportunities to standardize control components in our electric key products, allowing more streamlined manufacturing, shorter lead times, and lower costs. In our Detection & Management segment, we continue to advance our new product initiatives. Our transportation platform introduced a new ticket vending machine called the Venstar 5; it has a much smaller footprint, a larger screen, and several advanced features that provide an enhanced user experience. We're receiving great customer feedback on the product and are already seeing significant sales. In April, we continued to advance our inorganic growth initiative with the acquisition of Sigma and Omega, which enhances the value we offer our customers in our HVAC segment. Sigma and Omega's product portfolio includes vertical stack heat pumps and fan coils, institutional heating products, and self-contained units. These solutions are highly complementary with our existing HVAC businesses and expand our addressable market. They are often paired with cooling towers and boilers, typically receiving approximately twice the order value of the cooling tower boiler combined for this type of solution. The transaction is an excellent fit that creates significant opportunities for leveraging our combined channels to drive growth in attractive end markets, particularly for multistory buildings such as hotels, schools, hospitals, and commercial and residential properties across North America. Today, more than two-thirds of Sigma and Omega's revenue comes from domestic sales to their Canadian customers. As a part of our value creation strategy, we plan to substantially increase sales to U.S. customers, supported by the expansion of production at our existing U.S. facilities with minimal additional capital investment. We're very pleased with this transaction and are excited about Sigma and Omega joining the SPX team. Now I'll turn the call over to Mark to review our financial results.

Mark Carano, CFO

Thanks, Gene. Our first quarter results were strong. Year-on-year adjusted EPS grew 10% to $1.38. For the quarter, total company revenues increased 3.7% year-on-year primarily driven by the acquisition of KTS in late January, and an extra month of Ingenia, which closed in early February of 2024. Consolidated segment income grew by $10.7 million, or 10.7%, to $110.5 million, while segment margin increased 140 basis points. In our HVAC segment, revenues grew 6.8% year-on-year. On an organic basis, revenues increased 4.4%, driven primarily by growth in our heating platform and, to a lesser extent, our cooling platform. The extra month of Ingenia accounted for a growth of 2.9%, while FX was a modest headwind. Segment income grew by $5.5 million, or 8%, while segment margin increased 30 basis points. Increases in segment income and margin were due to higher sales, including the additional month of Ingenia. Segment backlog at quarter end was $451 million, up approximately 3% from Q4. In our Detection & Measurement segment, revenues declined 2% year-on-year. On an organic basis, revenue declined 6.9%, partially offset by an increase of 5.2% from the acquisition of KTS. FX was a modest headwind. The decrease in organic revenue was driven largely by the timing of project deliveries in the prior year. Year-on-year segment income grew by $5.2 million, or 16.6%, while segment margin increased 360 basis points. The increases in segment income and margin were driven by a more favorable sales mix, strong project execution in our CommTech platform, as well as the addition of KTS. Segment backlog at quarter end was $346 million, up 56% sequentially from Q4, including organic growth of 34%. Turning now to our financial position at the end of the quarter. We ended Q1 with cash of $182 million and total debt of $960 million. Our leverage ratio, as calculated under our bank credit agreement, was approximately 1.6x, excluding the effect of the KTS acquisition, which closed in January. Including the pro forma impact of the Sigma and Omega acquisition, which closed in April, our leverage ratio was 1.9x, well within our target range of 1.5 to 2.5x. We anticipate our leverage ratio declining below the low end of our target range by year-end, assuming no further capital deployment beyond our guidance. Q1 adjusted free cash flow was approximately $36 million. Moving on to our full year 2025 guidance. We are updating our range of adjusted EPS to $6.10 to $6.40, reflecting year-on-year growth of 12% at the midpoint. This represents an increase from a range of $6 to $6.25 previously. The increase reflects our strong Q1 results, some favorable timing as well as accretion from the acquisition of Sigma and Omega, which is anticipated to be modest due to higher interest costs from borrowings to fund the transaction. These are partially offset by the net impact of current tariff rates, and our mitigation efforts, including price increases and surcharges. The net impact of tariffs on our updated guidance is approximately $0.08 to $0.12 of adjusted EPS. For Q2, we anticipate adjusted EPS to be modestly higher than in the prior year period, with higher interest costs, corporate expense, and share count, partially offsetting the benefit of higher segment income. As a reminder, in Q2 2024 our HVAC segment results benefited from the delivery of a $20 million cooling service project. In our Detection & Measurement segment, we expect strong year-on-year growth in Q2, both organically and from the acquisition of KTS. 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, President and CEO

Thanks, Mark. We continue to believe that SPX is less cyclical than most industrial tech companies. We have a diverse set of end market drivers, a high level of replacement revenue, and we offer a broad set of critical solutions that are often government-mandated or essential. The business system provides effective mitigation tools and historically, that has managed to limit the impact of economic downturns on our financial performance. For example, during the COVID pandemic in 2020, our revenue and earnings were approximately flat, while many other industrial tech companies experienced significant declines. In the HVAC segment, we have a healthy backlog for our highly engineered solutions, and our core markets are holding up well. We are feeling incrementally more positive about data center opportunities in 2025 and 2026, and our related new product initiatives are progressing well. In our Detection & Measurement segment, run rate market demand remains flattish with regional variation, while our project businesses are seeing healthy backlog activity with many new bookings slated for delivery in 2026 and beyond. Overall, current market conditions support our updated 2025 guidance range. In summary, I'm pleased with the strong start to 2025. Our acquisition of Sigma and Omega further enhances the value we provide to our HVAC customers and positions us for future growth. Despite tariff headwinds, we are confident in our increased full-year guidance, which implies adjusted EBITDA growth of 15% at the midpoint. We also remain well positioned to manage macro uncertainty and navigate a rapidly changing environment. Looking ahead, I am excited about our future. With the right strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing, driving value for years to come. And with that, I'll turn the call back to Paul.

Paul Clegg, Vice President of Investor Relations

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

Operator, Operator

And our first question comes from Brad Hewitt of Wolfe Research.

Brad Hewitt, Analyst

So can you walk through what you're assuming in terms of the gross and net tariff impact for the year? It looks like you implicitly cut the organic EBITDA guidance for the rest of the year by about $5 million. Is that the right way to think about the tariff impact?

Mark Carano, CFO

Yes. Let me provide some clarity, Brad. We mentioned on the call that the tariff impact was between $0.08 and $0.12. Taking the midpoint suggests a net cost of around $6 million. The gross cost is approximately $20 million, with a low 20s impact being offset by about $14 million from price adjustments and surcharges. This is how you should mathematically approach it.

Brad Hewitt, Analyst

Okay. That's helpful. And then congrats on getting the Sigma and Omega deal closed. Just curious how you think about that business in terms of the through-cycle growth rates, both pre and post synergies? And then from an EBITDA margin perspective, is it fair to think of that business as currently being in the mid-teens range?

Eugene Lowe, President and CEO

Why don't I start the business, Brad? I think, first of all, this is a really good business. We really like this business. They have very complementary products to what we already sell today. So typically, when you see multistory applications, hospitals, schools, and hotels, you'll see us selling the cooling tower, and then the boilers, and then the heat pumps that go in the rooms. It is an engineered product that we have not participated in today. If you look at Sigma and Omega, they have a very good product, a very strong position in Canada. We actually see a very nice synergy opportunity to really expand their growth predominantly in the states where we are very strong in cooling towers and boilers. So we really like this business. They have very good technology, good product, and they are very complementary to our channels, and we actually see some nice synergies for growth. Do you want to run through some financials, Mark?

Mark Carano, CFO

Yes, regarding the size of the business, we indicated in our press release a few weeks ago that it generates approximately $65 million in revenue. We expect to own it for about 8.5 months of the year, which puts the revenue in the range of $40 million to $45 million. In terms of segment income, it is slightly below the average segment income for the HVAC business overall today.

Operator, Operator

Our next question comes from the line of Bryan Blair from Oppenheimer.

Bryan Blair, Analyst

Good start to the year. It sounds like you're very confident in the outlook, the raised guide that you've offered. We've talked for years now about the asynchronous demand profile that your company has in aggregate. There are many proof points that we have already. Just curious what you're seeing now with the tariff-related uncertainty and the overall volatility of the backdrop, platform by platform. How order rates have progressed through Q1 into Q2? Is there any notable changes that you would attribute to the uncertainty at hand? Or is it kind of steady as it gets?

Eugene Lowe, President and CEO

Bryan, to get straight to the point, there hasn't been much change. If anything, I believe we are in a stronger position than at the beginning of the year. I can provide an overview of the segments and some platforms. In HVAC, last year we experienced strong growth in cooling, while heating was relatively flat. Cooling was the main contributor last year with organic growth around 14%. This year, we've seen a good balance between heating and cooling, with solid demand. We've consistently discussed the health care institutional sector. I'm also seeing a notable increase in activity in the power sector, which often pairs with data centers, an area where we are particularly well positioned. Overall, the HVAC segment is well balanced, and we haven't noticed any negative impacts. One change I’d highlight is our strengthened position in data centers. We're observing a good amount of activity and feel we are winning there. Our products are performing well, and we've introduced new offerings in the data center space that are gaining traction. Regarding TAMCO, we have introduced new solutions suited for the building envelope area, which have shown significant growth. In cooling, our core cooling tower has a new Everest solution that is starting to receive good orders, providing a different cooling method favored by some customers, which we’re excited about. Additionally, we’ve launched an adiabatic and dry product that has generated strong interest. We believe this product has a solid value proposition, with several patents pending. As we’ve mentioned previously, we aim to secure significant bookings in 2025 and realize revenue in 2026, and this appears to be on track. In D&M, we've consistently talked about the run rate and projects, and the run rate is steady. Currently, our businesses feel slightly more optimistic about the U.S. while being more cautious regarding Europe and Asia, which remain flat for us, representing a smaller portion of our business. Overall, the run rate is steady, and project activity is high, as reflected in our backlog numbers where we're consistently winning orders. Looking ahead to 2025, the only area of potential concern would be the run rate in Europe and Asia, which is set to remain flat. However, we wouldn't have raised our guidance if we didn't feel confident about what we're seeing. Mark, do you have anything to add?

Mark Carano, CFO

I think you largely covered it. I mean, we feel like our guidance is pretty balanced, right? It is a dynamic environment, of course, that we're in today with tariffs and that impact, and we've tried to reflect that obviously in our guidance. But we feel like we're in a good spot in light of kind of the macro environment.

Bryan Blair, Analyst

Understood. That's very helpful color. I'd like to dive in a bit on Ingenia. We recently saw the facility, and feedback has been overwhelmingly positive on that event. For what it's worth, how your team presented very well. It's obviously a rather unique asset. So I appreciate you guys putting that together. It looks like with limited inorganic contribution time in this quarter, that growth continues to accelerate. Just curious if you're willing to share what your team is projecting in terms of engineering revenue for this year and then speak to the visibility that you have for multiyear growth with that asset?

Paul Clegg, Vice President of Investor Relations

Maybe one of the things I can do to clarify for you is that we expect to reach a run rate of $100 million by the end of last year. We didn't quite meet that target because of some equipment delays that you mentioned, but those were installed later. We are now achieving that pace. Therefore, between now and the end of the year, we believe the revenue capacity at Ingenia will reach $140 million. So it will be somewhere between those two figures. Clearly, for the entire year, our revenue will be less than $140 million since that is the capacity we expect to reach by year-end.

Eugene Lowe, President and CEO

Bryan, regarding demand, we are planning to expand into the U.S. due to high interest in that product. As we've noted, we offer a distinctive value proposition there. Many of our representatives are eager to include Ingenia in their offerings because they genuinely believe it provides a superior solution. We don't see our main challenge as finding new sales, although that remains necessary; instead, it's about increasing our capacity, which can be challenging to scale. They have seen significant growth over the past two years and continue to do so. They have a strong business and leadership team, and we are enthusiastic about the opportunities ahead. We are focused on scaling operations in Mirabel, Canada, while also enhancing our capabilities in the U.S.

Bryan Blair, Analyst

That's great to hear. And then one last one, if I may. Sigma and Omega, again, seems like a great fit for your strategy, and there's an intriguing staff on the value of the combined new technology. For HVAC overall, to what degree does increased Sigma and Omega increase TAM going forward?

Eugene Lowe, President and CEO

The total addressable market is significantly smaller than that of cooling towers, as cooling towers are used in nearly every application. This particular solution is more specific to multistory buildings, which is where it excels. These buildings typically include a cooling tower and a boiler, which does enlarge the total addressable market to some extent, but it remains smaller than the cooling tower market overall. Nonetheless, this addition is very appealing. The slide may have been a bit misleading; when we discussed the order size for a hospital or a building, there is much more revenue involved. We are already engaged with engineers and contractors, and providing a comprehensive solution is an attractive aspect of what we offer.

Operator, Operator

Our next question comes from the line of Ross Sparenblek of William Blair.

Ross Sparenblek, Analyst

Mark, really quick. On the D&M order growth, was that all organic? Or what was the contribution there from the recent acquisition KTS?

Mark Carano, CFO

Yes, it was the order growth. Specifically, are you asking about the revenue side, Ross?

Ross Sparenblek, Analyst

Of the backlog, I guess. The kind of organic backlog, yes.

Mark Carano, CFO

Got your backlog. I'm with you. So backlog overall, just repeat the numbers for everyone. $346 million with the ending backlog, and that was up quarter-to-quarter from the fourth quarter by 56%. About 22% of that was KTS and the rest of it was organic.

Ross Sparenblek, Analyst

Okay. So still, I mean, pretty solid growth. Gene, when you kind of look over the last couple of quarters here, I mean, it's been accelerating. You get the sense that there's been a capital release from the IIJ funds, and we're kind of hearing some early rumblings of this and this business is immediately picking up here.

Eugene Lowe, President and CEO

We continue to look into the situation, but we can't identify many specific cases. I know there are some bids that could relate to our transportation business, which is our smallest platform. There is a lot of activity happening, but I'm uncertain about it, and Mark, I'm not aware if you have examined it, as I haven't noticed much business.

Mark Carano, CFO

Yes. I would say you're right, Gene. That's the only area where we can kind of put our finger on it, so it's maybe directly being funded by it.

Eugene Lowe, President and CEO

Probably more on the comp.

Mark Carano, CFO

Yes, that's correct. I feel like the team managing that business believes we have the right technology and are well-positioned in those markets. When considering KTS, a significant portion of that is funded by government spending, particularly related to the Department of Defense. It's in those sectors where the U.S. military is investing resources as it adapts to the future of warfare.

Ross Sparenblek, Analyst

Yes, that makes sense. Just a quick note on the margins for D&M; it's a bit of a detail. We're lowering the full year guidance after a strong first quarter, which already had tough comparisons. The core business appears to be performing well. Can you explain the slight decline in margins for D&M this year, which presumably relates to HVAC?

Mark Carano, CFO

From a cost perspective, the issues are mainly related to D&M. In Q1, we saw a strong year-over-year margin performance. I want to highlight a couple of points regarding that. Firstly, there was a decline in a high-margin project with software components within our CommTech business, which was not included in our forecast. While we expect some benefits to continue throughout the year, they will largely be countered by the tariff impacts across the D&M segment. Additionally, some lower-margin projects have been pushed from Q1 to Q2 and beyond. These factors are the main drivers in Q1 and will influence the rest of the year.

Operator, Operator

Our next question comes from the line of Steve Ferazani of Sidoti.

Steve Ferazani, Analyst

Mark, I wanted to return to the issue of the relatively low costs from the tariffs, which amount to $6 million. I'm considering this from a modeling perspective. I suspect that the price increases and surcharges may have a delay, and there might be some backlog that couldn't be surcharged. So, what I'm trying to understand is whether we should assume that the majority of the impact is in the second quarter, with a decrease as the year progresses.

Mark Carano, CFO

Yes, Steve, that's a good question. Looking at the big picture, I agree with you. We've been careful in considering the impact of tariffs on our pricing strategy. On the D&M side of the business, we have projects and other items in backlog, which limits our ability to adjust prices in the short term. However, as we move through the remainder of this year and into next year, we expect to offset these costs through price adjustments and other strategies related to the supply chain.

Paul Clegg, Vice President of Investor Relations

Yes, I believe your assessment of the timing of the impact of that $0.08 to $0.12 is accurate. It will likely break down as approximately 40% in the second quarter, followed by 30% each in the third and fourth quarters.

Steve Ferazani, Analyst

And again, we're talking about pretty small numbers here, but helpful to know. I got to ask about the demand side and how you're factoring it in. I know Eugene for years you are covering. I know you've talked about you're not that cyclical, and you've cited the COVID year. But you do have the location and inspection business. I know as we've gone through earnings season unless you have a certain end market exposure, most companies are not seeing it yet. But we know the expectation is slower U.S. growth as the year goes on. Or at least that's what all the smart economists are saying. Were you able to factor that in at all? Or do you just think regardless, it's going to be so small given your mix of businesses now?

Eugene Lowe, President and CEO

Yes, I think you are correct about Radiodetection being a key indicator of economic activity. Currently, we feel optimistic about our radio segment this year, as we are experiencing solid activity. A significant portion of our HVAC equipment sales is driven by replacements. When critical systems like cooling towers fail in hospitals, commercial buildings, or data centers, replacement becomes essential. As for cooling towers specifically, it typically takes about seven months for us to see demand reflected in projects following the Dodge index. Initial project funding leads to activity, but orders for cooling towers follow a delay as larger equipment, like elevators, is prioritized first. There is indeed a lot of uncertainty currently, and we need to consider how this might be affecting major capital expenditures moving forward, which could lead to future disruptions. While we do not foresee major impacts for 2025 based on our current outlook, any recession would certainly affect us. However, we believe we would be less impacted compared to other industrial tech companies, thanks to our backlog, replacement business, and essential government-mandated services. Nevertheless, we must stay vigilant. At present, we are encouraged by our observations and are seeing successes that are contributing to revenues exceeding our expectations.

Steve Ferazani, Analyst

Okay. That's helpful. I guess the flip side is if the end game here is increasing, reshoring and onshoring, that could be a very nice tail for you?

Eugene Lowe, President and CEO

No doubt. Almost every manufacturing plant would have an opportunity for us to sell our equipment in. And as you know, we do very well with a lot of those types of customers. Semiconductors, battery plants, automotive plants. It's an area where we have a nice position.

Operator, Operator

I'm showing no further questions at this time. I'd now like to turn it back to Paul Clegg for closing remarks.

Paul Clegg, Vice President of Investor Relations

Thank you, everybody, for joining the call. We look forward to seeing many of you at conferences and on the road over the quarter, and we look forward to talking to you again next quarter.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.