Earnings Call Transcript - SPXC Q1 2026

Operator, Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2026 SPX Technologies Earnings Conference Call. Operator instructions. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Carano. Sir, please begin.

Mark Carano, CFO

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. I'm also excited to be joined by our new Head of Investor Relations, Johann Rawlinson. He has joined us from the Hertz Corporation, where he served as Head of Investor Relations for the last 5 years. 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 intangible amortization expense, acquisition and integration-related costs, nonservice pension items, among other items. Finally, we look forward to meeting with investors at various events during the upcoming months. And with that, I'll turn the call over to Gene.

Eugene Lowe, President & CEO

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 first quarter of 2026 as well as an update on our full year outlook. We had a strong start to the year with year-over-year growth in adjusted EBITDA of 23% and adjusted EPS of 22%. We continue to execute well, driving significant profit growth in both segments and making meaningful progress on several key initiatives. We are raising our full year guidance range to reflect our strong performance in Q1 and outlook for the remainder of the year, partially offset by the impact of the recent changes to the Section 232 tariffs. We do not expect these tariffs to impact 2027 earnings. Looking ahead, we remain well positioned to continue executing on our organic and inorganic value creation initiatives supported by our robust M&A pipeline. Turning to our high-level results for the quarter. We grew revenue by 17.4%, driven by the benefit of recent acquisitions and organic growth in both segments. Adjusted EBITDA increased 23% year-over-year with 90 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. The capacity expansions across our HVAC facilities to meet the strong demand for our data center cooling and custom air handling solutions are progressing well. They remain on track with the time line and capital requirements outlined last quarter. In Q1, we began producing highly engineered aluminum dampers in TAMCO's new Tennessee facility and expect production to steadily increase throughout the year. We also began production of the OlympusMAX in our Olathe, Kansas facility in the first quarter. Additionally, the Madison, Alabama facility build-out is well underway. We still expect to have assembly capabilities for OlympusMAX and custom air handling products in the second half of this year and initial production capabilities in the first half of 2027. Turning to Detection & Measurement. We continue to advance our new product initiatives across the segment. Our location and inspection platform recently launched a new locate performance management software that meaningfully expands the real-time analysis of our customers' critical data that is seamlessly transferred from our radio detection precision locators in the field. We believe this solution significantly enhances how our customers locate underground utilities by increasing their efficiency, safety, accuracy and overall data management capabilities. And now I'll turn the call back to Mark to review our financial results.

Mark Carano, CFO

Thanks, Gene. Our first quarter results were strong. Year-over-year, adjusted EPS grew by 22% to $1.69. For the quarter, total company revenue increased 17.4% year-over-year, primarily driven by the benefit of acquisitions and strong organic growth in HVAC. Consolidated segment income grew by $25 million or 22% to $135 million, while consolidated segment margin increased 100 basis points. In our HVAC segment, revenue grew by 22% year-over-year with 11.5% inorganic growth and a modest FX tailwind. On an organic basis, revenue increased 9.6%, with solid growth in both cooling and heating. Segment income grew by $15 million or 20%, primarily driven by higher volume, while segment margin decreased 40 basis points, largely due to start-up costs associated with the capacity expansions. Segment backlog at quarter end was $755 million, up 38% organically year-over-year, primarily driven by data center demand. In our Detection & Measurement segment, revenue grew by 8.3% year-over-year. The one month of inorganic revenue from KTS contributed 3.9% and FX was a modest tailwind. On an organic basis, revenue increased 3%, primarily driven by higher volumes in our transportation platform. Segment income grew by $10 million or 28% and segment margin increased 410 basis points. Increases in segment income and margin were primarily driven by higher volume and a favorable mix, including greater-than-typical high-margin software volume. Segment backlog at quarter end was $333 million, down modestly year-over-year. Turning now to our financial position at the end of the quarter. We ended Q1 with $158 million of cash on hand and total debt of $674 million. Our leverage ratio, as calculated under our bank credit agreement, was approximately 0.9x at quarter end, below our long-term target range of 1.5 to 2.5x, giving us significant capacity to pursue accretive growth opportunities. Q1 adjusted free cash flow was approximately $16 million. In addition, during the quarter, we received approximately $60 million in cash proceeds following the completion of the sale of Crawford United's Industrial and Transportation products business. As a reminder, these businesses were reported in discontinued operations and not part of our original 2026 guidance. And net of these proceeds, the implied EBITDA multiple for the acquisitions of the Air Enterprises and Rahn Industries, formerly the Air Handling segment of Crawford United, is approximately in line with our average acquisition model. Moving on to our full year 2026 guidance. We are increasing our adjusted EPS guidance by $0.15 to a midpoint of $7.95 to reflect our strong Q1 results, particularly in D&M, and additional data center-related volume anticipated to be delivered in the second half of this year. Our updated guidance reflects a $0.05 to $0.10 impact from the recently announced changes to the Section 232 tariffs. This headwind is expected to predominantly affect HVAC in the second quarter. Excluding this tariff headwind in Q2, we expect first half adjusted EPS gating to be similar to the prior year. As always, you will find our updated 2026 guidance on this slide and modeling considerations in the appendix to our presentation. And with that, I'll turn the call back over to Gene for a review of our end markets and his closing comments.

Eugene Lowe, President & CEO

Thanks, Mark. Current market conditions support our 2026 outlook, which implies 21% adjusted EBITDA growth. Within our HVAC segment, our core end markets remain resilient, and we continue to see strong demand for our data center solutions. In Detection & Measurement, our run rate businesses continue to see solid demand supported by new product introductions. For our project-oriented businesses, the front log remains active. In summary, I'm pleased with the strong start to 2026. We are executing at a high level, and our key initiatives, including the capacity expansions and the integration of recent acquisitions are on track. We are confident in our increased full year guidance, which implies adjusted EBITDA growth of 21% at the midpoint, and we remain well positioned to navigate the changing tariff environment. Looking ahead, I'm 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 to Johann.

Johann Rawlinson, Head of Investor Relations

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

Operator, Operator

Operator instructions. Our first question or comment comes from the line of Andrew Obin from Bank of America.

Andrew Obin, Analyst

Can we just talk just on your HVAC business. Very strong growth even with data centers. But if you back data centers out, what end markets really stand out to you in terms of strength?

Eugene Lowe, President & CEO

Yes, sure. If you look at it, you're right, the growth is strongest in data center. With the change in outlook this year, we moved our data center growth somewhere from the neighborhood of 50% to 70%. If you look at the rest of HVAC, we're mid-single digits, maybe a hair above that. Really, what we're seeing outside of data centers: health care and pharma remains very, very strong. We're seeing power be very strong. I think some of this is somewhat linked to data center. This would be both on new power and aftermarket. We're seeing some heavy industrial activity as well. And then the aftermarket has been very strong for us. So in general, we've seen a number of areas of strength across HVAC. Areas of softness have not changed a lot quarter-to-quarter. Commercial real estate still remains at a relatively low level, same with hotels. The institutional market—universities and government—has been healthy over the past couple of years and is relatively flat this year from what we're seeing in the early part of the year. We've called out softness in battery and semiconductor, which was very strong a couple of years ago; that has been lower recently. Having said that, we actually see some nice new opportunities coming, some bidding. That could be something that is coming back on the upswing. Overall, we're feeling very good about our markets, both within data center and outside of data center.

Andrew Obin, Analyst

And on Detection & Measurement, you highlighted strength in transportation. I think military was an area of strength. There was some pull forward. How should we think about that? Any benefit from what's happening in Iran on your business? And just in general, how did the government business do?

Eugene Lowe, President & CEO

So I think we touched the government in a lot of ways. Transportation tends to be more the U.S. municipal markets. The area of exposure that the Iran impact could affect would be more on the CommTech business. We've had very strong demand there over the past couple of years, and we expect that to continue. CommTech, as a reminder, is our legacy TCI ECS business; it does a lot of drone detection and so forth with the addition of KTS. We see continued growth there, but I wouldn't say we see any real step change in growth because there's been a lot of activity over the past couple of years. So it's very active. We like our value proposition. But I don't think it's something that, at least at this point in time, materially changes our mid-single-digit anticipated growth rate for D&M.

Andrew Obin, Analyst

Thanks for the color on CommTech.

Operator, Operator

Our next question or comment comes from the line of Joe O'Dea from Wells Fargo.

Joseph O'Dea, Analyst

Can we just talk about this? The step-up in the HVAC orders in the quarter, and just the timing of shipments around that, as well as when you talk about the front log, as we see that backlog number step up to where it is, you're just trying to think about moving forward and expectation setting and the degree to which there was a sort of concentrated amount of activity? Or as you look forward, do you see that strength persisting?

Mark Carano, CFO

Joe, I'll start off. With respect to the backlog, in our prepared remarks, we talked about data centers and there's real strength there in those markets, and we're seeing those orders come through. We also raised our guide for the year on the HVAC side, largely driven by the data center market. So we're seeing opportunities, orders and bookings going into backlog for 2026. And as we look out into 2027, we're seeing opportunities there that will be executed next year. So that market, I would say, is obviously very healthy. The momentum is strong there. It sets us up well for 2026, and we'll see as we look into 2027.

Eugene Lowe, President & CEO

If you look at the data center market overall, demand strength is very strong. We would say it's accelerating. We're seeing this across our different product lines. Some of our key customers are looking to accelerate, and we're able to expand capacity this year. That's how we've taken our growth rate from 50% to 70% in data centers this year. Beyond that, we actually see attractive runway looking ahead to 2027 and 2028. We have a good customer mix with several hyperscalers and colos, good global presence, and we have very good communication and visibility with our data center customers on expected demand. Overall, we're very pleased with what we're seeing in data center and we think we're getting nice traction in that market, and we expect that to continue.

Joseph O'Dea, Analyst

I appreciate the color there. And then on the tariff and sort of cost inflation front, just in terms of your response to that? How much of that is a pricing response? How much of that is a cost mitigation response? And then in particular, where you're manufacturing outside of the U.S., what's your timeline to bring more of that into the U.S. to help on the mitigation side?

Mark Carano, CFO

A couple of comments. We talked about roughly $10 million of gross costs from the tariff changes. We believe we can offset about 50% of that primarily through price, and we have other levers to pull as well, so that gets you to a lower net impact. Probably 75% to 80% of that impact will fall within the second quarter of this year. That relates to a couple of our businesses in Canada— the Ing nia business and the Sigma & Omega business—that have backlog today that's already priced. As we go through the back half of the year, we think the impact will be de minimis. In 2027, we don't expect to see any impact from tariffs. With respect to your second question, we're largely in country for country. We manufacture in the region that we're selling in. For the Canadian businesses, for example, the TAMCO expansion in Tennessee and the Madison facility will help move some manufacturing into the U.S. and create that in-country-for-country model.

Operator, Operator

Our next question or comment comes from the line of Brad Hewitt from Wolfe Research.

Bradley Hewitt, Analyst

So you mentioned there were some start-up costs and related inefficiencies with HVAC capacity expansions. Curious if you'd be able to quantify how much of that HVAC margin miss versus your expectations was due to the capacity ramp? And have you seen anything so far that kind of changes your thinking about the near-term timing of the ramp or the margin impact?

Mark Carano, CFO

Brad, I think in our last call we highlighted the start-up costs. If you do the math around what we said, it would get you to about $8 million to $9 million of start-up costs, predominantly landing in the first half of the year. About two-thirds of it will impact Q1 and Q2. Those start-up costs were expected. From our perspective, the margin performance in Q1 was on track with expectations. If you peel out those start-up costs and just look at the operating leverage and the accretion from the acquisitions, you'd see roughly 40 basis points of margin lift absent the start-up costs.

Bradley Hewitt, Analyst

Okay. Great. And then maybe switching over to the D&M side of things. Curious if we could kind of unpack some of the moving pieces there with the revenue outlook unchanged, but margins bumped up by 75 basis points for the year. It sounds like there may have been some pull forward on transportation, but any color on how that project timing shifted and the resulting impact on the segment seasonal guide for the year would be helpful.

Mark Carano, CFO

It wasn't a project pull forward. What we saw was an expanded scope on an existing project we're executing in the transportation segment. It's one of our larger multiyear projects and includes a software scope. The customer decided to expand that portion of the project. It wasn't something in our forecast or backlog; it effectively dropped in. The software components have high margins. We don't disclose specific margins for competitive reasons, but when you expand that scope it leverages through and benefits margins. The benefit from this expanded scope and project is a key driver of the 75 basis point improvement in our full year guide.

Operator, Operator

Our next question or comment comes from the line of Jamie Cook from Truist Securities.

Jamie Cook, Analyst

Just understanding some of the margin impact in the quarter that you spoke to for the year related to tariffs and capacity additions. Mark, what's your comfort level in the ability to put up normalized incremental margins as we exit 2026? I'm concerned capacity could continue to weigh on margins. Second, was there anything unusual as you think about the cadence of orders or sales throughout the quarter and as we're into April, given some of the macro uncertainty?

Mark Carano, CFO

I'm very confident in our ability to deliver our traditional incremental margins in the HVAC business, particularly through the back half of the year and into next year. If you strip out the impact of the expansion costs and a modest tariff impact, you'll see operating leverage of approximately 60 to 70 basis points, and the inorganic piece contributes another 10 to 20 basis points. We are seeing that when you strip out those costs. I have confidence in what we're doing now and I'm not worried about it as we go into next year.

Eugene Lowe, President & CEO

On the end markets question, we are feeling very good. We have a small amount of sales into the Middle East—less than 1%—and we are seeing some impact there, which is to be expected, but it's not material. Across all of our businesses, we track bookings closely by end market and we are a bit ahead of where we thought we'd be in bookings. So overall, we're comfortable with what we're seeing on end market demand.

Operator, Operator

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

Bryan Blair, Analyst

I was curious, how did radio detection perform in Q1? How is your team thinking about Q2 and full year revenue performance? And to what extent is the outlook influenced by the new technology and product rollout that you cited?

Eugene Lowe, President & CEO

We're feeling very good about radio detection. They are the global leader in underground location equipment with a very strong presence in Asia, Europe and the U.S. Their revenue has been modestly flat over the past couple of years, partly due to some slowness in parts of Europe, the U.K. and some Asian countries. But we see nice momentum now, both in end market demand and due to innovation we're bringing to market. I mentioned locate performance management in the prepared remarks—this is an area where we believe we have a significant advantage. We're also a leader in mapping solutions and integration with utility ERP. It's working: radio is performing very well to date. I speak with every GM on the day of these calls, and we like what we're seeing.

Mark Carano, CFO

Bryan, we are forecasting mid-single-digit growth for that business this year, and we're seeing low- to mid-single-digit growth in the first quarter, particularly in the U.S. market.

Bryan Blair, Analyst

Okay. That's great to hear. And it's obviously very early days, but maybe offer a quick update on the integration of Air Enterprises, Rahn and Thermolec. Have there been any surprises, positive or negative to date? And as always, it would be great to hear a little more color on your M&A pipeline and the prospects for capital deployments over the next few quarters.

Eugene Lowe, President & CEO

The punchline is we're very pleased with both acquisitions. The Air Enterprises and Rahn transaction was a bit more complicated because we acquired Crawford United and then successfully sold the noncore piece within the quarter. I'm very pleased with Air Enterprises and Rahn. Air Enterprises is a strong custom air handling solution with unique capabilities and very good leakage rates. Thermolec has a very good team and market position; it strengthens our electric duct heating leadership in Canada. We see synergies by leveraging channels to grow their products and vice versa. After the sale, both of these were acquired at attractive valuations, around our normal acquisition multiple of roughly 10.5 to 11x before synergies. With captured synergies, we're effectively bringing these businesses in at about 9x EBITDA. We feel we've acquired two very good companies and are off to a nice start. Regarding the pipeline, even after these acquisitions, our leverage is about 0.9x, below our target. We have significant capacity. The areas we see the most opportunity in HVAC remain engineered air movement and electric heat. We're also seeing more Detection & Measurement opportunities, with intriguing opportunities in transportation, CommTech and AtoN. The pipeline is robust and the flywheel is working. We are pleased with Sigma & Omega and KTS integrations last year as well; they fit nicely and add scale and technology to the business. I feel good about our inorganic strategy and the opportunities in front of us.

Operator, Operator

Our next question or comment comes from the line of Joe Giordano from TD Cowen.

Joseph Giordano, Analyst

Just to follow up on the capital deployment side, can a disciplined acquirer be successful in the market like this right now? Valuations on attractive assets seem to be spiraling higher and people are willing to pay. How do you think about maintaining discipline in a market that seems to lack it?

Eugene Lowe, President & CEO

Great question. Our M&A strategy always starts with strategy: how we get full potential organically—new products, channels, geographies, lean, digital and AI. That process defines our M&A targets. Approximately half of our M&A targets have been proprietary deals with no banker involved, and we like that. Where bankers are involved, we remain disciplined. There are segments with valuations we will not play. Our average valuation over 18 acquisitions before synergies is roughly 10.5 to 11x. With synergies, you're talking another 1.5 to 2x captured. We're effectively bringing businesses in around 9x EBITDA post-synergy. We won't chase transactions in the high teens or 20x EBITDA range. Some data center companies have been acquired at 20, 25, 30x EBITDA—those are not our cup of tea. Focus on strategy and discipline; we still have a tremendous amount of opportunity in front of us and have been able to deploy capital prudently.

Joseph Giordano, Analyst

Anything noteworthy you're seeing in terms of inflation? Some readings are ticking higher. How are you planning around that?

Mark Carano, CFO

You're referring to input costs like steel and aluminum. Those costs have moved up a little. As a share of total cost of goods sold, they represent a mid-single-digit exposure. Given we do a lot of engineered-to-order work, our ability to pass incremental costs through to price in near real time puts us in a good spot and has allowed us to mitigate inflationary pressures so far. We monitor this closely, but I'm not overly concerned currently.

Operator, Operator

Our next question or comment comes from the line of Amit Mehrotra from UBS.

Amit Mehrotra, Analyst

Mark, maybe just give us a sense of how you're thinking about the second quarter, so we can calibrate our expectations. There's tariffs, new capacity and good growth in data centers. Any color on organic growth and margin by segment in the second quarter would be helpful.

Mark Carano, CFO

Broadly, the markets we participate in remain healthy. We're not seeing anything that would indicate a tipping point. In the prepared remarks, we suggested the first half gating would be similar to the prior year, excluding the tariff impact. Absent that tariff, you should expect comparable gating to last year. HVAC revenue should be up sequentially in Q2. D&M can be impacted by timing of project revenue, which can create quarter-to-quarter variability, but we feel good about where we sit.

Amit Mehrotra, Analyst

When you say sequentially up, are you referring to year-on-year growth being up from the 9.6% or just absolute revenue up sequentially in HVAC?

Mark Carano, CFO

Yes, I mean up year-on-year.

Amit Mehrotra, Analyst

And a more strategic question: you're adding a lot of capacity and raised data center growth to 50%-70%. Can you update us on what percentage of revenue you expect data centers to be? And when you ramp up Tennessee, Mirabel, Madison, how much revenue can that unlock? It feels like you're more capacity constrained than customers seem to be.

Mark Carano, CFO

Our Olathe facility is a primary driver of incremental data center capacity for 2026 and came online earlier than anticipated, allowing us to meet more demand. Our expansions would give us the ability to serve about $550 million of incremental revenue in the data center market. These sites are constructed with flexibility to drive the product lines most needed at any time. Olathe should be at full capacity by mid-2027. The Tennessee TAMCO facility is expected to be at full capacity in 2027. The Madison facility will do assembly in the back half of this year and won't have full production capacity until the first half of 2027; it will ramp thereafter. Our view on capacity hasn't changed: these expansions will support substantial incremental data center revenue.

Eugene Lowe, President & CEO

To clarify, that $550 million figure was incremental off of a $200 million base. So if you consider being at roughly $350 million this year for data centers, you can say we have about $400 million more capacity beyond that. Our existing facility expansions are largely in production now and have gone well. TAMCO already has three lines up and is adding a fourth and is shipping. The Madison, Alabama facility is the longest lead time; we'll produce product there in the back half of the year and see a nice ramp next year. So that is where we sit today.

Operator, Operator

Our next question or comment comes from the line of Jeff Van Sinderen from B. Riley Securities.

Jeff Van Sinderen, Analyst

A little bit more on the data center area. Are you seeing any supply chain delays or any other color on supply chain around data center for you?

Eugene Lowe, President & CEO

Not for us. There are several critical components we manage, and before taking on more purchase orders we go through a rigorous process to ensure supply chain continuity. We've had to expand some suppliers due to rapid growth, but we feel very good about where we are now and are actively working to ensure we remain comfortable heading into 2027 and 2028.

Jeff Van Sinderen, Analyst

Okay. Great. And then I think you mentioned semiconductors and I'm just wondering what kind of work you're seeing to bid on there.

Eugene Lowe, President & CEO

There's a couple of bids going on now. We believe we're well positioned for at least one opportunity that is under confidentiality. We're typically strong in semiconductor with many of the largest OEMs and sometimes specified for cooling towers. As that market bubbles up, we think we'll be very well positioned to capture more opportunity. We're seeing early bidding and believe we can convert opportunities to revenue.

Jeff Van Sinderen, Analyst

Okay. Great. And then just one more to clarify: it sounds like with the Middle East, I realize less than 1% of your business is there. Do you anticipate any impact from higher oil prices and the macro around that on your business? Is that a fair assessment?

Eugene Lowe, President & CEO

We don't expect a material impact. Because we are an engineered product company, we rarely build to inventory. Each cooling tower, for example, is unique and priced with current cost information, so it's rare we have persistent PPV. We price in near real time, which helps mitigate inflation. We monitor inflation and manage it, but our systems and the engineered/configured nature of our business put us in a good position.

Operator, Operator

Our next question or comment comes from the line of Walter Liptak from Seaport Research.

Walter Liptak, Analyst

I want to stick with the data center questions. Last quarter, data center numbers were $200 million in 2025 going to $300 million. I wasn't sure I fully understood why you're taking that number now up to $350 million.

Eugene Lowe, President & CEO

The punchline is the demand is there. Many of our large customers are pushing for accelerated deliveries. We pulled different levers and added new lines, finding ways to expand capacity to meet demand. This is predominantly in our Olathe and Springfield facilities, which is driving the increase.

Walter Liptak, Analyst

Great. As a follow-up, was the data center demand during the quarter driven by progress with new hyperscalers or existing customers looking for more capacity and quicker lead times?

Eugene Lowe, President & CEO

It's both. Existing large customers want more and are increasing CapEx, which is front and center. Several existing customers and some new large hyperscalers and colos are involved. The activity is broad-based across hyperscalers, chip manufacturers and colocation providers. We bring a lot to the table: our cooling towers, TAMCO dampers and air movement technologies, and growth in the dry and adiabatic area. Customers want custom engineering, modularity, and efficiency to improve PUE and WUE, which aligns well with our strengths. The market is active, moving quickly, and it's exciting.

Johann Rawlinson, Head of Investor Relations

Thank you all for joining today's call. We look forward to updating you again next quarter. Operator, with that, we can end the call. Thank you.

Operator, Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.