Earnings Call Transcript - SPXC Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q3 2025 SPX Technologies Earnings Conference Call. 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, 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. 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, 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 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 the new product front, our Olympus Max product, a dry and adiabatic cooling solution focused on the large-scale needs of data center customers, continues to receive excellent feedback and engagement from customers. We are on track to achieve our objective of booking $50 million of Olympus Max orders in 2025 for revenue in 2026. Now I'll turn the call back to Mark to review our financial results.

Mark Carano, CFO

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, CEO

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, CFO

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

Operator, Operator

The first question today will be from Bryan Blair of Oppenheimer.

Bryan Blair, Analyst

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, CEO

Okay. Can you hear us now?

Bryan Blair, Analyst

We can hear you now, yes.

Eugene Lowe, CEO

Thank you for your question, Bryan. As we look ahead to 2026, we feel quite positive overall. Our HVAC businesses are diversified, and we are optimistic across all areas. The markets showing the most strength are consistent with what we have observed in recent quarters, particularly in data centers where we have strong momentum. There is also significant activity in health care and institutional markets. In the industrial sector, we are seeing modest growth, which is encouraging, and there are opportunities developing in power activity. However, some markets such as commercial buildings and hotels have been weaker. Overall, we remain optimistic about the markets. Additionally, I am excited about our initiatives, especially the Olympus Max, which is our new data center cooling solution. This product opens a new market for us, and we aim for $50 million in bookings this year that will translate to revenue next year, for which we believe we are on track. We also plan to expand capacity in several businesses experiencing high demand, particularly TAMCO, Ingénia, and Marley. Regarding HVAC, I am confident in the end markets and our initiatives for growth. Third-party market trackers predict mid-single-digit growth for the non-residential sector, but we expect to outperform that through our initiatives. In D&M, our overall run rate remains steady with modest growth, showing geographical variations; the U.S. is stronger while Continental Europe is flatter, although there is growth in certain areas in the U.K. We have strong activity in our projects, and while some backlog extends beyond 2026, we see an increase in multiyear projects. Overall, I anticipate growth in D&M as well. The overall backdrop is positive. Mark, do you have anything to add regarding D&M?

Mark Carano, CFO

Yes, I would like to add that we are in a very strong position regarding our backlog for both segments, which are at or near all-time highs. Looking ahead to 2026, about 40% of that backlog is scheduled for delivery, and this is consistent across both segments. We are in a favorable position as we approach next year. Gene mentioned a few projects that were initially part of our 2026 backlog but were delivered in Q3 within our D&M segment. This was referenced in our Q2 call, and the revenue from those projects was recognized in Q3.

Bryan Blair, Analyst

Understood. I appreciate the walk-through. Encouraging trends overall. Could you provide a quick update on KTS and Sigma & Omega integration? How are those assets performing compared to the deal model? Additionally, given your significant balance sheet capacity, it would be great to hear more about your M&A pipeline by platform. Where do you see the most attractive opportunities? You mentioned several attractive targets; are there any that are potentially actionable in the near term?

Eugene Lowe, CEO

We are optimistic about both KTS and Sigma & Omega. Sigma & Omega is newer and still in the early stages, while KTS is more established and integrated with our CommTech business. We're seeing some positive developments, including government endorsements that establish them as a design standard. KTS has expanded into new areas, and we are excited about the technology they offer. In Q4, we are launching a joint product with KTS and our legacy TCI business, which has generated a lot of excitement. We also have a strong team at Sigma & Omega and a good success rate. The market for them includes multi-level applications like hospitals and hotels, which usually require boilers and cooling towers. They have a strong presence in Canada, and we believe we can help them grow in the U.S., particularly through our established Marley and Patterson-Kelley channels. We've already signed several new clients who are enthusiastic about Sigma & Omega's growth. They are also innovating with new products. Overall, we see both KTS and Sigma & Omega fitting well within our hydronics business, with competent leaders and teams that align culturally. Regarding M&A, we are actively pursuing opportunities and feel confident about strategic capital deployment going into 2026. While we will remain disciplined, we see an attractive array of prospects, particularly in engineered air movement and electric heat, although the HVAC sector currently has a more active pipeline. We also see interesting, albeit fewer, opportunities in Detection & Measurement. As we approach 2026, we feel good about the opportunities ahead. As Mark mentioned, we have effectively gained nearly $1 billion without EPS dilution, allowing us to expand our balance sheet while maintaining earnings. This positions us well for growth investments, including organic opportunities. Overall, we are very positive about the pipeline and opportunities we have in front of us.

Operator, Operator

And the next question will be coming from the line of Damian Karas of UBS.

Damian Karas, Analyst

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, CEO

I can provide some details, although there are some aspects we’re not ready to discuss. The TAMCO project is essentially finalized, and we’ve signed the lease for a 150,000 square foot facility that closely resembles our current site. We believe we can gradually increase operations there, and we are quite enthusiastic about this development. We plan to begin commissioning some equipment, but it will take time to ramp up. We expect to be up and running by the end of Q1, and we see this as a great opportunity for growth in Tennessee. The project is also capital light, with most of the necessary capital already invested.

Mark Carano, CFO

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

Eugene Lowe, CEO

The larger project will be the expansion of Ingénia. This will be a significantly bigger site, potentially three times larger. We're making solid advancements, but we're not yet in a position to provide specific details. We expect that by the time of our next earnings report, we will be able to clearly outline the investments and revenue growth potential for all of these initiatives. Mark, would you like to elaborate on that?

Mark Carano, CFO

Yes. I think we're just working through the finer details of the site. When we acquire that facility, it will affect the timing and the capital expenditures. As Gene mentioned, we will be ready to provide more details during our Q4 call, and we will walk everyone through our plan. Obviously, it's a much larger facility, so the capital...

Eugene Lowe, CEO

Therefore, it's more capital in there, for those of you who've... Know Ingénia.

Damian Karas, Analyst

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, CEO

In the current nuclear market in the U.S., there are approximately 100 nuclear plants, with about half utilizing cooling towers and the other half using once-through cooling systems that leverage bodies of water for cooling. We have a significant presence among those with cooling towers, which can come in various forms such as natural draft towers commonly associated with nuclear facilities or mechanical draft systems. This strong positioning is beneficial as demand for power continues to rise, making it a critically scarce resource. Upgrading cooling towers can quickly yield an additional 50 to 80 megawatts from a power plant, presenting potential opportunities for us within the existing infrastructure, which can include nuclear, gas, or coal plants. Regarding new nuclear, we haven't identified any immediate prospects within our planning horizon for the next 2 to 3 years. However, there is considerable activity in combined-cycle power plants across the U.S., which are currently the primary option for achieving baseload power. These plants are often developed alongside data centers, providing us with opportunities to engage in cooling tower projects, even though combined-cycle systems tend to be smaller in scale. Overall, we view these developments positively as we remain alert to new opportunities in the nuclear sector.

Operator, Operator

The next question will be coming from the line of Andrew Obin of Bank of America.

Andrew Obin, Analyst

So first question, I guess, some of your competitors or HVAC players have mentioned delays in large data center projects. I would assume this is due to the industry facing capacity issues across the value chain. Can you share any observations about any delays in large projects on your end?

Eugene Lowe, CEO

We haven't observed anything unusual regarding pushouts on large projects, even though we have several significant accounts in the U.S., Asia, and Europe. Large projects often come with imperfect planning, whether they are in power, automotive, or semiconductors, and data centers also fall into that category. While there is always some uncertainty regarding timing, there's nothing that stands out as abnormal. Our key customers exhibit very high demand and are transparent about their requirements, actively encouraging us to meet their timelines. To directly address your question, there may be minor delays from time to time, but nothing that seems out of the ordinary.

Andrew Obin, Analyst

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, CEO

If you look at our presence in residential, it's a relatively small part of our HVAC segment, primarily involving Weil-McLain boilers. This area sees a very high percentage of replacement demand, and we are actually experiencing good growth there. We estimate that in any given year, around 80% to 90% of our residential sales come from replacements. The commercial segment tends to have a higher proportion of new installations. However, we have not noticed any slowdown or negative impact from our customers. It’s still early in the heating season, but I spoke to our hydronics leader this morning, and it seems we are slightly ahead of our bookings plan. Overall, we feel we are on track. Mark, do you have anything else to add?

Mark Carano, CFO

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, CEO

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

Andrew Obin, Analyst

Well, we're super excited to be onboard, and thank you so much.

Operator, Operator

And the next question is coming from the line of Ross Sparenblek of William Blair.

Ross Sparenblek, Analyst

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, CEO

Yes, we aim to reach $50 million in sales for the product next year. I truly believe in the value proposition and uniqueness of our dry and adiabatic products, which showcase our core Marley strengths in engineering and industrial-grade offerings. However, we acknowledge there are significant differences among hyperscalers regarding how they design their data centers, whether they prefer wet or dry options. This variance can slow our entry into these markets. That said, we are on track and optimistic about our new product achieving $50 million, with potential for rapid growth into 2027 and 2028 if successful. We’ve started off strong with increased bidding activity and discussions. In some markets, as we’ve previously mentioned, there’s also a lot of budget bidding as companies seek projects and funding, leading to the typical bumps and shifts in timing with larger projects. Overall, we see a promising array of opportunities ahead and feel confident in our product lineup. We are excited to move into next year with our Olympus Max.

Ross Sparenblek, Analyst

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, CEO

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, Analyst

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, CFO

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, Operator

And the next question will be coming from the line of Joe O'Dea of Wells Fargo.

Joseph O'Dea, Analyst

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, CFO

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, Analyst

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, CFO

Yes. Regarding the backlog, there are a couple of points to consider. First, looking at it year-over-year, it's up 32%, with about two-thirds of that being organic growth, which is a positive sign. Sequentially, we typically experience a reduction in backlog at this time of year, especially related to our hydronics business, due to the preseason purchasing that occurs now. We will observe a similar situation in Q4 as we manage inventory levels. This provides some context for the current situation. As we approach the end of the year, I believe our backlog will likely be higher than it is today.

Operator, Operator

And the next question will be coming from the line of Brad Hewitt of Wolfe Research.

Bradley Hewitt, Analyst

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, CEO

Brad, I believe this is the most common question we've received regarding the equity raise, and it's a valid inquiry. However, the reality is that our strategy remains unchanged. In line with your observation, we do have a strong pipeline of opportunities. The primary reason for the raise was our EBITDA; we've outgrown our revolver. Our EBITDA growth has been substantial, leading us to recognize some opportunities that would have been difficult to pursue without this adjustment. We wanted to avoid being in a tight spot. Thus, we feel we're currently in a solid position. There has been significant activity, but no changes to our strategy. Typically, we've indicated that a smaller deal might have an enterprise value around $50 million, while a larger transaction might be around $500 million. Most of our opportunities fall within that range, with more than 90% fitting into it, and there are a few smaller and larger deals as well. That's our current situation.

Bradley Hewitt, Analyst

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, CEO

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, Operator

And the next question will be coming from the line of Jamie Cook of Truist Securities.

Jamie Cook, Analyst

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, CFO

Yes, Jamie, I'll begin with the D&M topic. To understand our updated guidance for the year, which has been largely influenced by D&M, it's important to recognize what factors are driving this as we look ahead to Q4. There are three key elements that align with Q3 and are interconnected. First is the improvement in KTS margins. We saw a slight increase in Q3, but expect to see a greater impact in Q4. The initiatives I mentioned will influence both Q3 and to a lesser extent Q4. Additionally, the better leverage was primarily a factor in Q3. Considering the KTS and margin benefits, this will be our largest quarter for that particular business this year. Does that clarify your question?

Jamie Cook, Analyst

Yes, that's helpful. And then on the 2027, 2028 EBITDA targets?

Eugene Lowe, CEO

Yes. I think I should start there and then you can dive in. During our Investor Day in early 2024, we reviewed 2023, where our EBITDA was $320 million. Is that correct? Yes, so...

Mark Carano, CFO

It was $310 million.

Eugene Lowe, CEO

We are at $310 million, and we believe we can double this in the medium term, which is about 4 to 5 years. I think we are making very good progress towards that goal. We increased from $310 million to $421 million last year and we expect to reach $505 million at the midpoint this year. We are experiencing strong growth, particularly in our HVAC segment, alongside some promising inorganic opportunities. If I were to estimate the 4 to 5 year timeframe, I would say I would be disappointed if it took the full 5 years; I believe we are ahead of schedule. Mark, do you have any additional comments on this?

Mark Carano, CFO

No, I feel good about where we sit, especially as I look at our end markets that are part of some of the longer-term megatrends driving the business.

Eugene Lowe, CEO

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, Operator

The next question will be coming from the line of Jeff Van Sinderen of B. Riley Securities.

Jeff Van Sinderen, Analyst

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, CFO

I’ll start, Jeff. I want to be cautious; we’re not in a position to share guidance for 2026 today. However, I don’t see anything out of the ordinary. I’m considering a few aspects. Regarding our corporate structure in Charlotte, I believe we are appropriately scaled and don’t need to add significantly as we grow the business. Next year, there will be some start-up costs related to HVAC, and we've already encountered a little of that this year with ongoing initiatives for data center development and new technologies, along with new plants coming online. While the initial aspects are positive, there’s potential for some drag, but it shouldn’t significantly impact our margin profile next year. Overall, I feel confident about what we've accomplished in the past few years, notably improving the margin profile of the HVAC business and restoring the D&M business margins to previous levels. Looking ahead, as we grow our top line, we should achieve operating leverage.

Jeff Van Sinderen, Analyst

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, CEO

Yes, I would say it's a very fast-moving and fluid environment. There are elements that can accelerate and move earlier than planned. Some colocation providers, for instance, might establish a facility and then seek a major tenant. Once they secure that tenant, they can suddenly progress very quickly. We observe movements in both directions within the market. It is indeed dynamic, with substantial activity and growth. We have seen some projects advance while also encountering the usual delays.

Jeff Van Sinderen, Analyst

Thanks for taking my question, and continued success.

Operator, Operator

And the next question will be coming from the line of Steve Ferazani of Sidoti.

Steve Ferazani, Analyst

It's been a long call, so I'll ask a couple of straightforward questions. You had strong free cash flow in the third quarter. You mentioned earlier that all remaining cash costs related to the discontinued operations were accounted for last year. Still, the cash flow this quarter is much stronger. Your balance sheet looks great now. However, as I review my model for the fourth quarter, if you experience the typical working capital reversal, you could see significant cash flow given the cleaned-up balance sheet. I'm interested in how you plan to use that cash in the fourth quarter.

Mark Carano, CFO

Yes, I believe your presumption is correct.

Steve Ferazani, Analyst

I don't want to give it, but it's sizable.

Mark Carano, CFO

Yes. It all comes back to the mergers and acquisitions pipeline we have in front of us. We feel confident about the opportunities that lie ahead. This is a significant part of the capital available to us for driving value creation. Additionally, we have the plant expansion. Although we haven't fully assessed its size yet, it will definitely be included in our overall capital deployment.

Eugene Lowe, CEO

No, I think it's a great question. Our model has really worked, and our average multiple has been around 11x. We usually get about 1.5 to 2 turns. So, you can bring it in at 9x, which is a really good value considering our average EBITDA acquired is 20%, and these deals have also been additive in terms of growth rates. The main aim of our M&A approach is to strengthen our competitive position and to expand. I don’t see any change in our strategy. Typically, smaller deals in the $50 million range will be a turn or two lower. In contrast, larger deals with more established management teams and systems tend to be a turn or two higher, but they usually offer more leverage and synergy. So, our model remains unchanged. We are seeing deals, particularly in the Detection & Measurement sector, going for 19x to 20x, but that’s not our focus. We prioritize cash returns, and our strategy will continue as it has been for the past year.

Operator, 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, CFO

Thanks, operator.

Operator, Operator

That concludes today's conference call. You may all disconnect.