SPX Technologies, Inc. (SPXC) Earnings Call Transcript

Thank you for standing by, and welcome to SPX Technologies Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Johann Rawlinson, Investor Relations. Please go ahead.

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; and Mark Carano, our Chief Financial Officer. A press release containing our second 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 News 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 integrated-related costs and nonservice pension items, among other items. Finally, we look forward to meeting with investors at various events during the upcoming months. Also, we are hosting an investor site visit at our Olathe, Kansas facility on November 3. Please let me know if you are interested in attending. And with that, I'll turn the call over to Gene.

Thanks, Johann. 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 second quarter of 2026 as well as an update on our full year outlook. We had a strong second quarter with year-over-year growth in adjusted EBITDA of 20% and adjusted EPS of 22%. Looking at our value creation initiatives. Organically, we continue to advance our capacity expansion initiatives and now expect $1.1 billion of total data center capacity once at full production, up from our previous expectation of $750 million. Inorganically, we recently announced the addition of Neptronic to the HVAC segment. This strategic acquisition complements our existing product offering and expands our capabilities into new adjacencies. Touching on our full year guidance. We are increasing the midpoint of our range to reflect higher data center volume, stronger performance from our Detection & Measurement segment and the Neptronic acquisition. The midpoint of our updated guidance now implies 27% adjusted EBITDA growth. Turning to our high-level results for the quarter. We grew revenue by 23% and adjusted EBITDA increased 20% year-over-year, primarily driven by strong organic growth in both segments and the benefit of recent acquisitions. As always, I'd like to update you on our value creation initiatives, starting with our organic growth activities. The capacity expansions across our HVAC facilities to meet the strong demand for our data center and custom air handling solutions are progressing well. They remain on track with the time line and capital requirements previously outlined. In July, we launched assembly activities for the OlympusMAX at our new Madison, Alabama facility and will add production capabilities in this facility during the first half of 2027. Production of our highly engineered aluminum dampers in TAMCO's new Tennessee facility continues to ramp as expected. And in Olathe and Springfield, throughput of our data center cooling solutions has exceeded our initial expectations. Based on the meaningful progress to date, we now expect total data center capacity to reach approximately $1.1 billion once in full production, up from our prior expectation of approximately $750 million. Turning to Neptronic. This acquisition represents a natural extension of our HVAC strategy and another important step in strengthening our differentiated high-value portfolio. Neptronic brings complementary product platforms, including intelligent controls, electric duct heaters, humidification solutions and actuated valves that expand our product breadth, while strengthening our capabilities across the HVAC control stack. Strategically, this acquisition advances SPX in 3 important ways. First, it deepens our controls and systems intelligence, moving us further up the solution stack from equipment-focused offerings towards integrated controls-enabled solutions. Second, it expands our addressable market through complementary products serving commercial, health care, institutional and mission-critical applications, including data centers. And third, it gives us additional opportunities to leverage SPX's global channels, OEM relationships and operational scale to accelerate Neptronic's growth while preserving its culture of strong innovation. Ultimately, this acquisition positions SPX to deliver greater customer value through more intelligent integrated HVAC solutions that improve performance, energy efficiency and operational intelligence while driving growth and long-term margin expansion. Now I'll turn the call back to Mark to review our financial results.

Thanks, Gene. Our second quarter results were strong. Year-over-year, adjusted EPS grew by 22% to $2.02. For the quarter, total company revenue increased 23% year-over-year with 17% organic growth. Consolidated segment income grew by $31.3 million or 23% to $167.1 million, while consolidated segment margin remained at 24.6%. In our HVAC segment, revenue grew by 27.6% year-over-year with 8.5% inorganic growth and a negligible FX tailwind. On an organic basis, revenue increased 18.9% with double-digit growth in both cooling and heating. Segment income grew by $14 million or 15%, primarily driven by higher volume. The 260 basis point decline in segment margin primarily resulted from capacity expansion-related start-up costs and the net impact of tariffs, both of which were consistent with our expectations. Segment backlog at quarter end was $919 million, up 59% organically year-over-year, primarily driven by strong data center demand. In our Detection & Measurement segment year-over-year, revenue grew by 13%. Segment income grew by 43% and segment margin increased by 610 basis points. These increases were largely driven by high-margin project volumes, including a project that executed earlier than previously forecasted. We also continue to see the benefit of segment synergy initiatives. Segment backlog at quarter end was $312 million, down year-over-year, primarily driven by higher project volumes in the quarter. Turning now to our financial position at the end of the quarter. We ended Q2 with $168 million of cash on hand and total debt of $615 million. Our leverage ratio as calculated under our bank credit agreement was approximately 0.7x at quarter end. Including the effect of the Neptronic acquisition, our leverage ratio was 1.4x. Q2 adjusted free cash flow was approximately $72 million. Moving on to our full year 2026 guidance. We are increasing our adjusted EPS guidance by $0.45 to a midpoint of $8.40. The increase reflects additional data center volume, our revised outlook for the D&M segment, incorporating higher volumes and margins and modest accretion from the Neptronic acquisition. As always, you'll 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.

Thanks, Mark. Current market conditions continue to support our 2026 outlook, which implies 27% adjusted EBITDA growth. In HVAC, core end markets remain healthy, including robust demand for our data center solutions. Within Detection & Measurement, our run rate demand remains healthy, while project-oriented businesses continue to see an active front log. In summary, I'm very pleased with our strong second quarter results and the momentum we've built through the first half of 2026. As we look to the rest of 2026, we expect to continue to drive additional shareholder value through both our organic and inorganic initiatives, including our ongoing efforts to expand capacity and deliver on increased data center demand, the integration of Neptronic and our other recent acquisitions, which further scale our HVAC platforms and strengthen our positions in key end markets and an active pipeline of attractive acquisition opportunities. The strength of our execution and end markets give us confidence in our increased full year guidance, which implies 27% adjusted EBITDA growth at the midpoint. Looking ahead, I'm excited about the opportunities in front of us. With differentiated businesses, attractive end markets and an experienced team, we believe we're well positioned to deliver sustainable long-term shareholder value. Before I close, I'd like to touch on a few organizational updates. John Swann, who has led our Detection & Measurement segment, will be retiring at the end of the year. John has had an outstanding career and consistently delivered results across organic and inorganic initiatives. As part of a thoughtful succession process, John has worked closely with his successor, Eric Kaled, to ensure a smooth and well-planned transition. Since joining SPX, Eric has demonstrated strong operational leadership and has delivered meaningful results across the business. Having led the Transportation and CommTech platform since 2019, he's well positioned to guide Detection & Measurement through its next phase of growth. Finally, we're pleased to welcome Brian Deck to our Board of Directors as an independent member. Brian brings significant industrial and operational expertise as the CEO of JBT Marel, and we look forward to benefiting from his perspective and experience. And with that, I'll turn the call back to Johann.

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

[Operator Instructions] Our first question comes from the line of Andrew Obin of Bank of America.

Just a question on D&M. It was a very strong performance. How much of the strength was project timing pull forward versus sort of a durable step up in underlying demand and also cadence of D&M into the back half?

Yes, Andrew, that's a great question. Listen, we're very pleased with the performance we saw in the quarter at D&M. I kind of break it down this way. If I think about the 600 -- plus 610 basis point increase, really about half of that was driven by favorable project mix in the quarter relative to the project mix that we had last year. That was something that was known we were expecting coming into the quarter. The balance of it and the majority of that balance really was project timing. We referenced a project that shifted forward into Q2. That actually moved from Q3 into Q2. And it was about $15 million in size at a high margin. So that move and that impact, along with what continues to be initiatives around driving synergies across the whole D&M platform. That's really what drove the balance of that 610 basis point beat. I think we've talked about this before, particularly with these projects at these revenue levels when a high-margin project kind of moves into a quarter like that, it leverages our fixed cost base very nicely. So you see a lot of accretion in the margins with respect to that.

Got you.

I think with your -- and your second question was.

Just cadence for the rest of the year.

Yes. I think that as I think about the back half of the year, Q4 is probably going to be larger than our Q3 numbers. I would expect the margins across both quarters to be very similar.

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

Congrats on a nice quarter. I guess just 2 questions. Gene, can you just elaborate on the -- obviously, the data center capacity is coming out quicker. I think you said it's up to $1.1 billion versus $750 million. Just color on how you got there, how much incremental is in 2026 versus 2027? And how you think that contributes to the -- accelerates potentially top line growth, I guess, over the next 12 to 18 months? And then second, Mark, just on the -- I know we had capacity additions and tariffs that weighed on margins in the second quarter. Can you just call that out? And then it also looks like you raised your margins a little in the back half for HVAC. So any color on that?

I'll get started, Jamie. We're very pleased with the capacity. A couple of things I'll point out here. Really, the capacity is coming from 2 broad areas. And just as a reminder to level set kind of where we are in data center volumes. We're approximately $150 million 2 years ago, $200 million last year and really came out with a plan of $300 million this year. We've seen some very strong demand for our solutions. We raised that to $350 million last quarter. And we've subsequently raised it again to $430 million for the full year as of now. So that's basically growth of about 115%. Really underpinning some of these expansions in revenue is getting more efficiencies through. And the 2 broad areas are, the first is the OlympusMAX. This is a very big, complicated product with very complicated controls. We've done a lot of work on this product over the past several years, but in the production process over the past 6 months, we've done a number of lean projects. We've done some productivity work, and we've also done some flow optimization. And the punchline is we're getting more throughput than we had anticipated. And this will really be seen to benefit us both. As a reminder, we make the OlympusMAX in both our Olathe, our core main cooling facility as well as the new Madison facility where we've just started assembling there. So one is we can get more OlympusMAX throughput. And then the second area would be really our core cooling business. And this is really most commonly our Everest product. We have seen very high demand for that product as well. And we've done a lot of work on blocking and tackling, I'd say, more space, better flow and a number of lean projects that have helped as well as augmented staffing and different ways to -- basically to get more product out the door. So it's really the combination of those 2 broad categories that have allowed us to really raise the $750 million to $1.1 billion, and we have very good conviction about that. But then also, that has been a contributing factor for why we have been able to get our $300 million up to $430 million this year. The teams have done some really nice work, and we feel good about that. Just as a -- not as a plug, but we are doing an Investor Relations or IR meeting in November, I believe. November 3 [indiscernible]. So if you guys want to come out and see some real world OlympusMAX is at Marley Everest Towers, we'd be glad to show you. But that's a big thing. And then the second question.

On margins.

Yes.

I think, Jamie, one -- maybe the easiest way to think about it is the 260 basis point decline year-over-year in the Q2 margins. Really, I mean, that was primarily driven by kind of 3 known items that we sort of contemplated as we forecasted the year. One was the net tariff impact. That actually hasn't changed. It was where we had expected it to be. The start-up costs similarly. And then we had a prior year comp that was a tough one in Q2. But all of those equal to about 80 basis points of a decline individually, give or take. And then we did see some modest inflationary headwinds. I'd probably size that around 50 basis points or so that impacted the quarter. With respect to the full year, really the raise in HVAC was driven by Neptronic. That was the 25 basis points increase. The balance of the forecast within HVAC is unchanged.

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

Congrats on the quarter. Another impressive step-up in data center revenue expectations for this year. Given the backlog and project visibility that you have along with accelerating throughput with the OlympusMAX and Everest, how should we think about your visibility into 2027, realistic growth ranges perhaps? And then the increase to $1.1 billion in capacity, what's now a realistic time line for you to ramp to that level of revenue?

Brian, why don't I start on the first, and then I'll hand it off to Mark on kind of how to think about the future. I think the punchline is we feel very good about our competitive position in data centers and the demand profile in data centers. We're both seeing existing or very significantly increasing demand with our existing hyperscalers. We're seeing a lot of activity with a variety of customers. And the punchline is I really think the market is shifting towards our solutions. So basically, a bigger and bigger portion of the market is coming -- becoming addressable by our solutions. And I think we have very good solutions here. We are seeing a lot more liquid cooling under the roof. And then for our products, I'd say probably dry seems to be the most favored solution, but we are also seeing adiabatic, and we're also seeing nice demand for our cooling towers. We have very good relationships with the hyperscalers. We have a lot of -- we had some nice wins with colos and neoclouds as well. But as we look ahead to '27, I feel very good about '27. Typically, our hyperscalers give us very good visibility for the forward several years. And the reason is they're nervous that they need our product to turn the data center on. So they're very -- they want to make sure that we can deliver the volumes that they want. There's a lot of direct feedback back and forth. You'll find these companies in our facilities. You see in there for 2 weeks at a time with 10 people. So we have very good direct voice of customer. So the point is I feel very good about '27 and then going forward, we see a very nice ramp in the forward years. But be careful about '27 guidance, Mark, how do you want to talk about how we're going to scale the capacity.

Yes. I think the way to think about it, Bryan, is -- and maybe let's kind of break it down when you think about where the data center work is emanating from. Olathe and Springfield have actually performed, I think, better than we initially expected. Clearly, we've been able to deliver more data center revenue this year as a result of that. And Gene, I think, kind of referenced, I mean, as we've built the OlympusMax in that facility, there's been a lot of learnings there. We've gotten much more efficient at how we've executed on that. The TAMCO business in Nashville, that's on track. We talked about that being at full capacity -- production capacity in sometime in 2027. And then I think as we bring Madison online, and we're manufacturing our first product there now, I feel actually good about the learnings that we've developed in Olathe and the Springfield facilities that, that will ramp smoothly and kind of on track. Now what we've said to date, I think, as you know, we expect that to be at full production capacity, call it, in the second half of 2028. So largely, I would say our view hasn't changed with respect to the ramp. That said, I would say there is a bias that it could be earlier if things continue to go well. But I think from where I sit today, it's probably a little too early to make that call.

Okay. That's fair. I appreciate all the color. With regard to Neptronic, we know modest accretion for this year. How should we think about growth rates going forward, importantly, the sustainability of very healthy margins. And then given the complementary applications and some of the new technology that you're bringing into the fold, how does Neptronic affect HVACs TAM?

Yes, Bryan, why don't I start with kind of some data about kind of the strategic logic and then Mark can kind of dive into how he thinks is going to affect us financing the growth rates and so forth. But first line is we're very excited that Neptronic is a part of SPX. The way that I would think about this is pretty simply, about half the business is very close to our core business, almost very similar products. They do electric duct heating. As everyone knows, we invented duct heating with INDEECO. That's a very important part of our electric heat business. They're in humidification. They actually have some very strong technology in humidification. I mean humidification is a very important part of a number of our businesses, particularly the custom air handling. If you look at Air Enterprises and Ingénia, that's a very important part. So half their business is very -- is either our existing business or very close core. I'd say the newest piece would be the controls. And while we do a lot of controls, we do controls for our hydronics business. We have controls for our cooling business, we have controls for electric heat. They have a more advanced set of controls, particularly in the configured controls, they have really, really good capability. And they win very nicely on the outside market. Our controls really that we have to date and all of our capabilities really for our own equipment. They have a very nice controls business where they work with third-party fan walls and other OEM HVAC equipment, and they can even operate at a higher level there. So we think this is a really part -- important part of strengthening our competencies and building our controls capabilities. I can tell you, a lot of our businesses are very excited that they're joining and what they can do and how we can innovate together there. So -- and the other thing I would say here is with both their heating, humidification and controls, we actually think we can accelerate their growth. The reason being we have a great channel. We have very good OEM relationships. We have very good data center relationships. So we can open a lot of doors and allow them to get more at bats, which we think would yield more growth. So very much like with TAMCO, with Ingénia, with a number of actually Canadian businesses that we have acquired, we think 1 plus 1 can equal 3. And Mark, do you want to talk about how we should think about this going forward?

Yes. Bryan, I think from a growth rate perspective, when you think about everything Gene said and across all the capabilities they have. I think this business is going to grow above our medium-term growth targets that we put out there. I would probably put it at kind of high single-digit growth rate. It will be different depending on the components that they sell, the business they sell. And obviously, I think most people have gathered from the information that we provided that it does have a nice high sustainable margin profile that is higher than the segment average kind of in -- on a segment income basis, I would say it's kind of in the low 40s EBITDA basis, kind of mid-40s.

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

I wanted to ask if you can just talk about contribution margins as the data center revenue sort of increasingly scales and the contribution margin profile of that revenue relative to broader HVAC portfolio, just given obviously the capacity investment and incremental engineering costs? And then just related to that, how much of Neptronic's current revenue is exposed to data centers? And is there an opportunity to kind of expand that penetration through sort of your existing customer relationships?

Yes. Amit, thanks. With respect to the data center business, what we've said, we don't really talk about it from a contribution margin perspective. We really talk about it from a segment margin incrementals perspective. We would expect those incrementals to be similar or consistent with the balance of the HVAC business. So we typically identify those as sort of high 20s to low 30s incrementals.

And then...

Gene, do you want to talk about the Neptronics.

Yes, sorry, go ahead.

Yes. On the Neptronics, they do have some nice data center presence. I would say they're very similar to our HVAC data center percentage, if you look at this year, and I'd say actually maybe a tad higher there, but similar, they've had some good success, and we actually see some very nice opportunities for growth there going forward.

Okay. And then after Neptronic, I mean, you still have a nice amount of capacity and net leverage is sort of under 1x. And you guys have a very good track record of kind of identifying and paying the right multiple for these types of quality assets. Does the pipeline look good? Just be curious in terms of how you think about the go-forward opportunities after what you just did.

Yes, sure. I think -- well, first thing, I think we were -- I believe it was 0.7 at quarter end, but pro forma with Neptronic, I believe we're 1.4 -- yes, you're right. That's still below our target of 1.5 to 2.5, and we generate so much cash that, that will be very low by the year-end. So you're right, we have a lot of capacity here. We actually see a lot of very attractive opportunities. I'd say the areas that we see a lot of activity right now would be in Detection & Measurement on location and inspection. We think there's some very nice opportunities there as well as CommTech and transportation. I would say electric heat, we've obviously just added Thermolec and Neptronic to electric heat. So that's actually been very nice additions that really strengthens that business and provides some very complementary products. I would say, if you look across HVAC, where do we see the opportunities? The biggest number of active opportunities would be in engineered air movement, a number of very attractive opportunities. And I would say we're talking to or we have on the board. And so the punch line to your question is we've done a lot in the first 6 months. If you look at the amount of capital we've deployed, there's still a very attractive strategic set of opportunities even over the next 6 months. So we would expect to continue growing here.

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