Operator: Good day, and thank you for standing by. Welcome to the Q3 2026 SPX Technologies, Inc. Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message that your hand is raised. To withdraw your question, please press star one one again. In the interest of time, we ask that you limit yourself to one question and follow-up. Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Johann Rawlinson, Vice President, Investor Relations.
Johann Rawlinson: Thank you, operator, and good afternoon, everyone. Thank you for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. A press release containing our 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.
Johann Rawlinson: 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.
Johann Rawlinson: 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, and non-service pension items, among other items. Finally, we look forward to meeting with investors at various events during the upcoming months. With that, I will turn the call over to Gene.
Gene Lowe: Thanks, Johann. Good afternoon, everyone, and thank you for joining us. On the call today, we will provide you with an update on our consolidated and segment results for Q3 2026, as well as an update on our full-year outlook. We delivered a strong Q3. Adjusted EPS grew by 20%, marking the fifth consecutive quarter of a 20% plus year-over-year growth. Our HVAC segment delivered excellent growth during the quarter, driven by strong demand in core end markets and the continued execution of our capacity expansions. The D&M segment delivered another quarter of strong margin performance. Our recent acquisitions are performing well and delivering on our strategic objectives. Inorganically, we recently announced the addition of FIS Water to the HVAC segment. This acquisition complements our existing cooling product offering and expands our capabilities in attractive adjacencies.
Gene Lowe: Finally, we are updating our guidance to reflect our Q3 results and outlook for Q4. At the midpoint, our updated guidance implies approximately 25% adjusted EBITDA growth for the full year, reflecting continued momentum in both segments. Turning to our high-level results for the quarter. We grew revenue by 21% and adjusted EBITDA by 22% year over year, primarily driven by robust organic growth in the HVAC segment, strong margin performance in the D&M segment, and the benefit of recent acquisitions. In HVAC, we experienced the effects of higher than forecasted growth-related inefficiencies resulting from an increasing ramp in production levels necessary to meet accelerating customer demand, as well as elevated input costs. As always, I would like to update you on our value creation initiative, starting with our organic growth activities.
Gene Lowe: The capacity expansions across our HVAC facilities to meet the strong demand for our data center and custom air handling solutions remain on track with the timeline and capital requirements previously outlined. We continue to expect approximately 1.1 billion of total data center capacity once it is in full production. Importantly, Madison commenced assembly activities during the quarter, shipping both OlympusMAX and Ingénia products, and will ramp its production throughout the balance of the year. Turning to new product innovation. Our heat trace launch is gaining momentum, providing a new avenue for growth across both industrial and commercial applications. Early customer engagement has been strong, and we see meaningful opportunities to scale the offering through our established channels. Turning to FIS Water.
Gene Lowe: This acquisition enhances our cooling platform with complementary water management and control solutions that broaden our offering to customers and strengthen our position in attractive end markets, including data centers. These products are typically paired with cooling towers. We believe FIS Water will benefit from SPX's global channels, OEM relationships, and specification-driven sales capabilities, creating additional opportunities for growth. We welcome the FIS Water to the SPX team. With that, I will turn the call over to Mark to review our financial results.
Mark Carano: Thanks, Gene. Our Q3 results showed strong growth. Year-over-year adjusted EPS increased by 20% to $2.21. For the quarter, revenue increased 20.5% year-over-year, with 11.8% organic growth, 8.5% inorganic growth, and a negligible FX tailwind. Adjusted EBITDA increased by $29.6 million, or 21.7%, to $165.7 million, primarily driven by strong organic growth and the benefit of recent acquisitions. Adjusted EBITDA margin increased by 20 basis points to 23.2%. In our HVAC segment, revenue grew by a record 35.5% year-over-year, with 13% inorganic growth and a negligible FX tailwind. On an organic basis, revenue increased 22.3%, driven by growth in both heating and cooling, including strong growth in data center volumes. Segment income grew by $26.4 million, or 28%, primarily driven by strong organic volume and acquisitions.
Mark Carano: Segment margin declined approximately 140 basis points, principally due to the growth-related inefficiencies and elevated input costs that Gene noted earlier, with the former primarily associated with additional labor and outsourcing costs. Segment backlog on an organic basis increased 69% year-over-year, 15% sequentially, to approximately $1.1 billion, crossing the $1 billion mark for the first time. In our Detection and Measurement segment, revenue decreased 7.7% year-over-year, largely due to the prior year period benefiting from project timing, as highlighted in prior earnings calls. Segment income increased by approximately $1 million, or 1.7%. Segment margin increased by 260 basis points. The increase in margin was largely driven by favorable project mix and continued benefits from our segment synergy initiatives, as well as a commercial resolution with a customer. Segment backlog ended the quarter at $322 million, up 3% sequentially.
Mark Carano: Turning now to our financial position at the end of the quarter. We ended Q3 with $121 million of cash on hand and total debt of $1.3 billion. Our leverage ratio, as calculated under our bank credit agreement, was approximately 1.8 times at quarter end, including the impact of the acquisition of FIS Water. Year to date, adjusted free cash flow was $111 million. Moving on to our full year 2026 guidance. We are lowering the top end of our full year adjusted EPS guidance range to $8.50, resulting in a midpoint of $8.35. This update reflects our revised outlook for both segments and modest accretion from FIS Water. For HVAC, we are increasing our revenue range to incorporate the addition of FIS Water and modestly higher organic volumes.
Mark Carano: The revised segment margin range for HVAC reflects the impact of growth-related inefficiencies and elevated input costs experienced in the Q3, as well as the expected impact of these items in the Q4. For D&M, we are updating our segment margin range to reflect our results for the Q3 and revised forecast for the Q4. As always, you will find our updated 2026 guidance on this slide and modeling considerations in the appendix to our presentation. With that, I'll turn the call back over to Gene for a review of our end markets and his closing comments.
Gene Lowe: Thanks, Mark. Current market conditions continue to support our 2026 outlook, which implies approximately 25% adjusted EBITDA growth. In HVAC, core end markets remain healthy, including robust demand for our data center solutions. In Detection and Measurement, our run rate demand remains healthy, while the project-oriented businesses continue to see an active front log. In summary, I am pleased with our strong Q3 growth in revenue and profit.
Gene Lowe: 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 our data center demand, integration of FIS Water 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. Looking ahead, I am excited about the opportunities in front of us. With differentiated businesses, attractive end markets, and an experienced team, we believe we are well positioned to deliver sustainable long-term shareholder value. With that, I will turn the call back to Yaron.
Johann Rawlinson: Thanks, Gene. Operator, we will now go to questions.
Operator: Thank you. At this time, as mentioned, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please also note to limit yourself to one question and one follow-up. If you would like to withdraw your question, please press star 1 1 again. Please stand by while we compile our Q&A roster. Your first question comes from the line of Andrew Obin with Bank of America. Your line is now open.
Andrew Obin: Yes. Good morning. Good morning. Good afternoon. It has been a really long day. Sorry about that.
Mark Carano: Hey, Andrew. Yeah, I understand. A lot of guys going today.
Andrew Obin: Sorry. Yeah. So maybe we can talk about these inefficiencies in terms of the ramp. As we look at the guide for your HVAC, it certainly seems like they will continue into Q4. But can you just describe what you are seeing and what the rate is? Is it going to get better in Q4? Does it continue to get worse? What stops and reverses it? Thank you.
Mark Carano: Yeah, Andrew, thanks. I figured you would ask that question. Let me just put a little context around this. As I think you know, we have seen tremendous growth in our HVAC business this year. Our Cooling platform is going to grow by 30% or so in H2 organically. We have just been seeing accelerating demand right through the year and really into next year. So as we began to ramp our capabilities to really meet this demand and we rolled into Q3 as that sort of unfolded, quite honestly, I do not think we felt like our capabilities or our productivity was ramping fast enough. So as a result of that, we made a decision.
Mark Carano: It was an intentional decision to accelerate our hiring and secure additional suppliers to ensure that we can meet the demand that is out there really for the balance of this year and really set us up for next year as we look into what should be another strong year, particularly around data center, but across HVAC growth. That was really the context of it, the background. We do expect these obviously to continue on into Q4, so you will see that impact through the balance of the year. What I would say though, as you look into next year, my expectation is this labor will get more productive. We will begin to see efficiencies off of that. That said, we will be hiring as we continue to ramp the facilities. On the outsourcing front, we are increasing our outsourcing.
Mark Carano: But as the equipment we have comes online, particularly at Madison, and we begin to insource more of that, you should see that come more online and be insourced more within our plant facility. But I caveat that with demand is still very strong. If we have got the capability to drive and serve our customers, we are going to be balancing that with outsourcing. This is really around metal fabrication, so you know.
Andrew Obin: Okay. Then maybe we can talk about the state of the supply chain, because I think a number of HVAC companies have reported already, and it seems a long list of things. You have a somewhat different product exposure, but I would imagine you are impacted by some of it. What has been your experience? Once again, how do you feel about the state of supply chain at the end of Q3 and into Q4 and early 2027? Thank you so much. Look, I appreciate that it was not an easy quarter and you made the numbers. I do not mean to take away from all the hard work that the team is doing, and the growth is terrific, but I just want to focus on these issues. Thank you.
Gene Lowe: Well, thanks, Andrew. I think, if you look at the supply chain, I think in general, as Mark Carano had alluded to, you are seeing a tremendous amount of growth. That is putting more pressure on the supply chain in general. I think if you look at our supply chain, I do not think we have anything material that has been a significant impact to us as we look in Q3 and Q4. The biggest impact of the specific supply chain items that Mark Carano is really alluding to is a lot of what we were doing ourselves.
Gene Lowe: Our metal fabrication with the size and scale of the growth, we did have to outsource some of that to meet customer requirements. Overall, we feel like our supply chain is in good shape, but we are keeping a close set of eyes on it. Anything else, Mark Carano, you would kind of.
Mark Carano: Yeah, I think the only other thing I would add to that is, particularly in what you were just referencing, right? We are expanding our sourcing on some of this outsourcing that we are doing. As we go to secondary suppliers with lead times that are appropriate for meeting this demand, just given the environment we are in, it is coming in at a higher cost than I think we would have originally thought.
Andrew Obin: Terrific. Great answer. I appreciate it. Thank you.
Mark Carano: Thanks, Andrew.
Gene Lowe: Thanks.
Operator: Thank you. Your next question comes to the line of Bryan Blair with Oppenheimer. Your line is now open.
Bryan Blair: Thank you. Good afternoon, guys.
Gene Lowe: Afternoon.
Mark Carano: Hey.
Bryan Blair: I would like to stay on HVAC margins for now, and I guess approach it a little bit differently. Is there a way to parse out the impact of growth-related inefficiencies versus direct inflationary or price cost pressure in Q3? If so, are you willing to size that either on a dollar or margin basis? Then, similarly, how are you thinking about Q4 on that front?
Mark Carano: Yeah, Bryan, I will start. Listen, I think if you look year-over-year in the margin change, 23 of last year, 23 of this year, you would see that about two-thirds of that delta really relates to the volume net of these growth-related inefficiencies, as we call them. Then the balance of it, about another third, really relates to higher input costs or the price cost dynamic that we talked about. That is how you should think about it.
Mark Carano: Those are sort of the two pieces of the puzzle there. As we look into Q4, listen, we are into October. We feel good about the start of the quarter. Remember, this is an intentional or conscious decision that we made around labor and the sourcing side. We have got our arms around it, we feel. But those costs will impact us in Q4. That said, the guide will imply about 150 basis points of change of increase sequentially. So about two-thirds of that is going to be the operating leverage. So the increased revenue, again, net of these growth-related inefficiencies. Then the balance of it is going to be from accretion from the acquisitions.
Bryan Blair: Understood. That's very helpful. Sticking with margins, D&M profitability was eye-catching in the quarter. Full-year segment margin guidance now sits well above the medium-term framework that your team has out. I understand there's mix favorability to consider for this year, but are we getting to the point where there's been enough structural margin improvement in D&M that the 22% to 24% medium-term margin level target is officially stale at this point?
Mark Carano: Yeah, that's a great question. We obviously haven't updated that yet, Bryan. We're clearly. That business has done a very nice job, I think, resetting the structural margin profile of D&M. I expect we'll update that perhaps as we roll out the guide for next year. No doubt, as we, I think, talked about in Q2, the business is really running at a higher margin level than that, as you described it, stale guide. That said, this year has had some unique elements to it. I think as you recall back in Q1, we had the scope expansion related to a transportation project. We obviously called out this, what I would refer to as a kind of discrete or one-time commercial resolution. The mix was attractive this year kind of relative to a normal mix.
Mark Carano: When you think about our guide for 2026, and you sort of take those three elements, which I think we've shared the impact over the last few quarters, that equates to about 175 basis points or so. I think if you pull that out, that kind of gets you to where I would argue the structural margins of D&M should be operating at going forward.
Bryan Blair: Understood. Again, very helpful. Thank you.
Operator: Thank you. Your next question comes from the line of Jamie Cook with Truist Securities. Your line is now open.
Jamie Cook: Hi. Good evening. I guess two questions. One, to what degree. I understand some of the issues with capacity and inflation that you lowered the margins for HVAC are sort of tied to each other. But to what degree do we need to be worried with your backlog growing, that you have backlog potentially that is not at an optimal margin level just with inflationary pressures broadly just continuing to get worse. So I am just wondering, as we look to 2027, is there a sort of inflation risk to margins? And then I guess my second question, if you could just.
Jamie Cook: Obviously, everyone is very excited about data centers, but if you could just talk to what you are seeing in other markets or how you would characterize industrial growth outside of data centers, just sort of your broader portfolio organically. Thank you.
Mark Carano: Jamie, I will start on your first question, then I will turn it over to Gene. You are right. I think like a lot of folks, we saw a material increase in our input costs in Q3. And you think about steel and frankly, diesel that moved up dramatically, that really leaks through the supply chain. And when I think about this year, we are really now kind of roughly price-cost neutral on a dollar basis for the full year. But it is clearly had a margin impact as a result.
Mark Carano: That said, we have been raising price throughout the year. We continue to look at raising price across all of our HVAC businesses to really offset or mitigate these inflationary pressures. You are right. With respect to some of the near-term backlog that we have, and you can kind of see that obviously in the margin profile. That takes some time to pass through to new projects. To the extent some of that backlog, we have the ability to adjust price related to these costs. We will do that, but I think net, we will be in a better price cost position next year.
Gene Lowe: Yeah, we have a lot of the price increases that are already in the backlog now.
Mark Carano: That's correct. Yeah.
Gene Lowe: I think we're well positioned as we're set up for Q4 and then the H1.
Mark Carano: Yeah.
Gene Lowe: On the second question, Jamie, I think the markets that we're seeing overall we're feeling very favorable. So you look at HVAC, obviously data center is very strong. We're seeing, I would say, even accelerating traction there. We're feeling very good about what we're seeing for this year and next year. But if you look about the other HVAC markets, I would say power, very healthy, a lot of activity. Industrial and semiconductor, very healthy. Healthcare, pharma. We've seen a good amount of sports and entertainment projects. And then I would say commercial replacement activity is very healthy. If we look at what's flat to down, I would say education and government seems to be soft. New commercial still remains pretty soft. And then chemical, we don't see a lot of activity right now.
Gene Lowe: But net, if you look at HVAC, we are very pleased with the organic growth, and we are both in the core markets and in the data center markets. If you go to Detection and Measurement, I will give you a quick look by the platforms. Transportation is very healthy, good growth this year. We have new products. We feel good about 2027 there, so healthy there. CommTech, we see continued growth. That would really be our biggest brands there would be KTS and TCI. L&I, our location and inspection business, I would say is normal, right in the mid-single. The one that I would say is a little bit lower than our normal mid-single would be our AtoN business. We are seeing modest growth there, but we are seeing slower growth in Europe, the Middle East, and Asia.
Gene Lowe: I would say that would be the one platform that we are seeing some slower growth, some modest growth, but not the mid-single. But if we look at, as we know, about 15% or so or mid-teens is data center. You take that 85% that you are referencing, we feel very good about our normal growth model for our core markets as we look ahead to 2027.
Gene Lowe: So I think that would be a good baseline to think about where we will be for 2027 for our HVAC and Detection and Measurement. And then when you layer data center on top of that is obviously going to be a very high growth rate. And we are not prepared to obviously do 2027 guidance, but we are seeing good momentum there as we look ahead to 2027. So net, the markets are feeling pretty good.
Jamie Cook: Okay. Thank you. I will get back in queue.
Gene Lowe: Thanks.
Operator: Thank you. Your next question comes on the line of Amit Mehrotra with UBS. Your line is now open.
Amit Mehrotra: Thanks. Good afternoon, everybody.
Gene Lowe: How are you?
Amit Mehrotra: I am doing well. Thank you very much. I wanted to ask about the supply chain issue, and I know a lot has been talked about, but I wanted to just understand how it came to be in terms of when did you get visibility on it? It is certainly, you are not alone. A lot of people have had these issues, and I think what has been interesting to me at least is sometimes they come out of nowhere and really bring things down. I think you guys do use a decent amount of contract.
Amit Mehrotra: I know you have the IP, but you do use a lot of contract manufacturing. I guess my question is, maybe shed some light on when this became really evident to you. Does the use of contract manufacturing weaken your visibility into the tier 2, 3, 4 of the supply chain? What gives you comfort that the visibility has been addressed?
Gene Lowe: Yeah. Let me take a cut at that, and we can throw it over to Mark Carano to add a little color. I think specifically with Q3, some of the challenges that we had was, as a reminder, at the end of Q2, we raised our guidance for data center, and we had very high customer demand, and we agreed with the customer to take on approximately $130 million, or the change was very significant change. It was $100 million. As we ramped up, you are talking ramping several hundred people into the facility. When we talk about supply chain, this is really our product, our components that we are making. Think about cut steel, punch steel, that frankly, we had more demand than our supply. It is pretty typical. You can outsource cut products, things like that.
Gene Lowe: It is our bill of materials, it is our intellectual property, but there are third parties that do that. I would say we had a much higher amount of that than we were planning, and I would say the costs of that were higher. I think that in general, there is a lot of demand on supply chains everywhere. That is really what happened. What I would say is we have seen very nice improvement in performance.
Gene Lowe: If you look at our supply chain in September and then actually where we are year to date in October, we are very pleased with what we are seeing. That is the specific dynamic. In the macro, what I would say is there is a lot of growth here, so you always have to keep an eye on all of your supply chain elements.
Gene Lowe: As we have talked about in the past, you look at our typical products, most of it is our intellectual property, so most of it we own. If there is a supplier or that we need more capacity, we can actually go out to another supplier that can fabricate that component for us. So it gives us a lot more control and flexibility than being typically sole source. That is not always the case. There are a few times, I know like for example, EC fans is a very hot topic. Vast majority of our products do not use EC fans, but we do use EC fans in a few areas in our customer handling and so forth. Mark, what other color would you like to add?
Mark Carano: Yeah, I think I just maybe back to your, just to be clear on this outsourcing, and we are really talking, as Gene Lowe referenced, to metal fab. In that case, just because of the demand, we went to secondary suppliers where we had shorter lead times. But given the environment I think we are all working in, that came at a premium cost. Input costs are higher obviously, but we needed that at that time and place to support the demand for the growth. We will see that, I think, through the balance of the year, just given the demand that we have.
Mark Carano: But recognize that as the existing facilities and the new facilities come on, they are going to have substantial metal fab capabilities. Once we get those fully operational and efficient, more of this will ultimately be insourced.
Amit Mehrotra: Right. Okay. That makes perfect sense. Thank you. Just as a follow-up, I guess we are sort of on this journey from $430 million to $1.1 billion later this decade. I think that path is fairly linear, if you can sort of correct me if I am wrong on that. I do think in addition to the facilities you are ramping, you do take advantage of maybe some lease facilities where the economics can be quite positive in terms of throughput and returns on those investments. Is there an opportunity to, I guess, it is kind of a juxtaposition from the supply chain challenges, but is there an opportunity to maybe accelerate that linear path based on maybe some lease facilities as well?
Mark Carano: Yeah, let me start. I think with respect to the $1.1 billion that we have talked about and the timing on that, when we referenced that, I believe it was last quarter, and at the time, we talked about it being kind of linear in nature. That said, I think the bias is that there will be more than what the linear might imply next year in 2028.
Mark Carano: Particularly when you think about some of the activities that we have taken on to accelerate labor, these growth-related efficiencies, they are impacting us today, but they should set us up better for 2027 to be able to drive more throughput and reach potentially that $1.1 billion, if not sooner. Certainly, the ramp will be steeper. That is all within the confines of what we have underway and in our control today. A leased facility or something like that in-
Gene Lowe: Yeah. I think the leased facility is something we could do. One good example, and I think we have talked about our Springfield facility, which is a facility that we are very proud of, that built a lot of our cooling towers, our Everest cooling towers, a variety of products, very successfully, very well. That is a leased facility that we added a very small amount of capital, a couple million dollars, and are pushing a couple hundred million of revenue through. So, we are very well aware of that model.
Gene Lowe: When we look at Madison, that is fully integrated. So there is capital there is lasers there is metal bending, so that is a soup to nuts. As we look about- I am inferring from your question, once we get to a billion and one, how would you go beyond that? What I would say, we are very actively looking at different models here, and we are very comfortable with both models. The way I look at it, Madison, we needed Madison because really with custom air handling as well as cooling and data center, that is a critical bottleneck that we had. As you look forward, I think you have to be more thoughtful on what is the duration of the demand.
Gene Lowe: We are going to be very thoughtful and careful as we look at the options. As we look ahead, there is a lot of hyperscalers talking very big numbers in 2028, 2029 and 2030. So, it is certainly something that we are evaluating in great detail, and there is a lot of work going on, and it is a model that we are very familiar with. So yes, we are actively all over this.
Amit Mehrotra: Do you think we can get to the 11 run rate, like early 2028 instead of late 2028? I do not want you to put a fine point on it, but any additional thoughts there?
Mark Carano: Yeah, I am not giving, obviously, 2027 guidance yet, so I am probably not going to give any 2028 guidance. But listen,
Amit Mehrotra: Okay
Mark Carano: we are optimistic. We are going to work as fast as we can to get as much throughput through there, but
Amit Mehrotra: Sorry, it is my job to ask. It is my job to ask, but I appreciate it.
Mark Carano: You should. Absolutely.
Amit Mehrotra: I will see you guys on Monday, I guess, or Tuesday. Thank you very much. Appreciate it.
Mark Carano: Yep. Thank you.
Gene Lowe: Thanks, Elman.
Operator: Thank you. Your next question comes in line of Daniel DiCicco with BMO Capital Markets. Your line is now open.
Daniel DiCicco: Great. Thank you for taking my question.
Mark Carano: Hey, Dan.
Daniel DiCicco: We will go non-HVAC. I am losing count of the number of deals you have done this year. Maybe if you could just refresh us on anticipated accretion and then just how those are tracking, any areas that kind of stand out or any of the markets that stand out, and then any potential areas you are excited about as we move into 2027 related to those deals. Thanks.
Gene Lowe: Yeah, sure. I think we are very excited about the strategic deals we have done this year. There have really been four strategic deals. Crawford, which is really Air Enterprises and a smaller coil business called ROM. There is Thermolec, Neptronic, and most recently, FIS Water. If you look at the amount of capital deployed, it was about $1.2 billion. Then really you are talking about approximately $310 million of revenue run right here.
Gene Lowe: These are really good businesses, very strong competitive positions. We see a lot of synergies across all of these in a number of dimensions, channel, technology, and so forth. If you look at the blended multiple that we paid for these four transactions, it is approximately 11.7x. Then really, how are we tracking? We are basically on track or slightly to modestly ahead on a couple of these. So very pleased with the activity to date.
Gene Lowe: As you look ahead, what I would say is we have a very strong pipeline. I would not expect anything as large as FIS, but there are some very strategic opportunities that are still in the pipeline. In terms of where we are seeing opportunities, there has been a little bit of change there. In HVAC, we typically talk about the very significant amount of opportunities in engineered air movement and electric heat. That remains true. What I would say is we are seeing more cooling opportunities and we are seeing more niche hydronics opportunities. So really, across all of our areas in the HVAC side, we are seeing a lot of activity. We are seeing a lot of activity coming out in 2027 as well.
Gene Lowe: On Detection and Measurement, I would say the two areas that we see the most activity right now would be on the location and inspection side, and then on the transportation side. So, very pleased. Busy integrating these four transactions and some very good strategic opportunities in front of us, but probably nothing major before the end of the year. So anything else, Mark, on the M&A side?
Mark Carano: Yeah, I think one thing to point out, they have all been accretive to margins. When you look at the full year this year and look at year over year, you will see is about 60 basis points of margin accretion, give or take, from the core acquisitions.
Daniel DiCicco: Great. Very helpful. Thank you.
Mark Carano: Thanks.
Operator: Thank you. Your next question comes on the line of Joe Giordano with TD Cowen. Your line is now open.
Joe Giordano: Hey, guys.
Gene Lowe: Hey, Joe.
Joe Giordano: A lot of my stuff's been asked already, but is the guide for HVAC, is it still $430 million for data center? I know we're adding FIS. Just curious if that number has changed.
Gene Lowe: We think it's modestly above that, which is probably another $20 million or $30 million above that. One thing to point out, I think is worth noting, I think there is some data center in both Neptronic and FIS that's not included in these numbers. We're still kind of calculating the percentages. This is something we'll dive into more detail as we come into the guide for next year.
Joe Giordano: Okay. Can you just talk us through the mechanisms you have in some of these backlog contracts to work with the customer on some of these inflationary things as they pop up? Are these mechanical, kind of, if X goes up by this much, we get compensated, or are this discussions? How in place are these mechanisms?
Gene Lowe: Yeah, I think what I would say is when you have these frame agreements, you very clearly have mechanisms for how to make price adjustments. Typically, they'll ask for demonstrating and showing the actual delta or the change in the input costs. You go through a process and I think we're really talking about more the data centers where you have these very the hyperscalers, where you have these larger frame contracts.
Gene Lowe: But yeah, I think the mechanism we have used this over the past couple of years, it works. It doesn't happen in a day or a week. There's typically a process you go through. You sit down, you have some meetings. But it works very effectively. It's something we're very careful on because we don't want to get pinned into a situation where we have structurally eroding margins due to backlog. So yeah, we feel good about our structures. It is something we are very cognizant of and something we pay a lot of attention to in all of our hyperscaler contracts.
Joe Giordano: Thanks, guys.
Operator: Thank you. Your next question comes on the line of Piyush Khaitan with JPMorgan. Your line is now open.
Piyush Khaitan: Hey, thanks for taking the question.
Mark Carano: Yeah, good evening.
Piyush Khaitan: Hi, good evening. Maybe just wanted to ask about backlog on HVAC side. Usually haven't seen backlog increasing from Q2 to Q3 sequentially. I understand a lot of data center growth is being embedded in there, but seeing the demand that you see out there, is it fair to assume backlog continues to grow on a sequential basis going forward?
Mark Carano: Well, I think, listen, the backdrop on, Gene talked about it, our kind of core markets is healthy, and then, of course, I think we all know what's going on in the data center market, right? That demand remains very strong. You always run into some puts and takes around backlog from quarter to quarter because sometimes you have a big release of a project or projects within a short period of time. But the backlog is $1.1 billion. It's at a record level. I would expect that we're going to continue to see more and more opportunities on the data center side, which will continue to drive that backlog higher.
Piyush Khaitan: Thank you. A next follow-up would be more on the pricing front. You guys talked about increasing pricing. Is it coming under any particular business or end markets, or is it across the company on the HVAC side? We have seen, we heard from your HVAC peers, there has been some pushback on pricing. Are you seeing any kind of pushback on pricing, maybe?
Mark Carano: We haven't seen any pushback on pricing. When I talk about that, it's really mainly in the HVAC businesses. Of course, we're pushing price at different levels and at different times across all of those business units that are a part of it. So up till now, we've been effective at moving price.
Piyush Khaitan: Great. Thanks.
Mark Carano: Thanks.
Operator: Thank you. Your next question comes to the line of Zach Schechtman with Wells Fargo. Your line is now open.
Zach Schechtman: Hey, good evening, guys.
Gene Lowe: Hey. How are you?
Zach Schechtman: Thanks for taking my question.
Mark Carano: Hey, Zach.
Zach Schechtman: Hey, doing well, thanks. Since supply chain is a hot topic, I figured I would dive a little deeper into that. One of your heat rejection competitors talked about a coil shortage. Was just wondering what you are seeing in terms of demand in your round coil business. Anything to highlight there on industry capacity, and if that is giving you a noticeable competitive advantage at this time?
Gene Lowe: We haven't had any coil shortages. I do think you have to develop your supply chain. As a reminder, we do some coils internally, some coils externally. As a part of our Madison expansion, we will be expanding our coil manufacture. The way we're set up is we structurally do have outside suppliers that will fabricate. We have the engineering, we have the design, we have the quality, but we do have outsourced providers. So we do have a number of suppliers that provide us really our design of coils.
Gene Lowe: As we grow, you have to keep developing that, because that's really, if you look at the OlympusMAX or the OlympusV product categories, our dry or adiabatic, they're very coil intensive. So it's probably your most important bill of material item. But we've been able to manage this. We feel good. We have good suppliers here, but we will have to continue to expand and grow as we scale our volumes looking forward.
Zach Schechtman: Got it. Thank you. Then just on the dry cooler side, are you seeing competition ramp there from some of the other players? It seems like the air-cooled chillers from the legacy chiller OEMs have free cooling capabilities built in, but are you seeing new entrants to spaces as water-cooled chiller demand starts to ramp? Anything that you could touch on there?
Gene Lowe: Yeah. We see a lot of different things. What I would say is, a very common question we get is what architecture do you see, and do you see people with no chillers? Do you see people preferring water-cooled chillers? When you have a water-cooled chiller, you typically put a dry cooler and adiabatic tower or a cooling tower on it. Or do you see air-cooled chillers? One of the interesting things that we are seeing is we have seen some architectures where typically if you use our product, which you can use in free cooling, which would mean you don't require a chiller, you require lower capital investment. We've seen one or two data center, I would say more on the neo cloud side, that are using this architecture. But typically you're going to have chillers there.
Gene Lowe: I would say more commonly, we see water-cooled chillers, but we have seen a few solutions where there is an air-cooled chiller with a dry cooler attached. When you need to get the mechanical delta T, you can do it with a water-cooled chiller or an air-cooled chiller. Now, typically, the air-cooled chillers are standalone, and they do not link into an external heat rejection. But we have seen some architectures where that is the case, so I do not think there is one standard. I think that there is different design criteria.
Gene Lowe: There are different ways people are approaching this. Some of it is just design philosophy, some of it is the weather. You need a little bit less heat rejection in the northern regions than you would in Houston, Texas, for example. So, we are seeing a lot of different solutions. I do not see one. It is a variety.
Gene Lowe: But there is a lot of activity and a lot of differences there. The more I look at it, though, what I would say is the TAM, our addressable opportunity that we can compete in, is becoming a bigger and bigger share of the market. That is one thing that we are very confident in, and we are seeing this typically with the larger hyperscalers and the larger neo clouds and so forth. Overall, we feel like we have a good opportunity set in the evolving and changing data center technology space.
Zach Schechtman: Got it. Thanks, Jess.
Gene Lowe: Thanks.
Operator: Thank you. Your next question comes to the line of Joe O'Dea with Vertical Research. Your line is now open.
Joe O'Dea: Hi, good afternoon. Thanks for taking my questions.
Gene Lowe: Hey, Joe.
Mark Carano: Hey, Joe.
Joe O'Dea: Yeah. I will bring it back to HVAC margins, and really just trying to get a sense for dollar quantification of the headwinds relative to prior expectations. Looking through it, I think H2 margins were previously anticipated around 26.5%, now maybe closer to 24%. That would suggest something like $25 million to $30 million of cost headwinds. Any color on that? More importantly, as you think about next year, how do you see that pacing? Meaning, are those costs going to be there for a while, or by the time we are in H2 of next year, have you really worked through that such that you could be back at that 26.5% kind of margin level?
Mark Carano: Yeah, Joe. Your math is close to right. When you do that bridge on the H2, it is about $25 million or so of cost. The majority of it or more of it is really related to these growth-related inefficiencies. Think about $15 million and the balance is around price cost. I think we have talked about this earlier on the call, particularly with the growth-related inefficiencies.
Mark Carano: It was a conscious decision that we made to set ourself up to deliver for the balance of this year and as I mentioned, really for next year. I think I also said this already, but I just repeated, with respect to labor, I expect this labor that we have hired, we are going to see the efficiencies and the productivity out of that. But we will be hiring more as we ramp Madison into full production in the beginning of next year.
Mark Carano: The outsourcing, we will begin to insource more of that, but we will be weighing that, I think, against the overall demand profile as that insourcing capability comes online. So I think you are going to see some of that dynamic leak into 2027. But what I would say, and I am really not prepared to give 2027 guidance at this point, but I would expect our margins to be towards the high end of our medium-term target range that we have outlined next year for the full year.
Joe O'Dea: That is helpful color. Then just thinking about the revenue versus cost side of that. The HVAC revenue guide moved up about $40 million at the midpoint, and we are talking about $25 million of costs that went higher. It seems like it is probably wrong to draw a direct line saying $40 million of revenue translated to $25 million of cost. It was more the total revenue base, and achieving that was just a little bit harder to achieve, and that led to bringing on some of these costs.
Mark Carano: Yeah. Your latter point is spot on. It was really the cost required to support what is just continually accelerating demand for 2026. Then frankly, as we look at the opportunity into 2027, we need to be in a position where we can execute on that. So that was really the driver.
Joe O'Dea: Got it. Thank you.
Mark Carano: Great. Thank you.
Gene Lowe: Thanks, John.
Operator: Thank you. Your next question comes to the line of Walter Liptak with Seaport Research. Your line is now open.
Walter Liptak: Hi. Thanks, guys for taking my question. As we Monday morning quarterback this insource versus production and efficiency issue, in retrospect, was there anything that you could have done differently? Could you have gone to outsourcing and then ramped the capacity? Would that have had any cost difference, or is it purely just an issue of we thought one thing, that is what was in the guidance, and now we are doing something else?
Gene Lowe: Well, why do not I start and then let Mark dive in. I think that when you are ramping very rapidly and you are talking in the several hundred employees and bringing them on, it is pretty obvious, and we were expecting not to have brand-new employees performing as someone who had been in their roles for 5 years or 10 years. So we obviously took that into account. What I would say is where we had some material differences in how we thought things were going to play. We did have higher turnover in the quarter. We also were off on productivity.
Gene Lowe: So there were some variances there in our expectations as we have grown. We have, I would say, changed how we are recruiting, how we are training, how we are scaling. So I think, yeah, there are certainly things we could do better.
Gene Lowe: I think there are some lessons learned that we are very actively applying. But yeah, I think that we are very pleased to meet our customer demand, and we have some very important customers. As Mark said, we invested to make sure we are going to meet our obligations and satisfy our customers. Did we perhaps over-invest to some degree? We might have a little bit. But overall, I feel like it was the right decision. Mark, you have more color on the breakdowns here.
Mark Carano: Yeah. I might just add a finer point to it, just because it dovetails off of really even the last question we had, right? Big picture, meeting the customer demand that was out there was important to us, and we really thought it was the best long-term decision for us to be in that position to capture that demand, meet that demand, and service our customers. So while the numbers and the impact that it had, we would rather not have that, it does set us up, and we consciously did it so that we could be in a position to roll into 2027 in the best possible
Walter Liptak: Okay, understood. Thank you very much.
Operator: Thank you. Your last question comes to the line of Jeff Van Sinderen with B. Riley Securities. Your line is now open.
Jeff Van Sinderen: Hi, everyone. Can you give us a sense of how your customer concentration is evolving in data center among hyperscalers, neo clouds, and colos? What is your high-level view of the scope and cadence of data centers getting built out, considering the complex backdrop? Thanks for taking my questions.
Gene Lowe: Yeah. I think, with data centers, if you are playing in data centers, you are going to have some structural customer concentration. What I would say is we have a lot of blue-chip customers here. The majority of what we have, I would say north of 90%, is really pointed to the hyperscalers. We do have some neo clouds and some smaller data center activity. But I would say the bulk is really with the hyperscalers, a number of the hyperscalers. Obviously, confidentiality, we do not talk specifics. What I would say in the evolving landscape of data centers, what we see and hear from our customers is very good visibility over the next 2 to 3 years. What I would say is there is probably going to be some external factors that drive demand growth beyond that.
Gene Lowe: The revenue generation of the customers that are using AI or using data centers or using these applications. It may be harder to see what. We have all the market research reports that predict out for quite a long time. From what we see over the next 2 or 3 years, we see very healthy demand. Like I said earlier on the call, where we sit today versus 3 months ago is increasing and accelerating demand. So it is a very good opportunity set, and one that we feel like we have a good set of solutions that we can bring to the party here.
Jeff Van Sinderen: Thank you.
Gene Lowe: Thanks.
Johann Rawlinson: Great. Thank you all for joining today's call. We look forward to updating you again next quarter. Operator, with that, we can conclude the call. Thank you.
