SPX Technologies - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue grew 13.7% year-over-year to $533.7M, GAAP EPS was $1.19 and adjusted EPS was $1.51; consolidated operating margin expanded 350 bps YoY to 16.9% and segment margin to 24.2%.
• HVAC delivered record margin and profitability; segment revenue rose 18.6% YoY to $370.5M and margin reached 24.8%, driven by cooling volumes and Ingénia acquisition contribution.
• Management introduced FY2025 guidance: revenue $2.13–$2.19B, adjusted EBITDA $460–$490M, and adjusted EPS $6.00–$6.25; HVAC segment margin guided to 23.5%–24.5%, Detection & Measurement (D&M) to 22%–23%.
• Wall Street consensus from S&P Global was unavailable due to API limits; outcome vs estimates cannot be assessed in this report (S&P Global consensus data unavailable).
• Cash flow and balance sheet strong: Q4 operating cash from continuing ops $166.7M, FY cash $313.1M; year-end cash $161.4M and total debt $614.7M; leverage ratio under bank covenant ~1x at Q4, ~1.7x including January KTS acquisition.

What Went Well and What Went Wrong

What Went Well

• “Our strong Q4 performance included record margin and profitability in our HVAC segment, supported by robust customer demand and solid operational execution.” — CEO Gene Lowe.
• Adjusted EBITDA increased to $116.1M (21.8% margin) in Q4, reflecting margin expansion and favorable mix; adjusted EPS grew 21% YoY to $1.51.
• D&M margin improved 410 bps YoY to 23.0% in Q4, with higher volumes in Location & Inspection and Aids to Navigation and more favorable project execution in CommTech.

What Went Wrong

• Heating demand was soft due to an unseasonably warm Q4; HVAC margins came in “on the lower end” of intra-quarter expectations given weaker heating drop-through.
• Sequential revenue step-up in Ingénia was below expectation due to slower timing of facility expansion ramp, though installation challenges were resolved by quarter-end.
• Run-rate demand across parts of D&M remains flattish and sensitive to macro conditions, with project timing skewing more to 2026–2027, elongating revenue conversion.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Q4 2024 SPX Technologies Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Clegg, Vice President of Investor Relations. Please go ahead.

Paul Clegg (VP of Investor Relations)

Thank you, Operator, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. A press release containing our Q4 and full-year results was issued today after market close. You can find the release in 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, non-service pension items, mark-to-market changes, and other items. Finally, we will be meeting with investors at various events over the quarter. On April 1st, we are planning to host a tour of our Ingenia custom air handling unit production facility outside of Montreal. This tour is open to investors and analysts. If you have an interest in attending, please email me or contact me through the email address on our Investor Relations website. And with that, I'll turn the call over to Gene.

Gene Lowe (CEO)

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the Q4 and full year of 2024. We'll also provide full-year guidance for 2025. We had a strong close to the year. We grew full-year Adjusted EBITDA by 36% and delivered Adjusted EPS near the upper end of our guidance range. Adjusted free cash flow was 108% of adjusted net income. During the Q1, our company continued to execute well. We drove strong margin performance across both segments and made great progress on several key initiatives. Recently, we made another significant addition to our detection and measurement segment with the addition of Crons Technology Solutions, or KTS, which significantly scales our position in our communication technologies platform and positions us for further growth.

Looking ahead, market conditions support continued solid growth for SPX, and we remain well-positioned to continue our strong operational performance. Today, we're providing 2025 midpoint guidance that reflects another year of double-digit Adjusted EBITDA and Adjusted EPS growth. Turning to our high-level results, for the Q4, we grew revenue by 13.7% with growth in both segments, including a particularly strong performance in HVAC cooling. Adjusted EBITDA increased 28.1% year-on-year, with 250 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. 2024 is a big year for innovation at SPX, and we introduced a number of new products that significantly enhance our customers' efficiency and safety. In our HVAC segment, we continue to extend our range of sustainability-focused products.

Within our heating platform, we introduced solutions that allow our customers to reduce their carbon footprint, including biofuel boilers and a heat pump-boiler combination. In our cooling platform, we introduced an adiabatic line of cooling products that enables customers to optimize between power and water usage for various cooling applications. This year, we're expanding our range with a larger scale version ideal for data center cooling. In detection and measurement, we introduced a survey-grade precision locator that enables our customers to meet exacting requirements for mapping critical utility infrastructure. We also introduced an innovative technology that uses acoustics to detect problematic intersections between different underground utilities, such as gas and water lines. In January, we completed the acquisition of KTS, which significantly expands the scale of our communication technologies platform within our detection and measurement segment.

KTS's advanced digital interoperability and tactical networking solutions integrate and distribute real-time information across multiple communications domains and platforms. Their solutions enhance situational awareness, coordination, and tactical execution during operations. KTS's solutions are highly complementary to our existing tactical data links and radio frequency, or RF, countermeasure offerings from TCI and ECS. Together, we see significant further growth opportunities for our ComTech platforms. KTS enhances and strengthens our position in communication solutions, broadens our access to attractive growth markets, and expands our global customer base. We also believe their highly differentiated technology creates attractive new product development opportunities that can be leveraged through our existing sales channels to ultimately address a wider range of potential applications. Over the last several years, our approach to value creation, including capital deployment, has been highly successful. We've grown earnings per share an average of 28% per year over the past four years.

Looking ahead, we remain very well-positioned to continue driving value for our shareholders, both organically and through further acquisitions. Now, I'll turn the call over to Mark to review our financial results.

Mark Carano (CFO)

Thanks, Gene. Our Q4 results were strong. year-on-year, adjusted EPS grew 21% to $1.51. Full-year adjusted EPS grew 29% to $5.58, or towards the upper end of our guidance range of $5.45 to 5.60. For the quarter, total company revenue increased 13.7% year-on-year. Organically, revenue grew 9.9%, while the Ingenia acquisition drove an increase of 4%, and FX was a modest headwind. Consolidated segment income grew by $26.6 million, or 25.9%, to $129.4 million, while segment margin increased 230 basis points. For the quarter in our HVAC segment, revenues grew 18.6% year-on-year. On an organic basis, revenues increased 12.8%, driven primarily by continued growth in cooling and to a lesser extent in heating. The acquisition of Ingenia in our cooling platform contributed growth of 6%. FX was a modest headwind. Segment income grew by $18.6 million, or 25.4%, while segment margin increased 140 basis points.

The increases in segment income and margin were due to operating leverage on higher organic sales and the Ingenia acquisition. Segment backlog at quarter-end was approximately $437 million, or similar to Q3. For the quarter in our detection and measurement segment, organic revenues grew 4.2% year-on-year, while FX was a modest headwind. The increase in revenue was driven largely by stronger sales of location inspection and AToN products. Year-on-year, segment income grew $8 million, or 27%. Segment margin increased 410 basis points. The increases in segment income and margin were driven by operating leverage on higher revenue and favorable project execution, as well as further benefits from our continuous improvement initiatives. Segment backlog at quarter-end was $221 million, up 14% sequentially from Q3. Turning now to our financial position at the end of the quarter. We ended Q4 with cash of $161 million and total debt of $615 million.

Our leverage ratio, as calculated under our bank credit agreement, was one times. Including the effect of the KTS acquisition, which closed in January, our leverage ratio was 1.7 times, or well within our target range of 1.5 to 2.5 times. We anticipate our leverage ratio declining below our target range by year-end, assuming no further capital deployment. Full-year adjusted free cash flow was approximately $284 million, reflecting conversion of adjusted net income of 108%. Moving on to our guidance. Today, we introduced full-year 2025 guidance, including KTS. We anticipate revenue in a range of $2.13 billion-$2.19 billion, segment income margin in a range of 23%-24%. We anticipate adjusted EBITDA in a range of $460 million-$490 million. At the midpoint, this reflects a margin of approximately 22%, year-on-year adjusted EBITDA growth of 13%.

Our adjusted EPS guidance range of $6 to 6.25 reflects approximately 10% growth at the midpoint. In our HVAC segment, we anticipate revenue in a range of $1.44 to 1.48 billion, and segment margin in a range of 23.5% to 24.5%. In our detection and measurement segment, we anticipate revenue in a range of $690 to 710 million, including the KTS acquisition, and segment margin in a range of 22% to 23%. For Q1, we anticipate modest revenue growth driven by the KTS acquisition and a full quarter of Ingenia, which we acquired in February of 2024. We expect flat organic revenue, with growth in HVAC offset by a year-on-year decline in detection and measurement related to the timing of project deliveries during the year. We anticipate margins in both segments to be similar year-over-year.

We also expect higher interest costs associated with acquiring KTS and a tax rate consistent with our full-year 2025 guidance. As always, you'll find modeling considerations in the appendix to our presentation. Before I turn the call back over to Gene for a review of our end markets, I wanted to touch briefly on tariffs. For China, we've reflected the recently enacted tariffs in our guidance for 2025. For Mexico, sourcing and revenue exposure is nominal. For Canada, sales into the US from our Canadian operations make up a mid-single digit percentage of our total revenue. SPX is well-positioned to navigate potential tariff changes, and we have multiple mitigation measures available. More than 80% of our revenue comes from the United States. We largely follow an in-country, for-country sourcing model. Supply chain management is a core component of our business system, and we have pricing power across our businesses.

While the current situation is dynamic, we remain nimble and are prepared to act quickly, and with that, I'll turn the call back over to Gene.

Gene Lowe (CEO)

Thanks, Mark. Current market conditions support our 2025 outlook for solid growth. Within our HVAC cooling platform, we continue to see solid demand for our products across several key end markets, including data centers, healthcare, and institutional. In our HVAC heating platform, we're experiencing order rates consistent with the more typical heating season and steady demand for non-residential projects. In our detection and measurement segment, we're seeing healthy demand for projects, with delivery times more targeted towards 2026 and beyond. In our run rate businesses, we're seeing flattish overall demand with regional variation. In summary, I'm very pleased with the close to 2024 and our strong full-year performance. Our acquisition of KTS further scales our attractive ComTech platform and positions us for future growth.

With a solid demand background and strong operational execution, we are well-positioned for another year of double-digit growth in adjusted EBITDA and adjusted EPS in 2025. We also have an active pipeline of attractive acquisition opportunities to enhance our growth. Looking ahead, I remain very excited about our future. With the right strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come, and with that, I'll turn the call back to Paul.

Paul Clegg (VP of Investor Relations)

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

Operator (participant)

Thank you. At this time, we'll conduct a question-and-answer session. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bryan Blair of Oppenheimer. Your line is now open.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

Thank you. Good afternoon, guys.

Gene Lowe (CEO)

Hey, Bryan.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

Hey. Another good quarter, solid momentum into 2025. It would be helpful if you offered a little more color on how your team's thinking about the full year. What are the key watch items to keep in mind? Thinking about the lower end of guidance, what levers could perhaps drive upside to the 625 high end? And then that framework in mind, how should we think about the cadence of revenue and earnings through the year?

Gene Lowe (CEO)

Yeah, Bryan, thanks. I'll start off here. As we look at the year, and I would say when I think about our HVAC business, broadly, we remain bullish on those end markets, right? Data centers, institutional, healthcare. Some of the markets we've mentioned throughout last year remain solid, and we continue to see good opportunity there. As you think about what could drive that guidance to the upper or the lower end within HVAC, obviously, you've got the weather dynamic that we always see on the heating side of the business that's out of our control. On the cooling side, when I think about non-resi momentum, does that accelerate throughout the year or does it slow down? Those are key things we're always watching, some of the key indicators like Dodge and PMI. And then the data center market, which represents fairly large projects at times, right?

That could represent incremental opportunity for us if it plays out. With respect to D&M, we've talked about the short cycle or the run rate side of the business. That's obviously going to remain tied to the economic environment that we're operating in. I would say with respect to our L&I business, that tends to be the most sensitive to that. In certain markets, we actually feel more optimistic about what we're seeing in the US And in the project side of the business, that pipeline or front log of opportunities remains very robust. We feel good about what we're seeing across Genfare and ComTech and some of our other businesses. But I think, as you know, there's always a timing element to those and where they fall within the quarters and sometimes within the year.

We are seeing this backlog, while it's very attractive, we're seeing actually more, and I think we mentioned this in our last call. We're seeing good opportunities in 2025, but we're also seeing quite a few that are kind of rolling into 2026 and 2027. So that's kind of the broad comments. I would say just overall in the economy, we're cautiously optimistic about what we're seeing. The sentiment is obviously improved, but you do have this kind of short-term policy disruption that's out there that I think is impacting the general market. Just think about some of the things that are happening with respect to the new administration and what that means for businesses across particularly North America and the United States.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

That all makes sense. I appreciate the color. And you mentioned data centers there. There's obviously been consternation lately in terms of where spending will trend, where growth rates will shake out. Unrelated exposures. I guess to level set, where did data center revenue shake out for SPX in 2024, and what are you contemplating in the guide for 2025?

Mark Carano (CFO)

It was about Bryan actually came in about what we thought it would be at around 7% of the total company or around 10% of HVAC, and it's one of the drivers of our growth, along with healthcare and institutional on the HVAC side as we look into 2025, so we would expect that to represent a similar or better share.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

Understood. One last one, if I may. KTS, you walked through the portfolio fits, the differentiated technology. What should we think about in terms of year-one financial contribution, where it made a climb over time? And then most intriguingly, are you willing to speak to the TAM expansion that having brought that asset into the fold was now in play for ComTech and D&M?

Gene Lowe (CEO)

Sure, Bryan. I'll kick that off. When we announced that deal, we indicated that it would have about $90 million in revenue on an annual basis and segment margins slightly higher than the current segment income margins of the D&M business. Obviously, we're only going to own it for 11 months of the year. So you can kind of do the math around that. It's probably about $80 million or so of revenue contribution throughout the year.

Mark Carano (CFO)

Yeah. If you look at it on the first half, second half basis, Bryan, we're looking at the first half being closer to kind of one-third contribution and the second half, two-thirds contribution, and it really goes to the timing of the installations in the programs that they're involved in.

And then the other comment I'd make, which I think you guys have worked out, is that you see a heavier interest burden in the front half of the year and that interest burden starts to decline as you get into the second half and generate more cash flow. As you said, when we bought them, that it would be a modest contribution for this year and that will pick up in the subsequent year when you pay down some of that debt.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

Got it.

Gene Lowe (CEO)

Then, Bryan, I think you asked further about kind of a market opportunity going forward, right? This is a key program for the Marines and that branch of the US military. We've got high visibility into that program and visibility into the deployment of it over the coming years. When you think about broadening that out, there's considerable opportunity to expand that capability within the other branches of the government, whether that's Navy or other areas.

Paul Clegg (VP of Investor Relations)

Yeah, I think just a few comments there. As we've stated before, KTS is embedded in many platforms, and these are multi-year installs on a variety of different aircraft helicopter platforms that have a very strong position in a significant number of those and very good visibility of that.

And as Mark had alluded to, one of the areas of a very attractive synergy that we see is our TCI business has very strong global presence, very strong in MoD in the UK and Canada, the Five Eyes, and we see some attractive growth opportunities there. We also have a nice presence in the Air Force. We see some growth opportunities there. We also see some very nice technology synergy here where they have very, very good technology. And then this technology overlaps very well with our data links technology, and we think there's going to be some good opportunities to work together here on some different opportunities.

Bryan Blair (Managing Director and Senior Equity Research Analyst)

All sounds good. Thanks again, guys.

Operator (participant)

Thank you.

Gene Lowe (CEO)

Thanks, Bryan.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Damian Karas of UBS. Your line is now open.

Damian Karas (Equity and Stock Research Analyst)

Hey, good evening, everyone.

Paul Clegg (VP of Investor Relations)

Hey, Damien.

Damian Karas (Equity and Stock Research Analyst)

A follow-up question on data centers. Paul, correct me if I misheard you, but I think you said that you ended the year around 7% of your total sales into data centers, the HVAC cooling business. And I think you said you'd expect a similar level this year, maybe a little higher. So one, just if my math's right, that kind of suggests you're maybe expecting data center growth of like 8%, high single digits, something like that. Could you just confirm that? And the second part of my question is just given some of the commentary out there on some of these big companies like Microsoft and maybe having a little bit over capacity, I'm just curious if you've seen any changes in your project funnel or your visibility for data centers since we last talked.

Paul Clegg (VP of Investor Relations)

I'll talk about the second one first, and I would say the answer to that is no, Damian. We actually feel really good, and as you know, if you think about data centers, AI is actually still a pretty small portion of the overall demand. Obviously, growing very fast, but the majority of data centers is really people moving to the cloud or other applications like that, but I would say the demand for us we see in front of us in our current product line is very attractive, and then also, as a reminder, we have launched new products that expand our addressable opportunity here, in particular on the adiabatic and the dry, and we actually think that's going to open up some very interesting opportunities for us going forward, but I would say the data center demand we see is healthy and steady.

And you want to go to Mark throughout.

Mark Carano (CFO)

Yeah, sure. Damian, the only thing I take into account in your math there is that remember that we have a couple of acquisitions that benefit us in the 2025 numbers that don't have anything to do with data centers. And so obviously, Ingenia is part of that that rolls into this year, and the other is KTS. And so those are going to raise your overall revenue number a little bit there that affects the math. So I'm not sure I agree with your conclusion there.

Damian Karas (Equity and Stock Research Analyst)

Okay. Appreciate it. Can follow up with you offline on that. My second question is just on detection and measurement. And Gene, you said project activity is healthy, but a lot of that stuff you're saying is kind of 2026 and beyond. I think that's a little bit longer lead times than you typically see in that business. So could you just maybe elaborate on the nature of these projects and why they're longer dated? And just thinking about the flat underlying sales guidance for this year for D&M, how are you kind of thinking about that, the short cycle run rate part of the business versus projects?

Gene Lowe (CEO)

Yeah. Why don't I start? Then I'll throw it over to Mark to kind of put it into more of the numbers. If you look at D&M, I would say on our run rate businesses, it's steady. It's maybe some modest growth there. It does vary by region. I think the US is pretty steady. The continent of Europe, a little more modest. UK is pretty steady. But overall, I'd say our run rate business, which is the bulk of the detection and measurement segment, is performing well and performing steady. On the projects, as you know, Damian, there's a couple of different business units that have project activity. So on the transportation side, the Genfare brand, we've seen a lot of larger orders, I would say, very large orders, which are very good, and you see some of that in our backlog.

You'll see more of this where we've been verbally awarded. I think some of these could even hit Q1, Q2 that have a good chunk. These are multi-year projects that are, I would say, larger than the projects we've seen historically over the past five years. These are not in and out in the same year. A lot of the transportation businesses you get an order could be $1 million, could be $5 million, could be $8 million. Oftentimes, that gets in and out in the same quarter or two. A number of these opportunities are more multi-year projects where you're doing a broader range of work for them. We're actually very excited about it. The team's done a really nice job winning a lot of that business. I think that positions us well for 2026.

Two other ones in our AtoN business, we have some project in the portable airport lighting has been very good business for us. We actually see some nice projects rolling into 2026, 2027. A lot of that is more on the military side. So you do see longer lead times, which is very similar to the portion in our ComTech business, which we've always talked about. We do have some longer lead times there. So yeah, I'd say the project activity is healthy, and we feel good about what we're seeing.

Mark Carano (CFO)

Yeah. I think, I mean, just to add to that, what Gene's comments were, when I think about the run rate side of the business, I mean, we've talked about that being flattish. I think we are more optimistic as we sit today about what we're seeing in certain parts of the globe, particularly in the US

But our guide today still contemplates kind of a flattish run rate business, much like we experienced last year. With respect to the project side, really all three of those are seeing a high level of activity. And when I think about that backlog, some of those projects will be bid and executed within the year, but we're just seeing a fair number of projects that will get bid later in the year that will either execute in 2026 or beyond or will be on a multi-year execution.

Damian Karas (Equity and Stock Research Analyst)

Great. Thanks for all the color, guys. Best of luck.

Mark Carano (CFO)

Thanks, Damien.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ross Sparenblek of William Blair. Your line is now open.

Ross Sparenblek (Equity Research Analyst)

Hey, good evening, guys.

Hey, guys.

Hey, guys. Thinking through just some of the product commentary within HVAC, can you maybe just help us get a sense of demand levels and some of the dynamics between Evers cooling and the EMA business?

Gene Lowe (CEO)

EAM business?

Ross Sparenblek (Equity Research Analyst)

Yeah.

Yeah, engineered air movement?

Gene Lowe (CEO)

Engineered air movement business.

Yeah. If I think of cooling, I'd say you hit on probably our two biggest product categories for data center. I would say cooling is healthy. As a reminder, we're very strong in cooling towers. We do well in data centers, not only in North America, but we have a nice position in Asia where we do a lot. Actually, a big chunk of the Asian business is really oriented around data centers. We also do well in Europe. Let's say the business there is doing well. Frankly speaking, there's a lot of excitement about the expansion of the product opportunity because we were really servicing one portion of that area, which is the cooling tower, but the two other areas, dry cooling and adiabatic, we really have not been servicing. So we did launch this at the ASHRAE show, the large HVAC show last month.

I think there's a lot of excitement there. These tend to be longer lead times. We would be focused on getting a material amount of bookings in 2025 and targeting to get a chunk of that revenue into 2026. I'd say on the cooling side, we feel very good about what we're seeing there. On the TAMCO side, demand is very strong. I think our product, I think we have a better product. It's very similar to Ingenia, where our challenge is getting the production to meet the demand. We are expanding both in Canada and in the US there. Our focus is being able to sell more because we are in a situation where we are at full capacity there. I'd say on both sides, we're feeling good about what we're seeing.

Damian Karas (Equity and Stock Research Analyst)

Got it. That makes sense. Yeah. Well, I'm just trying to understand kind of the sensitivity in the HVAC top line. I almost get the sense that maybe you're reserving some of the new capacity for Evererest for these new products. I mean, maybe just any updates on where you are and kind of absorbing that Springfield site.

Gene Lowe (CEO)

I think the site's done really well. It's ramped up very rapidly. We've gone from zero. Have we shared the numbers there publicly, Paul? But I think you're talking tens and tens and tens of millions of dollars. It's been a really nice facility. We focus most of our NC and our MD Everest through that facility. That's not only for data centers. We will see those larger scale products also used in semiconductor. We're seeing them in a variety of applications, battery plants. We've seen them in steel, a variety of larger applications. But it's been a very nice addition, but we still also have more room to grow there. So I think that if we find the demand, we can scale a material amount further in our cooling business.

Damian Karas (Equity and Stock Research Analyst)

Okay. So when you're kind of thinking about the high and the low end of the HVAC margin range then, I mean, there's still some overhead absorption to go. If we hit the midpoint of kind of the organic guide, I mean, what gets us towards that low end? Is that kind of the recent M&A that was in the medium-term targets that you guys gave last March? Or is there something else around additional capacity for Ingenia that would kind of hit that, I think, 23% range?

Mark Carano (CFO)

No, Ross, that would really be if you're talking about the lower end of the range, that would really be where you don't see as much drop through on the top line. You're not seeing as much absorption. Some of that could come from the heating side. If you're talking about a weaker winter, some of that could just come if you start to see deterioration in the macro.

Damian Karas (Equity and Stock Research Analyst)

Okay. One more if I can then. It feels like it's been a pretty abnormally cold winter, and a little surprise on the low single-digit growth on the heating side for the boilers. Is this kind of maybe January loaded? So it's flowing through in the Q1, or is there something else there?

Gene Lowe (CEO)

Yeah, so actually, for Q4, it was really quite warm. It did turn cold in January, and we had some stronger bookings in the Q1 in hydronics.

Damian Karas (Equity and Stock Research Analyst)

Okay. That's helpful.

Gene Lowe (CEO)

As you would expect, but.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Steve Ferazani of Sidoti & Company. Your line is now open.

Steve Ferazani (Senior Equity Analyst)

Evening, everyone. When you guided for the full year a few months back, I'm looking at the numbers here. It's a segment results for 4Q. It looks like D&M actually came above the high end of your range, while HVAC was at the very low end. I'm just trying to see what transpired as the quarter went on that sort of generated those kinds of results.

Mark Carano (CFO)

Yeah. I think, Steve, with respect to the D&M business, we did have a very strong Q4 with respect to our execution there, and really what you saw was, given the incremental revenue that we saw, particularly from the L&I side of the business, you saw operating leverage in the business. You also saw some very favorable project execution on some of the ComTech projects that were executed within the quarter, and then I think, as you know, we've been on this journey over the last year or two, really using CI and other synergies to drive margin across the D&M platform as a segment, and really, it was kind of a blend of all three of those elements that drove that outsized performance in the quarter.

Some of that dynamic you obviously saw throughout the year, right, as we continued to drive D&M margins up to the levels where we finished the year. With respect to the HVAC margins and the dynamic there being on the lower end relative to where we were guiding, it's really related to revenue and the drop through related to that, right, which was a function of heating and the dynamic that we saw in the Q4.

Gene Lowe (CEO)

We had set heating at a fairly low bar for the quarter because it had been warm. It turned out to be we didn't see a lot of uptake. It remained warm. You guys were all in T-shirts up in the north, and nobody was buying boilers. So that was a key driver that caused us to come in a little bit lower on HVAC.

Steve Ferazani (Senior Equity Analyst)

I know I'm not the first one to ask this, but does the start of the season, is that how the season goes? Because it obviously was the coldest in at least three years as we got into January, February. But if you don't order the boiler in October, are you not ordering it? You'll wait till next year? Or how does that usually play out? You guys have done this for so many years.

Gene Lowe (CEO)

Yeah. Steve, I think you hit the nail on the head. It's not only the number of heating degree days, but when it does get cold, and what you do see is if it gets cold early, September, October, November, people will replace the boiler. If it gets kind of cold in January and February, what you see is a lower pickup rate. You might get parts orders. You might get some service work, but you're exactly right, so the two numbers we always look at are the heating degree days, but also specifically when it gets cold. We have all sorts of regression models and historical data about what drives our TAM for that year, but I think the way you described it is accurate.

Steve Ferazani (Senior Equity Analyst)

Okay. That's helpful. On the backlog build with D&M and the expectation that 2026 could be a very strong year, so much of D&M is supported by government spend. Given the new administration, does that put any of these projects at risk?

Gene Lowe (CEO)

Yeah. Steve, great question. When I think about the two areas where you would see that would be one around our Genfare business on the transportation side. I will tell you, as we sit today, we're not seeing any impact from the change in administration or any of the sort of noise that you're seeing coming out of Washington regarding that business. The opportunities remain robust there, and there's really been no timing change. With regard to the ComTech side of the business, where you would see a tie to defense spending, we obviously are watching that very closely. We are not seeing anything as we sit today that would lead us to believe that there would be a change in the order rate or the opportunity there as we look out.

Clearly, when you look at particularly the KTS business with some of the other elements of ComTech, right, these are businesses that are really skewed to kind of what is the modern technology of the US military, right? It's kind of where the US military is going. And it's not really tied to sort of these kind of large traditional equipment that you see out there. And frankly, they're essential, I would argue, to the kind of the strategy of the US military. So I think we feel good about where we're positioned there from a defense perspective, but we'll be watching it closely, clearly.

Steve Ferazani (Senior Equity Analyst)

That's fair. I just wanted to flip back to KTS for a second. I mean, that looks like really unique technology. It looks like it would be very, very hard to displace on any projects. Looks like it fits perfectly with your past M&A strategy. But I wanted to get a sense, Gene. Is your M&A strategy evolving at all? Have you shifted priorities and what you're looking at now versus what you maybe were looking at two, three, four years ago in terms of targets?

Gene Lowe (CEO)

I don't think so. I think we've stayed true to our values in terms of how and where. What types of businesses are we good at that we can build and growing our platforms? It's engineered products. It's leadership positions. It's tech-heavy. It's all of the same types of things that we've always been focused on over the past 10 years. What I would say that does evolve is you think about our different platforms. As you build, you will see new opportunities grow. A perfect example of that would be Engineered Air Movement, where a couple of years ago, we were not in that business, right? We were in cooling towers, which is a very close adjacency to that. But by getting into Cincinnati Fan and then TAMCO and now Ingenia, our TAM is dramatically larger in how we can build that out.

Now, it's the same strategy in terms of the types of business. We're not a commodity guy. We're not a cheap guy. We run engineered businesses where product management is very important. We have a very strong focus on the customers and innovation, very strong focus on digital. And I would say if you look across our platforms today, there is a lot more opportunity. This is, on the M&A side, the busiest I have ever seen us in 10 years. And we see some very attractive opportunities on the HVAC side in a couple of different areas, and then also on the detection and measurement side. So I believe our strategy is sound, but we're not changing anything in terms of how we think about it really. And Steve, as you know, we kind of laid out in March our strategy. It's very similar.

So we're executing against that. We feel good about what we're saying.

Steve Ferazani (Senior Equity Analyst)

Great. Thanks, Gene. Thanks, everyone.

Gene Lowe (CEO)

Thanks, Steve.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brad Hewitt of Wolfe Research. Your line is now open.

Brad Hewitt (VP and Equity Research Analyst)

Hey, good afternoon, guys. Thanks for squeezing me in.

Gene Lowe (CEO)

Absolutely.

Brad Hewitt (VP and Equity Research Analyst)

Hey. So it looks like your revenue was relatively flattish sequentially in Q4, whereas I thought the expectation was for a modest step up sequentially to get to kind of a $100 million annualized revenue run rate. Was there a timing component to be aware of there? And then how should we think about the growth outlook for Ingenia this year, both on a full-year basis and kind of on an exit rate basis?

Mark Carano (CFO)

Sure, Brad. I'll kick that off. With respect to Ingenia, we have a very, very strong backlog in that business. So we feel good about the opportunity set there. I think, as you know, we're doing a facility expansion there currently. And that was a little bit slower than I think we had originally intended when we were chatting about this over the last couple of months. Most of that kind of challenge that we had with respect to getting up and running is behind us now. So it's up, fully functional. But that did impact revenue within the quarter.

Gene Lowe (CEO)

We came in a little late from the guide based on that. But with that equipment installation, we're back on track.

Brad Hewitt (VP and Equity Research Analyst)

Okay. That's helpful. And then maybe on the KTS business, can you walk through what you're assuming from a synergy perspective and maybe a year five ROIC math? And then do you expect to see any impact on the business from Dodge?

Mark Carano (CFO)

I'll start with, we kind of talked a little bit about the Dodge dynamic just, I think, in the last question. But we're watching that very carefully. But what I will say, and I think Gene has made this point as well, this is just a really critical technology to the US military. It's embedded within one of the branches, and the expectation is it will be one of the core technologies across many of the other branches. And when you think about where the US military is going and the sort of technologies they need to support in theater, whether that's drones, communications, things of that nature, this is just a critical component to it. So I think, generally speaking, I would be surprised if it was impacted.

But clearly, the future and what's coming out of Washington, DC right now is unpredictable, so we're keeping a close eye on it. With respect to, I'm trying to remember the other parts of your question. With respect to ROIC in year five, listen, one of our key elements of any transaction that we do is that it has got to generate a return in excess of our cost of capital within three to five years. So we wouldn't have moved forward with the transaction should it not have had that sort of return profile. So you can rest assured it's something we're very focused on.

Gene Lowe (CEO)

On the synergy side, just a few more qualitative comments. While KTS has won a number of platforms, multi-year installing of their technology like the MV22, the CH53, the AH1Z, the MQ9A that are multi-year programs, there's actually a lot of growth within their existing business in other platforms in other areas within their existing infrastructure. The thing we like about this is this solves a real pain point for frontline operations. You're really taking a lot of different proprietary communications where you don't want to have 10 different communication systems. You want to have one where you can actually see everything and manage everything. And that's really the special sauce that KTS has. So we think they're very well positioned with their technology. As Mark alluded to, we actually think on the synergy side, we bring a lot of very strong relationships from our ComTech business.

We have very strong relationships in the UK and Canada, some of the other Five Eyes that we think can really help expand this, as well as in the Air Force, which is a big AtoN with our mobile Air Force lighting. We have a very strong relationship there. That's on the commercial side. But then on the technical side, the teams are very excited about how we can bring our tactical data links and their solution together and deliver more value not only to the KTS side of the customers, but to the legacy TCI side of customers. That's not something that happens overnight. It does take some time to do the joint development, but we see some real opportunities there as well. So yeah, we feel good about the growth opportunities here and the synergy opportunities specifically on the commercial and the technical side.

Great. Thanks, guys.

Thanks, Brad.

Operator (participant)

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

Paul Clegg (VP of Investor Relations)

Thank you all for joining us. We look forward to updating you on the quarter, once again, on the quarter ahead. Once again, if you have an interest in attending our Ingenia facility tour, please email me.

Gene Lowe (CEO)

Thank you for choosing participation in today's conference. This concludes the program. We will now disconnect.