SPX Corp

NYSE:SPXC

Q2-2025 Earnings Call

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2025 SPX Technologies Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Carano, Chief Financial Officer. Please go ahead

[Mark Carano, executive]

Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. A press release containing our second quarter results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website, spx.com.

I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude amortization expense, acquisition-related costs, nonservice pension items, mark-to-market changes and other items.

Finally, we will be meeting with investors at various events over the quarter, including the Seaport Virtual Investor Conference in August, in the Jefferies Industrial Conference in September.

And with that, I'll turn the call over to Gene.

[Eugene Lowe, executive]

Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the second quarter of 2025 as well as an update on our full year outlook. Our Q2 performance was strong. We grew second quarter adjusted EPS by 16%. SPX continued to execute well, driving significant profit growth in both segments and making meaningful progress on several key initiatives. Once again, we are raising our full year guidance range to reflect our strong results and outlook for the remainder of the year. We now anticipate growth in adjusted EBITDA of 18% at the midpoint of our updated range.

Looking ahead, we remain well positioned to continue executing on our organic and inorganic value creation initiatives, supported by a robust M&A pipeline. Turning to high-level results. For the second quarter, we grew revenue by 10%, largely driven by the benefit of recent acquisitions and project sales in our Detection & Measurement segment. Adjusted EBITDA increased by approximately 16% year-over-year with 120 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. Over the past quarter, we've continued to gain traction on our growth and new product initiatives. We are making meaningful progress on expansion plans for our engineered air movement businesses where we see significant demand in excess of our current production capacity. We expect to announce site locations for the U.S. production expansion of our TAMCO actuated dampers and Ingenia customer handling units before year-end with incremental production capacity anticipated to come online in the first half of 2026.

On the new product front, we are receiving positive feedback and engagement from customers on the launch of our OlympusV MAX product, a new cooling solution focused on the large scale needs of data center customers. Introduced earlier this year, the OlympusV MAX runs either dry using no water or an antibiotic mode, allowing the user to optimize their preferences between water and power usage. We expect this product to strengthen our position and significantly increase our addressable market in data center cooling solutions. Our target is to book OlympusV MAX orders this year for revenue in 2026, and we believe we are on track to achieve this target.

Now I'll turn the call back to Mark to review our financial results.

[Mark Carano, executive]

Thanks, Deane. Our second quarter results were strong. Year-over-year, adjusted EPS grew 16% to $1.65. For the quarter, total company revenues increased 10% year-over-year, primarily driven by the acquisition of KTS and Sigma Omega as well as higher project sales in Detection & Measurement.

Consolidated segment income grew by $18 million or 15.5% to $136 million, while segment margin increased 110 basis points. For the quarter in our HVAC segment, revenues grew 5.7% year-over-year with 4.9% in organic growth. On an organic basis, revenues increased 0.7% with the modest increase reflecting a large cooling service project in the prior year. Excluding this project, the organic increase was approximately 7% with solid growth from both cooling and heating.

Segment income grew by $12 million or 14.5%, while segment margin increased 190 basis points. The increases in segment income and margin were largely due to higher volumes with a more accretive mix and favorable project execution in our cooling business that generated higher than typical margins. The latter accounted for nearly half of the segment's year-over-year margin improvement. Segment backlog at quarter end was $540 million, up 19.5% from Q1, including approximately 7% organically. For the quarter, in our Detection & Measurement segment, revenues increased 21% year-over-year. On an organic basis, revenue increased 5.5%.

The KTS acquisition accounted for an increase of 14.9% and FX was a modest tailwind. The increase in organic revenue was largely due to higher transportation and Comtech project deliveries. Year-over-year segment income grew $6 million or 18%, primarily driven by the KTS acquisition, while segment margin declined 60 basis points, reflecting a slightly more favorable sales mix in the prior year. Segment backlog at quarter end was $365 million, up 6% sequentially from Q1, all organic.

Turning now to our financial position at the end of the quarter. We ended Q2 with cash of $137 million and total debt of approximately $1 billion. Our leverage ratio, as calculated under our bank credit agreement was approximately 1.7x, including the effect of the Sigma and Omega acquisition, which closed in mid-April. We anticipate our leverage ratio declining below the low end of our target range by year-end, assuming no further capital deployment beyond our guidance. Q2 adjusted free cash flow was approximately $37 million.

Moving on to our full year 2025 guidance. We are updating adjusted EPS to a range of $6.35 to $6.65 and reflecting a year-over-year growth of 16.5% at the midpoint. This represents an increase from our previous range of $6.10 to $6.40. The increase reflects our strong Q2 results and second half outlook.

In HVAC, we are narrowing our revenue guidance range, resulting in a midpoint of approximately $1.52 billion, while our margin guidance is increasing by 75 basis points at the midpoint, largely to reflect our performance in Q2. In D&M, we are increasing revenue and margin guidance to reflect additional project deliveries in 2025. With respect to cadence, we expect Q3 adjusted EPS will be approximately flat sequentially, and the second half as a percentage of the full year will be similar to the prior year. As always, you'll find modeling considerations in the appendix to our presentation.

And with that, I'll turn the call back over to Gene.

[Eugene Lowe, executive]

Thanks, Mark. Market conditions support our increased full year outlook for 2025. In our HVAC segment, we have a healthy backlog for our highly engineered solutions and our core markets remain solid. We continue to feel positive about data center opportunities in 2025, 2026, and our related new product introduction initiatives are progressing well.

In our Detection & Measurement segment, run rate market demand remains flattish with regional variation, while our project businesses are seeing healthy frontlog activity with many new bookings slated for delivery in 2026 and beyond.

In summary, I'm pleased with our strong Q2 performance, and I'm confident in our updated guidance, which implies adjusted EBITDA growth of approximately 18%. We continue to see solid momentum in our end markets and key initiatives including our progress on capacity expansions and new product introductions. We also have a robust M&A pipeline with several attractive opportunities. Looking ahead, I remain excited about our future. With a proven strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come.

And with that, I'll turn the call back to Mark.

[Mark Carano, executive]

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

[Operator]

[Operator Instructions] Our first question today will be coming from Bryan Blair of Oppenheimer.

[Bryan Blair, analyst]

It's a very solid quarter. You called out data center technology investments, and obviously, there's a lot of enthusiasm or new enthusiasm on data center build-out and growth runway. What kind of growth is your team seeing in the space? What are expectations for 2025? And are you willing to size orders to date in dry and adiabatic technologies and how supported that rollout may or should be to 2026 growth?

[Eugene Lowe, executive]

Yes. Why don't I start there, Brian. I think as we've talked about in the past, data center has become more material to us using broad brush numbers, and this has grown from, let's say, around $150 million to $200 million in 2025. This would be around high single digits for the company overall, and 9%. This will grow further going into 2026. We feel like we're very well positioned with our product portfolio, in particular, on cooling towers, also our actuated dampers.

But as we've talked about in the past, we have significantly increased our TAM, our addressable market with the introduction of the OlympusV MAX. This is a dry and/or abiotic solution that is large in scale for the data center market. And I would say we feel very good about where we are. What we've said is we want to get a material amount of bookings. We're talking the tens of millions of dollars for this year that we would anticipate revenue in next year. And I think we are right on track and feeling very good about this product. We actually feel like we have a number of advantages on this product and it's being seen and received in the market.

So as we step back and look at where we play in data center, I think this year is a good year for us. And I think next year is going to be even better. So overall, we like what we're seeing. This what does this mean at the company level, we're not going to offer guidance at this point, but it will be higher than 9% of our company revenue would probably say low double digits as we look ahead to 2026.

[Bryan Blair, analyst]

That's very exciting. And you noted U.S. manufacturing capacity for TAMCO and Ingenia being online during the first half of next year. If we were to take the capacity add in the U.S. for those businesses combined with what's ongoing in Quebec for Ingenia. What would the run rate revenue capacity lift be if we were to fast forward to the middle of next year or the end of next year?

[Eugene Lowe, executive]

Yes. What we've said, if you look at Canada, Mirabel where I know a number of people have just visited just fabulous facility team and product area. We basically said we wanted to get to a $100 million run rate by the end of last year. We see very close to that. I'd say we're a little short but very close to that. And then really, we'd want to be at $140 million run rate out of that facility at the end of Q4. That doesn't mean we'd get to that revenue number this year, but we'd be running at that rate.

And the capacity expansions there are going well. I think that we are growing. And I think that we're from what we see, it's not easy to grow and add capacity of a highly robotic automated solution, but we are making very nice progress. So I think we're going to hit that for this year. And then what we've said is that when we add the new facility, we would target by the end of '27 to be in the range of having a capacity of $300 million-ish run rate.

And so if you look at that, that's a very significant growth to where we were last year and very significant growth where we are this year. Again, we've talked about Ingenia a lot. They have a truly a great [indiscernible] physical product, but the software solution, our System 1 solution, which we think now one in the industry can match in terms of how quickly they can configure a unique solution for customers. We feel good about that. So yes, we would expect to see some nice, meaningful growth on Ingenia really driven as a part of our expansion in Mirabel outside of Montreal. But then also our U.S. expansion, which we think will get up and rolling in the first half '26.

[Bryan Blair, analyst]

I appreciate that detail. And if we move to the D&M side of the portfolio, and there's better project momentum than we expected at this point. You've spoken to the 2026 prospects, and it sounds like that visibility is getting better and better. But for the back half of this year for D&M, what's your team contemplating in terms of project contribution versus run rate activity?

[Mark Carano, executive]

Yes, Brian, we're -- I think as we said, we remain excited about what we're seeing on the project front in D&M for the back half of the year and into 2026. I think as you probably can tell, book-to-bill was around 1.1 for the quarter. Backlog has grown nicely, and we expect it to be even higher by the end of the year. I would guess as I look at the project business, we're expecting that to kind of grow in the high teens organically during the second half of the year.

[Operator]

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

[Damian Karas, analyst]

Just a follow-up clarification on that comment you just made. So you did raise the sales guidance for D&M by like mid-single digits. And so you've got this double-digit growth baked into the back half. I'm just trying to understand, so is some of the stuff that you thought was going to happen in 2026 actually kind of happening sooner, getting pulled forward? Or did you actually see new project activity kind of pop up in the last couple of months that really wasn't there when we last talked.

[Mark Carano, executive]

No, Damien, that was -- so the raise or the increase in the guide was really projects that were in the very early part of 2026 that have moved into 2025. So it's really just sort of a timing dynamic. You know we say this all the time, but we do our best to get these in the year, but within shorter periods of time, they can move across quarters fairly easily.

So that's really what drove it. But we continue to see a lot of activity on the project side. I mean I just mentioned that and reiterate it. Despite those moving from '26 to '25, and we're continuing to see a lot of activity both on the Genfare side of the business as well as Comtech.

[Damian Karas, analyst]

Understood. I wanted to ask you about the HVAC margin, obviously, quite strong there in the second quarter. Could you just talk a little bit about what drove the strength and the guide looks like it suggests you'll see a little bit of a step down. I know you raised the full year statement margin, but you're expecting the back half to not be at the same level in the second quarter. So could you just talk through your expectations there?

[Eugene Lowe, executive]

Yes, sure. So in the quarter, the margins were 25.4%. That was -- year-over-year, it's about 190 basis points over where we were in Q2 of last year. Really, a couple of things that I would call out, one of which was, obviously, in our prepared remarks, about 50% of this related to some favorable project execution we had within the HVAC business. So that represented about half of that increase. The remaining 50% was really split between higher volume that we had in the quarter. And then we had a more accretive mix for lack of a better description, a higher-margin kind of book of business within the quarter.

So that's really how it broke out between the two. When you step back and think about the full year for HVAC when I look at where our guide was at 23%, I think the midpoint was 23.75 margin. We've moved that up to -- at a midpoint of 24.5%. So it's up 80 basis points for the full year. And when you look at the half year, it's actually -- it will actually also be up in the range of -- check in my numbers here, about 40 basis points.

[Operator]

And our next question will be coming from Ross Sparenblek of William Blair.

[Ross Sparenblek, analyst]

Just a clarifying point on the OlympusV Max. You said dry an hybrid. This is a dual unit or we should still expect a dry launch later this year?

[Eugene Lowe, executive]

They're both launched, Ross. So the beauty of this product is it's modular, which we actually think gives us a competitive advantage. What that means is you can buy this as a dry product without the [indiscernible]. The abiotic is a part of the system which delivers the water on the outside that gives you higher efficiencies and reduces your energy. So they are both in the market. We are quoting both. We are getting -- we're making nice progress on both, but they're both out there today.

[Ross Sparenblek, analyst]

Okay. And can you maybe just help us get a better sense of what the mix profile will be for these 2 products?

[Eugene Lowe, executive]

It depends. I think that we've had some customers that we are working with flip back and forth in general. I think you get a lot more value out of abiotic because water just gives you higher efficiencies, less power usage, less carbon emissions. So if power to look at it, just to set the table, as a reminder for data centers, this segment of the market is bigger than cooling towers. So you think of everything we've done with the Everest, which has been a great product for us and growing very rapidly, this new market we've entered is larger than that market. So I would say we've seen interest in both, but probably rough ballpark, maybe 2/3, 80-betic, 1/3 dry is what I would say.

[Ross Sparenblek, analyst]

Okay. And then just -- I mean, based on what you can say, any thoughts on kind of competitive position in the market and maybe potential exclusivity with hyperscalers?

[Eugene Lowe, executive]

Yes. I think our competitive positioning is very strong. I think we have a number of advantages here that are being seen by the end customers we start with our heritage of cooling towers where we are, I would argue, the #1 cooling power provider in the world. We invented the cooling tower you look at natural draft towers, large towers, we just have some unique competencies on air flow, heat exchange, back pressure analysis, et cetera, et cetera. We're very good at the big stuff.

And so what has happened is we are very -- we believe we have a very strong position in cooling towers for data centers. A lot of the technology, a lot of the capability translates over. So if you think about it, A couple of things that I would call out that I think we believe we have some unique advantages there. First, we have a modular design, which means the same product can be upgraded and get more tonnage our competitors. We don't see that being prevalent in the market. So we think that gives us an advantage. I would say our mechanical equipment. We make our own unique fan designs, our own motor designs or on gear reducer designs, that have been battle tested over the past 50 years in the field for cooling towers, this is just really a cooling tower with the different heat exchange. It's really a coil oil products.

So that translates very nicely that we believe we have an advantage on our mechanical equipment. And this is particularly important for data centers who really care about uptime. We have, I believe, the best uptime equipment in the market. And the third thing I would say is we're doing CTI testing. We believe we're going to be 1 of 2 products that will be CTI validated. That means cooling tower Institute validated which basically shows that it guarantees the performance of your product. So when customers buy our products, they are darn sure they're going to get the performance that they want and they need. So yes, so we feel good about this market. And I would expect we're going to be shipping product here in 2026.

[Operator]

Our next question will be coming from Jeff Van Sinderen of B. Riley Securities.

[Jeff Van Sinderen, analyst]

Wanted to check a little bit more, if we could, on I guess, get a better understanding if we could, on the applications for the VMAX and data centers. I guess if customers are deciding between going with the VMAX and going with another solution, what are the main considerations that would make them decide to go with the MAX. Is it how much of that might be speed, cost, performance, et cetera.

[Eugene Lowe, executive]

Yes. I mean I think if I look at it -- what I would say in this market, I think if you go to -- if you look at cooling power market in the U.S., the water [indiscernible] it's a very consolidated market. There's 3 large players that accounts for the majority of the market, for example, in North America. In the air cooled, you see more fragmentation. There's more players. There's a number of players.

Having said that, when you get to the very large applications, it's a much smaller set of competitors. And the reason being is there's very high engineering requirements. If you look at these products, these products are longest, 40 feet long. It could be up to 20 feet high. You're talking tons of product, and you need to be very capable of handling in like large industrial scale and understanding all of the associated ramifications of that. So that really narrows down the number of people who can be a qualified provider in that market. And I would say we shine in that regard.

The second thing I would say is they typically look at all of the things that customers look at, they want certain efficiency levels, what's the power usage. They want to be able to do something that is flexible. It can run with the water on, with the water off, they have sound requirements, low sound is important as some of these data centers are going in neighborhoods. They don't want to have a lot of decibels out there. So when you look at these markets, there's usually a number of different features and benefits.

But typically, they're going to want to partner with a large-scale partner who they can count on to meet their very large needs. They want to have engineering capabilities to be able to solve any issues that may arise during the engineering or the delivery process, and they want the functional specifications that they're desiring. So of course, if you've got better efficiencies, you've got better airflow, you've got lower horsepower motors, you'll do better.

And I think we match up very well on our product. I think we match up very well on being a very qualified supplier in that market. I think the Marley brand holds a lot of weight in the cooling tower market. And I think that's a benefit for us. So those would be some of the things to think about. One thing I would say in this market most data center -- we're talking about the hyperscalers, they prefer to have -- they don't -- they prefer not to sole source. So they prefer to have a large provider and then they prefer to have an option of a smaller supplier. So we'll typically try to avoid being sole source to one company here.

[Jeff Van Sinderen, analyst]

Makes sense. And then if we shift to the D&M business for a moment, maybe you can delve a little bit more into kind of the main drivers you're seeing for that business and the growth you're expecting going forward? And maybe touch on the drone detection and jamming part of that business. Just curious kind of I guess, where you're seeing demand there? Are you seeing anything in civilian -- is it more defense? What kind of -- how is that shaping up?

[Eugene Lowe, executive]

Yes, sure. I'll start, and then Mark can jump in here. I think that if you look at this as a level set, if you look at the Detection & Measurement business, approximately 2/3 of that business is run rate. It's been flattish modest growth we've seen over the past 2 years, actually some nicer growth this year. But projects are about 1/3 of that business, and we've seen really nice progress here. What I would say is the way I think about it is transportation, really on Genfare, is this that would be installing large projects for our customers there. What drives that, the transportation bill that's been out there for a couple of years has provided support. But the punchlines are seeing good activity there. We've had some really nice competitive wins at some multiyear wins.

So if I look at that business, it's the normal course. We have expanded our addressable opportunity. We've actually launched a new ticket vending solution, the hardware and software that really opens up some opportunities for us who already on our large first large -- our first 2 large customers there, 1 large 1 metal size and with a number of other it's ongoing. So that's probably what's driving the transportation.

On the Comtech, there is a good chunk of Comtech, which is military, but there's also nonmilitary components in there. A lot of our PCI branded product is used for spectrum monitoring. That same product is also used in military applications. And to your point, we are seeing drones being a primary application usage there. So our products can really help you identify where the enemies are but also where the drones are. And it works very well. So that's been the driver of our projects there. The newest [indiscernible] position, which is also a part of that is called KPS. That's a little bit different of a space, but there was also some nice -- we think, some nice benefits from drones there where they provide digital interoperability where they are the centralized point of communication for customers. They bring all these different disparate communication technologies into 1 solution, and we're seeing a lot of drone activity there and and being used in our products being used in those applications there. So yes, that is a driver for us.

[Jeff Van Sinderen, analyst]

Okay. Great. And if I could just squeeze 1 more in. On the M&A front, just wondering any shifts in focus there, where you might be most focused? And then how are targets aligning for completion?

[Eugene Lowe, executive]

Yes. What I would say on M&A is I'm feeling very, very positive start with as a reminder, M&A is a critical component of our value creation strategy. As if you've been following our company, we really invest for growth. 98% of our cash flow has gone into growth, predominantly M&A and CapEx, but that was 92% in terms of acquisitions. $2 billion of capital, 16 acquisitions average price has been 10 to 12x. These are really good businesses, really hard synergies but have really strengthened our company and have been accretive on aggregate, both in margins and in growth rate.

So as I step back and look about where we are today, I'd say our pipeline is very robust and it's robust, not only now for what we see and what we're actively working on, but also for what we see coming out over the next 12 months. The areas within our business that we see the most activity. Probably the largest 1 would be engineered air movement. We really like this is really a great business for us. You talk about Ingenio, you talk about TAMCo, you talk about [indiscernible] Cincinnati and we see a lot of runway here, and we see very attractive opportunities to continue to build, strengthen that business.

And then I would say we're seeing some nice opportunities and the Detection & Measurement side, probably most specifically Comtech and transportation, where we think there's some very nice synergistic opportunities there as well.

[Operator]

And our next question comes from Steve Ferazani of Sidoti.

[Steve Ferazani, analyst]

Well, it sounds like you're doing pretty well as well. I wanted to ask about, as we've gone through earnings season, we're hearing certainly from plenty of companies that there were at least some hiccups post liberation Day, whether it was expected orders being delayed, whether it was issues with distributors exercising more caution. It sounds like you were completely exempt from all of it. Maybe that's because of Precision Engineered Products. Can you touch on that at all? Did you see any sense of caution in the market at least in those first couple of months as there was just general economic uncertainty? .

[Eugene Lowe, executive]

I'll start and I'll turn it over to Mark. I'd say you look at our overall, I think it's been managed pretty well. We can't really point to anything. One thing I would say you got to be a little care-lis companies don't typically start large capital programs, and there's lots of uncertainty. And so we're going to keep our eye on the Dodge report, for example, and if you were to build a new hospital or a new manufacturing facility, the demand that would hit us the cooling towers or the customer handling or the any of our range of products is typically downstream. And so we're going to keep our eyes on that. But I would say that overall, if I look at our end market demands going into '26, actually, actually this had a full strategic review last week. And I would say end markets look on track for '26. We're actually feeling good. Mark, what you said, so we did get clipped a little bit with tariffs.

[Mark Carano, executive]

Yes, a little bit. We can come back to that. But I think from a supply chain perspective, we're largely in country for country, with a lot of our manufacturing and I wouldn't say we really had any issues with respect to sourcing equipment and anything of that nature. We've done a lot to manage that through the COVID period and kind of deploying our business system and our supply chain capabilities to make sure we are well positioned to support the business additively, over the last quarter or so.

[Steve Ferazani, analyst]

Okay. That's helpful. And you said there was some -- you wanted to touch on follow-up on the tariff issue.

[Mark Carano, executive]

Yes. I mean, big picture, Steve, I think last quarter, we talked about tariffs being at a midpoint kind of a $0.10 headwind for the year, which is frankly not really that material a number you think of total EPS. Yes. And over the last kind of quarter is, I mean, the tariff environment has been changing, right, almost weekly or daily. It feels like it's hit at least a new floor for now. But nevertheless, kind of managing through that, looking at our -- I come back to our business system and our supply chain teams really focusing on that. We've actually sort of recalibrated our exposure, and we actually think it's only about $0.05 [indiscernible] the company.

[Steve Ferazani, analyst]

Well, that's great. I want to turn for a second to free cash flow, you are trailing where you were last year to the first half looks like there was a more sizable working capital build. I know you had the 2 acquisitions. I'm sure there was some cash costs involved in that. But you guided for it being back towards the lower end of your net leverage target ratio. So it would seem to indicate much stronger free cash flow than the typical seasonal working capital reversal. Can you touch on free cash flow trends you're expecting in second half?

[Mark Carano, executive]

Yes, sure. Listen, I'm still confident about us meeting kind of our free cash flow commitments for the year. no change there. This quarter, you're absolutely right. It kind of stuck out from a working capital perspective. There's really timing around ARR and some of the big project work that we've had in the the first half of the year, particularly in Q2.

And then if you looked at inventory, you're probably looking at the cash flow statement. Much like other companies, right, we -- in order to mitigate despite it being the tariff impact not being a material issue for us, we certainly were looking at ways to mitigate it and buying ahead and putting inventory on the balance sheet. So kind of we're well positioned to meet our commitments.

[Steve Ferazani, analyst]

Excellent. And if I can get 1 more in. In terms of M&A strategy moving forward, you've gotten a lot larger through [ 16 ] acquisitions. Does this -- and I've been asked this question, I'm sure you're getting asked this question. Does this mean your targets have to get larger so that they can move the needle? Does this change your M&A strategy at all, given your size now?

[Eugene Lowe, executive]

Steve, I don't think so. I mean, if you think about around which deal size has been $130 million over the past 16 deals. What I would say is as we've grown, our surface area has gotten larger, right? So for example, EAM is not a business that we were in years ago, right? Now it is a very important part of our business, and there is a different range of opportunities there. So I would expect our core bread and butter if you look at our strategy, we think we're in the early innings of our strategy, and we don't see a change. I think you're right, we have done some deals that were at a higher value, $300 million, $400 million. And we're very comfortable doing that as long as it is a very good strategic fit. But if I look at the range of what we have in our pipeline, the opportunity sets looking forward, our strategy is the same.

[Operator]

And our next question will be coming from Walter Liptak of Seaport Research.

[Walter Liptak, analyst]

I wanted to ask sort of a follow-on on the price cost. Gross margins in HVAC, you kind of went over those already. As we're looking into the back half and looking at the backlogs -- how is that shaping up for the back half? You talked about some headwinds, but are we at a high point in the year for gross margins and they come down? How should we think about that? .

[Mark Carano, executive]

No, I don't think so. Well, when I think about price volume, and you think about that balance there, which I know is not directly your question, but prices on the HVAC side, when I look at the growth, it's probably maybe about 1/3 of it, approaching about 1/3 of it with the 2/3 being volume. And it is is less price on the D&M side, more volume.

[Walter Liptak, analyst]

Okay. Great. And that's.

[Mark Carano, executive]

Yes, go ahead.

[Walter Liptak, analyst]

Okay. Yes, I was just going to switch over to D&M margins, too. That backlog is up nicely as well. And considering the tariffs, again, and mix of business, how does margins look for the second half of the year?

[Eugene Lowe, executive]

Yes. I think the implied second half there, if you look at the guide, it would imply that they're down for the second half of the year. And that's really driven by the tariff dynamic we just talked about. The $0.05 tariff exposure as we recalibrated that and looked at the impact, it's really going to be back half weighted. So it will be in Q3 and Q4 and predominantly in the D&M business. So they're seeing the impact of that more so than in the HVAC business. And then we are making -- it's low single-digit dollars, but we are making some investments around some of these new products particularly our ticket vending machine and some of these other Comtech projects -- products, we're investing in those as we kind of position the company for '26 and beyond. So it's really those 2 elements that are impacting it.

[Walter Liptak, analyst]

Okay. All right. Great. And then maybe just a last 1 on M&A for me. I wonder if you could refresh us on just your capacity, and I think you kind of talked about this already, if you're going to stick to the same deal size as before. But how much dry powder do you have for M&A? .

[Mark Carano, executive]

Yes. Obviously, our current borrowings are about $500 million on our revolving credit facility. We'll continue to pay that down through the balance of the year. So we've got a $1 billion credit facility as we sit today. So we've got plenty of firepower when you think about the size of transactions that we normally do from an average size perspective. So I feel good about where we sit today. We obviously have the ability to access capital if we needed it. But right now, we're in a good spot.

[Operator]

Our next question will be coming from Brad Hewitt of Wolfe Research.

[Bradley Hewitt, analyst]

As it relates to the moving pieces on the Q3 guidance, how should we think about organic growth and margins both by segment and at the consolidated level?

[Mark Carano, executive]

Yes, Brad, maybe I'll kind of think about it from a -- I'll start with the second half kind of perspective because I think that's kind of helpful. When I look at -- when I look at the implied second half for HVAC, we're looking -- that implies growth of about mid-teens, and about 2/3 of that would be organic, with margins being up 40 basis points year-over-year from 24.7 -- 24.7 from 24.3%. On the D&M front, much higher growth on that side, just given the inorganic and organic contributions there. But organic is similar, I would say, in total to about what HVAC is so circa around 10%.

With margins stepping down a bit from 2024, about 90 basis points based on largely the things that we mentioned earlier, tariffs as well as the impact of some of the investments that we have during the back half.

[Bradley Hewitt, analyst]

Okay. That's helpful. And then maybe switching gears a little bit here. A lot of the data points seem to suggest that the outlook for data center is stronger than it was a couple of months ago. I guess curious what you would need to see in order to accelerate your investments in data center even further, whether it be organically or inorganically?

[Mark Carano, executive]

Yes. What I would say, Brad, is I would say that we are sitting here 3 months after our last earnings call, and we are feeling even more bullish about the opportunity set. I would say in all kind of I look at our 3 main product categories, cooling towers, the actuated dampers, air movement and then the -- our new product, we feel very good. So we're spending a lot of work on being able to support that growth. But no, we're not throttling back at all. We are supporting the growth because we think this is a good market. We think we have a great right to play, a great right to win here. And we do see a lot of runway ahead. .

[Operator]

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

[Damian Karas, analyst]

I just have a few follow-up questions. Mark, you were talking about the tariff exposure. Just curious, did you end up taking pricing actions in the second quarter? And if so, to what extent?

[Mark Carano, executive]

We did. We took pricing actions obviously across both businesses where we could -- obviously, it's driven by the competitive dynamics in both of those segments. So yes, that was -- it was both a combination of price increases and surcharges depending on the business unit and where they felt they could drive achieve that increase.

[Damian Karas, analyst]

Okay. Got it. So you'll see a little bit of a step down on some of those surcharges during the rest of the year?

[Mark Carano, executive]

We will. I think particularly as it related to certain areas like China, right, where shortly I guess it was in May, I've kind of lost track of all the changes, quite frankly. But the China tariff stepped down pretty dramatically. So in some cases, where we were using surcharges as a way to offset that cost. Those are harder to stick clearly.

[Damian Karas, analyst]

That makes sense. And then I wanted to ask you about your early experience so far with the 2 new acquisitions. So it's been, I guess, about half a year with [indiscernible] and maybe a quarter or so with Sigma Omega. So Gene, like how the integration been going with SPX, any unexpected surprises, whether good or bad?

[Eugene Lowe, executive]

Yes. I would say very, very positive. So [indiscernible] KPS -- we call them our deal thesis there was twofold. One, they're intrinsic product and position. We see a lot of growth just in the current market and current positioning right, the real areas of synergy where we can kind of create some nice additional values on 2 sides. One is we actually think their technology could help our TCI and ECS products, and we've already integrated some of this. We're actually launching this combined product, I believe, in September. So we've actually strengthened our technology position on our core compact business. And then on the second side, the second main element of the thesis is KPS is very successful in the U.S., but they're very small globally, whereas our Comtech business is a very global business.

It has installed base is all over the world, probably more than 100 countries. And we can help them accelerate. We've already have active discussions, and I don't know it's public or not. So I'll just say there's already 2 countries that I'm aware of where we're having very active discussions of leveraging their digital interoperability platform in that in those countries, friendly countries, obviously. But yes, so KPS, actually both of these businesses were just here for our strat plan, first time of them being with all of the teams, part of the greater hole. So as I say, went very well, really like the leadership of KPS, very driven, very hard work. And so the KPS is very good. And then Sigma Amega also, we feel very good about. That is very much really a part of our Hydronics business now. So think of that going with a McClean and Patterson Kelly. All 3 of those have a great degree of overlap. And the thesis there is that Sigma Mega has a great heat pump technology, very very strong position in the multilevel.

You're looking at hospitals or residential or hotels, things like that, very good position, but are the smaller number of markets, very strong in Canada, but less channel in the U.S. So really, we're helping them build their channel. And as you know, Damian, we have a very strong channel in the U.S. You look at our Marley channel, you look at some of our other brands. So we've already signed up a number of new channel partners for Sigma and Omega, and we actually see some good opportunities to continue that. So we think we're going to help them accelerate their revenue. So where we sit today, we feel very good about those.

Sigma Amega has a great team, too. I really like the team. They're very -- they truly are industry experts. They spend many, many decades at some of the big OEMs, the trains, the Yorks and they bring to bear just a ton of expertise. So yes, we feel good about that. And then if you go to the acquisition prior to that, Ingenia, just the growth we've seen there and the success we've seen there has been very attractive. So Yes. I think the -- we feel good about our M&A strategy. We're very disciplined. And I think that, as you know, there's a lot of data that says if you have a lot of experience and it's a part of your ongoing business system, you're going to be more successful I believe we have a very strong front-end due diligence process, strategy process, and you obviously have to deliver the goods. So the integration is very, very important. And we have a very good team here that helps make that happen. So to cut to the chase, we feel very good about both of those, [indiscernible].

[Damian Karas, analyst]

Great to hear. And 1 last question here, if I could squeeze it in. Obviously, I'm nitpicking a bit because the HVAC business has been growing by leaps and bounds. But you actually lowered the high end of the range. This is the first time we've seen the HVAC sales guidance come down, not go up since like the fourth quarter of 2021. So I just want to get your thoughts like data centers, obviously, are doing quite well. Are there by chance, any end markets within HVAC that are maybe dragging a bit?

[Mark Carano, executive]

Damian, I'll start with that. And I actually wanted to kind of come back to your margin question from earlier. But we did -- we just tweaked the top end of the range on HVAC. In part because of surcharges, that was really what was driving it, where we had been using surcharges or we had forecast that we reduced surcharges to offset some of the tariff dynamic. And obviously, it wasn't nearly as material as we thought it would be. So many of those are no longer in effect. That's really what was driving it, nothing more than that.

And back to your margin question, I know you were looking at second half. I wanted to kind of give you another way to think about it. When you look at the first half, margins in HVAC and you kind of back out that favorable project experience we had in Q2 first half margin is about 23.89% right around there, just under 24%. And then the implied second half is 24.7%. So you can see kind of the lift in margins in the business in the back half of the year.

[Bryan Blair, analyst]

On a year-over-year basis. Yes, yes. .

[Mark Carano, executive]

That's sequential.

[Operator]

And I would now like to turn the conference back to Mark for closing remarks.

[Mark Carano, executive]

Thank you all for joining us for today's call. We look forward to updating you next quarter. .

[Operator]

And this concludes today's conference call. Thank you for participating. You may now disconnect.