Earnings Call Transcript - SPXC Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q2 2025 SPX Technologies Earnings Conference Call. 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 A. Carano, CFO

Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. A press release containing our 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 Joseph Lowe, CEO

Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the 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 in Adiabatic 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 A. Carano, CFO

Thanks, Gene. 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 by 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 CommTech 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 & 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, 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 Joseph Lowe, CEO

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 backlog 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 A. Carano, CFO

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

Operator, Operator

Our first question today will be coming from Bryan Blair of Oppenheimer.

Bryan Francis Blair, Analyst

It's a very solid quarter. You mentioned data center technology investments, and there is a lot of renewed enthusiasm for data center build-out and growth potential. What kind of growth is your team observing in this area? What are the expectations for 2025? Also, are you able to provide insights on orders to date in dry and adiabatic technologies and how that may support growth through 2026?

Eugene Joseph Lowe, CEO

Yes. Why don't I start there, Bryan. 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, say, 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 adiabatic 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. So 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 Francis 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 Joseph Lowe, CEO

Yes, we've mentioned that in Canada, particularly in Mirabel, which is an impressive facility with a great team and product area, we aimed to reach a $100 million run rate by the end of last year. We came very close to that goal, although we fell slightly short. We are targeting a $140 million run rate from that facility by the end of Q4. While we may not achieve that revenue figure this year, we expect to be operating at that rate. The capacity expansions are progressing well, and we are experiencing growth. Although scaling up a highly robotic automated solution is challenging, we are making significant progress and are optimistic about meeting our targets for this year. Furthermore, we anticipate that when we introduce the new facility, we will aim for a capacity run rate of around $300 million by the end of 2027. This represents substantial growth compared to last year and this year. We've highlighted Ingenia, which offers an exceptional product that includes both impressive physical products and a highly adaptable software solution that we believe no one else in the industry can match in terms of tailoring unique solutions for customers quickly. We are confident about seeing meaningful growth from Ingenia, driven by our expansion in Mirabel and our growth plans in the U.S., which we expect to initiate in the first half of 2026.

Bryan Francis 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 A. Carano, CFO

Yes, Bryan, we remain excited about what we're seeing on the project front in D&M for the latter half of the year and into 2026. Book-to-bill was around 1.1 for the quarter, and our backlog has increased nicely. We anticipate it will be even higher by the end of the year. Looking at the project business, we expect organic growth in the high teens during the second half of the year.

Operator, Operator

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

Damian Mark Karas, Analyst

Mark, 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 A. Carano, CFO

No, Damian, the increase in guidance was due to projects that were initially planned for early 2026 but have now moved to 2025. It's primarily a timing issue. We consistently strive to deliver these projects within the same year, but they can shift between quarters quite easily. That’s the main reason for the adjustment. We are still observing significant activity in our project pipeline. Even though some projects moved from 2026 to 2025, we are seeing strong engagement on both the Genfare and CommTech sides of the business.

Damian Mark 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 segment margin, but you're expecting the back half to not be at the same level of the second quarter. So could you just talk through your expectations there?

Mark A. Carano, CFO

In the quarter, the margins were 25.4%, which is an increase of about 190 basis points compared to Q2 of last year. This improvement was primarily due to two factors. First, approximately 50% of the increase came from favorable project execution within the HVAC business. The other half was attributed to higher volume during the quarter and a more favorable mix of business that included higher-margin projects. Looking at the full year for HVAC, we initially guided for a margin of 23%, with a midpoint of 23.75%, but we've now raised that midpoint to 24.5%, resulting in an increase of 80 basis points for the full year. Additionally, for the first half of the year, we're seeing an increase of about 40 basis points.

Operator, Operator

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

Ross Riley Sparenblek, Analyst

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

Eugene Joseph Lowe, CEO

They're both launched, Ross. The advantage of this product is its modular design, which we believe gives us a competitive edge. You can purchase this as a dry product without the adiabatic component. The adiabatic part of the system provides the water externally, enhancing efficiency and lowering energy consumption. Both products are currently in the market, and we are quoting for both. We are making good progress on each of them. In summary, they are both available now.

Ross Riley 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 Joseph Lowe, CEO

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 adiabatic because water just gives you higher efficiencies, less power usage, less carbon emissions. So if I were 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 adiabatic, 1/3 dry is what I would say.

Ross Riley Sparenblek, Analyst

Okay. Any thoughts on your competitive positioning in the market and the potential for exclusivity with hyperscalers?

Eugene Joseph Lowe, CEO

I believe our competitive positioning is very strong, and we have several advantages that our end customers are recognizing. We have a rich history in cooling towers, and I would assert that we are the leading provider of cooling towers globally. We were the pioneers in this field. Our expertise in natural draft towers and large systems gives us unique skills in airflow, heat exchange, and back pressure analysis. We excel in larger applications, which has led to a solid standing in cooling towers designed for data centers. Much of our technology and capabilities are applicable across these areas. Notably, we have a modular design that allows the same product to be upgraded for increased capacity, a feature not commonly found among our competitors. Additionally, we design our own fans, motors, and gear reducers, all of which have proven their reliability through 50 years of field testing. Essentially, our product is a cooling tower with a different heat exchange system, which positions us well in the market. This is particularly crucial for data centers that prioritize uptime. I believe we offer the best uptime equipment available. Furthermore, we are conducting Cooling Power Institute testing and anticipate that we will be among the few products to receive CPI validation, which certifies the performance of our products. This assurance provides our customers with confidence in the performance they will receive. Overall, we are optimistic about this market and project that we will be shipping products by 2026.

Operator, Operator

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

Jeffrey Wallin Van Sinderen, Analyst

I wanted to gain a better understanding of the applications for the V Max and data centers. If customers are choosing between the V Max and another solution, what are the key factors that influence their decision to go with the V Max? Is it related to speed, cost, performance, and so forth?

Eugene Joseph Lowe, CEO

Yes, I think the water cooling tower market in the U.S. is highly consolidated, dominated by three major players in North America. In contrast, the air-cooled segment is more fragmented with more competitors. However, when it comes to large applications, the competition becomes limited due to the high engineering requirements. These products are enormous, reaching up to 40 feet in length and 20 feet in height, which means they require significant industrial-scale handling and understanding of various implications. This restricts the number of qualified providers in the market, and we excel in this area. Additionally, customers consider multiple factors like efficiency levels and power usage. They desire flexibility in operation, sound requirements, especially since some data centers are located in residential areas, where low noise levels are essential. Therefore, clients generally prefer partnering with reliable large-scale suppliers who can address their substantial needs while providing engineering capabilities for resolving any issues during the process. Having superior efficiencies, better airflow, and lower horsepower motors will enhance our competitiveness. I believe we are well positioned in this market, and the Marley brand has a strong reputation in the cooling tower industry, which works to our advantage. Most data center operators, particularly hyperscalers, prefer not to rely on a single supplier; instead, they like to work with a major provider as well as have the option of a smaller supplier to avoid being solely dependent on one company.

Jeffrey Wallin Van Sinderen, Analyst

Can you elaborate on the main drivers for the D&M business and the growth you anticipate moving forward? Additionally, could you discuss the drone detection and jamming segment? I'm interested in understanding where the demand is coming from, whether it's in the civilian sector or primarily defense, and how that landscape is developing.

Eugene Joseph Lowe, CEO

Sure, I'll begin and then Mark can add to it. If we look at the Detection & Measurement business, about two-thirds of it operates on a run rate, which has been relatively stable with modest growth over the past two years, and we've actually seen better growth this year. Projects constitute around one-third of that segment, and we've made significant progress in that area. Specifically, in transportation, particularly with our Genfare business, we are focused on implementing large projects for our customers. The transportation bill, which has been in effect for a couple of years, has supported this progress, and we’re observing strong activity in that sector with several competitive wins, including some multiyear contracts. When assessing this business, everything seems to be on track. We have broadened our market opportunities and introduced a new ticket vending solution that combines hardware and software, which has opened up additional prospects for us. We have successfully secured our first two major customers in this area, one large and one medium-sized, with several other bids currently in progress. Regarding CommTech, this segment includes a significant portion dedicated to military applications, but it also covers non-military aspects. Our PCI branded products are utilized for spectral monitoring and are applicable in military contexts as well. Furthermore, we are noticing that drones are increasingly being employed in these applications. Our products effectively help identify enemy locations as well as the presence of drones, which has driven project growth in this area. Additionally, our recent acquisition, KTS, operates in a somewhat different space, but we believe it can yield substantial benefits from drone technology by facilitating digital interoperability. KTS serves as a central point of communication that integrates various communication technologies into one solution, and we are observing a growing amount of drone activity using our products in this capacity.

Jeffrey Wallin Van Sinderen, Analyst

Okay. Great. And if I could just squeeze one 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 Joseph Lowe, CEO

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 in capital, 16 acquisitions. Average price has been 10 to 12x. These are really good businesses, really hard synergies that 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 one would be Engineered Air Movement. We really like that this is really a great business for us. You talk about Ingenia, you talk about TAMCO, you talk about Strobic and Cincinnati Fan. We see a lot of runway here, and we see some very attractive opportunities to continue to build and strengthen that business. And then I would say we're seeing some nice opportunities in the Detection & Measurement side, probably most specifically CommTech and transportation, where we think there's some very nice synergistic opportunities there as well.

Operator, Operator

And our next question comes from Steve Ferazani of Sidoti.

Stephen Michael Ferazani, Analyst

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 the 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 it was just general economic uncertainty?

Eugene Joseph Lowe, CEO

I'll start and then hand it over to Mark. Overall, I think we've managed things pretty well. There's nothing specific to point out. One thing to be cautious about is that companies usually don’t initiate large capital projects amidst uncertainty. We will keep an eye on the Dodge report, for example. If someone were to construct a new hospital or manufacturing facility, the demand for our products, such as cooling towers or custom air handling units, typically arises afterward. So, we want to monitor that closely. However, looking ahead at our end market demands for 2026, I can say we just conducted our comprehensive strategic review last week, and we feel optimistic about our end markets for that year. As for what you mentioned, we did face some challenges from tariffs.

Mark A. Carano, CFO

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.

Stephen Michael Ferazani, Analyst

That's helpful. Would you like to discuss the tariff issue further?

Mark A. Carano, CFO

Yes, big picture, last quarter we discussed tariffs being at a midpoint, causing a $0.10 headwind for the year, which isn't a significant number in terms of total EPS. Over the past quarter, the tariff environment has been changing almost daily, and it seems to have stabilized at a new level for now. Despite this, our focus is on managing our business system and supply chain teams. We've recalibrated our exposure and currently estimate it's only about $0.05 for the total company.

Stephen Michael Ferazani, Analyst

That's great. I want to turn for a second to free cash flow. You are trailing where you were last year through the first half. It 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 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 the second half?

Mark A. Carano, CFO

I'm still confident that we will meet our free cash flow commitments for the year, so nothing has changed there. This quarter did stand out from a working capital perspective due to timing with accounts receivable and some of the major project work we undertook in the first half of the year, especially in the second quarter. If you examine the cash flow statement regarding inventory, similar to other companies, we were taking steps to mitigate any impacts. Even though the tariff situation was not a significant issue for us, we focused on buying ahead and increasing our inventory on the balance sheet. Overall, we are well positioned to fulfill our commitments.

Stephen Michael Ferazani, Analyst

Excellent. If I may add one more point regarding the M&A strategy going forward, you've grown significantly through 16 acquisitions. Does this mean that your targets now need to be larger to have a substantial impact? Has your M&A strategy changed at all given your current size?

Eugene Joseph Lowe, CEO

Steve, I don't think so. I mean, if you think about our average 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 5 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 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, Operator

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

Walter Scott 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 A. Carano, CFO

No, I don't think so, Walt. 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 or approaching about 1/3 of it, with the 2/3 being volume. And it is less price on the D&M side, more volume.

Walter Scott Liptak, Analyst

Okay. Great. And that's...

Mark A. Carano, CFO

Yes, go ahead.

Walter Scott 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?

Mark A. Carano, CFO

Yes. The guidance suggests a decline in the second half of the year, primarily due to the tariff situation we discussed earlier. The $0.05 tariff exposure indicates that the effects will primarily be felt in the latter half of the year, specifically in the third and fourth quarters, and mostly within the D&M business rather than the HVAC sector. Additionally, we are making some investments, albeit modest in scale, in new products such as our ticket vending machine and other CommTech initiatives as we prepare the company for 2026 and beyond. These two factors are significantly influencing our outlook.

Operator, Operator

Okay. Great. I have one last question about mergers and acquisitions. Could you update us on your capacity? I think you've touched on this already, but will you be maintaining the same deal size as before, and how much capital do you have available for M&A?

Mark A. Carano, CFO

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, Operator

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

Bradley Thomas 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 A. Carano, CFO

Yes, Brad, I’ll approach this from the perspective of the second half, as it provides clarity. For HVAC, we're anticipating mid-teens growth in the second half, with approximately two-thirds of that being organic. We expect margins to increase by 40 basis points year-over-year, rising from 24.3% to 24.7%. In contrast, D&M is expected to experience significantly higher growth due to both organic and inorganic contributions. However, the organic growth rate there is similar to HVAC, around 10%, with margins projected to decrease by about 90 basis points from 2024 due to factors we previously discussed, including tariffs and some investments we have planned for the latter half of the year.

Bradley Thomas 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?

Eugene Joseph Lowe, CEO

Yes, Brad, I want to express that three months after our last earnings call, we are feeling even more optimistic about our opportunities across all our main product categories, including cooling towers, actuated dampers, and air movement, as well as our new product. We are committed to supporting this growth and are not holding back at all. We believe this is a strong market for us, and we see significant potential ahead.

Operator, Operator

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

Damian Mark Karas, Analyst

I just had 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 A. Carano, CFO

We did take pricing actions across both businesses where we could, driven by the competitive dynamics in those segments. It involved a combination of price increases and surcharges depending on the business unit and their ability to achieve that increase.

Damian Mark Karas, Analyst

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

Mark A. Carano, CFO

We will. I think particularly as it relates to certain areas like China, where shortly, I guess it was in May, the China tariff decreased significantly. So in some cases where we were using surcharges to mitigate that cost, those are harder to implement clearly.

Damian Mark 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 Kranze and maybe a quarter or so with Sigma & Omega. So Gene, like how has the integration been going with SPX? Any unexpected surprises, whether good or bad?

Eugene Joseph Lowe, CEO

Yes, I would say we are very optimistic about our recent acquisitions. With Kranze, or KTS as we refer to them, our rationale for acquiring them is twofold. First, we believe in their product and market position, which show significant growth potential. More importantly, we see synergies that can create additional value on two fronts. Their technology has the potential to enhance our TCI and ECS products, and we are already working on integrating some of these advancements. We plan to launch this combined product by September, which strengthens our technology advantage in the core contact business. Secondly, while KTS is very successful in the U.S., they have a limited global presence. In contrast, our CommTech business operates on a global scale, with installations in over 100 countries. We can assist KTS in expanding their reach internationally. We've already initiated discussions in two countries regarding their digital interoperability platform, and we are engaging in friendly discussions there. Regarding Sigma & Omega, we feel equally positive. They are a key part of our hydronics business, working alongside Weil-McLain and Patterson-Kelley, all of which have significant overlap. Sigma & Omega possess excellent heat pump technology and a strong position in specific markets, especially Canada, though they have a less established channel in the U.S. Our established U.S. channel can significantly aid in building their distribution network. We’ve already onboarded several new channel partners for Sigma & Omega and see promising opportunities to boost their revenue. In summary, both KTS and Sigma & Omega have strong teams filled with industry experts who bring a wealth of experience. We are confident in our disciplined M&A strategy, which is backed by a thorough due diligence and integration process. We believe these efforts will lead to success, and I feel very positive about both acquisitions.

Damian Mark Karas, Analyst

Great to hear. And one 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 and 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 A. Carano, CFO

Damian, let me address your margin question from earlier. We made a slight adjustment to the high end of the range for HVAC mainly due to surcharges. This was the primary factor since we initially expected surcharges to help mitigate some of the tariff impacts, but it turned out to be less significant than anticipated, and many of those surcharges are no longer applicable. Regarding your margin inquiry, particularly concerning the second half, here's another perspective: when you examine the first half margins in HVAC and exclude the favorable project experience from Q2, the margin for the first half is approximately 23.89%, just below 24%. The projected margin for the second half is 24.7%, indicating an improvement in margins in the latter part of the year. And I would now like to turn the conference back to Mark for closing remarks. Thank you all for joining us for today's call. We look forward to updating you next quarter.

Operator, Operator

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