SPX Technologies, Inc.

Good day and thank you for standing by. Welcome to the Q2 2025 FPX Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. 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.

Thank you, operator, and good afternoon, everyone. Thanks for joining us.

With me on the call today is Jean Lowe, our President and Chief Executive Officer. A press release containing our second quarter results was issued today after market closed. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the investor relations section of our website at spx.com. 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 gap 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'll be meeting with investors at various events over the quarter, including the CPORT Virtual Investor Conference in August and the Jefferies Industrial Conference in September.

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

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're raising our full year guidance range to reflect our strong results and outlook for the remainder of the year. We now anticipate growth and 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 and 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 custom air 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're receiving positive feedback and engagement from customers on the launch of our Olympus VMAX product, a new cooling solution focused on the large-scale needs of data center customers. Introduced earlier this year, the Olympus VMAX 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 and data center cooling solutions. Our target is to book Olympus VMAX orders this year for revenue in 2026, and we believe we're on track to achieve this target.

Now, I'll turn the call back to Mark to review our financial results. Thanks, Gene. Our second quarter results were strong.

Year over year, adjusted EPS grew 16% to $1.65. For the quarter, total company revenues increased 10% year-over-year, primarily driven by the acquisition of KTS and Sigma and Omega, as well as higher project sales in detection and 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 segments, 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 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 1.7 times, 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, 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. 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 and measurement segment, run rate market demand remains flattish with regional variation while our project businesses are seeing healthy front log 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.

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

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. Our first question today will be coming from Brian Blair of Oppenheimer. Brian, your line is open.

Thank you. Good afternoon, guys. Very solid quarter. Hey, Brian. Thanks, Brian. You called out data center technology investment, and obviously there's a lot of enthusiasm, renewed enthusiasm on data center build-out and growth runway. What kind of growth is your team seeing in this space? What are expectations for 2025, and are you willing to size orders to date in dry and adiabatic technologies, and how supportive that rollout may or should be to 2026 growth?

Yeah, why don't I start there, Brian? I think as we've talked about in the past, the data center has become more material to us. Using broad brush numbers, 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, I'd 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 Olympus VMAX. This is a dry and or adiabatic solution that is large and 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. You know, 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 if you 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. What does this mean at the company level? We're not going to offer guidance at this point, It will be higher than 9% of our company revenue. We'd probably say low double digits as we look ahead to 2026.

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 ad in the U.S. for those businesses combined with what's ongoing in Quebec for Ingenia, but what would the run rate, you know, revenue capacity lift be if we were to fast forward to the middle of next year or the end of next year?

Yeah, what we've said, you know, if you look at Canada, Mirabelle, where I know a number of people have just visited, just a fabulous, you know, FACILITY, TEAM, AND PRODUCT AREA. WE BASICALLY SAID WE WANTED TO GET TO 100 MILLION RUN RATE BY THE END OF LAST YEAR. WE CAME 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 BY 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. The capacity expansions there are going well. You know, I think that we are growing, and I think that we're, you know, 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 is that when we add the new facility we would target you know by the end of 27 to be in the in the range of having a capacity of 300 million ish run rate and so you know 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 product i mean a great physical product, but the software solution, their system one solution, which we think no 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 yeah, we would expect to see some nice, meaningful growth from Ingenia, really driven as a part of our expansion in Mirabelle, outside of Montreal. but then also our U.S. expansion, which we think will get up and rolling in the first half of 26.

I appreciate that detail.

And if we move to the DNM side of the portfolio, 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 DNM? What's your team contemplating in terms of project contribution versus run rate activity?

Yeah, Brian, I think as we said, we remain excited about what we're seeing on the project front in DNM 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 even higher by the end of the year. I would guess, you know, as I look at the project business, you know, we're expecting that to kind of grow in the high teens organically during the second half of the year.

That's great to hear. Thanks again.

And our next question will be coming from Damian Karras of UBS. Damian, your line is open.

Hey, good evening, gentlemen. Hey, Damien. Hey, Mark. Just a follow-up clarification on that comment you just made. So, you know, you did raise the sales guidance for B&M, you know, by like mid-single digits. And, you know, 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 happening kind of pop up in the last couple months that really wasn't there when we last talked?

No, Damian, 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 was 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, you know, within shorter periods of time, they can move. quarters fairly easily. So that's really what drove it. But, you know, we continue to see a lot of activity on the project side. I mean, I just mentioned that and reiterated, you know, despite those moving from 26 to 25, I mean, we're continuing to see a lot of activity both on the GenFair side of the business as well as ComTech.

Understood. Thanks for clarifying on that.

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, you know, 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 know, you're expecting the back half to not be at the same level the second quarter. So could you just, you know, talk through your expectations there?

Yeah, sure. So, you know, in the quarter, you know, the margins were 25, 25.4%. You know, that was, you know, year over year, it's about 190 basis points over where we were in Q2 of last year. Really a couple 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 with 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. You know, when you step back and think about the full year for HVAC, You know, when I look at where our guide was at, you know, 23, I think the midpoint was 23.75 margin. We've moved that up 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, just checking my numbers here, about 40 basis points.

Okay. All right. Thanks for that explanation.

I will get back in the queue.

Thank you. And our next question will be coming from Ross Barenbleck of William Blair. Your line is open, Ross.

Hey, good afternoon, gentlemen.

Hey, everyone.

Hey, guys. Just a clarifying point on the Olympus VMAX. You said dry and hybrid. This is dual unit, or we should still expect a dry launch later this year?

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 adiabatic. The adiabatic is part of the system that 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 yeah, they're both out there today.

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

You know, 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 A to B Attic because, you know, water, It just gives you higher efficiencies, less power usage, less carbon emissions. So if I were to look at it, you know, just to set the table as a reminder for data centers, this segment of the market is bigger than cooling towers. So, you know, you think of everything we've done with the Everest, which has been a great product for us and grown very rapidly, this new market we've entered is larger than that market. You know, I would say we've seen interest in both, but probably, you know, rough ballpark, maybe two-thirds adiabatic, one-third dry is what I would say.

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

Yeah, 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. You know, you start with, you know, we start with our heritage of cooling towers where we are, I would argue, the number one cooling tower provider in the world. We invented the cooling tower. You look at natural draft towers, large towers. We just have some unique competencies on airflow, heat exchange, back pressure analysis, et cetera, et cetera. We're very good at the big stuff. And so what has happened is 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. 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, our own 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 a different heat exchange. It's really a coil product. 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. The third thing I would say is we're doing CTI testing. We believe we're going to be one of two products that will be CTI validated. That means Cooling Power Institute validated, which basically shows that it guarantees the performance of your product. When customers buy our products, they're darn sure they're going to get the performance that that they want and they need. So, yeah, so we feel good about this market. And, you know, I would expect we're going to be shipping product here in 2026. Very helpful.

Thanks, Gene. I'll jump back in queue.

And one moment for our next question. Our next question will be coming from Jeff Van Staren of B Reilly Securities. Your line is open, Jeff.

Hey, Jeff.

Hi, everyone. 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 VMAX? How much of that might be speed, cost, performance, et cetera?

Yeah, I mean, I think if I look at it, you know, what I would say in this market, I think if you go to, if you look at the cooling power market in the U.S., the water cooling power market, it's a very consolidated market. There's three large players that account 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. You know, if you look at these products, these products are humongous, 40 feet long. You know, it could be up to 20 feet high. You're talking tons of product. You need to be very capable of handling 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. 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 so some of these data centers are going in neighborhoods they don't want to have you know a lot of decibels out there so You know, 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, you know, 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. Of course, if you've got better efficiencies, if 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 going to 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, 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, you know, they prefer to have an option of a smaller supplier. So they'll typically try to avoid being sole sourced to one company here.

Makes sense. And then if we shift to the DNM 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. You know, are you seeing anything in civilian? Is it more defense? What? Kind of how's that shaping up?

Yeah, sure. I'll start and then Mark can jump in here. I think that, you know, if you look at this as a level set, if you look at the detection and measurement business, approximately two-thirds of that business is run rate. Run rate's been flattish, modest growth we've seen over the past two years. Actually some nicer growth this year. But projects are about a third 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 our Gen Fair business, that would be installing large projects for our customers there. You know, 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. Had some multi-year wins. So, you know, 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 want our first two large customers there, one large, one middle size, and with a number of other bids 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 non-military 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 all the drones are. And it works very well. So that's been the driver of our projects there. The newest acquisition, which is also a part of that, is called KTS. That's a little bit different of a space, but there's 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 communications technologies into one solution, and we're seeing a lot of drone activity there and being used in our products being used in those applications there. So, yeah, that is a driver for us.

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?

Yeah, what I would say on M&A is I'm feeling very, very positive. You know, to 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. Ned was 92% in terms of acquisitions. Got $2 billion in capital, 16 acquisitions. Average price has been 10 to 12 times. These are really good businesses. Some 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. You know, the areas within our business that we see the most activity, probably the largest one would be engineered air movements. We really like, this is a really a great business for us. You know, you talk about Ingenia, you talk about TAMCO, you talk about Strobeck and Cincinnati Van. 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 and measurement side. Probably most specifically ComTech and transportation, where we think there's some very nice synergistic opportunities there as well.

Okay. Thanks for taking my questions. Thank you.

And our next question comes from Steve Ferrazani of the DOTI. Your line is open, Steve. Hey, Steve.

Good evening, Gene, Mark. How are you doing? I'm well. I'm 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 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?

I'll start and I'll throw it over to Mark. I'd say, you know, 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 careful of is, Companies don't typically start large capital programs, and there's lots of uncertainty. And so, you know, we're going to keep our eye on the Dodge report, for example. And, you know, if you were to build a new hospital or a new manufacturing facility, the demand that would hit us, the cooling towers or the custom air handling or any of our range of products is typically downstream. And so, you know, we want to keep our eyes on that. But I would say that overall, if I look at our end market demands going into 26, actually, Dexter just had our full strategic review last week. And I would say our end markets look on track for 26. We're actually feeling good. Mark said we did get clipped a little bit with tariffs.

Yeah, a little bit. We can come back to that. But, you know, I think from a supply chain perspective, you know, 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, you know, sourcing equipment and anything of that nature. You know, 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, you know, we're well positioned. you know, to support the business additively, you know, over the last quarter or so.

Okay, that's helpful.

And you said there was some, you wanted to touch on, follow up on the tariff issue?

Yeah, you know, I mean, big picture, Steve, I think, you know, last quarter we talked about tariffs being, you know, at a midpoint kind of a 10 cent headwind for the year, you know, which is frankly, you know, Not really that material a number when you think about total EPS. And, you know, over the last kind of quarter, 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, you know, nevertheless, kind of managing through that and 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 five cents for the total company.

Wow, 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. Looks like there was a more sizable working capital build. I know you had the two 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 second half?

Yeah, sure. Listen, I'm still confident about us meeting kind of our free cash flow commitments for the year. So no change there. This quarter, you're absolutely right. it kind of stuck out from a working capital perspective. There's really timing around AR and some of the big project work that we've had in the first half of the year, particularly Q2. And then if you looked at inventory, you're probably looking at the cash flow statement. You know, 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, you know, buying ahead and, you know, putting inventory on the balance sheet, so we're well positioned to meet our commitments.

Excellent. If I get one more, Ian, 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?

No, Steve, I don't think so. I mean, if you think about it, our average deal size has been $130 million over the past, you know, 16 years. You know, 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 five 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, you know, if you look at our strategy, you know, we think we're in the early innings of our strategy and we don't see change. You know, 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.

Okay. Great. Thanks, Gene. Thanks, Mark. Thank you.

And our next question will be coming from Walter Liptack of Seaport Research. Your line is open, Walter.

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

No, I don't think so. Well, you know, when I think about price volume, you know, and you think about that balance there, which I know is not directly your question, but, you know, prices on the HVAC side, when I look at the growth, it's probably maybe about a third of it, approaching about a third of it, with the two-thirds being volume. And, you know, it is...

less price on the DNM side, more volume. Okay, great. And that's, yeah, go ahead.

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

Yeah, I think, you know, the implied second half there, you know, if you look at the guide, you know, it would imply that they're down for the second half of the year. And that's really driven by the tariff dynamic that we just talked about. You know, the five-cent tariff exposure, as we recalibrated that and looked at the impact, it's really going to be back half weighted. So it'll be in Q3 and Q4 and predominantly in the DNM business. So they're seeing the impact of that more so than in the HVAC business. And then we are making, you know, 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 products. We're investing in those as we kind of position the company for 26 and beyond. So it's really those two elements that are impacting it. Okay.

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

Yeah, you know, 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 billion-dollar 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, you know, I feel good about where we sit today. We obviously have the ability to access capital if we needed it. But, you know, right now we're in a good spot. Okay, great. All right, thank you.

And one moment for our next question. Our next question will be coming from Brad Hewitt of Wolf Research. Brad, your line is open.

Hey, good evening, guys. Hey, Brad. So 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?

Yeah, Brad, maybe I'll kind of think about it from a – I'll start with a second half kind of perspective because I think that's kind of helpful. You know, when I look at the implied second half for HVAC, And we're looking at that implies growth of about mid-teens. And about two-thirds of that would be organic. You know, with margins being up 40 basis points year over year from 24-7 to 24-7 from 24-3. You know, on the DNM front, you know, much higher growth on that side. just given the inorganic and the 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

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 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. Thank you.

Yeah, what I would say, Brad, is I would say that, yeah, we are – We're sitting here three months after our last earnings call, and we are feeling even more bullish about the opportunities that I would say in all kind of, if I look at our three main product categories, cooling towers, the actuated dampers, air movement, and then our new product, we feel very good. So, you know, 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. Great. Thanks, Gene.

And our next question will be coming from Damian Karras of UBS. Damian, your line is open.

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

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, you know, 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.

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

We will. I think, you know, 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, you know, the China tariffs stepped down pretty dramatically. So, you know, in some cases where we were using surcharges as a way to offset that cost, you know, those are harder to stick, clearly.

That makes sense.

And then I wanted to ask you about your early experience so far with the two new acquisitions. So it's been, I guess, about a half a year with CranZ and, you know, maybe a quarter or so with Sigma and Omega. So, Gene, like, you know, how's the integration been going with SPX? Any unexpected surprises, whether good or bad?

Yeah, I would say very, very positive. So Kranzer or KTS, we call them, our deal thesis there was twofold. One, they're intrinsic product and position. We see a lot of growth just in their current market and current positioning. But they're real areas of synergy where we can kind of create some nice additional values on two 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 contact business. And then on the second side, the second main element of the thesis is KTS very successful in the U.S., but they're very small globally, whereas our ComTech business is a very global business. It has installed bases all over the world, probably more than 100 countries, and we can help them accelerate. We've already had active discussions, and I don't know if it's public or not, so I'll just say There's already two countries that I'm aware of where we're having very active discussions of leveraging their digital interoperability platform in those countries, friendly countries, obviously. But, yeah, so KTS, they 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 whole, so... You know, as I say, it went very well. Really liked the leadership of KTS. Very driven, very hardworking. So the KTS is very good. And then Sigma and Omega also we feel very good about. That is very much really a part of our hydronics business now. So think of that going with Law, McLean, and Patterson, Kelly. All three of those have a great degree of overlap. And the thesis there is, that Sigma and Omega has a great heat pump technology, a very, very strong position in the multi-level. You know, you're looking at hospitals or residential or hotels, things like that. Very good position, but in a 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, Damien, we have a very strong channel in the US. 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 and Omega has a great team, too. I really, really like their team. They truly are industry experts. They spent many, many decades at some of the big OEMs, the trains, the Yorks, and they bring to bear just a ton of expertise. So, yeah, we feel good about that. And then if you go to the acquisition prior to that in Genia, Just the growth we've seen there and the success we've seen there has been very attractive. So, yeah, I think, you know, 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, you know, 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, David.

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, not go up since like the fourth quarter of 2021. 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?

Hey, Damian, I'll start with that. And I actually wanted to kind of come back to your margin question from earlier. But 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 would use 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, you know, are no longer in effect. But that's really what was driving it, nothing more than that.

Okay. Thanks for clarifying.

Yeah, and hey, back to your margin question. I know you were looking at the 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, you know, and you kind of back out that favorable, you know, project experience we had in Q2, that 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.

On a year-over-year basis. Yep, yep. Understood. All right. Well, thanks a lot. That's sequential. Sorry.

Thanks, David.

Thanks. Okay. 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.

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