Earnings Call Transcript - SPXC Q3 2020

Operator, Operator

Thank you for joining us for the SPX Corporation Third Quarter 2020 Earnings Conference Call. I will now turn the call over to Paul Clegg, VP of Investor Relations and Communications. Please proceed.

Paul Clegg, VP, Investor Relations and Communications

Thank you and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Jamie Harris, our Chief Financial Officer. A press release containing our third quarter and year-to-date results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at SPX.com. 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 until November 5. 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, including our disclosures related to the ongoing COVID-19 pandemic. Our comments today will largely focus on adjusted financial results. You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today's presentation. Our segment reporting structure combines the results of our Heat Transfer and South African operations into an All Other category, which is excluded from our adjusted results. Our adjusted earnings per share also excludes non-service pension items, amortization expense and investment gain and one-time costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors during the fourth quarter, including our participation in the Baird Annual Industrial Conference on November 12th. And with that, I'll turn the call over to Gene.

Gene Lowe, President and CEO

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. I hope that all of you and your families have remained safe and healthy. On the call today, we'll provide you with a brief update on our overall results and segment performances for the third quarter. We'll also provide updates on the current environment and our view of the key variables driving the remainder of the year. This is our first call with Jamie Harris as our CFO. Jamie joined in mid-August and he is already an invaluable member of our team. Jamie brings a strong background and record of success in strategic planning, continuous improvement and growth. Jamie, welcome to the team.

Jamie Harris, CFO

Thanks, Gene. I appreciate the kind words. I have already had the pleasure of meeting many of you who are on the call today and look forward to meeting more of you over the next several weeks. I have thoroughly enjoyed my two plus months at SPX. I really like the culture, the people and the business opportunities. I look forward to the future of our company.

Gene Lowe, President and CEO

Thanks, Jamie. Now I'll touch on some of the highlights from Q3. I'm very pleased with our third quarter performance, which shows continued strong execution by our team despite pandemic-related headwinds. During the quarter, we took another step in our growth journey with the acquisition of ULC Robotics in our Detection & Measurement segment. Looking forward, we anticipate a solid level of earnings and cash generation for the fourth quarter. On a full-year basis, we now anticipate our earnings to be modestly above the prior-year level. While the pandemic initially slowed some of our M&A activity and continuous improvement initiatives, we are now actively pushing ahead with these programs. I feel very good about where we are today as a company. Looking across our businesses, we have a strong team and the right resources in place to continue executing our growth journey in 2021 and beyond. Turning to our adjusted results for the quarter, both revenue and operating margin were modestly higher than prior year levels. The benefit of acquisitions and a strong performance in our HVAC and Engineered Solutions segments more than offset headwinds in our Detection & Measurement segment. I'm very pleased with our adjusted EPS of $0.64, or nearly 7% above the prior year. On a year-to-date basis, our performance remained strong with a growth of approximately 9% in adjusted operating income. As we did last quarter, I think it is helpful to discuss the current environment, as well as what has changed since our second-quarter earnings call. First, our facilities continue to be operational and our safety protocols have been effective. We continue to maintain close communications with local health officials and engage in a continuous review of our processes to identify and implement any enhancements until the COVID situation evolves in our communities. Our team has been doing a great job of remaining flexible and motivated in a very challenging environment. I'm really proud of what our people have been able to accomplish. With respect to the impact of the pandemic on our businesses, in the non-residential portion of our HVAC business, we are very pleased with the results for the third quarter and year-to-date period. The teams there have done a great job executing, including delivering on some cooling orders during the third quarter that were initially expected in Q4. Consistent with our comments last quarter, we're seeing quote and order trends for non-residential products that indicate softer demand in the near term. Last quarter, we also talked about the impact of the pandemic on Locator sales within our Detection & Measurement segment. This is our shortest cycle and highest margin business. After reaching its low point in early Q2, we continued to see orders strengthen throughout the second and third quarters. Overall, Q3 Locator sales were comparable to the prior year period. This included the benefit of some catch-up orders in Q3, following the disruptions from the pandemic in the first half. We also previously indicated that we were experiencing timing delays for project sales in our Communications Technologies businesses. These delays largely continued through the third quarter, although we did begin to see some deliveries and expect more in Q4. And in our Engineered Solutions segment, our Transformers business continues to deliver a solid performance. Turning to our value creation roadmap, our Business System continues to prove invaluable in helping us manage through a complex environment. While the logistical challenges of the pandemic initially slowed some of our growth and continuous improvement initiatives, recently we have been able to accelerate these efforts. We have launched several programs within our businesses using tools like LEAN and AD-20 to drive efficiencies. As we make these processes an integral part of SPX's culture, we believe that over time these programs will be instrumental in driving continued margin expansion and further growth, helping to compound returns and deliver substantial value to shareholders. The pace of our growth initiatives has also picked up, including pursuing attractive acquisitions in closely adjacent markets. While these efforts were disrupted by travel restrictions and quarantine rules, several conversations have become more active and we have been developing processes to overcome these logistical hurdles. We are pleased with the performance of our acquisitions and integration efforts. Our team is well positioned to execute on other transactions and we have significant financial capacity to move forward. Our most recent acquisition was ULC Robotics, which closed at the beginning of September. ULC uses tethered robots to reseal the joints of aging underground utility gas pipelines to provide up to 50 years of additional service life. We have a unique and proprietary design that significantly limits the disruption associated with these repairs and reduces the cost of the remediation well below competing technologies. And there is a very large installed base of infrastructure requiring remediation over the coming decades. ULC also has a custom R&D business that develops innovative solutions for utilities, industrial, and technology companies. They have demonstrated very strong capabilities in deploying robotics, machine learning, and unmanned aerial vehicles to resolve complex business problems. We see multiple opportunities for collaboration with other SPX businesses to leverage these capabilities in the development of innovative next-generation industrial applications. The ULC acquisition is the latest step in building our location and inspection platform, which is now approaching 60% of our Detection & Measurement segment. Prior to 2018, this platform consisted of our approximately $95 million Radiodetection business, the global leader in underground locators. In early 2018, we supplemented this business with the bolt-on acquisition of Schonstedt, the leader in magnetometers or specialty locators for ferrous materials. With the acquisitions of CUES in June 2018, we further extended our reach into high-value underground infrastructure tools. CUES nearly doubled our revenue and significantly expanded our position in the closely adjacent market for inspection and rehabilitation tools for water and wastewater utility pipelines. ULC further builds on these capabilities using robotics as a service to inspect and remediate underground infrastructure in the gas utility market. Looking across these businesses, we see significant opportunities to leverage our expertise in product development, channel management, software development, and machine learning and robotics to further improve the value and efficiency we provide to customers. I'm very excited about the Location & Inspection business we have built and see a very attractive opportunity to continue expanding this platform. And now I'll turn the call over to Jamie to review our financial performance.

Jamie Harris, CFO

Thanks, Gene. I'll start with our results for the quarter. On a GAAP basis, we reported earnings per share of $0.49. On an adjusted basis, which excludes the impact of the items noted by Paul, EPS was $0.64, which represented a 6.7% increase over Q3 2019. A result we were very pleased with, given the uncertainties in the macroeconomic environment over the past several months. Overall, our solid results for the quarter were driven by strength in our HVAC and Engineered Solutions segments where we saw growth in both revenue and segment margins. This was partially offset by pandemic-related declines in our Detection & Measurement segment. The company's adjusted revenue was modestly higher than in the prior year, a 2.4% reduction in organic revenue was more than offset by the benefit of acquisitions and a currency tailwind. Segment income increased $2.4 million or 4.7% and segment income margin rose 50 basis points. Given the headwinds associated with the current environment, we are very pleased with these results. Now, I will walk you through our segments in detail. Starting with HVAC, revenue increased to 10.3%, including organic growth of 4% and 6% from the Patterson-Kelley acquisition, currency with a modest tailwind. The organic increase was driven by stronger international cooling sales, partially offset by lower domestic cooling and heating sales. Our cooling team did a great job of executing on our backlog, including processing several orders during Q3 that were originally anticipated for Q4. Adjusted segment income rose by $4.7 million and margin increased by 160 basis points as a result of the higher international volumes, strong operational execution, and a more favorable product mix in our domestic cooling business. Looking ahead into Q4, we would expect a mid to high single-digit percentage decline in year-over-year revenue, with lower heating and cooling sales, more than offsetting the partial quarter benefit of Patterson-Kelley acquisition, which occurred last November. Key factors driving the fourth quarter include the impact of orders accelerated into Q3, slower non-residential activity, and the ultimate level of seasonal winter demand for our heating products. At this point in the year, we forecast long-term normal levels of demand compared with stronger than typical levels in Q4 of last year. Based on anticipated mix, we would expect a modest decline in margin compared to Q4 last year. Overall, we are pleased with the year-to-date performance of our HVAC segment and feel very good about opportunities for growth ahead. Detection & Measurement: revenue declined 12.7%, including an organic decline of 16.7%, partially offset by a 3.1% increase from the ULC acquisition; currency was a tailwind at 90 basis points. The organic decline was due primarily to delays in Communication Technologies project sales. Locator sales were comparable to the prior year, but included some catch-up sales delayed from earlier quarters when the pandemic measures were more restrictive. While obstruction lighting sales also declined year-on-year, this was largely a function of timing, compared with a particularly strong Q3 of last year. Adjusted segment income declined $5.6 million and margin declined 330 basis points. This decline was largely due to the decline in sales of our communication technologies products, which have a high level of operating leverage and therefore are impacted by volume changes. As discussed last quarter, revenue and margin are being impacted by delays associated with governmental approvals and travel restrictions, which have become prevalent during the COVID pandemic. Despite this, end market demand and funding continue to look solid. In the late third quarter, we began to see some delayed project sales deliver. We have seen additional deliveries already in Q4 and expect more throughout the quarter. While we expect this activity to pick up, our current view is that the timing of certain larger project sales may stretch past the end of this year. For Q4, we anticipate a mid-single-digit percentage increase in revenue, with the impact of the ULC acquisition partially offsetting an organic decline from lower project sales. We expect margin to be up sequentially from Q3, but down moderately year-over-year due to lower project sales. Our Detection & Measurement segment has become an increasingly important part of our growth strategy. We are excited about our acquisition of ULC Robotics and the opportunities to continue to drive value. In Engineering Solutions, revenue for the quarter increased by 1.7%, reflecting better pricing discipline and a more favorable mix. Process Cooling sales also increased modestly. Segment income increased by $3.3 million and margin increased by 260 basis points, reflecting a more favorable transformer pricing and mix. Looking forward into Q4, we anticipate a low single-digit percentage decline in revenue and modestly lower margin than the prior year, due largely to the current mix in our backlog for transformers. Engineered Solutions continued a strong performance in the third quarter and has proven very resilient in a challenging macroeconomic environment. We are excited about the pricing and operational improvements and look forward to continued solid performance. Now turning to our financial position. Our balance sheet remains solid. Our net leverage ratio of 1.9 times reflects the September acquisition of ULC Robotics for approximately $88 million. By the end of the year, we would expect leverage to decline towards the lower end of our long-term target of 1.5 to 2.5 times driven by our seasonally strong Q4 cash generation. Adjusted free cash flow was $31 million in Q3, which is similar to the prior year. For the quarter, cash outflow associated with South Africa was approximately $6 million net of tax benefits. This includes the typical operational and legal costs as well as the impact of claims on bonds related to the projects. Over the last few months, we won several disputes against Mitsubishi, our primary remaining counterparty on the projects that allowed us to collect a modest amount of cash and to reduce some of our bonding requirements. However, recently Mitsubishi made claims on certain of our remaining bonds resulting in cash payments to them. We believe they have no justification for their claims, and we plan to vigorously pursue our contractual rights. We are disappointed with their actions and believe we have a very strong position to recover these amounts. We feel good about our claims, our recent victories, and our positioning for future dispute resolution proceedings. As we have previously stated, we anticipate that any remaining cash impact related to the South African projects, including for dispute resolutions, would not have a significant effect on our plans to deploy capital for growth. On an overall company basis, we feel good about the underlying strength of our businesses and our balance sheet. We believe we have significant capital available to deploy for growth initiatives. Turning to our near-term outlook, based on our strong year-to-date performance and visibility into Q4, we anticipate that our full year EPS will be modestly higher than the prior year. For Q4, we anticipate a modest decline in our adjusted revenue with the benefit of acquisitions partially offsetting an organic decline. Based on the composition of the results, we would also expect a modest decline in margin compared to the prior year. Key drivers of the fourth quarter include project timing in detection and measurement and seasonal heating demand and non-residential orders in HVAC. In the appendix to today's presentation, we have once again included estimated detrimental and incremental margins by segment, as well as some additional color to help you with modeling. With respect to corporate expense in Q4, we anticipate some additional spending on continuous improvement and excellence initiatives offset by discretionary cost reductions implemented earlier in the year, bringing us more in line with Q4 2019 levels. Now, I will turn the call over to Gene for some commentary on our end markets and his closing remarks.

Gene Lowe, President and CEO

Thanks, Jamie. Overall our end markets continue to reflect the resilient nature of our portfolio. In HVAC, we are pleased with the performance of our non-residential business on a year-to-date basis. We are well positioned with a significant amount of replacement revenue in the diverse mix of end market exposures, however, as noted, we are seeing continued signs of moderating non-residential order and quote activity. With respect to our Heating business while it's still early, current trends in order patterns for Heating are stable and winter weather remains a key Q4 driver. In Detection & Measurement, Locator demand has rebounded significantly, especially in China. We continue to see solid backlogs in our project-based businesses and movement on delayed orders in communication technologies, however headwinds associated with travel and access restrictions have not fully abated and project timing remains a key area of focus. In Engineered Solutions, we continue to see largely stable transformer customer behavior and solid backlog. In summary, I'm very pleased with our strong performance for the quarter and for the year-to-date period. Despite this challenging environment, we expect full-year earnings to be modestly higher and anticipate ending the fourth quarter with a strong balance sheet and liquidity position. While our growth and margin enhancement initiatives were temporarily slowed by the pandemic, we are now on track to make significant strides over the coming year. We are well positioned to drive substantial value for our shareholders, including through the deployment of capital to accelerate our growth in 2021 and beyond. I'm very excited about the path in front of us. I believe we have the right plan, the right resources, and the right team to continue our successful value creation journey. Now I'll turn the call back to Paul.

Paul Clegg, VP, Investor Relations and Communications

Thanks, Gene. Operator, we are now ready to go to questions.

Operator, Operator

Our first question comes from Damian Karas of UBS. Your line is open.

Damian Karas, Analyst

I wanted to ask about the HVAC projections, which indicate a mid-single-digit to high single-digit decline in the fourth quarter. There are a few factors at play, such as the acceleration of certain projects and more challenging comparisons to last year's figures. Could you provide insight into what the normalized underlying growth rate might be if we exclude these one-off impacts? Also, as we look ahead to next year, I understand there are expectations for a slower non-residential market for a while. Could you share your thoughts on the underlying growth rate in that context?

Gene Lowe, President and CEO

Yes, Damian, let me address that. It's a good question and we're very focused on the non-residential market. It's worth noting that we have a balance between replacement and new construction in our segment. Looking ahead to 2021, the Dodge index is the key market indicator we've discussed previously, and various industry analyses suggest a modest decline in market demand for 2021. Most forecasts indicate a mid-single-digit decline, particularly in the U.S. It's also important to remember that our cooling business has an international segment that's about half the size of our U.S. operations. However, for 2021, we anticipate performing better than the market. Considering our geographic distribution, product introductions, and current position, we expect growth for 2021 to be relatively flat based on the data available to us today. This is our perspective on the non-residential segments. Jamie, do you have anything to add regarding Q4?

Jamie Harris, CFO

Yes, I want to mention that in the fourth quarter, as discussed in our call script, we experienced some project acceleration that brought revenue into the third quarter, which we had originally anticipated for the fourth quarter. Reflecting on the earlier part of the year during the pandemic, we had a significant number of orders placed, and now, six months later, we're starting to see the impact on our order book, which is consistent with the typical delay in this industry.

Damian Karas, Analyst

And then Gene, you talked a little bit about getting back to the operating initiatives, which kind of have been on pause due to the pandemic. I was wondering if you might be able to give us a better sense on the LEAN and other opportunities you're speaking to? What kind of margin opportunities exist? And when I look at that incremental margin framework that you have for the three segments, does that kind of bake in your LEAN and Business System initiatives, or would that sort of be an incremental opportunity above that?

Gene Lowe, President and CEO

Yes, it's a good question, Damian. I think the way that I think about it is, from the time we spent to where we are today, we've driven our EBITDA margins from approximately 6% to approximately 13%. So we're sitting in low teens right now. We really want to get that the high teens. And we believe we can do that and really the primary way for us to do that I believe is through RCI initiatives. At the end of the day, we're all in competitive businesses, we all have inflationary pressures. If you are not doing CI, you're actually going to be moving backwards. But the way that I think about it at a high level framework is we push all of our businesses to expand their margins 50 basis points a year, and in order to do that, you just can't do it on your good looks, right, you have to have a plan, you have to have a strategy and we actually think LEAN and AD-20 are the best tools for us to really drive value. Now, if I look at where we are today as an enterprise, I do believe we have built a really good business system and how we run the company. Everything we do from our planning to our strategy, to our goal deployment, our KPIs, the integration processes have been excellent. And I would argue that's really a best practice and what we're really focused on doing, is bringing in the CI leg to our business system. It's a cultural change, the tone at the top, it's how you behave, it's how you act, it's how you reinforce it. It's not something that happens overnight, but it's a process and we actually are very excited about this journey. So, yeah, so I think COVID, frankly, we had a lot starting at the beginning of this year, which COVID took a lot of our programs and slowed them down due to, frankly, due to travel. And you can't do as much training, you can't do much as travel but we feel good about our direction and it's something you're going to hear us talking about a lot more. But then again, we haven't put a number in there, but the way I would think about it, Damian, is we have to do this to drive our margin higher and this is the primary tool and not enough. Jamie, Paul, you guys have anything else you'd like to add there?

Paul Clegg, VP, Investor Relations and Communications

Damian, this is Paul. I wanted to follow up on your previous question and provide some insights from a modeling perspective that may be helpful for the fourth quarter. First, I want to remind you that we completed the PK acquisition in mid-November last year, which contributes about $5 million in revenue, give or take, as inorganic growth in the fourth quarter. Regarding the shift in cooling between the third and fourth quarters, that difference was approximately $10 million in international revenue.

Damian Karas, Analyst

And Gene, for the record, I think Scott Sproule would probably argue that he could get your 50 basis points a year, margin expansion on good looks alone. But I think that's enough for the day. On that note, I will get back in the queue. Thanks guys.

Operator, Operator

Our next question comes from Brett Linzey from Vertical Research Partners. Your line is open.

Brett Linzey, Analyst

Just wanted to come back to D&M in specific on the Q4 outlook, it sounds like there is some timing in moving around. What is your level of visibility on those deliverables? I mean, are they taking order really into October here and what particular businesses gives you the confidence that snaps back in the fourth quarter here?

Jamie Harris, CFO

Brett, this is Jamie. Regarding our Q3 performance in the communication technologies sector, we encountered some challenges during the government approval process and delivery, primarily due to staff not being on-site and travel restrictions. By the end of Q3, we started to see progress on some projects within the system. As we moved into Q4, that momentum has continued. Currently, we are not concerned about the volume of business we have, but we do have questions regarding timing. The approval process for some governmental orders naturally takes time, and the absence of many individuals from their offices has likely extended this process further than usual. Nevertheless, we feel optimistic about the business and the activities we’re observing. We are not experiencing issues with funding or demand, so the main question is just timing; some projects might extend from Q4 into Q1. However, we anticipate that shipments will occur in the coming quarters. In our radio business, particularly the Locator segment, we managed to rebound from Q2 into Q3, resulting in a comparable quarter for that business. As one of our shorter-cycle businesses, it adapted quickly during COVID and has shown a strong return. We view it as a key component of our overall growth platform. Our obstruction lighting business faced similar timing issues, but we believe it will also recover to become comparable. Overall, we expect margins in Q4 to be slightly higher sequentially but modestly lower compared to last year. Some project-oriented businesses, like communication technologies, involve fixed costs, so any timing shifts can have a greater negative impact on income. However, once the timing of shipments aligns, we anticipate the fixed costs will normalize. As Gene pointed out, we are enthusiastic about this outlook and believe it represents a critical part of a promising growth strategy, viewing it primarily as a timing issue rather than a question of the business's stability.

Brett Linzey, Analyst

Okay. Yes, thanks for that. And then maybe just shifting gears to Engineered Solutions, the down low-single digits and this is really kind of a Q4 but even into next year. What are the expectations for Transformers and Process? Is the complexion similar in Q4, both kind of trend down here? And then specific to Transformers, anything you could add on to lead times, it sounds like pricing is better, but it is maybe visibility in early parts of 2021?

Jamie Harris, CFO

Yes, I'll take a pass at that as well. So Engineering Solutions has done extraordinarily well this year, have been one of our really strong points of a resilient part of our business during the pandemic. We ended the year with a good book of business, we enter next year with a good book of business. If you go back to Q4 of last year, some of the pricing activities that we saw flow through the first three quarters began last year in the fourth quarter, some of the operational and some of the mix improvements that we made, we saw in the fourth quarter of last year. So the comp of last year included a lot of the operational and pricing improvements that we have benefited from in the first three quarters of this year. As we look into next year, we do see a modest organic decline, we see maybe a modest margin decline. But that being said, we still think we have a lot of opportunities for that to be a solid contributor and as Gene said, this is one of the opportunities, I think that our continuous improvement. There are a lot of dollars there that the LEAN process, AD-20 process will be very well suited to help us gain some margin improvement there as well.

Operator, Operator

Our next question comes from Bryan Blair with Oppenheimer. Your line is open.

Bryan Blair, Analyst

Doing well, thanks. Great to see the continued recovery in locator demand and something we could drill down on that a bit. What is in the cadence of that business, month-by-month? And what are you seeing in early Q4? I was wondering how locators impact the Q4 guide.

Gene Lowe, President and CEO

I'll take a shot at that, Bryan. As we've discussed in both the Q1 and Q2 calls, and as Jamie pointed out, this is part of our shorter cycle business. The impact of the pandemic was evident to us very quickly. It was the first area to feel the effects of reduced demand, which we began to notice in March. However, since then, we have seen consistent improvement each month sequentially. Jamie mentioned that Q3 performance was on par with Q3 of last year, and we did experience some revenue that was deferred from Q2. There may have been a bit of a catch-up there, but we are recognizing solid sequential strength. That said, I want to remind everyone that we must stay alert to any potential global shutdowns. Overall, what we observe today is encouraging, with ongoing sequential improvement continuing up until now.

Paul Clegg, VP, Investor Relations and Communications

I would just point out that we did have a very strong fourth quarter in locator in 2019.

Bryan Blair, Analyst

And ULC seems like a great fit with your portfolio. If we think about financial profile, how should we think about modeling near and longer-term growth rates? And I guess same question on margin trajectory.

Gene Lowe, President and CEO

I'll begin by noting that CUES, which provides tethered robots capable of operating underground up to 1500 feet, effectively manages and repairs water and wastewater lines, as well as gas lines. This aligns well with our business model. We believe integrating this company will be beneficial. Their operations consist of two main segments: the core robot-as-a-service segment, which accounts for approximately three-quarters of their revenue, and their research and development segment. ULC Robotics stands out because they tackle unique challenges, exemplified by their sysbot, the only robot known to perform certain tasks globally. Currently, they have a diverse range of R&D initiatives, contributing about a quarter to their overall business, which we estimate to be around $40 million. We also anticipate that their profit margins exceed our average in the D&M sector, although I'm not certain of the specifics on that comparison.

Paul Clegg, VP, Investor Relations and Communications

Yes, higher.

Gene Lowe, President and CEO

And then we would expect the growth rates to be higher. So if you think about our Detection & Measurement, that's a growth rate we believe on average around 4%. We would view this to be a little bit higher than that, modestly higher than that as we think about that going forward.

Bryan Blair, Analyst

Appreciate the color there and Jamie, you have been in your seat for a little while now. Curious what if anything has surprised you about SPX and what you think some of the best opportunities are for the company going forward?

Jamie Harris, CFO

Yes, that's a great question. First of all, this is an amazing company, and my initial impressions have been confirmed since I joined. It has a strong winning culture, and everyone collaborates effectively. Gene has assembled an outstanding team, and everyone we've worked with has been incredibly welcoming. We also have a diverse range of businesses serving various end markets, which provides a nice blend of diversity. For instance, the Transformer business has proven to be quite resilient during the pandemic and helped offset some of the declines we've experienced. In the short term, it's been encouraging to see how well the Detection & Measurement portfolio works together. We have a solid balance sheet, and both the Executive Leadership Team and the Board emphasize the importance of wise investments, which I find exciting. Gene spoke about Continuous Improvement and LEAN projects, which I believe could significantly enhance earnings and customer service, helping us stand out as a preferred supplier and positively impacting our bottom line. There's considerable potential for growth; Gene mentioned we have a strong pipeline for inorganic growth, and I've noticed a lot of opportunities for channel development and product segmentation. This gives the company various avenues for growth, which is exciting. While we may not succeed in every effort, we have multiple options to explore, and we can prioritize those that will allow us to grow faster. In terms of significant opportunities, we've learned to manage better during COVID, improving our overall operations. Gene and I discussed how the pandemic taught us how to sell remotely, which may be a lasting change. This allows us to connect with more people, distributors, and customers quickly and efficiently, without the need for extensive travel. There are certainly opportunities in this shift, and while the specifics will unfold over time, SPX has adapted well and positioned itself as a differentiated supplier, which is thrilling. We also see opportunities in our working capital; being more efficient translates to more funds available for investment, which is crucial. The company has a solid capital structure that aligns with our current business needs. Although I’m unsure how that will evolve in the future, Scott and the team have effectively aligned our capital structure with our business demands so far. I've had the chance to join a well-performing company that seems well-positioned for future growth. Overall, it has been a great experience over the past three months, and I look forward to what’s ahead.

Operator, Operator

Our next question comes from Walter Liptak with Seaport. Your line is open.

Walter Liptak, Analyst

I wanted to ask about the D&M business, particularly the communications technology. It's encouraging to see those order delays easing up a bit. Can you clarify if there are just a few orders that have started to clear up, which you have visibility on, or have you managed to navigate the government regulators or approval process and found a way to adapt to this new situation to advance more of those projects?

Jamie Harris, CFO

I would say it's likely a combination of factors you mentioned. It's essential to learn how to navigate this environment effectively. With the recent transition from the end of one fiscal year to the beginning of the new fiscal year for the Federal Government, which significantly impacts our customer base relying on federal funding, it's crucial to consider how budgets are utilized and reallocated. We're not just seeing a few orders; we're experiencing a typical flow of orders. Although there are many smaller orders, a few larger ones are also anticipated. We have some consistent smaller business, and as we look ahead, we're encountering a normal backlog. The main question is what steps we need to take to get those orders fulfilled. On the project-oriented side of the business, having improved visibility now compared to six months ago gives us a lot of confidence.

Walter Liptak, Analyst

Okay. And thinking that these have been delayed for a while, are the margins still solid in that business, or has there been some degradation?

Jamie Harris, CFO

I mean, I think generally speaking, they're very similar, it doesn't necessarily show up in the P&L because we do have a fixed cost structure there. But over the long-term, as shipments balance out, we haven't seen any really decline in the margin structure thus far.

Walter Liptak, Analyst

If I can try one in the heating season, your understanding with your heating businesses is replacement. But we've seen this kind of resurgence in residential spending, could we see a better than normal replacement cycle this year?

Gene Lowe, President and CEO

We could, Wal and I think as we go into heat season, the way we think about that market is, it's a big steady market it grows some every year probably low-single digits to mid-single digits, and just normally, organically, and then as always the big driver will be weather. Right? A really cold winter could expand the market by 10% or really warm winter could shrink it by 10%. So we're always keeping our eyes on the winter, on the Heating Degree Days, both the number of them then also when they hit. The earlier, they all have a benefit to drive up demand. So those are the things we're keeping our eyes on. The other thing I would say you want to make sure that there is not overstocking or understocking and all that information we have today is that there is pretty balanced inventory in the channel. So going into the heating season, we actually feel pretty good. We also like our products. We launched a really nice Ecotech product that we think has a great value proposition. So yeah, we actually feel good about the trajectory of that business and where we are going into Q4.

Operator, Operator

Thank you. And I'm showing no further questions at this time, I'd like to hand the conference back to Mr. Paul Clegg for any further comment.

Paul Clegg, VP, Investor Relations and Communications

Okay, thank you all for joining our call and we look forward to catching you up again next quarter on our accomplishments. Please stay safe. Take care.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a great day.