SPX Technologies, Inc. (SPXC) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the SPX Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference to your speaker today Paul Clegg, VP, Investor Relations and Communications. Please go ahead, sir.

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.

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.

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.

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 till 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 which were initially expected in Q4. Consistent with our comments last quarter, we're seeing quote and order trends for non-residential products that indicates 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 order 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 the building of 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.

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 lowering -- 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 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 -- offset by 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 1.7%, reflecting better pricing discipline and a more favorable mix. Process Cooling sales also increased modestly. Segment income increased $3.3 million and margin increased 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 continues to -- 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 the 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 in 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 had 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 and 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 and 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 in discretionary cost reductions implemented earlier in the year and 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.

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 significant amount of replacement revenue in the diverse mix of end market exposures, however, as noted, we are seeing continued sign of moderating nonresidential 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 frontlog in our project-based businesses and movement on delayed orders in communications 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.

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

[Operator Instructions] Our first question comes from Damian Karas of UBS. Your line is open.

I wanted to ask you about the HVAC statements and the guidance is sort of a mid-single digit to high single-digit decline in the fourth quarter there and noted a couple of items such as the pull forward of some projects and then you have some tougher comps seasonally versus last year. I'm just wondering, if you were to sort of strip out those, those one-off -- can you give us a sense for what the kind of normalize, underlying growth rate is? And as you kind of think about where we might be next year, obviously, I think Dom, our people feel like we might be in for a slower non-res environment for some time here, so maybe you could just give us a sense on the underlying rate there..

Yes. Damian, let me take a crack at that. So I think, it's a good question, I think we're very focused on the non-resi market. It is a reminder, you know that we are very balanced in terms of replacement versus new build in our segment, but as you look forward to 2021, the biggest market indicator that we've always talked about is the dodge index, and if you look at the various market industry analyses, you're seeing an expectation for, I would say, a modest decline in 2021 in terms of the market demand profile -- the -- if you look at it across the different prognosticators, you probably get a mid single-digit decline and I'm really talking about the U.S. here. As a reminder, in our cooling business, we also have an international business, which is about 50% of the size of the, our US operations, but when I look at it and what we are seeing for 2021, we would expect to do better than the market. If I look at our geographic mix, I look at our product introductions, I just look at where we are, I would say and again, we're not giving our guidance today or anything like that, but you know, we would expect 2021 to be, I would say flattish, is with all the data we have available to us today. And that's kind of how I think -- that's kind of how we're thinking about things and really in the non-resi segments what I'm talking about here. And Jamie, do you have anything you'd like to add on Q4, if you.

Yes, the only thing I would add to that in Q4, as we talked about in the script in the call, yesterday -- you called it earlier -- we did have some pull forward with some of our projects that brought some dollars into the third quarter that we were actually expecting in the fourth quarter, and if you go back to the earlier part of the year as the pandemic hit, we had a lot of orders on the books, we've seen those flow through and as we're six months past the beginning of the COVID pandemic and yeah, we are starting to see what the order book looks like as a result of, maybe a six month lag, which is typical in that business.

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?

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 tire and this is the primary tool and not enough. Jamie, Paul, you guys have, anything else you'd like to add there?

Damian, this is Paul. I was going to add to your prior question, get a couple of things in there from a modeling perspective, it may help you out here for the fourth quarter. Number one, just a reminder that we did do the PK acquisition in mid-November last year, so that's around -- let's call that around $5 million plus or minus of revenue, that would be inorganic in the fourth quarter. And then, you asked about the timing of the shift in cooling between 3Q and 4Q. And that was around $10 million on the international...

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 on the queue. Thanks guys.

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

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?

Brett, this is Jamie. So a couple of things as we talked about for Q3 are communication technologies business, we had some projects that is -- as we go through the government approval process and delivery. The folks not working, made it a little bit more difficult to get approved, some of the travel restrictions of getting the deliveries made. We at the end of the third quarter, really began to see some projects begin to move through the platform, move through the system or through the network. As we've entered the fourth quarter, we see that continuing to happen. As we look at our book right now, we have really no concerns about the amount of business that we have. We do have questions about timing, just by definition with the process that some of our governmental orders go through, it just takes time and with a lot of the folks in the approval process not at their offices it probably takes more time than historically has. That being said, we actually feel really good about the business and some of the activity that we're seeing, we don't see an issue with funding. We don't see an issue with demand. And so it's really more of a question of timing, might some of the projects bleed from Q4 into Q1 possibly. But over the period of the next couple of quarters we certainly think, we will see the shipments come to pass. On our radio business, which is our Locator business, we saw some catch-up from Q2 that resulted in Q3. So it was actually a comparable quarter in that business. That is one of our more short cycle businesses, so it was one of the quicker ones to save a track during COVID but it was also one of the ones that came back more rapidly. We see that being a very strong business. In fact, one of our key components of the whole D&M platform to grow upon, and so we see that business doing well. Our obstruction lighting business, we had some timing challenges there as well for a lot of the same reasons. That being said, we see that being a very strong business and coming back to be a comparable type of business. So, overall when we look at it, we do see margins in the fourth quarter sequentially be a little bit higher. We do see them being modestly lower than last year and I think if you look at some of the project-oriented businesses, communication technologies being one of them, they do carry fixed cost with them and so when we see timing shifts from one quarter to the next, detrimental impact to the income line is a bit larger. The flip side of that when we see that timing of shipments, actually hit, we should see the incremental side of the fixed cost equation come back. So overall I think as, Gene mentioned, you will see we are very happy about that. We think that gives us another key component of an exciting growth platform. And so we see it more of a timing challenge as more so than a -- is the business really on solid grounds or not.

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?

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, a lot of the -- 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 are continuous improvement. There is a lot of dollars there that that the LEAN process, AD-20 process will be very well suited to help us gain some margin improvement there as well.

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

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 impacts the Q4 guide.

I'll take a crack at that, Bryan. I think as we talked about on the really the Q1 call, the Q2 call, on this call and as Jamie had highlighted that is our shorter cycle business. So when the pandemic started, we saw that very, very quickly. And so that was the first to really have the demand impacts, but since that, we really started seeing in March. But since the downturn sequentially every month has been improving and as Jamie had alluded to or had mentioned, Q3 was really comparable to Q3 of last year and now we did benefit from a little bit of revenue was closed down in Q2. There might have been a little bit of a catch up there, but sequentially we're seeing nice solid strength there. Having said that, I would caution as everyone would -- there is a global, shut down or -- we always have to keep our eyes on that. But what we see today is very positive and that sequential continuous sequential improvement has continued even up to this point today.

Okay.

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

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.

So why don't I start there. One of the things we talk, I know you're right, that is a great fit for our business, as you know CUES is tethered robots that go underground up to 1500 feet, that there really manages, remediates and fixes water and wastewater lines. These are tethered robots that go underground and do the same for gas lines. So it's a really comparable business. The -- we do think this is a really nice addition to us. There is two parts to that business. One is their core what I'd call robot-as-a-service business, which is about three quarters of the revenue and then there is their R&D business, they actually -- one of the things, it's really unique about ULC Robotics, is they solve problems that have never been solved before. So for example their sysbot, robot is the only robot that we're aware of in the world that can do this. And so we have a really nice situation where that solution has come out of their R&D. They have a wide variety of R&D projects they have underway right now but that's about a quarter of their business. But roughly speaking we think that, that is in the neighborhood of a $40 million business. We think the margins are higher than our D&M average. I don't know Paul, exactly what -- we're comparable to higher.

Yes, higher.

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.

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?

Yes, great question. But it's surprise wise it's, this is a great company first of all and so I think the things I like about it before I came and its been confirmed, since I've been here, it has a great can-do, winning culture, which I really love, everybody works together, very collaborative. Gene set of a great team. I mean that is at the ELT and everybody that we've worked with had been so so welcoming. We have a great diverse set of businesses here. We do -- we serve many different end markets, which gives us a nice blend of diversity. As has been evidenced by the last two quarters, the Transformer business, as an example to emerge as such a resilient business during the pandemic, to offset some of the decline we saw. So in the short-term for Detection & Measurement has been really nice to see how the portfolio works together. We have a great balance sheet and we have an ELT and a Board, who want us to use it wisely. They want us to invest it wisely, which I think is exciting. Gene talked about CI and the LEAN projects or the AD-20 programs, I think that can be a real earnings boost. It can be a greater efficiency, that can be a great customer service tool where we can diversify our -- differentiate ourselves to the customers, so that we can be a preferred supplier, as well as seeing it go to our bottom line, back to balance sheet. We have a large amount of opportunity Gene has mentioned that the pipeline is strong on inorganic growth, but we also have from what I've seen a lot of channel opportunities, a lot of product segmentation opportunities and so there is -- I think the company has a lot of options of places it can grow, which I think is exciting, because we're not going to get them all right but we have a number of options, that the ones that we found that can -- we can accelerate down, we have the option to get to that. In terms of significant opportunities we have mentioned the growth side of the business. We've learned as every business has, how to manage better during COVID. What does that do? I mean Gene and I were talking earlier this afternoon about digital. I mean we've learned during the pandemic, how to sell remotely. Is that a way of the future? Who knows, but it certainly allows us to get in front of more people and more of our distributors and more of our customers, quicker and faster and more timely than we were. If we have to travel by plane and make an appointment, so I mean there is opportunities there, how that plays itself out I think is a question, but I think the point of SPX, I think the company has done a really nice job of adapting and penetrating really to be maybe a differentiated supplier again, which I think is exciting. I think there is opportunities in our working capital and the more efficient we are in working capital, that translates into more investable dollars we have, which I think is important. From capital, the company has a great capital structure. I think it is well suited for the company, with our current investment -- current set of businesses. How that looks in the future? I don't know, but it's that Scott and the team has done a nice job of matching our business needs to the capital structure thus far, and so I had that opportunity to come into a great company that has done very well. That's really I think well positioned for growth in the future. So I mean, it's been a great experience for the last, almost three months now and look forward to the next several.

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

I wanted to ask about the D&M business and specifically the comm-tech, it's nice to see those order delays starting to loosen up a little bit. I wonder if you guys -- are you guys saying that there is, just a few orders that have started to loosen up that you have visibility to now or is it -- have they have they figured out the government regulators or approval process. Have they figured out how to work in this new normal and get more of those projects moving forward?

Yeah, I would say probably a combination of all of the above, that you mentioned. I think certainly figuring out or learning how to process during this environment is a key, I think not coincidentally, we just passed, the end of last fiscal year and the beginning of the new fiscal year for the Federal Government and given that particular segment has so much of our customer base that relies on some type of federal funding. Moving into a new budget year, I think it's important as dollars are used up in the old fiscal year and reappointed or re-portioned in the new fiscal year. We are not just seen a couple of orders, we are seeing, I would say, a normal flow of orders. That business has -- it has a number of smaller orders, but it has a couple of large ones that will come through, I think the company called that run rate, we have had some run rate business that are the smaller items, but I think it's, -- I think we're seeing a normal frontlog as we look into the year. The question is what are the steps that we have to go through to get them shift. And yeah, I think it's -- that business being a project-oriented business getting better visibility and having better visibility now than we probably did six months ago gives us a lot of good confidence.

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

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.

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?

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 to keeping our eyes on. The other thing I would say you want to make sure that there is not overstocking or under stocking 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.

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.

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.

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