SPX Technologies, Inc. (SPXC) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by and welcome to the Q3 2021 SPX Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your host today, Paul Clegg, VP of Investor Relations. Please go ahead.

Thank you, operator. 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. The press release containing our third quarter results was issued today after market close. You can find the release and our earnings slide presentation, as well as a link to a live webcast of this call in the Investor Relations section of our website 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 10. 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 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 includes the results of our South African operations in an other category, which is excluded from our adjusted results. Our adjusted earnings per share also exclude non-service pension items, amortization expense, investment gains, certain discrete tax items, acquisition-related costs, and certain other non-recurring items. Also, SPX closed the sale of our Transformers business prior to quarter-end. In the appendix of today's presentation, we have also provided a table showing quarterly P&L results excluding Transformers for 2000 [ph] and year-to-date 2021. Finally, we will be conducting virtual meetings with investors over the coming weeks, including at conferences hosted by Baird, UBS and Deutsche Bank. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with a brief update on our consolidated and segment results for the third quarter. We'll also provide an update to our full-year guidance. I'll start with some of the highlights from the quarter. At quarter-end, we completed the sale of Transformer Solutions, helping reposition the company for our next phase of growth and providing us with an exceptionally strong balance sheet to pursue our growth investments. We are very pleased with the value we received and see attractive opportunities to redeploy the capital into more strategically aligned businesses. During the quarter, we also saw very strong demand for our products and continue to have commercial success in our end markets. Our orders and backlog reached record levels. Excluding a non-repeating project in HVAC cooling, organic orders increased 36% year-over-year, while backlog was up 48%. Additionally, our free cash flow generation was particularly strong. Year-to-date, our free cash flow is up $61 million including some one-time items. On the NPI front, I'm excited about our momentum. Recently introduced products have been getting strong customer feedback, helping us to win share and positioning us to benefit from favorable long-term trends. Having said that, late in the quarter, we did see an acceleration of supply chain challenges that affected our productivity. We estimate the impact of these challenges to our Q3 financial performance to be approximately $0.10 of EPS. A good example of this is in our HVAC heating platform where we saw very strong demand during Q3. Total heating revenue was roughly flat year-on-year, while orders increased 44% and backlog grew 258% from $19 million to $69 million. Despite the supply chain headwinds, our adjusted net income for the quarter was in-line with our internal model. We are acutely focusing on mitigating and overcoming these supply chain challenges, but do anticipate that supply availability as well as project delays will constrain our Q4 results and are adjusting our full-year guidance accordingly. As I look forward, I feel good about our positioning, the current strong demand backdrop and our ability to manage through the current environment successfully. With significant available capital, a robust pipeline of strategic acquisition opportunities and momentum on organic growth initiatives, I'm very confident in our ability to achieve the SPX 2025 goals that we laid out earlier this year. A review of our adjusted segment results reflects the current mix of strong demand and tight supply conditions. Revenues increased 6.6%, driven primarily by acquisitions. Operating income and margin declined from prior year, largely due to the supply chain impact, partially offset by cost controls and continuous improvement initiatives. Turning to our value creation framework. Over the last few months, we have continued to make progress on several fronts. We continued to execute on our continuous improvement and digital initiatives and extended our actions in ESG, including the publication of our latest sustainability report which contains several new disclosures and details of improvements we have made. On our digital initiatives, our HVAC cooling business introduced customers to our new product specification tool called CoolSpec, a leap forward in ease and optimization of the cooling equipment selection process. We believe that this will give us an advantage in achieving basis of design with engineers. The rollout has been very well-received. We also continue to gain traction with our new fluid cooler and evaporative condenser offerings, which experienced very strong year-on-year growth. In HVAC heating, our new Ecotech [ph] high-efficiency gas boiler is getting favorable customer responses and winning share. In Detection & Measurement, we launched our CUES SpiDER 3D Manhole Scanner in Europe. And in our AtoN platform, we booked several large strategic government orders. We also began the integration of the ECS into our CommTech platform, following the acquisition of the company in August. We continue to see attractive opportunities for cross-selling our products. And now, I'll turn the call to Jamie to review our financial results.

Thanks, Gene. For the third quarter, adjusted EPS was $0.41, down from the prior year. In addition to the segment drivers, which I will review shortly, we benefited from lower interest cost due to lower debt balances and the new swap agreement which began in Q2 and carries a lower effective interest rate. This was partially offset by moderately higher tax rate compared with the prior year. Both periods included favorable discrete tax items, although with a larger impact on the rate in the prior year. With very strong backlog and encouraging demand trends in our run rate businesses, we are focusing on alleviating production constraints to meet more near-term customer demand. While we cannot accurately predict the duration of ongoing supply chain challenges, we believe we are well positioned to use the leverage within our control to continue executing on our SPX 2025 objectives. With regards to our high-level results for Q3, revenue was up 6.6%, primarily driven by acquisitions. Adjusted segment income decreased approximately $4 million with lower HVAC results being partially offset by modest growth in Detection & Measurement. Year-to-date, adjusted EPS was up 19%. Reviewing our segment results. In Q3, the acquisitions within Detection & Measurement segment were the primary drivers of revenue growth. Margins were down year-over-year across both segments. For our HVAC segment, revenues declined 1.8% with an organic decline of 2.4% and a modest favorable currency effect. Heating sales were approximately flat, with price increases offsetting lower unit volume associated with supply chain challenges. Cooling sales were down approximately 3% due to a non-repeating data center project in our EMEA region in the prior-year period. Our Americas cooling sales were up despite some labor constraints. Adjusted segment income and margin decreased $5.5 million and 280 basis points respectively. The decline was largely due to supply chain issues, including the availability of certain component parts which impacted shipments, productivity and efficiencies, as well as cost. Overall, demand levels remain very high for our HVAC products. Excluding the effects of one large cooling project booked in the prior year that did not repeat, HVAC's organic orders and backlog were up 34% and 29%, respectively. Total ending backlog for HVAC was $204 million. The most significant increases in year-over-year order in backlog were from our heating platform, particularly for boilers. Based on our bookings and backlog, both heating and cooling were positioned to materially exceed our prior-year results. In Detection & Measurement, revenues were up 24.9% year-over-year, including an organic increase of 7.6%, a 16.2% impact from the acquisitions of ULC, Sensors & Software, ECS and Sealite, and a modest favorable currency impact. Adjusted segment income increased modestly. Segment income margin decreased 270 basis points due to lower margins associated with recent acquisitions. We are very pleased with all of our acquisitions and our integrations initiatives are going very well. That said, our ULC Robotics business is experiencing lower-than-anticipated revenue and income due to the impact of a rate case related to a customer's near-term budget, which has a detrimental effect on our margin. Despite these challenges, we are excited about ULC and see significant upside and numerous opportunities for revenue and profit growth for the company. Overall, our core businesses continue to perform well and our other acquisitions are on track or ahead. Organically, Detection & Measurement orders and backlog were up 39% and 94%, respectively, compared to the prior year. Ending backlog was approximately $177 million, including the benefit of acquisitions. That said, we are seeing the timing of some large projects continue to be delayed. The most significant increases in our year-over-year orders and backlog were from our CommTech, AtoN and transportation businesses. Many of these orders are for highly specialized products for government or quasi-government customers. We believe this positions us very well for growth into next year and beyond. Turning now to our financial position at the end of the quarter. We ended the quarter with cash of $560 million. Net of our term loan, which we do not currently intend to pay off, we are in a net cash position of $312 million. Our very strong balance sheet reflects the proceeds from the sale of Transformer Solutions and a strong cash collections year. In the near term, we have used the proceeds from the Transformer sale to pay off our revolver debt and to reduce other forms of borrowings. Adjusted free cash flow for the quarter was also strong at $36 million including the benefit from certain one-time items. Cash flows associated with South Africa was $16 million in the quarter, consisting primarily of a tax refund. We feel good about our position in the dispute resolution process and continue to see favorable momentum. Overall, we are very well-positioned with a strong balance sheet and cash flow to grow through organic and inorganic initiatives and we have a robust pipeline of opportunities, including several active prospects. Regarding guidance, we estimate adjusted earnings per share in the range of the $2.18 to $2.27 compared with a prior range of $2.25 to $2.45. At the midpoint, our updated EPS guidance declines $0.125 and reflects growth of 21% over our 2020 adjusted results. The primary drivers of the guidance update are the impact we're seeing in Q4 around supply chain challenges and the project delays we mentioned earlier. Overall, we remain excited and optimistic about our business outlook moving forward. We are monitoring and addressing the supply chain constraints aggressively and believe we are winning in the marketplace and with our customers, and on the shop floor with our continuous improvement programs. As always, you will find more details on our guidance in the appendix to today's slides. The primary changes to our income statement assumptions relate to lower interest expense and a lower tax rate based on jurisdictional mix and discrete items. I will now turn the call back to Gene for discussion of our end markets.

Thanks, Jamie. Overall, our end markets are seeing very favorable demand trends. In HVAC, we are seeing differences geographically, with notable strength in the Americas, particularly in heating. In Detection & Measurement, we continue to see a very strong level of demand for run rate products across most regions. As noted, our more project-oriented businesses are seeing attractive customer activity in bookings and are building significant backlog despite delays. In summary, our Q3 performance reflects very strong levels of underlying demand as well as supply chain constraints. While the current environment is challenging, our team continues to work hard and remain flexible to optimize our performance. The closing of the Transformer sale positions us well to continue executing on our growth and value creation initiatives, including inorganic opportunities. With the strong demand backdrop and exceptionally strong balance sheet and a highly capable experienced team, we have multiple levers under our control to continue driving toward the SPX 2025 targets we laid out earlier this year. And now, I'll turn the call back over to Paul.

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

[Operator Instructions]. And our first question comes from Bryan Blair from Oppenheimer.

I was hoping you could frame run rate supply chain impact for us a little bit more. You called out the headwinds in heating. Any further discrete call-outs by platform that we should think about? And then, looking to the fourth quarter, we have the bottom line impacts implied and then your guidance revision. How should we think of that by platform or by segment?

For Q3, we called out sort of a $0.10 per share impact. We think about a third of that roughly came on the cold side. The balance came from just capacity constraints, production constraints from being able to ship product and get it out the door. We believe we would have had a significant upside to our reported results, absent supply chain impacts. Across the two segments, the majority was impacting our heating business, somewhat our cooling. Cooling was probably more of a slight labor issue. But heating, there was some impact on a couple of our businesses. Our radio business had some shipments that couldn't get out. Our AtoN business also had some shipment that we couldn't get out. Primarily a component availability issue. We saw the impact and we've been fighting supply chain like everybody else all year. We saw late in the quarter it really began to show up more acutely to some of our businesses. It showed up in the form of availability, suppliers, late minute cancellation or allocation of supply. And so, having those components, to be able to put things together, finish production process, to get it out the door is really where it showed up. A little bit of cost-efficiency, primarily more on just could not get it out the door. And you saw our backlog grow. As we look towards the fourth quarter, I think you'll see a similar type distribution across our business. As you know, our heating business is a very large fourth quarter business, so that will probably, across the spectrum, be our largest impact, especially on our boiler side. We're building inventory quite a lot during the year, shipping a lot of that in the fourth quarter. So, as that supply chain has begun to back up, building inventory will be a little bit tougher for us. On the cost side, we talked about, in August, we expected to have a slight headwind on price cost relationship. We would say that was a little higher than we had anticipated. We've had some pricing out in the marketplace. I think we said last quarter on the call, it was going to hit latter part of the third quarter. That has taken place. It is in the marketplace. We still feel good about our ability to maintain our price and to cover our cost structure going into Q4 and into next year based on what we know today. We still think we'll have a net tailwind for the second half of the year, predominantly again in the fourth quarter. But the supply availability, the component disruption, if you will, of the innovative plan and to get things out and shipped is predominantly where we're seeing the impact. But across the segment, I think it will be a similar distribution.

I guess shifting to a more positive topic – and understanding that we don't have a 2022 guidance framework. We'll have to wait for that. But maybe you can offer some directional insight or perspective on your outlook by platform, given backlog position, underlying market trends, et cetera, where you're most confident in seeing strong growth next year and perhaps where you think there are still some watch items out there.

I'll take a cut at that. As you look at it and as we've talked about, our demand profile has been very strong across virtually all of our markets. We feel really good about our products. We feel really good that we're winning in the markets, and so you can see that in the very elevated bookings and then, obviously, very elevated backlogs. So, we actually believe we're going to go into 2022 with a very strong backlog position, much stronger than normal in a number of our businesses. If you get to the underlying demand of what we are seeing, what I would say is, if you look on the cooling side, which really serves a wide variety of end applications, from data centers, schools, government, commercial, all across, we're actually seeing very positive indicators. And if you look at the areas we track, the Dodge report of new starts, you look at their predictions for 2022, I would say that would lean positive. So, we're seeing some positive signals on the demand side on the cooling side. A chunk of that would also pertain to the heating side. As a reminder, most of our hydronic or boiler business is more replacement, but we feel really good with where we are with our products and our market share strategies there. In particular, our contactor program. So, I would say on the HVAC side, we feel good as we look forward to 2022. As I look across our D&M, I would say, on location and inspection, we feel good. We've had some really nice bounce back from radio detection, which is our largest business, and we're just seeing really nice momentum in there and we would expect that to continue. And you look at the other components within there, we see some continued growth going in. I would also expect AtoN to see nice growth as we go into next year. And then, as I look to CommTech and transportation, we do expect growth. I would say, I'd probably expect more moderate growth there in those platforms. So, at a high level, we feel good about the general demand profile and we feel, ironically, that the situation we find ourselves in is we're winning in the market and our new products are doing very well. We have more demand. The demand is just outstanding. And I guess, like a lot of companies, a tremendous amount of our time is focused on the supply side and that would include supply chain as well as some labor. So, a little bit of that slipping out should give us a little bit of benefit as we go into 2022.

How is your team thinking about dry powder and the actionability of your M&A pipeline as we approach the New Year? Obviously, you're in a great balance sheet position now. You've spoken very confidently about the funnel and then your prospects for a while and they'll have much more capacity than you ever have. I'm just curious if you can give us any finer points on the outlook for your M&A strategy and then your team's confidence in bringing some more deals across the finish line in 2022?

We said last quarter we feel very good about the front log and this is a function of, one, I think there is more activity in the market; two, I think we have more clarity of exactly how and where we want to grow. So, as I look at it, I actually feel very good about the amount of activity we're seeing and some very attractive opportunities that we think can really help us build our platforms further. So, I'm feeling from the last call, which is very optimistic, I would even say I'm a little bit more incrementally optimistic. As you know, just by looking at the math, there is a very strong balance sheet. You could go up to $1 billion of balance sheet. Our businesses are generating tons of cash and we're growing. And I do think the sale of Transformers, while that is a good business, I think that's going to be a good business for GE Prolec, this really strengthens us and allows us to pursue our strategy. And that, net-net, is going to pay some real dividends going forward. So, I feel really good about how we're thinking about investing for growth as we go into 2022.

Our next question comes from Damian Karas from UBS.

I was a little surprised to hear your comments on the heating side of HVAC, the flat growth and, in particular, as it relates to the boiler market challenges. Could you elaborate on that specifically, whether it's components or labor? What exactly is going on in the boiler market that has suppressed sales?

Why don't I start and I think Jamie has also been heavily involved in a lot of these activities. If you start with the demand, as we've talked about, the demand is exceptional. And we do believe our new products are winning in the market. As I said on the call, the amount of backlog that we have that has grown. If you just look year-over-year, it's pretty amazing. But the fundamental issue, I would say, is really component supply. And what I would say is, as we were coming into this quarter, Damian, you look in the first two months, our order volumes were so strong, we actually thought we are going to have a very, very – some interesting upside up until, I would say, towards the end of the quarter. And what ended up happening is some very reliable suppliers that we worked with for years and years pushed out and we had to mitigate some of those. So, I think the very simple answer is supply chain and it has been a challenge. I think it's worth noting that when you look at our supply chain, supply chain is something we're very involved with with our businesses. In 2018, we formed a Supply Chain Council. We do a lot of cross business work together. For example, we buy about $82 million of steel. We coordinate this together, so we get scale prices. We work together to share pricing opportunities, but also supply opportunities. And this is something that, in COVID, was pretty important. So, we spent a lot of time on supply chain, but I would say the acceleration at the end of the quarter was a surprise to us. And what I would say is we are very focused on the supply chain. We have many initiatives and actions, and we're working through it and we will work through it successfully and feel good about where we are. The other interesting thing is, I do think this is ultimately making us – there's a lot of benefit to a lot of these activities that will pay some dividends. Jamie, do you have any other comments as you think about Damian's question.

Yes, definitely agree. There was a – more a supply chain challenge to get product out, therefore, to get sales than it was the demand to get it out. And we had great demand. Some of the things we're doing to address that, we are expanding our sourcing breadth as we're adding third, fourth, fifth tier suppliers where possible. We're going through some types of reengineering component parts, so we can get different or new parts if we're having trouble getting them. We have safety stock wherever possible. So, we are acutely focused and pulling out all stops, if you will, to address that. But, again, for heating, this last quarter – and we were in a build process in the last part of the third quarter, moving into the fourth quarter. And so, when we see a disruption of the component part, that really inhibits our ability to produce and to ship. And so, I think we all feel good. It's not a demand-driven issue as much as it is an ability to get it out the door issue.

On boilers, is there any particular component or components you can point to? Or is it kind of a hodgepodge.

I think, for us, one of our strengths in supply chain quite honestly, in most times, is that we have a dozen, plus or minus, small and medium-sized businesses that we have. We don't have a reliance on one big material that could really cripple us, if you will. We have good diversity. That said, at a macroeconomic level, we have broad scale supply chain challenges. We have a lot of different component parts that fall prey to disruption somewhere one, two, three steps upstream in the supply chain process. If you look at specifically component parts that relate to heating, a couple of examples.

Wire harness, insulation.

Some of the steel sheets.

Ironically, our core heat exchange blowers where we're actually in very good shape. And it was more the extraneous or the other bill of material items predominantly that affected Q3.

It ended up being some aluminum-based components that ended up being some of the challenges we had. And you hear aluminum issues in other industries. So, those happen to be some of the ones that we experienced. But net-net, [indiscernible], I think that's a big asset that we have with the company that we have diversity in our supply chain and we're able to full scale together. But it does give us more component parts to have to deal with in a tough environment.

I guess just thinking about some of those levers that you can pull that you alluded to, Jamie. What's your confidence that you can get those margins back on track? How long is it going to take? Maybe just anymore, any more color on how you're going about pulling those levers and when you see kind of getting back to normal?

Yes, it's a great question. I would probably say we all would be thrilled if we could predict exactly when we're going to see the supply chain gets back to normal. So, that's a questions that I think everybody has regardless of the industry set that you are in. I think to the point Jamie made is very important. This will make us a better company regarding production assembly, supplier management, inventory management, scheduling on the plant floor. And other things Jamie said was important. A number of our continuous improvement projects have been geared around supply chain. I think I'm confident in saying, a lot of the CI work we've done this year and last year helped us mitigate some of the challenges so far this year and probably less than some of the challenges that we saw hit us late in the quarter. But I think the things that you're probably hearing from most of your companies you're covering, sourcing is important, working with your suppliers, making sure there is a relationship there that they are going to take care of us relative to the portfolio of customers they'd have to look after. We've been working hard on our working capital management. This is a time where we've got to go a different route and we have going to different route to build safety stock. It's much less expensive to have safety stock in place than to have a supply disruption in the plant. When we can get product in and our supply in and get ahead, we are doing that and putting it in inventory. So those are the things you would normally think about. But the continuous improvement, I can't overemphasize, because if you were to walk through some of our plants, you see some of the improvements have been made in the flow of goods. What that means is our supply of components get to the floor more efficiently. We know more about what we need. It helps our scheduling process. And I do believe that's been a big mitigator of some of the challenges this year.

And our next question comes from Steve Ferazani from Sidoti.

I guess I'm going to probably end up following up on a lot of the supply chain questions that have been asked. Just trying to get a sense. You didn't move EPS guidance that dramatically, given you saw the problems at the end of the quarter. And typically, this has been a current Q later than a lot of other companies. And typically what we've seen is problems that crop up in one quarter get much worse in the next quarter. And I'm just trying to get a sense of why you don't think, at least based on the guidance, that it doesn't get a lot worse.

I think couple of things come to mind there. We saw this hit us really late in the quarter. If you've had all the visibility of data that we see, our outlook for the quarter in second week in September was where we thought it would be. It is really that last week to 10 days. As we look forward into the fourth quarter, we clearly taken some steps to mitigate where possible, first of all. I think we also are moving guidance that we did put in place and it's based on what we're seeing based on today's environment, with some risk also provided in there about certain components that have the most, let's call it, the most potential volatility to our P&L. And so, I think every company, supply chain is kind of a wildcard right now. Do you think it is – again, just since the last quarter, we've tried to step up our game even more. One of our businesses, they literally are in daily contact with the two suppliers. Is our components still on track? Is it still on track? And so, having that communication is very important. But based on what we're seeing right now – and certainly, again, the demand is strong. We believe that we've got numbers in there that reflect what we'll be able to get out the door based on sales demand, component shipping plans, our inventory in place, but supply chain right now is very volatile to state the obvious.

So, how long term are you planning for these challenges because if we now think that this persists at least through the middle of next year, how long term – I know it's day-to-day, but what types of things are you doing to handle the longer term issues? And I guess, this applies to labor as well, whether we're looking at wage inflation, if you are quite challenged on the labor front. So, it's sort of a bigger picture, longer term supply chain and labor question.

I think we were talking earlier, I think if you look at our businesses across the spectrum, we don't manufacture a lot of goods. We typically will buy more components and items, much more of an assembly type flow process, in most cases, not all. And so, I think part of the reason you are seeing our impact from supply chain be the later than other companies is because I, ultimately, think a lot of supply chain is ultimately a labor issue [indiscernible]. If you go back one, two, three steps into the supply chain process, ultimately, I think it becomes a labor type issue, whether it's labor from an import, a labor to unload cargo ships, whatever the situation is, I think that's a significant part of the supply chain kind of root issue. So, I think it hit us a little bit later. I think for that same reason, we have the ability to manage through the labor challenges better because our direct labor, I think we'd all say that our labor, while still challenging, we are seeing some modest improvement in certain of our plants where we've had some real challenges. I think as some of the stimulus dollars went away, we saw some reaction to that and we were able to get people in and be recruited for roles. And so, I think from that perspective, we feel like it's manageable. As it relates to the component parts, again, working with the suppliers, staying on top of where we are on lead times and delivery dates and finding alternative means to – whether it be a reengineer of the product set or an alternative component to be able to use and really broadening out our supplier base on a much broader scale than we probably would have ever thought about two years ago is the steps we're taking.

I would add that – I do think labor, which has been challenging, has been getting incrementally better. And I think that is a function of initiatives we have, both in terms of recruiting, engagement, retention, et cetera, has started to pay some dividends. And I do think the supply chains – even with what's in our control, take the exogenous factors out, when your sole sourced or when you now have five different sources for a particular component, you're just structurally in a much stronger position. And there has been a tremendous amount of engineering work that Jamie has alluded to that has really, really reduced number of items that we are sole sourced on. And the other thing, a few other things that are going on is we have built safety stock and we look very closely at our bill of material items before we go into the quarter. And we're also procuring for longer portions of time. Take, for example, at our radio detection. Our core control boards, we already have bought up to 2023. And so, there is a number of initiatives and actions and these actions have structurally taken risk out of our system. I feel like – so I think there's been a lot of progress made. Some of these engineering change overs have taken three months, some have taken six months. So, these are not things you can just snap your fingers. And I think, fundamentally, that does make us stronger and reduces our risk profile. But as Jamie said, there is a lot of choppiness in supply chain, but I do believe we're managing this and I do feel good about how we've laid out the rest of the year.

Just last one is on, with the longer lead times, are you seeing any slowdown in demand in response to those longer lead times that is affecting orders?

Not that I have seen. But what I would say, as a reminder, the bulk of our products are engineered items, so meaning it is specified for a very particular customer or purpose. For example, every cooling tower we ship is for that particular customer. The size, the tonnage the horsepower, the type of fan, et cetera, et cetera, et cetera, is unique. We don't build anything to inventory. So, for our engineered product businesses, where you really only start making the product once you get an order, you feel very good that there is real demand behind that. What I do think we need to keep our eyes on are those portions of the business where you're building more towards the stock. And as an example, I would give there – probably our biggest business is in the hydronics, is in boilers. And that is where we do have a really nice variety of solutions. But it is a standard product. And so, the way that I would think about that is if you do grow demand very high, is the pull-through there and we'd have to keep our eyes to make sure that there's not a buildup of stock and then a destocking coming up. So, I do think it's something that we're aware of. What I would say is I do feel good that the demand is there – to your specific question, do we see demand destruction right now with extended lead times and also higher prices. We don't see any demand destruction that I'm aware of across our business. Jamie, can you think of a – it's actually, demand is quite obvious.

Continuing to come in very nicely.

[Operator Instructions]. And our next question comes from Walt Liptak from Seaport Research.

Want to ask one more on this boiler business. Are the strong orders coming through from channel partners and are they building inventory or is their sell-through, do you think, to the end users?

I would say it's predominantly channel partners. So, there is some usage there. And so, let's break it down. So, Heating, let's say, broadly speaking, $300 million. About $100 million of that is electric heat. About $200 million of that is hydronic. $200 million to $250 million, actually with PK probably closer to $250 million. The bulk of the purchases on the resi side really occurs in Q4 and Q1. That's where the pull-through demand is and the stock up really is going on now and you are starting to get consumption in the field now. So, I would say you are getting consumption in the field now, but the build out from the channel is really to make sure they don't get stock-outs right? They want to be able to service their customers for the year, which is really Q4 to Q1. And so, they're very aggressively trying to be able to service that demand.

So, you should be able to ship these. Some of them will go in the fourth quarter. And then, if you're shipping in January, February, you're still getting your channel partners to get the demand to the residencies.

I would think that would be our intention. And one of the things we always look at at the end of a heat season, so at the end of Q1, we look at the balances. How much inventory do our distributors have? We have very good visibility and a lot of distributors. Some visibility at some, some we have less. But overall, we have a pretty good feel about the balance of inventory, and so that would be something that we would always look at at the end of the heat season.

The backlog in D&M, it's nice to see that up so much. Are you back now to the 2019 backlog levels? Are you above 2019?

I would say, if you look across, the numbers are higher, but some of that is acquisition driven. You look at our AtoN business, which has some very attractive backlogs. ZWE are talking about our project businesses, the ones that we typically talk about, let's say, Genfare, TCI, it's really kind of CommTech and transportation, backlog is definitely higher pretty significantly. But I don't think the demand is up to the 2019 levels yet, but we are seeing nice improvement there.

And thank you. And I'm showing no further questions. I would now like to turn the call back to Paul Clegg for closing remarks.

Okay. Thank you all for joining the call today and we look forward to speaking to you over the next quarter.

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