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SPX (NYSE:SPXC)
Q4 2019 Earnings Call
Feb 13, 2020, 4:45 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 SPX corporation earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Clegg, VP of investor relations. Thank you.

Go ahead, sir.

Paul Clegg -- Vice President of Investor Relations

Thank you, Justin, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our president and chief executive officer; and Scott Sproule, our chief financial officer. A press release containing our fourth quarter and full-year 2019 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 February 20. As a reminder, portions of our presentation and comments are forward looking and subject to safe harbor provisions.

Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results. 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.

Consistent with how we established our guidance, our adjusted earnings per share also excludes nonservice pension items, including our true up of actuarial assumptions, amortization expense and investment valuation true up and onetime costs associated with acquisitions. In addition, our adjusted segment results exclude amortization and acquisition-related costs. Finally, we will be meeting with investors during the first quarter in the Midwest and in Texas. We will also be attending the Sidoti & Company Spring research conference in New York on March 26.

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

Gene Lowe -- President and Chief Executive Officer

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. 2019 was a very good year for SPX, and I'm proud of the work our team has done to drive solid improvement in our operational and financial performance.

On the call today, we'll give you a brief update on our overall results, segment performances and end market conditions. We'll also provide guidance before going into Q&A. Overall, our strong year-over-year performance in 2019 was the result of solid execution. Adjusted EPS was $2.76, an increase of 22% from 2018, while adjusted operating income grew $26 million.

We also continue to generate strong free cash flow. Our businesses performed well operationally, and we are pleased with the pace of integration of our acquisitions, including the recent purchase of Patterson-Kelley. Our balance sheet remains strong, and we have substantial available capital to deploy for further strategic growth and value creation initiatives. For 2020, we expect adjusted EPS in the range of $2.90 to $3.05 or a midpoint of $2.98.

Turning to our adjusted results for Q4 and the full year 2019. Operating income for the quarter increased 4% compared to a strong prior year. For the full year, adjusted operating income increased 18%, with margins up 120 basis points. All three segments generated solid profit growth, including the effect of new product and operational initiatives and the acquisitions in our detection & measurement and HVAC segments.

Overall, 2019 was another milestone year, and I am proud of the many accomplishments of our team. As always, I'd like to give you a brief update on our value creation initiatives. Over the last year, we've been very successful reaching our value-creation goals related to organic and inorganic growth, employing our business system to enhance value and developing our employees. In 2019, we continue to drive organic growth with the introduction of several new products, such as our new line of high-efficiency boilers for large applications, such as large hospitals or office buildings.

We also gained further traction on existing products, such as our SPiDER inspection solution, which significantly reduces the amount of time required to assess the condition of manholes. In addition, we closed three new acquisitions for a total of five in the last two years. I am very pleased with our progress on integrations as we leverage our business system to drive results. And we attracted new top talent and continue to invest in the education and development of our employees to ensure that our next generation of leaders have the skill sets to continue executing effectively on our vision and strategy.

Our team's successes are reflected in our strong financial performance. I am pleased to say that we see much more opportunity to drive value, including through additional investments that accelerate our growth objectives, broaden our opportunity in existing and in closely adjacent markets. And provide important technology and product development opportunities. The acquisition of Patterson-Kelley, which closed in November is a great example of an investment that accelerates our strategy in a key growth area.

This transaction significantly extends our footprint in commercial high-efficiency boilers, where they are a trusted leader. Patterson-Kelly's business is highly complementary to our products, channel and geographic strength. They have highly developed technology and an extensive commercial channel that broadens our addressable opportunity across an attractive growth portion of the heating market. We are very pleased with their talented team of engineers and product development expertise.

Going forward, we'll continue to leverage our core operational strengths, and deployable capital to invest strategically in close adjacencies. In HVAC, we see numerous opportunities to extend our platforms to a broader array of specialty products in heating, cooling, ventilation and air movement, areas where we have core technical expertise, as well as potential channel overlap and synergies. We also see opportunities to extend our detection & measurement platforms with further technology-focused investments that enhance our coverage of location and inspection of underground infrastructure and communication technologies products such as aids to navigation. And now I'll turn the call over to Scott to review our financial performance.

Scott Sproule -- Chief Financial Officer

Thanks, Gene. I'll start with our net results for Q4 and the full year. On a GAAP basis, we reported earnings per share of $0.75 for Q4 and $1.67 for the full year. On an adjusted basis, which excludes the impact of the items noted by Paul, EPS was $0.96 for the quarter and $2.76 for the year.

Overall, our solid results for the fourth quarter were driven primarily by our engineered solutions and HVAC segments. Turning now to our adjusted results. For Q4, revenues increased 3.8%, driven primarily by the acquisitions in our detection & measurement and HVAC segments. Segment income increased $4 million, and margins expanded 20 basis points with the largest impact from our engineered solutions segment.

On a full-year basis, revenues increased 6% due to significant growth from acquisitions and organic growth across each of our reportable segments. Organic revenue grew 1.3%, and segment margin increased 80 basis points, driven by the performance of our engineered solutions and HVAC segments. Now I'll walk you through the details of our results by segment, starting with HVAC. For the quarter, organic revenues increased 2.1% due primarily to strong sales in our cooling business.

Segment income increased by $1.8 million, while margins decreased 30 basis points due to sales mix. Recall that in the fourth quarter of 2018, our heating business benefited from stronger than typical seasonal demand, including a large one-time replacement boiler shipment for a utility customer. On a full-year basis, revenues increased 1.9%, including modest organic growth. Segment income increased 7%, and segment margin rose 80 basis points driven by positive price costs and operational improvements in our cooling business, partially offset by lower seasonal demand for heating products compared to the exceptionally strong prior year.

In detection & measurement, for the quarter, revenues increased 3.7% due to the Sabik acquisition, partially offset by the timing of communication technology products orders compared to the prior year. Q4 segment income decreased by $2.7 million, while segment margin decreased 370 basis points due to fewer project shipments and a less favorable mix. On a full year basis, revenues increased 19.8%, due primarily to acquisitions, while segment income increased 12.3%. Margins of 23.7% were in line with our guidance.

In engineered solutions, revenues for the quarter increased 1.1%, reflecting higher sales of transformers. Segment margin increased 310 basis points due to the higher throughput and improved execution in our transformer business, and a more profitable mix in our process cooling business. On a full-year basis, segment revenue grew 2.2%, and segment income margin increased 130 basis points. The improvement was driven largely by higher transformer throughput associated with productivity initiatives.

The transformer team has done a great job of implementing operational improvements, positioning us well for 2020. Now to our financial position at the end of the year. Our balance sheet remains strong. For the full-year 2019, we generated adjusted free cash flow of $140.5 million representing conversion of adjusted net income of 113% and ended the year with cash and equivalents of $55 million.

Cash flow conversion was higher than our 110% guidance due to earlier than expected customer receipts in Q4. During 2019, we deployed $147 million of capital for three acquisitions and ended the year with a net leverage ratio of 1.6x or near the lower end of our target range of 1.5 to 2.5 times. For the full year, we used $18 million of net cash for the projects in South Africa. We feel good about the progress we have made in South Africa.

I am pleased that our construction activity is now substantially complete on our final scope of work and we are in the process of winding down our site-related work. Following a recent arbitration win against a former subcontractor, Mitsubishi is now the only counterparty with which we have significant remaining disputes. We expect cash usage in South Africa to decrease significantly in 2020. We anticipate the net cash used to support the wind down of project activities will be modest although we do anticipate some elevated legal spending as we ramp up dispute resolution efforts.

Before moving to guidance, I'll briefly review our recent bank credit financing or refinancing. In December, we refinanced our credit facility and extended the maturity two years through 2024. While the overall size of our facility is similar, we reduced the size of our term debt and shifted more capacity to our revolver to better match our cash flow generation patterns. The new agreement provides increased financial flexibility and improves near-term liquidity.

We also benefited from more favorable pricing and financial covenant levels. Moving on to guidance. For the full year 2020, we expect to achieve adjusted earnings per share in a range of $2.90 to $3.05. This represents an increase of about 8% at the midpoint compared with 2019 adjusted results of $2.76.

On an adjusted basis, we are targeting revenue of approximately $1.6 billion and an increase of about 5% versus 2019. We are targeting segment income margin of 15% to 16% and operating income margin of approximately 11.5%. Turning to our segments. Our HVAC guidance calls for revenue of $630 million to $640 million, reflecting modest organic growth plus the full-year impact of the Patterson-Kelley and SGS acquisitions.

We expect the HVAC margins to be approximately flat compared to 2019. In detection & measurement, we expect revenue in a range of $395 million to $415 million or an increase of approximately 5%, reflecting growth within our long-term target range of 2% to 6%. Adjusted segment income margins are expected to be similar to 2019 levels at 23% to 24%. The timing of projects is one of the most significant factors driving the upper and lower end of our guidance range for detection and measurement.

In engineered solutions, we anticipate revenue of $550 million to $560 million or growth in a range of flat to up 2%. We anticipate margins of approximately 8.5% or an increase of more than 50 basis points, with transformers and process cooling, both contributing to the increase in the top line and margin expansion. Regarding commodity costs and our pricing initiatives across the company. In 2018, price costs represented a headwind of approximately 50 basis points to our results, which we fully recouped during 2019.

Looking to 2020, we expect the impact of price cost to be neutral to year-over-year results. Our free cash flow generation conversion is anticipated to be between 100% and 110% in 2020, as we integrate acquisitions with conversion rates closer to 100% and due to the impact of earlier customer receipts in 2019. As always, you will find details of other factors driving our 2020 guidance in the appendix to today's presentation, including our tax rate, which we expect to be approximately 20% to 22%. While we do not provide quarterly guidance, we have included historical quarterly performance metrics in the appendix to assist with your modeling.

Overall, we are expecting a similar earnings cadence to last year. The warmer start to winter and the coronavirus impact are providing some headwinds in Q1, but we continue to anticipate modest earnings growth for the quarter. Now I'll turn the call back to Gene for a review of our end markets and his closing comments.

Gene Lowe -- President and Chief Executive Officer

Thanks, Scott. Overall, we continue to be well positioned in our end markets for 2020 and beyond. Our customers and end markets are diverse, with many demand drivers that are less sensitive to macroeconomic factors, including government spending and regulatory mandates. In addition, around 70% of our revenue are driven by replacement sales, which provide additional stability.

The areas of our portfolio that have more economic sensitivity are the commercial portion of our HVAC business and our locators business, which historically have shown a relationship with global GDP and construction trends. Our guidance anticipates some moderation in growth in these markets compared with last year. However, we continue to see a steady pace of orders in our less economically sensitive businesses, and our new suite of new products and other operational initiatives leave us well positioned to achieve our full-year targets. One variable, we continue to monitor is the coronavirus.

Obviously, we have only modest direct exposure to China, but we have been assessing the risks to our overall supply chain and developing contingency plans for any potential disruption to our businesses. During 2019, we made several positive changes and investments to strengthen our company and are on track to continue delivering value to our shareholders. The integration of our acquisitions is going well. Our investments in our businesses are yielding positive results, and we feel good about our ability to continue growing earnings and generating strong cash flows.

Our balance sheet and liquidity position are very strong. With the recent refinancing of our credit facility, we have even more flexibility to make attractive investments. Our pipeline of highly strategic acquisition candidates remains robust. And we see multiple opportunities to expand our addressable market and growth profile in our HVAC and detection & measurement segments.

Overall, I'm very pleased with our strong performance and the state of our business as we begin another year of growth and value creation. And now, I'll turn the call back over to Paul.

Paul Clegg -- Vice President of Investor Relations

Thanks, Gene. Justin, we are ready to go to Q&A.

Gene Lowe -- President and Chief Executive Officer

Thank you sir.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Damian Karas from UBS.

Damian Karas -- UBS -- Analyst

Hey good afternoon everyone and congratulations on finishing a very strong year in 2019. So I wanted to start off asking you about the detection & measurement margin guidance for 2020. Scott, I know you mentioned project timing when you sort of talked about the range for the segment. But if I look at the guidance, it kind of suggests flat to maybe slightly up margins on 5% underlying growth.

I think you'd probably get better incrementals than that. So could you maybe just walk through the price cost, mix, any other aspects to the equation leading to your margins there?

Scott Sproule -- Chief Financial Officer

Yes, sure. It's not a price cost matter here. It really does relate to the project nature of the segment really within the communication technologies and transportation businesses. So it's really more the timing of those projects and the nature of the projects.

So all projects are the same. We had some very strong margins two years ago in some of those businesses, decent margins last year there. And when we sit there and estimate what level of projects will come into the year, we're really putting in the high confidence level of projects and making some assumptions around margins at an average level. So they may execute when we finalize better than that because most of these are not in the backlog.

So we try to take a prudent position there when we're putting that forecast together.

Damian Karas -- UBS -- Analyst

OK, that makes sense. And I guess, a question on engineered solutions, in particular, transformers, you highlighted in the slides, a moderate firming signals. Could you maybe give us some additional color around that? What kind of lead times are you seeing in the business right now? Perhaps, is there any change in the market given some of the heightened focus that there's been on trade recently? And any other color you have just on sort of the 100 basis points of improvement that you have in the outlook for this year?

Gene Lowe -- President and Chief Executive Officer

Yes, Damian, this is Gene. We are very pleased with the progress of transformers. They have been executing very well. The facilities are executing in a nice level.

A lot of nice CI initiatives is there. In terms of the market, we have seen a very steady demand. As we all know, that's a very, very steady demand profile and the team just keeps winning orders. Now we have been pushing for price, and we have seen some pockets of price opportunities.

So in general, we feel good about the market dynamics there. And we're going to keep pushing for price. So overall, we are very pleased with where the transformers is and their execution and feel good about their trajectory into 2020.

Damian Karas -- UBS -- Analyst

OK. Great. Thanks.

Gene Lowe -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Joe Mondillo from Sidoti & Company. Your line is now open.

Joe Mondillo -- Sidoti and Company -- Analyst

Hi. Good morning guys. So just to sort of follow up on that prior question regarding the sort of margins at D&M. I'm just wondering if you could sort of walk through, because there's a lot of different pieces to that segment of where the puts and takes are, the ups and downs related to the mix issue.

Just where are you expecting maybe some of the lower margin to be higher than -- volumes to be higher there versus other parts of that business? Just trying to understand what your visibility is at this point? And how to make up of that margins side?

Scott Sproule -- Chief Financial Officer

Yes, Joe, this is Scott. So we don't provide that level of detail by the different platforms within detection & measurement. But really where you are seeing it is in the project portion. And as I said, those projects all have good margins.

It's just the level of margins associated with those projects is what can swing margins in the segment around a bit, both from a what the organic revenue looks like, as well as just the absolute margin level looks like. But when we stand back, when we look at it and say, we're going to have 23%, 24% margin, we feel like that's always good performance in that business. And it is not always going to work like a normal where you just get volume leverage, and it's all the same volume. Some of that project volume is a little bit different.

There's a wider variability of what the margins in those projects are going to execute at?

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then at the HVAC segment, revenue on the organic side was stronger than I expected. The gross margin was quite strong. I know you guys had a tough comp.

So it was impressive to see that you were able to put up the numbers that you did. Just curious what sort of drove that? And then number two, looking at 2020. It looks like sort of excluding the acquisitions, you're looking at sort of low single-digit organic growth, correct me if I'm wrong there. And if that's correct, what's slowing? What's your take on sort of the market dynamic related to that slower growth relative to what you saw in 2019? And talk about sort of the backlog that you have and the visibility that you have there?

Scott Sproule -- Chief Financial Officer

Sure. Let me take the '19 and I'll let Gene jump in on the market. So on '19, really, we had great execution in our cooling business. They've been doing a lot of work around operational improvements in the facility to improve their throughput.

And they really had a really strong fourth quarter frankly and ended up exceeding the top end of our guidance range from a revenue perspective, and that was the big driver. The other thing is, even though, overall, the heating season was warmer than anticipated, we did see an early demand for heating products. So that kind of offset mitigated that. So we didn't have as big of a headwind there in the quarter.

So just overall, really strong performance by our HVAC business. Now going into 2020. That does leave us with a tougher comp, particularly on the heating side and with some of the market dynamics.

Gene Lowe -- President and Chief Executive Officer

Yes. And Joe, if you look at the HVAC segment, on the cooling side, we've said moderating growth a little bit flattening. You do see some differences across some of the different geographies. We like our initiatives and some of the NPIs that we have and we feel good about our actions there.

Now there have been some positive signals. If you look at the end of the year, if you look at the Dodge, ABI, there's been a couple of months of some signals that could be positive for us. Now it typically takes six to seven months of those indicators to affect our demand profile. So what I would say is, if you look at those indicators, and we're seeing some nice traction there, that could be a positive for us in the back half of the year.

If you look at the heating side, I'd say things are steady. If you look at '18, we did have two cold shoulders in Q1 and Q4. We are off to a little bit warmer start of 2020, if you look at the heating degree days. But overall, I feel really, really solid about that business and the initiative, the expansion of the product line.

So if you put the two together, we feel good about the opportunities. We don't see dramatic growth there. But as you had pointed out, we probably see modest growth there.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And lastly, I was wondering if you can update us on sort of the continuous improvement initiatives? I know this is an effort that you're sort of probably still in the early stages, but could you update us on how you're doing with that? What you're doing? And it doesn't really seem like at a higher level, it doesn't seem like a whole lot is baked into the guidance overall. Maybe you can comment on that as well.

Gene Lowe -- President and Chief Executive Officer

Yes, sure. So the first thing I'd say is, there's actually a lot of activity going on and continuous improvement across our businesses. If you look at a lot of the impact on margins over the past year, we've seen some really nice successes that I could point to very specifically into our transformers business, our cooling businesses, even some portions of our heating businesses, have been driving some nice CI impacts. What we don't do or what we're really focused on instead of having good pockets of excellence is really driving this enterprise wide and that's a key focus area for this year.

That will be under Randy Data's area. And we have brought on our CI leader this month. We feel good about that. And we do have KPIs across our enterprise, with regard to our targets.

But when I look at this, I do see a nice opportunity here. This is not something that happens overnight. You don't change culture overnight. This is a journey, but I actually think it's a very attractive opportunity for us.

And we're really moving in a positive direction there. So there is a lot going on. At the end of the day, you have to resource it and you have to focus on it. And I think this is a year where you're going to see us really ramp up our focus there.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then just a follow up. Regarding the guidance, would you say there's upside? It sounds like there's maybe a lot of opportunity that's going to evolve over time? Would you say that there's potential upside of the guidance just based on continuous improvement alone, depending on how things progress through the year. Is that fair to say?

Scott Sproule -- Chief Financial Officer

Yes, this is Scott. I'll jump in. I think that as far as seeing the fruition of specific projects, we're not expecting any significant impact from the new things. Obviously, as Gene alluded to, there's underlying things going on at a plant by or location by location.

But from an enterprisewide approach, we're not anticipating that we're anticipating kind of this is a year of kind of setting things up, getting things established and foundations and prioritizing with the areas that we're going to be focused on and would expect maybe some latter part of the year benefits, but nothing of a material nature and then starting to see that impact from a 2021 forward.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. Great. I appreciate it. Thanks.

Scott Sproule -- Chief Financial Officer

Thank you.

Operator

And our next question comes from Robert Barry with Buckingham. Your line is now open.

Robert Barry -- Buckingham Research -- Analyst

Good evening and congrats to the solid finish comments. I wanted to clarify what you said about the segment income phasing, you referenced it, but also it sounded like you were signaling that maybe 1Q would be a little weaker. Maybe some of it was the heating degree days, maybe some of it was the virus, etc. I just wanted to clarify what the message was?

Scott Sproule -- Chief Financial Officer

Yes, it's Scott. So what we said overall is that it will have a similar gating cadence as 2019. We were identifying that, hey, there are some things that are challenging here in Q1, but we still do expect some modest year-over-year EPS growth.

Robert Barry -- Buckingham Research -- Analyst

OK. I guess, in 2019, it was a little less than the 20%. So maybe you're referencing that it would be again?

Scott Sproule -- Chief Financial Officer

I'm sorry, I didn't catch that.

Robert Barry -- Buckingham Research -- Analyst

I guess, in 2019, 1Q was a little less than the 20%. That's kind of on Slide 23.

Scott Sproule -- Chief Financial Officer

Yes, our lowest quarter of the year in 2019 was 1Q. Third quarter is also typically one of the lower quarters given the maintenance outages at our transformer plants.

Robert Barry -- Buckingham Research -- Analyst

Got it. And I guess, I just wanted to follow-up on engineered or talk about engineered and the margin guidance there. It feels like a little softer than maybe what you'd been talking about recently getting up into the 9% to 10% range. So just curious what's changed there, if anything?

Scott Sproule -- Chief Financial Officer

Yes, I wouldn't say anything has really fundamentally changed. I think we feel good about the initiatives that are in place. We feel really good about the progress that's been made in 2019 and continuing forward. And for transformers, the improvement in the mix profile of our process cooling business is going well.

It is taking probably a little bit longer to get some of the levels of conversion that we anticipate. So we feel good about saying 50-plus basis points of improvement going into 2020. And we're continuing to hold to that near longer-term target of 9% to 10% margins for the segment.

Robert Barry -- Buckingham Research -- Analyst

Got it. I guess, just lastly, to clarify on China and what's going on there. I don't think there's much, right? You said revenue in China, but maybe some supply chain with parts of the business, does that impact? And if there's some contingency built in currently for that? Or how big a deal could that be?

Scott Sproule -- Chief Financial Officer

Yes. So as we said, we kind of recognized that impact to some level here in Q1, but as everybody is having to deal with, this is a very fluid situation. But to size it for you, it's structurally, being still very heavily weighted toward North America. China in total as an end market is somewhere around 3% of our total revenues, a little bit less than that as far as an earnings perspective.

And then when you think about it from a supply chain perspective, it's low single digits as a percent of our COGS. And when we think about from a supply chain that's right now, from a Q1 perspective, we're in good shape. No shortages that anybody is talking about. So really, the exposure is about when does China become back fully up from an in-country perspective, fully operational and being in the supply chain in-country, fully operational which is the same issue everybody is dealing with.

But structurally, it's just not as material for us as it is for many others.

Robert Barry -- Buckingham Research -- Analyst

Right. All right. Thanks very much.

Scott Sproule -- Chief Financial Officer

Thanks. Thanks Rob.

Thank you.

Operator

And our next question comes from Walter Liptak from Seaport. Your line is now open.

Walter Liptak -- Seaport Global Holdings LLC -- Analyst

Hi. Thanks. How is it going? Most of my questions were taken. So I will just ask an easy one about the guidance.

You took the guidance up and kind of very early, I think, you had guidance out from late last year. What do you see in the business that maybe you want to take it up this early, especially with some of the coronavirus and China slowing and things like that going on?

Scott Sproule -- Chief Financial Officer

You're talking about the growth in this year's 2020 guidance? Just to clarify.

Walter Liptak -- Seaport Global Holdings LLC -- Analyst

Yes, yes, exactly. Right. Yes. Right, for 2020 guidance?

Scott Sproule -- Chief Financial Officer

Well, I think, as one of the things we've talked about is that when you look around many of our businesses and the geographic profile of the company, there's many of our markets that don't follow some of the broader GDP. So other than what Gene talked about, Brexit has some effect to us, although relatively minor given our presence there and some of the non-res construction markets in the U.S. Those are the most sensitive areas. Otherwise, we see really good demand across the rest of our businesses, healthy backlog, healthy order books and strong execution across the businesses.

So we feel good about the level of guidance, given the initiatives we have and the overall market backdrops.

Walter Liptak -- Seaport Global Holdings LLC -- Analyst

OK. And on that Slide No. 22, you've got some of the things that could go well and to the high end or to the low case. Obviously, political events always look bad.

But are you seeing any -- the weaker seasonal heating, is that enough to get you to the low end for this year? Or commercial construction, are you seeing any deceleration in that right now?

Gene Lowe -- President and Chief Executive Officer

Yes. Well, we have started a little bit slower. If you look at the data on heating degree days year to date. So it has been a little bit warmer than it was last year.

And then also, there is a little bit of deceleration of growth in the commercial construction market. But we believe we've taken these into account as we've put together our operating plan for 2020?

Scott Sproule -- Chief Financial Officer

Similar to what we experienced in 2019 when you look at kind of one of the biggest variables is going to go back to detection & measurement and the timing and scope of the project nature of that side of that business that's able to execute in the year.

Walter Liptak -- Seaport Global Holdings LLC -- Analyst

OK. Got it. Great. Thanks guys.

Thanks a lot.

Scott Sproule -- Chief Financial Officer

Thanks. Thank you.

Operator

And we have a follow-up question from Damian Karas with UBS. Your line is now open.

Damian Karas -- UBS -- Analyst

Guys give me a minute. So I have a longer-term question for you on HVAC. One of the things that a lot of the OEMs have been talking about recently, are some of the regulatory changes related to refrigerants and obviously, efficiency standards over the next several years. Just wondering, in your guys' world, does that really change anything related to your product line? Or are you kind of more or less agnostic to what happens there with refrigerants and things of the like?

Gene Lowe -- President and Chief Executive Officer

Damian, this is Gene. So what I would say and pretty much in general, and I'll get a little bit more specific on the HVAC. If you look across our portfolio, we're typically the technology leader in the niche markets that we serve. So what I mean is typically, when the regulations get harder and more complex, requiring more engineering or more solutions, that, in general, typically benefits us because we're the best positioned competitor to be able to meet that spec or find a solution that can meet that new regulation or new specification.

And that's definitely the case in our HVAC business. If you look on both the cooling and the heating areas, the specific refrigerant you're talking to is not as relevant to us, but there are a variety of other regulations that are very relevant to us. And we are on the board of ASHRAE and we are on any number of working committees that have a very important hand in defining the regulations that affect our end market. So we take it very seriously.

We play, I would say, a very important role in that. But in general, it works to our benefit. If you look at on the heating side, the DOE will typically put out higher efficiency ratings in both the residential and the commercial side. And we, being a leader in that market have the resources to really ensure that we meet and maintain the specifications very similarly in the cooling side.

Cooling, as a reminder, is the most efficient way, the most efficient form of air conditioning, much, much more than using air cooled. So by its nature, is a very green, very efficient product. But even with that, there's always different regulations and rules, and we think we're in a nice position to be able to handle those. So to cut to the specific question, the refrigerant one, we don't think affects us too much.

Regulatory impact is something that we have in almost all of our businesses, and we really focus on taking a very proactive strategic approach there. And in general, like I said, when the bar gets raised, that typically is a nice opportunity for us.

Damian Karas -- UBS -- Analyst

That's really helpful. And one last quick one, Scott, on the tax front. Sorry, if I missed this, but it seems like tax came in quite a bit below expectations anything to that?

Scott Sproule -- Chief Financial Officer

Yes, we're at the, obviously, the lower end of what we were expecting. We just had some -- there were some discrete benefits there and more so in 2019. So when we're looking at 2020, we're going to be up just a little bit, but that probably has more to do with the increase in revenues in the U.S., which is the highest tax jurisdiction.

Damian Karas -- UBS -- Analyst

OK. Great. Thanks guys. Good luck.

Scott Sproule -- Chief Financial Officer

Thank you.

Operator

And we have a follow-up question with Joe Mondillo from Sidoti & Company. Your line is now open.

Joe Mondillo -- Sidoti and Company -- Analyst

Hi guys, thanks for taking a follow up question. Just regarding cash flow, you guys are projecting good conversion from earnings. Could you just comment on your M&A pipeline, how strong is it? Do you anticipate to pay down any debt? Or is the pipeline of acquisitions, good enough that you'll probably be using a good amount of your cash flow on acquisitions, hopefully?

Gene Lowe -- President and Chief Executive Officer

Yes, Joe, this is Gene. On the M&A side, what I would say is we have a very attractive front log, and we do believe in our business model and of building out our platforms. And as a reminder, everything starts with a strategy. And all of our moves are very strategic in how we're building out our platforms.

I really like the businesses that we've added to SPX. These are good businesses that have really strengthened our competitive position as well as enhanced our margin and our growth profile. And if you look in front of us, we actually think we're in the very early innings here. We think we have a really good business model, and there's a lot of runway in front of us.

So on capital allocation?

Scott Sproule -- Chief Financial Officer

And Joe, this is Scott. So from a capacity perspective, with our -- ending our year with our leverage at 1.6 times, we're already at the low end of our range where we would not be looking to utilize cash for debt paydown, we'd much rather put that to work, and we get our leverage up a little bit and put it to smart strategic acquisitions, which, as Gene said, we feel like we have some good opportunities there.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then just a little more specifically on cash. Your capex is ramping up this year. Could you comment on what you're investing in? And then on inventory, it's up quite a bit year over year.

And I know that's partially due to some of the acquisitions that you've acquired. But how do you think about sort of the inventory levels? And is there any opportunity at all? Or do you think they're sort of in pretty good levels at this point here?

Scott Sproule -- Chief Financial Officer

Sure. So I'll first address on the capex side. So it is up a little bit. Some of it is from just more companies in the business with the acquisitions.

So we have a little bit higher capex just from that perspective versus historical. And the other is we are making some investments as associated with some of our improvement in operational improvement initiatives at the facilities. So it's tied to our returns. But if you look at it overall, we're still structurally not a very heavy capex company, and our amount of capex is below our overall depreciation for the company, and that's just structurally how we're set to be.

From an inventory perspective, yes, there were some build in inventory. Some of it is associated with, as you'd be a buildup in our heating business, anticipating for the demand here. So no real concerns around the company around inventory, it will come down naturally, and we'll be able to manage it with the demand profile.

Joe Mondillo -- Sidoti and Company -- Analyst

Thanks a lot.

Scott Sproule -- Chief Financial Officer

Thanks Joe.

Operator

Thank you. And I'm showing no further questions. I would now like to turn the call back over to Paul Clegg, VP of investor relations for further remarks.

Paul Clegg -- Vice President of Investor Relations

Thank you, Justin, and thank you all for joining the call, and we look forward to updating you again next quarter.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Paul Clegg -- Vice President of Investor Relations

Gene Lowe -- President and Chief Executive Officer

Scott Sproule -- Chief Financial Officer

Damian Karas -- UBS -- Analyst

Joe Mondillo -- Sidoti and Company -- Analyst

Robert Barry -- Buckingham Research -- Analyst

Walter Liptak -- Seaport Global Holdings LLC -- Analyst

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