Spx Corp (SPXC) Q3 2021 Earnings Call Transcript

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Spx Corp (SPXC -0.40%)
Q3 2021 Earnings Call
Nov 3, 2021, 4:45 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Paul Clegg -- Vice President of Investor Relations & Communications

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 closed. You can find the release and our earnings slide presentation, as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website 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 and in 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 [Phonetic] 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.

Gene Lowe -- President & Chief Executive Officer

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, but 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 $90 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. The 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 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 the 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 [Phonetic] 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 ECS into our contact 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.

Jamie Harris -- Chief Financial Officer

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 decline 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 backlog [Phonetic] for HVAC was $204 million. The most significant increases year-over-year order and backlog were from our Heating platform, particularly for boilers. Based on our bookings in 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 and 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 and 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 customers 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. And then [Phonetic] backlog with 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 Com tech, AtoN and transportation businesses. Many of these orders are for highly specialized products for government of 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. 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 positioning and 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 12.5% and reflects growth of 21% over our 2020 adjusted results. The primary drivers of the [indecipherable] 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.

Gene Lowe -- President & Chief Executive Officer

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.

Paul Clegg -- Vice President of Investor Relations & Communications

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Bryan Blair from Oppenheimer. Your line is now open.

Bryan Blair -- Oppenheimer -- Analyst

Thanks. Good afternoon, guys.

Gene Lowe -- President & Chief Executive Officer

Good afternoon.

Bryan Blair -- Oppenheimer -- Analyst

I was hoping you could frame run rate supply chain impact for us a little bit more, you called out the headwinds and 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?

Jamie Harris -- Chief Financial Officer

Hey, Brian, it's Jamie. For Q3, we called out sort of a $0.10 per share impact. We think about a third of that roughly came on a call 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 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. We 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, continuous 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 toward 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. 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 inhibited plan and to get things out and shift is predominantly where we're seeing the impact. But across the segment, I think it will be a similar distribution.

Bryan Blair -- Oppenheimer -- Analyst

Okay. I appreciate all that detail. And I guess shifting to 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, etcetera, where you're most confident in seeing strong growth next year and perhaps where you think there are still some watch [Phonetic] items out there.

Gene Lowe -- President & Chief Executive Officer

Brian, this Gene. 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 and 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 [indecipherable] 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. So, 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 [Phonetic] 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 com tech 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.

Bryan Blair -- Oppenheimer -- Analyst

Again, that's very helpful. And 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 and bringing more deals across the finish line in 2022?

Gene Lowe -- President & Chief Executive Officer

Yes, 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 -- 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 a billion dollars 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. That 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.

Bryan Blair -- Oppenheimer -- Analyst

Understood. Thanks again, guys.

Jamie Harris -- Chief Financial Officer

Thanks, Bryan.

Gene Lowe -- President & Chief Executive Officer

Thanks, Bryan.

Operator

And thank you. And our next question comes from Damian Karas from UBS. Your line is now open.

Damian Karas -- UBS -- Analyst

Hey. Good evening, guys.

Jamie Harris -- Chief Financial Officer

Hey, Damian.

Damian Karas -- UBS -- Analyst

So, 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?

Gene Lowe -- President & Chief Executive Officer

Sure. 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 is pretty amazing. But the fundamental issue, I would say, is really component supply and what I would say is as we are 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 interesting upside, up until I would say the toward 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 our businesses. In 2018 reform to 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 spend 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, give me another comments if you think about Damian's question.

Jamie Harris -- Chief Financial Officer

Yes, definitely agree. It was a more of a supply chain challenges to get product out, therefore, to get sales and 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 get numbers safety stock wherever possible where we are acutely focused on pulling out all stocks, if you will, to address that, but again for receiving this last quarter and we're going to build process in the last part of the third quarter, moving in the fourth quarter. And so when we see a disruption of the component parts 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 a, an ability to get it out the door issue.

Damian Karas -- UBS -- Analyst

Got it, got it. And on boilers. I mean is there any particular component or components you can point to, or is that kind of a hodgepodge.

Gene Lowe -- President & Chief Executive Officer

Yes, OK for us. One of our strengths in supply chain quite honestly in most times. And we have plus or minus small and medium-sized businesses that we have, we don't cover alliance on one big material that could really cripple us if you will. We have good diversity that said, when we have, when at a macroeconomic level we have broad scale supply chain challenges. We have a lot of different component parts it fall prey to disruption somewhere 1, 2, 3 steps upstream in the supply chain process. If you look at specifically component parts that relate to see the couple of examples.

Jamie Harris -- Chief Financial Officer

Your wire harness installation.

Gene Lowe -- President & Chief Executive Officer

Yes. I mean some of the steel see ironically, our core heat exchanger blowers where we're actually in very good shape. And it was more of the extraneous or the other bill of material items predominantly that that affected Q3. It ended up being from aluminum-based components that ended up being some of the challenges we had. And here in aluminum issues and other industries. So, those happen to be some of the ones that we experienced. But net-net turn out. I think that's a big asset that we have with the company and 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.

Damian Karas -- UBS -- Analyst

Got it, got it. Okay, that makes sense. Thanks for all the detail there. And then I guess just thinking about some of those levers that you can pull that you alluded to Jamie. I mean 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 what you see kind of getting back to normal.

Gene Lowe -- President & Chief Executive Officer

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 of there some questions that I think everybody down regardless of the industry set, which are in. I think it is. I think the point Jamie made is very important. This will make us a better company regarding production assembly new supplier management, inventory management, scheduling in the plant on the plant floor and other things. Jamie, service in the number of our continuous improvement projects and the year around supply chain and so a lot of I think I'm confident in saying, a lot of the 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 it us late in the quarter, but I think it's is the things you're probably hearing from most of your, in 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 that 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 is much more, much less expensive to have safety stock in place and the help supply disruption in the plan, and so we are. And when we can get product in our supply and get ahead we are doing add included in inventory. So those are the things you would normally think about, but the continuous improvement, I can't overemphasize, because as you if you were to walk through some of our plants, you see some of the improvements have been made in the flow of the what that means is our supplier of components 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 mitigate or of some of the challenges this year.

Damian Karas -- UBS -- Analyst

Okay, got it. Thanks, guys. I'll pass it along.

Gene Lowe -- President & Chief Executive Officer

Yes, thank you.

Operator

Thank you. And our next question comes from Steve Ferazani from Sidoti. Your line is now open.

Steve Ferazani -- Sidoti. -- Analyst

Jamie, I guess I'm going to probably end up following up on a lot of the quest supply chain questions 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 later. And then 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 because it doesn't get a lot worse.

Jamie Harris -- Chief Financial Officer

Yes. So, great question. I think couple of things come demand there. We saw it hit us really late in the quarter. I mean if you were at the you had all the visibility of data that we see our outlook for the quarter in second week in September would where we thought it would be. It is really that last week to 10 days, as we look forward into the fourth quarter. I mean, we clearly taken some steps to mitigate where possible. First of all, we, I think we also guidance the moving guidance that we did put in place and is based on what we're seeing based on today's environment with some risk also provided in there about certain for certain components that have the most at this 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 2 suppliers there is our component still is still on track. That is 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 will be able to get out the door based on year sales demand component shipping plans, our inventory in place but is supply chain right now is very volatile to say to state the obvious.

Steve Ferazani -- Sidoti. -- Analyst

So I mean how long term, are you planning for these challenges. If we now think that this persist at least through the middle of next year. How long term and I know it's day-to-day, but what types of things are you doing to handle so longer term issues and I guess the supplies to labor as well whether we're looking at wage inflation, if your truck challenge on the labor front. So it's sort of a bigger picture long longer term supply chain and labor question.

Jamie Harris -- Chief Financial Officer

Yes, I think you were talking earlier, I think if you looked at our businesses across the spectrum. We don't manufacture a lot of goods. We typically will more components as items, but more of an assembly type flow process, in most cases, not all, and so I think probably the reason you've seen our impact from supply chain in the later than other companies is because ultimately think some of a lot of supply chain is ultimately a labor issue as it, if you go back 1,2,3 steps and supply chain process. Also, I think it becomes a labor issue whether it's labor from an import, a labor unload cargo ships, whatever the situation is, I think that's got a significant part of the supply chain kind of issue. So I think it hit us a little bit later. I think for the same reason we have the ability to manage through the labor challenges better, because our direct labor. I think we say that our labor while still challenging, we are seeing some modest improvement and certain of our plants where we've had some real challenges I think at the some of the stimulus dollars one way we saw some reaction to that and we're able to get people and would be recruit 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 stay on top of where we are on lead times and delivery dates and an alternative means to whether it be a reengineer of the product set or an alternative of component to be able to use and really broadening out our supplier base on a much broader scale, and we probably will never thought about 2 years ago. It is the steps we're taking.

Gene Lowe -- President & Chief Executive Officer

Yes. 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, etcetera 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 5 different sources for a particular component, you 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, if you other things that are going on is we have built safety stock and we look very closely at our bill 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 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 3 months and we've taken 6 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 and supply chain and, but I do believe we're managing this and I do feel good about how we've laid out the rest of the year.

Steve Ferazani -- Sidoti. -- Analyst

Great. And just last one is on with the longer lead times, are you seeing any slowdown in demand in response to those longer lead times. Is it affecting orders?

Gene Lowe -- President & Chief Executive Officer

Not that I have seen and, but what I would say, as a reminder, the bulk of our products are engineered items, so meaning it is specified for very particular customer or purpose, for example, every cooling tower we shipped is for that particular customer, the size, the tonnage the horsepower, the type of fan, etcetera, etcetera, etcetera, is uniquely. We don't build anything to inventory. So for our Engineered Product businesses where you really only started 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 toward the stock and so an example I would give there probably our biggest business is in the Hydraulics because in boilers. And that is where we do have a really nice variety of solutions. But it is a standard product and so you know what, 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 processor business is Jamie, can you think of a, it's actually demand is quite is continuing to come in very nicely.

Steve Ferazani -- Sidoti. -- Analyst

Great. Appreciate the answers, Gene, Jamie. Thanks for the time.

Gene Lowe -- President & Chief Executive Officer

Thank you.

Jamie Harris -- Chief Financial Officer

Thank you. Thanks, Steve.

Operator

Thank you. [Operator Instructions] And our next question comes from Walter Liptak from Seaport Research. Your line is now open.

Walter Liptak -- Seaport Research -- Analyst

Hi, thanks guys. Want to ask as one more on this boiler business are the strong orders coming through with from channel partners in, are they building inventory or is their sell-through anything to the end users.

Jamie Harris -- Chief Financial Officer

I would say it's predominantly channel partners. So there is some usage there. And so let's break it down for Heating let's say broadly speaking 300 million, about 100 million that's electric heat, about 200 million of that is hydronic 250 actually with PK final close in 250. 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. 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 really Q4 to Q1. And so they're very aggressively trying to be able to service that demand.

Walter Liptak -- Seaport Research -- Analyst

Okay, great. And so you should be able to ship these, some of them will go in, 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.

Jamie Harris -- Chief Financial Officer

Yes, I would think that would be our intention. And one of the things we always look at, at the end of the heat season. So at the end of Q1, we look at the balances. How much inventory to our distributors have, we have very good visibility and a lot of distributors. Some visibility at 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.

Walter Liptak -- Seaport Research -- Analyst

Okay, great. And then 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.

Jamie Harris -- Chief Financial Officer

So I would say if you look across the numbers are higher, but some of that is acquisition driven. You look at our real time business, which has some very attractive backlogs if we are talking about our project business is the ones that we typically talk about let's say [indecipherable], it's really contact 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.

Walter Liptak -- Seaport Research -- Analyst

Okay, great. Okay, thanks very much.

Jamie Harris -- Chief Financial Officer

Thanks, Michael.

Operator

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.

Paul Clegg -- Vice President of Investor Relations & Communications

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

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Paul Clegg -- Vice President of Investor Relations & Communications

Gene Lowe -- President & Chief Executive Officer

Jamie Harris -- Chief Financial Officer

Bryan Blair -- Oppenheimer -- Analyst

Damian Karas -- UBS -- Analyst

Steve Ferazani -- Sidoti. -- Analyst

Walter Liptak -- Seaport Research -- Analyst

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