Q2 2022 SPX Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Hello, Thank you for standing by and welcome to the second quarter 2022, SPX Corporation earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer.
To ask a question during the session you will need to press star one one on your telephone please be advised that today's conference maybe recorded.
I would now like to hand, the conference over to your Speaker today, Paul Clegg VP Investor Relations and Communications. Please go ahead.
Thank you and good afternoon, everyone. Thanks for joining us.
With me on the call today are gene Lowe, our President and Chief Executive Officer, Jamie Harris, Our Chief Financial Officer.
A press release containing our second 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.
The Investor Relations section of our website at SPX.
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 this webcast will be available on our website until August 11.
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 and comparisons will be with the results of continued operations only.
You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures.
Index to today's presentation.
Alright adjusted earnings per share also exclude non service pension items amortization expense certain favorable discrete tax items and other strategy related items.
Finally, we will be conducting virtual meetings with investors over the coming months, including the seaport annual Summer Investor Conference on August 24.
Adobe Smallcap virtual conference on September 22nd.
With that I'll turn the call over to Jim.
Thanks, Paul Good afternoon, everyone and thank you for joining us.
On the call today, we will provide you with a brief update on our consolidated and segment results for the second quarter.
I'll also provide an update to our full year guidance.
Now I'll touch on some of the highlights for the quarter.
We had a strong performance in Q2, including the benefit of project deliveries in our detection and measurement segment, where we are.
We're seeing robust bookings.
We continue to see strength broadly across our end markets and we remain focused on aggressively managing challenging supply chain conditions.
We also announced today that we plan to implement a new holding company structure to better align our legal entities with our business objectives and value creation strategy.
We will address this in more detail later in the call.
During the quarter, we repurchased approximately $34 million of our stock.
On our capital allocation strategy will remain primarily focused on organic growth and acquisitions we've done.
We'll continue to consider opportunistic share repurchases as a part of our strategy with the potential to reach 5% to 10% of our total capital allocation.
Finally, we are raising our adjusted EPS guidance for full year to reflect our strong Q2 results our outlook for the second half and the impact of stock repurchases.
Turning to our high level results for the quarter, both our HVAC and detection and measurement segments generated strong organic and acquisition revenue growth.
Total adjusted operating income grew 47%.
<unk> margin increased 220 basis points.
I am very pleased with our results for the quarter and our outlook for the remainder of the year.
With significant capital availability and attractive M&A pipeline.
And several ongoing organic and continuous improvement initiatives SPX remains well positioned to continue driving value for years to come.
As always I'd like to discuss our value creation framework.
During Q2, we continued to make progress in a number of key initiatives.
Our digital initiative continues to move forward.
And our cues business, which sells equipment to inspect and remediate water and wastewater pipelines.
We gained further traction with customers standardizing their field work on our granite net software platform, which.
Which helps to improve data collection customer efficiency and the value customers derive from using our hardware products.
Our new product development front, we have had considerable success integrating technologies from GCI and.
And our recently acquired ECS business.
This has helped us to launch a highly successful solutions and strong project bookings and then communications intelligence market.
We also progressed on our ESG initiatives in.
In Q2, we completed an updated materiality assessment to help tighten our focus on key areas of importance to our stakeholders as we work toward developing multiyear sustainability goals later this year.
Published a presentation on our website, highlighting our ESG strengths and activities across a number of different focus areas and across our portfolio.
And with that I will turn the call to Jamie.
Thanks, Jamie.
Prior to reviewing our results and guidance update I'd like to discuss the plan changed our legal structure.
As Jim mentioned, we plan to implement a reorganization of our corporate legal structure to better align with our long term strategic goals.
As a result of this transaction and the name of our company will change from SPX Corporation to SPX technologies, but there will be no change in our ticker.
And no interruption in the trading of our stock.
We anticipate several benefits from this change such as simplifying our legal structure, enabling more efficient management and growth of our business, including through M&A.
And by segregating, our legacy liabilities and the associated assets, allowing us to explore opportunities to more efficiently address those liabilities.
We currently do not have any plans to seek resolution of these liabilities through chapter proceedings, and we will continue to focus on the efficient management of claims that have claims address the manner generally consistent with historical practices.
We have filed an 8-K with the SEC contains additional data there.
No detail on reorganization and we plan to provide more information once the process is completed which we expect to be on or about August 15.
Turning to our results we are pleased with our performance for the quarter.
Adjusted EPS by 20 to 71 per share an increase of approximately 39%.
The adjustments that Paul described at the beginning of the call includes the effect of a noncash mark to market pension adjustment.
And costs associated with the execution of our corporate legal reorganization.
In addition to the segment income drivers, which I will review later some below the line items had a modest impact on a year on year earnings, including lower corporate and stock based compensation costs lower interest expense a higher tax rate.
Our Q2 results reflect continued solid demand in our run rate businesses and strong project revenue for several quarters, we haven't seen strength building in our detection <unk> measurement projects front log and we are now seeing that convert into strong bookings and revenue in the second half of 'twenty.
And into 'twenty three.
Our total backlog increased 56% year on year to $517 million, including organic growth of 39% with the remainder from acquisitions.
During the quarter, we continued to work hard to manage labor and supply challenges.
Robust project sales in the <unk>.
<unk> and measurement and strong HVAC heating sales contribute to contributed to organic growth of 10, 2%.
Growth from acquisitions was 10, 8% and relates to the purchases of Cincinnati fan ECS and RTL.
Segment income grew by $11 4 million.
To $56 $1 million of op margin increased 70 basis points. The increase in segment income was driven by higher project revenue in detection <unk> measurement.
<unk> costs with a modest margin tailwind for the quarter and we expect it to be a tailwind for the remainder of the year.
Reviewing our segment results.
H back in Vietnam are strong drivers of overall revenue growth. We also experienced a one 6% currency translation headwinds revenue due to the strengthening U S dollar.
Currency had a nominal impact on income in margin due to the strong natural hedges in our cost structure, Let's now review the details of our segment performance.
In our HVAC segment for the quarter revenue grew 18% year over year.
The acquisition of Cincinnati and drove a nine 8% increase while organic revenues increased eight 9%.
<unk> was the primary driver of strong organic growth with solid contributions from both price and volume.
Adjusted segment income increased by $1 $7 million of op margin decreased by 140 basis points, reflecting the impact of it.
Some constraints.
<unk> costs with a modest tailwind.
During the quarter, we saw some improvement in labor availability, and we continued leveraging our supply chain counsel to manage through challenging supply conditions.
As we head into the second half of the year demand levels remained strong for our HVAC segment as reflected in a 27% organic increase in orders for Q2.
Backlog increased 69% to $320 million, including organic growth of 51% with the remainder from acquisitions.
Based on existing price increases be current input cost trends, we expect price cost to become more of a tailwind during the second half of the year.
Okay.
In detection and measurement revenues grew 21, 7% year over year, the acquisitions of ECS and ICL drove a 12, 5% increase while organic revenues increased 12, 4% growth in all of our platforms.
Also experienced a three 2% currency translation headwind due to the strengthening U S dollar.
Segment income increased by nine 7%, while margin increased 420 basis points due to the higher revenue, particularly project deliveries, which carry higher incremental margin.
Overall, we continue to see solid demand in our run rate businesses strong project orders and deliveries, notably in contact where we have seen meaningful project synergies related to the ECS acquisition.
Q2 segment orders increased approximately 14% organically backlog increased 38% to $196 million, including organic growth of 25% with the remainder from acquisitions.
Turning now to our financial position at the end of the quarter.
Our balance sheet and liquidity remains strong and position us well to continue our organic and inorganic growth initiatives. During Q2, we purchased 707000 shares of stock at an average price of $47 70.
This amounts to one 5% of our outstanding shares.
We continue to have approximately $66 million of <unk>.
Availability under our current authorization for this fiscal year.
We would anticipate continuing opportunistic share repurchases, reaching up to 5% to 10% of our overall capital allocation.
Our primary focus will remain on acquisitions in regards to overall cash flow as previously noted we anticipate the bulk of our cash generation in this year to come in the second half.
Notable cash usage. This quarter included a tax payment of approximately $40 million related to a gain on the sale of transformer solutions, which closed Q4 of last year.
$34 million of share repurchases and $20 million of strategic inventory investment.
Related to the management of supply chain.
Moving on to our guidance, we have increased our full year 2022 guidance to reflect the strength of our Q2 results.
<unk> second half demand and the impact of recent share repurchases. We now anticipate higher full year revenue in both HVAC and detection <unk> measurement and we have increased our midpoint adjusted EPS guidance by <unk> <unk>.
To a range of $2 70 to $2 85.
<unk> hundred $72 78 midpoint represents year on year growth of 19%.
We are also increasing our guidance for adjusted operating margin to 11, 5% to 12% or the upper end of our prior range, which was 11% to 12%.
With respect to the cadence of earnings for the remainder of the year, we would expect Q3 to be operationally similar to Q2, but with modestly higher corporate costs and a higher tax rate.
And HVAC based on analysis of our current backlog price increases we have implemented in recent commodity price trends. We currently expect Q3 HVAC results to be similar to Q2.
Significant increase in Q4.
We now expect full year HVAC margin of approximately 14% or the lower end of our prior range of 14 to 14, 5% due to continued supply challenges.
Partially offset by higher pricing.
In detection and measurement based primarily on increased project orders, we anticipate second half results reflect continued strength with Q3 being similar to our strong Q2 results.
Followed by an even stronger Q4, we continue to expect full year margin in the 19% to 21% range.
As always you can find modeling considerations in the appendix to our presentation I will now turn the call back to Jim for a review of our end markets and his closing comments.
Thanks, Jamie.
Overall, we continue to see broad strength across our end markets.
In HVAC, our North American cooling demand continues to reflect the strength of macro indicators such as the Dodge momentum index, while heating orders remain at healthy levels.
<unk> measurement segment, while we see some pockets of flattening overall demand remained strong, particularly in our comtech and transportation platforms.
One of the biggest questions. We've been getting recently is about how our diverse set of businesses would respond in an economic downturn.
Overall, we feel good about our positioning for growth over the coming years based on strong secular trends such as infrastructure spending.
While we do have some shorter cycle exposure, we believe that we would experience more moderate impacts in many industrials in a recessionary environment as we did during the recession that occurred in 2008 and in the early stages of the Covid pandemic.
A significant portion of our revenue about two thirds.
Comes from replacement sales and many of our products are in regulated markets markets, where their uses mandate of the safety equipment.
These products are often sold to government utilities and other quasi COVID-19 with customers.
Tend to show more resilience in downturns.
Our residential market is primarily our hydraulics business and is largely replacement demand.
In prior downturns. These factors help balance out shorter cycle effects elsewhere in the portfolio.
In summary, I am pleased with our strong Q2 results and our positioning to continue our growth journey.
We continue to experience solid demand trends, while managing through supply chain constraints and believe we are well positioned for a strong second half 2022 and beyond.
We've raised our EPS guidance to reflect our Q2 performance and solid outlook and our recent share repurchases.
With a strong balance sheet and highly capable experienced team I am very excited about our opportunity to continue creating value for shareholders and achieving our SPX 2025 targets.
And now I'll turn the call back over to Paul.
Thanks, Tim Operator, we are ready to go to questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone. Please standby we compile the Q&A roster.
Our first question comes from Damian Karas with UBS you May proceed.
Hey, good evening guys.
Hey, good evening.
Nice to see some share.
Share repurchase been waiting a while.
For that so I guess so.
Discretionary activity $48 not too shabby.
Okay.
Yes.
Please that 4700 70.
So wanted to ask you about the <unk>.
Kind of the margin guidance here Jay in your commentary all sounds really positive on the demand front.
Good visibility.
It just feels like the the margin guidance might be a little bit light. So.
Would appreciate any color you might be able to provide on kind of the margin cadence and how youre thinking about that.
Through year end.
Yes. So good question there yes.
Go back to where we started we were very pleased with the quarter as we look at the back half of the year, we see a good bookings.
A trend in our in our portfolio, we see good front log specifically to the margins.
When we look at the rest of the year.
We still see some risk out there in our supply chain as Jim noted in his comments.
We do see it stabilizing.
Some areas is getting better.
Things that pop up we still see some labor challenges in our Olathe plant in particular in our Venice film facility.
We took what we felt like it was a very measured approach with our margins.
Are there opportunities for the margin to be on the high side of what we've laid out in our guidance as well as some risk areas. It really depends on where the supply chain falls I mean, we felt like to sell a lot of the Ci initiatives that we've taken place already.
That we were working on.
Year, two years ago, and some of the progress we've made we feel like we've dealt with the supply chain very well.
Much more stable than it was last Q3, when we first raised the point.
But it's still out there so we have some some risk there, but also some upside there.
We feel like we've called out a couple of times.
Backlog, then ask about backlog.
We feel like at one point, we had some possibly some cost risk there as we see some commodities pricing come down we see probably some opportunities there if costs go our way so there could be some opportunities in margins there.
And then the last piece is really the project delivers we had a really strong quarter across our dnm platform and.
And as projects.
Play out in a number of bookings on both our Comtech and our transportation platforms as those projects play out.
<unk> process to get those out the door and delivered we feel good about that but we've also been measured about how we saw that playing out the rest of the year and as you know that's an area that has carries a very high incremental margin and so as those ship the margin opportunities are enhanced.
With that.
Great that's really helpful.
And I wanted to ask you about some of these acquisitions.
At least relative to where we were modeling.
Seem to be contributing.
A bit more could you just talk about how all these newly acquired businesses are performing relative to your expectations and I guess also.
So.
Just more broadly how is the integration going and how are you finding things.
Sure I'll start on that we've done we've done 11 acquisitions and we actually have really good data and we track this very closely.
I think net net I would say very positive.
These.
I'd say the most recent acquisitions that we've done that would be Cincinnati fan CLI sensors, and software ECS and ULC robotics.
I'd say five of them are performing at a very high level, even ahead of our expectations for the really the only one that's a little bit off in terms of.
Where we thought there would be would be ULC robotics.
We've talked about with fuel.
Very good about the future of that business and the traction they are getting with not only with our assist bought product some of the other markets that they are participating in.
Solar robotics opportunities as well as some cross border opportunities, but I think the punch line is if you look across our 11.
Acquisitions that was done over the past three years I'd say, it's a very good success story is even worse.
ELC, which I would say is off model, but I would say ULC.
<unk> is progressing positively this year.
And additionally.
We have.
<unk> been awarded some some really nice business going into 2023 that we see some further growth going into next year and in terms of the integration I think overall, it's a very positive story.
It does vary by the acquisition that we did so for example sensors and software and Sean said these are really like new products as a part of radio detection and.
Those have really done well they have <unk>.
Taken a really good technology with scaled globally.
And we've gotten some really nice revenue gains throughout our channel there.
Some of the other ones as well PK.
Patterson Kelley, which is really high efficiency nonresident boilers has.
Given us a very attractive channel and we've had nice inroads in expanding our presence in the non <unk> space.
If you look at see light.
<unk> and Sabic.
Really think we have been the global we have built the global leader in the <unk> business. So.
The.
Net net I would say, we feel really good about the progress we've made on building out our platforms, but I'd also say that.
Runway in front of us is very very attractive.
We actually have very detailed plans for all six of our platforms, both for our organic strategic growth initiatives, but our inorganic and as you know with our SPX 2025 plan.
Yes.
A continued part of our investment in growth and Youre going to continue to see.
Further expansion there so net net we're very pleased with where we are.
And we think there's a lot of opportunity in front of us.
Thanks, John I appreciate it I'll hop back in the queue.
Thanks Steven.
Thank you one moment for questions.
Our next question comes from Bryan Blair with Oppenheimer You May proceed.
Thanks, guys solid quarter.
Thanks, Brian .
To help us think about growth momentum into the back half maybe provide a little more color on <unk>.
Order rates by platform and where are you seeing any shift through July relative to the Q2 trends and within reset sales guidance.
The 25 raise in HVAC $13 million in DM.
Is it painful waiting to a given platform and other segment.
Well I'll start on that Brian and just kind of at a high level and then Jamie are following you guys to kind of fill out a little more than.
Net net across the portfolio so really good.
It would be the amount.
The order rates are up.
March year over year backlog up 20%. So we have such a stronger backlog position that really I think sets us up very nicely to the back half of the year. If you look at it by platform crawling. We feel good you estimate are very healthy.
Orders are way up 50% year over year.
One of the challenges we've been having there is labor.
And challenges they are moderating we've done a nice job building out the team and if you look at the macro data. The Dodge appears very favorable for 'twenty two 'twenty three so cooling.
Feel good about heating demand remains healthy and managing the supply chain, there and we're actually getting some nice wins with our high efficiency expansion there. So.
Our largest segment is HVAC and we feel like we're well positioned going into the back half of the year for detection and measurement the way that I'd think about it is overall.
The run rate business businesses, which is about two thirds of the revenue there I would say is very healthy.
Seeing the U S being a little stronger than in Europe .
And overall, we're seeing some some very strong areas. We are seeing a few areas had a little flatter I'd say, our eighth an obstruction.
Is more flattish, but overall, we're seeing very very good gains there and I think we're very well set up and have a lot more backlog than we typically have in the run rate.
And then on the projects. This is where I think we have a really good success story, where we've talked about the front log activity for a while.
But this is not active it anymore and this is now orders and revenue.
And in particular Comtech or transportation.
I've had a number a very nice strategic plans that I believe set them up.
Set us up very well for 'twenty, two and 'twenty three.
And those are.
And those businesses. So so when you put it all together.
Our being careful we're being.
We are watching the end market's very closely particularly with.
Some of the macro.
Items going on so we're staying close to that but with everything that we've seen to date, we feel very good about 2022, and we think we're starting to set up nicely for us.
A nice lead into 2023.
Jamie or Paul do you guys have anything you'd like to add.
Yes, I'd say theres good overview, the only think I would add and it kind of ties. This question back to the last question about acquisitions.
We saw some really good order increase good bookings and now working into 'twenty, two and 'twenty three backlog with our contact business.
And I think it's really been a good testament to the synergies that we've been able to get by putting our legacy Tcf business together with our ECS business that we bought last year, and we took really two distinct product offerings and by putting them together.
And making them available to different customer channels.
But legacy TCR and ECS, we've been able to see a lot of activity with that combined product and so that there was we saw really nice pickup in bookings this quarter, we've got a nice backlog, but we're very pleased with how that acquisition is really integrated the sales teams together in the product.
Offering together that we think differentiate that product out there in the marketplace. That's a great point, Jamie in that kind of links back to Damon's question, Ryan M&A and Thats, where the DLT assessment product thesis was by putting these two products together you could have a much more valuable products and that has resulted in tens of millions of dollars of orders.
Now, we don't believe we would've gotten.
We know this joint product together, so yes, that's a great example, on synergy and integration on the M&A question as well.
That's helpful color.
<unk> kind of level setting one.
You've called out constraints in HVAC for since.
Since the election last year, how has that trended quarter by quarter, either in terms of a dollar figure or margin impact.
Particularly Q1 versus Q2 of this year and then what's contemplated in the back half given.
We're seeing some thing in terms of those constraints.
So maybe one thing that we can start with is that we did call out in the prepared remarks, the cadence for the quarters. If you are anticipating for the rest of this year and in HVAC.
It's being that the third quarter will be relatively similar operationally.
To the second quarter.
The same in detection and measurement and facts.
Of course, your seasonal upswing in the fourth quarter due to stronger heating sales.
And then on the detection and measurement side.
Project deliveries in the fourth quarter.
Yeah.
In terms of specifics on the impact of.
Constraints, we didn't really break it out but you can clearly see that there was a significant improvement from Q2 from Q1.
Yes, I think you can see the gap between Q1 of Q1 of HVAC margins has closed quite a bit and we expect that to close.
Further in Q3 and actually a turnaround in Q4.
Okay, That's fair and last one for me I'll reiterate that it was nice to see repurchase activity in the quarter, particularly where your stock was trading earlier.
But we also appreciate that.
Calling out up two 5% to 10% of capital allocation given.
Preference for strategic.
So I guess on that front, how has macro uncertainty affected your deal funnel of recent past.
That your strategic interest as their capacity is obviously, they're more curious how recession fears shifting great backdrop tax policy are affecting the other side of the table.
Yes, Brian it's a good question.
I would say is what we see in front of us very solid activity.
We have not seen.
Really any change in activity levels and the amount of.
Front log activity on an M&A or on pricing as well, it's been pretty steady if you look at the macro M&A data that has slowed down a little bit it's something we're keeping our eyes on I think.
To your point some of the macro uncertainty maybe affecting that.
But as a reminder, as you know a lot of our work is done we start with strategy I believe we have six very robust platform growth strategies, a lot of our activity is proprietary.
Talking to people.
Outside of our process.
And so.
I would just say overall, we feel good with where we are.
I feel really good about our platform of growth strategies and I'd say, we're on track for <unk> 2020 plan that.
Oh, great. Thanks again.
Yes.
Alright, Thanks, Brian Thank you Brian .
Thank you one moment for questions.
Our next question comes from Steve <unk> with Sidoti <unk> Company you May proceed.
Evening everyone.
Just wanted to see.
Just wanted to briefly ask about.
The timing of the reorganization.
Steve if that would have made sense for a while any impetus to doing it now does anything lead you to say right now we have to do it.
Thanks, Steve It's Jamie Greg Great question.
The timing I would say.
Youre right it has been.
Kind of on the agenda and needed for a while I mean, the first point we made.
In the prepared remarks simplify our structure was the big driver I mean, we SPX formed over many many years the legal entity structure was kind of an evolutionary process that had a lot of acquisitions and several dispositions through the years. It was just a good time to do that.
That being said, we think that this legal structure simplification as we said gives us a lot more opportunity to manage.
Our business internally various more much more efficiently it will help us make an M&A transaction, where we're a buyer.
Could you acquired entity into a better spot that we can manage it better.
It also segregates, our legacy liabilities, both on the liability side as the asset side and it actually helps us manage those better we do spend resources internally overseeing those and by having those assets and liabilities segregated into their to their distinctive legal entity.
Gives us a much cleaner organization that we think helps us think about it strategize about it and manage it much more tightly and much more effectively.
Does this have any impact on on corporate costs moving forward. After the obviously the actual transaction costs.
Yes, I would say in the near term on a day to day operations no.
Over the intermediate term and longer term, we certainly believe this new simplified structure can lead to process improvement and some reengineering our process. So we do think that I don't think it's necessarily a material item.
When we when we move into an acquisition mode. As an example, I do think it helps us be more efficient more effective at that time is probably more impactful on day to day today versus tomorrow.
B any immediate really change in our corporate cost structure at all.
Okay, Great that's helpful.
When I think about.
Infrastructure spending and I guess, we haven't necessarily seen ex funneled to states or end users. Yet are you seeing anything across your platforms to indicate some of that spending is coming are you seeing any impact yet.
Yes, I can I can talk about scenarios, Steve that we are seeing I would say that across all of our businesses. We this is an area of focus on as you know this has the potential to touch a lot of our businesses.
I can tell you that we're very aware and involved in some bidding activity.
I can think of projects and work we're doing this is probably more for 'twenty three.
And probably 24.
We're seeing activity with regards to our cues robotics platform with regards to our radio detection under them locate.
Business.
We're seeing some movement in some areas.
With regards to our lighting.
And then I would say.
We have seen very healthy activity in our transportation.
Now I don't know if thats directly tied to the bill, but we've seen a lot more I would say.
Movement and activity, which we believe is caused by the monies that are coming in from the infrastructure Bill. So net net I think I would say the only place that I think that its really materially hit us where we've seen some.
Award that I do believe R. R.
Impact there is on transportation, but I do think that should be a positive driver for 'twenty three and 'twenty four.
Great.
And I did want to follow up on the question about supply chain and component shortages, because it's sort of at the latter stages of earning season of certain we've certainly heard from industrial companies that are at least <unk>.
Lighting component shortages, the issues being more diverse and popping up now in areas. They would have never expected and creating more day to day challenges and problems. When we would've thought it would've been smooth or are you not seeing that.
Yes, I would say, we're still seeing that I think.
When we were together at our Q3 call. We raised this point is the first time, it really hit us in a material way.
We have taken a lot of actions since that time.
I'll call out some cash investment and supply chain inventory build so.
So let's call that just have increased and our safety stock.
<unk>, we think that has helped us minimize the variability from day to day week to week, having components in house to do or to do our jobs.
We have done a lot of work around.
Adding <unk>.
Resources, and adding sourcing channels, we did not have a lot of large exposure on single source items. Although we did have some but all the cases, whether we are single source or dual source, we expanded our supplier base.
That takes time with the with an engineered product, but that is something that we've worked on kind of multi sourcing.
We have a chart that kind of says what stable whats.
It's difficult to manage and we have things on our watch list I mean, the normal suspects that I'm sure you're hearing from everybody electronic components or top of the list I mean, everybody is experiencing that in with your car manufacturer of industrial assembler like we are.
Power modules and I'd say things that are coming in via the water through shipping freight across the ocean is a challenge just because there is still a big on.
In balance if you will of where ships are located around the world and the time delays. It can take place and so we think some of the safety stock build that we have done has helped alleviate that or at least reduce the variability of that from day to day.
Don't want to wants you to lead you to believe that we're not still having challenges because we are but.
But we do think that.
Been able to manage them.
I'm very well.
One addition, there we do have.
Part of our business systems supply chain Council that has been very I would say affected here pushing out best practices, such as we know every bill of material item.
It's stocking position for the forward month for three months that we've rolled out to every one of our business is a lot of tools and techniques.
Other thing I would say is because.
Our labor our frontline.
Labor has really improved across our business that has been a net positive. So I would agree with Jamie I'd say the market is probably flat to slightly better but I think we are managing this much smarter and thats why we are having.
Some success here, but there's still a choppy market out there no doubt.
Great. Thanks.
Thanks, Jamie.
Thank you.
Thank you.
And as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from Walter Liptak with Seaport Research you May proceed.
Hey, good evening guys good quarter.
Got it.
Got a couple of follow ons.
Hit these pretty quick.
The new structure, where the costs do they flow through second quarter or are there going to be costs in the future. How should we how are those getting a reported.
The call is to accomplish a restructure that's your question yes.
Yes, yes.
So the cost.
Primarily flowed through the second quarter.
We did that is included in the slide.
Slide that we showed the reconciliation between GAAP earnings and adjusted it flows through the line item called other.
So we adjusted that into or out of our GAAP numbers into our core results to give you the best reflection of our operating performance.
Okay.
The majority of those costs are in the second quarter.
Okay got it okay.
And then it's great to see the TCA ECS.
Combo working for new products.
How should we think about that orders is something that's.
One tiny or as part of a recap cycle.
Or is it something that could be scalable.
Around the world.
How sustainable is the future orders.
Yes, that's a great question than that.
First of all again, we're very pleased with the combo of these two companies.
They've done a really nice job of putting their sales teams together and putting the product offering together and getting them out in the marketplace.
Thank.
This is the project business is certainly has it has variability to it we actually think we've got some some good legs for a sustainable growth here.
If you look around the world I mean, obviously the first of all we think we have a good product offering we think we have a better product offering together than either of US did separately before so that's that's a win in the marketplace by itself, but if you look at the the sources of where our products have gone historically.
The World is a lot of geopolitical activity going on.
Yes.
Things are this is say countries are on heightened alert we've done a lot of business over the years with the defense Department and allies and as countries are a little bit on heightened alert about just making sure they understand what's going on in our products or something that is really attractive.
For a lot of those folks and so we think that heightened alert. If you will is probably something that is going to last for at least the foreseeable future and so we think the demand for our products in general and especially the combination of ECS and Tcs product together, we think has got really good legs.
Outlook basis.
The bookings and the front log that we're working on certainly gives us an indication of that.
Okay, that's great.
The orders the bookings that you took in.
Do those start shipping in the second quarter or is that going to come way later like in 2023.
It's a combination.
Combination.
This piece of our business because we're working with.
The.
The department of Defense in General and then often through the department of defense with other Allied countries.
There's a lot of steps to go through the process in fact, I think I remember our president of this groups and in some cases, there is up to 30 steps that go along in the process of getting that order.
Getting it through the system. So it takes time that being said, we do have some orders that have come in this year that we have already shipped but I'd say the majority of it has got some some time period to be able to assemble produce get all the suppliers and get it shipped and get it to the destination, which also involves getting folks on it.
Ground to do some training and.
So a lot of our what we've seen as backlog has been booked this year, we see that.
Taking place in second half of this year into 2023.
But we did see some of that flow through the P&L this quarter for sure.
Okay, great Okay.
Okay. Good and then maybe I'll just ask the last one.
Probably late in the call the M&A pipeline.
Jim I Wonder if you could just talk about how are you feeling about the pipeline and valuations in our valuations.
Coming down at all from some of the lofty levels.
There have been talked about in the past.
Yes. It was a good question I would say if I look at it by our platforms, we kind of break it down.
The Asia Pac side cooling and heating.
Start by saying.
There are a lot of lofty valuations, there, but we've been pretty prudent in how we.
How we've purchased arent as a reminder, our blended net price has been about 10% 10, four times EBITDA before synergies.
Somewhere in the eights after synergies and what I would say on pricing in general is not a lot of change positively or negatively so I'd say, that's probably pretty consistent with what we're seeing we do see some nice activity in cooling.
Both in terms of.
No.
Were engineered our quality Cincinnati fan gives us a really nice leg in the air movement, which were.
Already have some some strong confidence on we actually think theres. Some some further areas to build out there. We also think there is some further areas to broaden our cooling solutions. So.
Again aligned with our strategy on the heating we see some interesting opportunities and I would say as you know Walt.
<unk> done a lot of building and actually I think that's a really strong etan platform.
More opportunities there as well.
As well as in our location and inspection. So I think if you look at it across the six platforms. There is a good amount of activity and.
It's something we've got to keep our eyes on because if we do go into economic downturn that could pull some sellers out of the market, but with what we see right now I'd say there is a.
I wouldn't say, increasing but I wouldn't say decreasing I'd say, a pretty steady level of activity across our platforms.
Okay, Alright sounds great. Thank you.
Thanks, Thanks, a lot.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Paul Clegg for any further remarks.
Okay. Thank you very much for dialing in and we appreciate your interest we look forward to talking to you again next quarter.
Yes.
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Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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