Idex Corporation (IEX) — Q1 2016 Earnings Call Transcript

Thank you, Rob. Good morning, everyone. This is Mike Yates, Vice President and CAO for IDEX Corporation. Thank you for joining us for a discussion of the IDEX first quarter financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three-month period ending March 31, 2016. The press release along with the presentation slides to be used during today's webcast can be accessed on our company's website. Joining me today is Andy Silvernail, our Chairman and CEO, and Heath Mitts, our Chief Financial Officer. The format for our call today is as follows. We will begin with Andy providing an overview of the first quarter's financial results and then he will provide an update on our markets and what we are seeing in the world, and discuss our capital deployment. He will then walk you through the operating performance within each of our segments. Finally, we will wrap up with an outlook for the second quarter and full year 2016. Following our prepared remarks, we'll then open the call for your questions. If you need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number and entering conference ID or you may simply log on to our company's home page for the webcast replay. As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike, and good morning, everybody, and I appreciate you joining us here for the discussion of our first quarter results. As Mike said, I'm going to walk through some overview comments and also some conversation around capital deployment, and then we'll get into the financials and the segment results. So from a big picture, as we sit here after the end of the first quarter, it looks an awful lot like we talked about at the end of 2015. The overall economic picture is mixed. As I look at the landscape in the industrial markets, whether in the U.S. or Europe or Asia, they're relatively weak. That's being offset in many regards by strength in our Health & Science businesses; municipal is also strong, and we've had very good execution. I'm going to take you through more detail when I walk through the markets and the segments, but I think it's suffice to say that the challenges we talked about at the end of the year are still very much the same picture that we have after the first quarter. With that, I'm very pleased with how we started the year, given the markets, really because of the overall execution by our teams in the field. The first quarter – when I look at the first quarter, I think about the benefits that our shareholders get by IDEX having diversity in end markets and businesses and allowing us, in these questionable economic times, to still drive profitable growth. And we saw that with the strength in our Health & Science business that still saw growth, even though there are some challenges in the industrial parts of the markets. I'm very happy with our teams focusing on what they can control. Starting in the midpoint of last year, we put a lot more emphasis on over-driving productivity, making sure our cost structures are in place, while, at the same time, continuing to invest in the long-term growth that really differentiates IDEX over time. If you look at the first quarter, EPS was $0.89. That was up $0.05 or 6% from a year ago. Op margin came in at 20.4%, which was 10 basis points ahead of a year ago. Free cash flow is very strong at $62 million, up 45% versus a year ago. We also completed the acquisition of Akron Brass. It fits very well into our fire and rescue platform. It really fits all the dynamics of what we refer to as an IDEX-like business. It fits our operating model, it addresses mission-critical solutions with highly engineered products, and it really faces a niche market that we have excellent positioning in. So, we're thrilled to have Akron as part of the IDEX family. Additionally, as you look at the first quarter, our healthy balance sheet and strong cash flow has allowed us to continue to drive capital deployment decisions. We increased our dividend by 6%, and we bought back 628,000 shares for about $46 million, so a favorable price, sitting at just under $73 a share. While we look at this lack of underlying economic demand and the challenges that it continues to create, we know that the growth is going to be hard to come by. But we have a philosophy and a discipline of how we run these businesses, and that remains intact and very solid. We continue to expect to win this year and continue to drive value for shareholders throughout 2016. I want to take a minute here and just walk through what we're seeing in our core markets and geographies. In terms of markets, I'll start with energy and chemical. We've been touching on this for the last 18 months. The weakness that we've seen, specifically around the energy businesses and the weakness in these markets have hit our energy platform, BAND-IT and Sealing Solutions, meaningfully as we've talked about in the past. We're also seeing kind of the residual impacts of hit to Warren Rupp, Viking, and Richter, all important businesses for IDEX, and they do touch, in one way or another, the implications from the energy slowdown. Now, this is being mitigated to a large degree by where we sit in the energy food chain, so to speak. We don't really touch the wellhead. We're not involved deeply in E&P. Where we sit in midstream and downstream has had a significantly lighter impact overall, not nearly as deeply cyclical. So we've held up better than a lot of folks who are much further upstream. If you look at the industrial segment, where we sit, we've really seen a steadying sequentially. If you look at how we came in the third quarter, the fourth quarter, and now first quarter, we have seen some consistency sequentially. Now, we did have tough comps here in the first quarter on the industrial side. So, that's driving some of the negatives that you're seeing. But we have seen this level off to some degree which is, I think, a solid sign. Agricultural, everybody knows the story here. Overall commodity prices have been hit hard and they are expected to remain that way throughout the balance of the year. The hit to farmers' wallets has really slowed OEM demand, and we expect it to be that way for the balance of the year. It is somewhat offset by the strength in the aftermarket, but not enough at the magnitude that we're seeing OEM equipment sales come off. The opposite of that is Scientific Fluidics and really the life sciences markets in general, which have been strong across the end markets, whether you're looking at Bio, Analytical Instrumentation or IVD. Those were all strong in the first quarter, and they will be for the balance of this year. The same can be said in municipal. We've had consistent low-single-digit growth across North America and Europe. Municipalities are investing in areas that IDEX touches, and so that's been a solid story for us, and we expect it will be also for the balance of the year. If you turn now to regions and we look at North America, Europe, and Asia, in North America, the story is largely industrial. If you look at where the weakness is, it really comes from industrial distribution, the residual impacts of what's happened in the energy markets, and the fact that we really are sitting at historic low inventory levels within our distribution channels. In Europe, it's been quite stable. We feel very good about our positioning in Europe for today and in the balance of 2016. We have nice exposure across a number of businesses, specifically, in dispensing and water. They have really outpaced the market growth in Europe, and we expect them to do so here for the balance of the year. In Asia, it's really two different stories. One is China, which has been consistently weak; not a new story that we've been talking about. We've been talking about this now for well over a year, and we expect those headwinds to continue. On the other hand, if you look at India, India has been a great story for us. We're seeing – we're really taking advantage of the infrastructure improvements and the expansion both within the country and our accelerated investments, and that's playing out in many regards in our fire, rescue, dispensing, and also in our energy business. So India has been a good news story for us. With that, let me touch on capital deployment for a minute. As we've talked about in the past, we really have a four-pronged strategy around capital deployment, and we've been very focused on continuing to invest in our strategy of long-term organic growth, number one, disciplined M&A, consistent dividends, and opportunistic share repurchases. And what I want to do is just take a minute and talk about each of these areas. So on organic growth, we keep investing for the long term. We've got the capacity to make these investments that drive profitable growth for many years to come. We all see businesses that, when they face challenging times, start to cut the things that are easy. Oftentimes, the things that are easy to cut are the things that you really need for long-term investment. We're fortunate that we've got the cash flow, the balance sheet that we can continue to really invest in the long term, and this is going to pay off for IDEX and differentiate us over time. If we're looking at dividends, you saw on April 6 that our Board of Directors approved an increase of 6% in our dividend, and we're now paying $0.34 a share per quarter. In share repurchases, I mentioned a moment ago, we repurchased 628,000 shares in the quarter for $46 million at just under $73 a share. Going forward, we're going to continue to be opportunistic. We've talked about this a lot in the past. We have a very disciplined and thoughtful process of when and how aggressively we buy back stock, and we'll continue to have that discipline as we go forward. On the M&A front, as I've mentioned, we bought Akron Brass. We spent $224 million for Akron. They had, in 2015, about $120 million of revenue. It's really an excellent strategic fit. We are in the integration process now, and over the first 30 days, it's gone very well. So we're pleased with the asset that we have in Akron and the team there. We're thrilled to have them as part of the IDEX family. If you look into the future of M&A, the market dynamics remain pretty similar to what we talked about at the end of 2015. We're going to continue to be a player in the marketplace. We've got a good funnel, and we've got the cash flows and the balance sheet that will really allow us to continue to deploy capital for M&A. All right. With that, let me switch over here and let's start talking about the quarterly results. I'm on slide four. In the first quarter, we had revenues that were $503 million. That was flat in total, down 3% organically. We had orders of $526 million that were also flat and down 3% organically. But, very importantly, we built $23 million of backlog in the quarter, and that puts us in an excellent position as we think about going into the second quarter, giving us visibility into the second quarter. Also, as we think about the step-up from Q1 to Q2 and then how the rest of the year flows through, having that $23 million of backlog is a good place to start from. In terms of organic orders and sales, they continued to be pressured, as I've said, by energy and ag markets. We don't expect that to get meaningfully better as we look at the balance of the year. And also, there was one other part there that's a little bit of an interesting comparison and does put some noise into the numbers. That last piece of the trailer business that we had in 2015, in the first quarter of 2015, that shift that we comped against. So, when you look at the FSD segment and you see some of the puts and takes in that segment, and specifically, around organic orders, that really explains the overall situation there – excuse me – organic sales, that explains the situation. Organic orders were quite good in FSD. Overall, for the company, we had a 20.4% op margin. That was up 10 basis points year-over-year. There are a lot of moving parts in that, and I'll go into that on the next slide here in a second. Overall, I'm very happy with how we've executed and how we're driving profitability and ultimately cash flow in the business. To that end, as I said, cash flow was $62 million in the quarter, up 45% from last year. We had GAAP earnings of $0.89, up $0.05 or 6% for the year. With that, what I'd like to do is go to the next page, turn to slide five, and I want to just take a moment to bridge you from our reported $0.89 against the midpoint of our guidance as we were going into the quarter, which was $0.81. So if you'll flip to slide five, I'll just walk you through that bridge. The midpoint of our Q1 guidance, as you recall, was $0.81, and we delivered $0.89 for the quarter. On an operating basis, we added $0.03 over our $0.81 guidance driven by very solid execution. If you look at the purchase of Akron Brass, the net of that for the quarter was actually negative $0.01. We owned Akron for just two weeks in March. We got some operating benefits for owning them for the two weeks of March, but that was offset by $2.2 million or fair value inventory step-up. The net of that was a negative $0.01. Also, we had a $0.03 reversal for contingent consideration for an acquisition from 2015 that really turned in $0.03 of benefit. I'd ask you to note though that this is handled in the corporate books. So it's not reflected in the segment results. This will be important as we think about segment margins on an apples-to-apples basis because of how some of these pieces are flowing, and we'll make sure that we can bridge you guys, if you have any questions, to make sure that as you go forward your models are accurate. Finally, we chose to adopt early the accounting standard for share-based compensation. That gave us $0.03. I think you're all aware that every U.S. company is going to adopt that by the end of the first quarter of next year. We simply elected to adopt that early. All in all, when I look at it, it's a very strong start for us. Operationally, I think we had a solid first quarter. Certainly when we get to Q&A, if you've got questions on these puts and takes, we're happy to spend some time on it. All right. Let's turn to the segment discussions. I'm on slide six, and I'll start with Fluid & Metering. In the first quarter, FMT orders and sales decreased by 6% and 5%, respectively, and operating margins were down 130 basis points. That was driven by lower volume in the energy and ag businesses. We've talked a lot about what we've seen in industrial, energy, and ag, which have been more challenged. The real good news story here is around water. We had another solid quarter, similar to what we saw in the fourth quarter. Municipal markets are solid in North America and Europe with single-digit growth. The mild winter also helped us some. When you think about the work that has to be done – specifically, when you think about the UK and the U.S., when you get a mild winter, you get projects that get pulled forward that would originally be scheduled for the spring or summer. So we did see a little bit of business come forward. More importantly, though, we've had terrific new product development and productivity out of that group that's driven the incremental benefits. As I mentioned before on industrial, order rates in Viking and Warren Rupp still remain under pressure, although, sequentially, they have stabilized. That's really about the demand levels in industrial distribution. I would not call it destocking. I think it’s that we've seen in industrial distribution is demand has been weak; they have taken down their inventory levels, and I think they're managing that well. We have talked about the drivers of this and it really is around the impacts of oil and gas. I’ll give our teams a lot of credit here; they’ve done a very nice job of getting their businesses right-sized and continuing to be highly profitable. These are businesses with very strong incremental margins on the upside and downside, and they've done a nice job of getting in front of that. In our energy business, we did see a soft start to the mobile market. That's really driven by builds in Class 6 and Class 8 trucks, which has started to slow. It was offset a bit by aviation, which has been stronger and benefited from lower fuel prices and strong demand. These guys are going to work through this. Again, like I said on the industrial side, they have done a nice job of getting their cost structures in place and making sure they've got the appropriate business scope and size for the market. Finally, just on ag, I've talked about that enough already, but that's going to look like it has for the balance of this year, and we're going to make sure that we're in fighting shape to compete. If you go to slide seven, on Health & Science, that's a much more positive tone across the business. The life sciences and the scientific markets remain strong. The industrial businesses have stabilized quarter-over-quarter, which is good. We saw organic orders down about 4%, but, as you know, in this market, and very specifically, in this segment, you can get some more puts and takes quarter-to-quarter. Organic sales were up and op margin increased by 90 basis points. This was driven by overall volume leverage and nice productivity across the segment. As you get down into some details, Scientific Fluidics, orders, and sales have continued to be strong. The markets are in a good spot. We are well-positioned across Analytical Instrumentation, Bio, and IVD, and we expect this to be a very solid marketplace for us through the balance of this year. Sealing Solutions is a mixed bag. The parts of that business that touch scientific markets, mostly semiconductor, have done very well. The parts that touch oil and gas and heavy equipment have taken a pounding. So, net-net, it's been a challenging year for Sealing Solutions. Certainly, a good news piece of this is our Novotema business that we bought last year. It's integrated well, and they've been able to get on board and be part of IDEX and build a product portfolio and the operating practices that really help them be part of the IDEX core business. Optics & Photonics were stable in the quarter. Profitability improvement, once again, was very good. These productivity improvements over the past few years take hold as you get any uptick in volume at all. So, we're very pleased with the profitability levels and what they're demonstrating there. On the industrial side of HST, looks a lot more like FMT. They're still weak year-over-year, but we're seeing stability sequentially, and again, I think that's at least a solid story for us. Material process technology is the lumpiest of all of our businesses. Capital projects, really, on a global basis, have been challenged. Our team's done a nice job of focusing on places where we really have differentiated technology and capability, and we've had some nice wins in Asia around food and overall in the pharma markets. We expect that we're going to see some weakness in North America. Overall, however, we think Asia should balance that out. We think MPT has the shot of having a pretty solid year throughout 2016. I'm on our final segment. I'm on Diversified on slide eight. As I mentioned before, there are some puts and takes, specifically, on the sale side because of comping up the last piece of that trailer order, but the net of it is organic orders were up 4% in the quarter, while organic sales were down 6%. Operating margins decreased to 120 basis points. But overall, if you look at what happened with the step-up charge from Akron, if you exclude that, FSD operating margins actually increased 80 basis points. On the core operations, really nice performance. So, Akron, as it gets brought into the fold, it's a little bit muddled in terms of how things flow through the P&L and balance sheet, and we'll make sure that we're clear with you again on an apples-to-apples basis. In terms of dispensing, really nice job; they continue to deliver for the company. They're winning across North America, Asia, and Europe. X-Smart continues to be a very good story for us, and it's really turned into a high-profit business that has terrific positioning for the global markets. We think 2016 is going to continue to be strong for dispensing. Fire Suppression, we talked about the impact of trailers. But if you neutralize for that, the core markets are stable in the U.S. and in the UK and had a nice solid first quarter. Again, having Akron as part of that team is going to be terrific. That positions us very well across the spectrum of those markets. Rescue; rescue has been soft, as we've talked about. It's continued to be that way. But we are expecting an uptick later in 2016. Several large projects in Europe and Australia have either been announced or are in preparation, and we think we're well-positioned against those chunks of business. These are some of the first larger chunks of business outside of the U.S. that we've seen here in some time, and we feel good about going after that business. Finally, on rescue, eDRAULIC 2.0 and our StrongArm, two products that we've talked about in the past, both are doing well in terms of growing in our core markets, specifically in North America, getting off to a nice start. But that market softness in other parts of the world is muting that. Finally, BAND-IT has really been hit hard by the impacts of oil and gas and the industrial markets. But they've done a nice job in transportation. They've had to deal with these headwinds well. This is a great business for us, and it will continue to do so, a great profit generator and one that will return to growth here in the future. I want to take some time and just walk you through our second-quarter and full-year guidance. I'm on slide nine. All right, so let's talk about 2Q. In the second quarter, we're expecting EPS of $0.91 to $0.93. Importantly, this includes the remaining $5.4 million pre-tax inventory step-up charge for Akron, or about $0.05. The way to think of it operationally is it would be $0.05 better than what we have on the sheet here, but we are going to run through the last of our inventory step-up for Akron here in the second quarter. Because of that, you will have a lower operating margin for the quarter. Again, that $5.4 million is about 1 point of operating margin, so it’s $0.20 reported and 21% apples to apples. Organic revenue, we think, will be flat in the quarter. The tax rate will be about 27.5%. If you look at the fiscal year, we are increasing our guidance. We were at $3.60 to $3.70. We're now at $3.70 to $3.75. This is principally driven by the benefits associated with the new accounting rules for the share-based compensation that I talked about earlier. It's important to note that we're going to neutralize this year for the impact of Akron. The way to think of it is the first half charges that we'll take relative to inventory step-up will be offset by the operating benefits you'll get in the second half of the year. For the full year, you really neutralize the EPS impact of Akron in total. Full-year revenue, as we said in the last quarter, we expect to be flat with operating margins – organically expect to be flat with operating margins in the 20.5% to 21%. Again, we guided at about 21% earlier. The difference between what we're talking about now and the 21% earlier is 100% associated with Akron and bringing that in as part of the family. CapEx will be about $50 million. Free cash flow at 120% of net income. We'd ask you to model about a 2% net decrease in shares. Obviously, we had a great start to the year when the share price was depressed, and so we're asking you to model at approximately 2%. As always, any future guidance does not include the impact of acquisitions, either costs or benefits. So, Rob, with that, I'm going to pause here, and why don't we turn it over for questions.

Thank you. Good morning, guys.

Good morning, Matt.

Could you discuss the visibility that you have to the flat organic growth this quarter? Because orders are still down, and I know there's a comp issue with the trailers. Especially in FMT, your orders are down 50% on an organic basis this quarter. Can you just discuss how you bridge to flat sales next quarter?

Yeah. If you think about where we're ending the quarter in terms of backlog and what we usually go into a quarter with, typically, we have a total backlog that's about half the quarter. We're kind of plus or minus that. We go into it thinking about what the first quarter versus second quarter looks like with the amount of backlog we have today and the fact that we built $23 million incrementally of backlog. It gives us a lot of confidence that we'll get to that second-quarter number, plus or minus. I feel pretty good going into the second quarter about where the top line will land. Because we are such a short-cycled business, you never know, as you know full well, Matt. Where we stand today with what I'll call stability on the industrial side and visibility relative to our current backlog and building backlog feels pretty good.

Okay. Great. And then, when you discuss the improvements in businesses like water and Scientific Fluidics, can you differentiate how your markets are doing versus – I know some of these are the pieces that you've been investing in through a fairly soft demand environment. Is there a way to split out how IDEX is doing versus the market in some of these areas that are going to grow in the back half?

Not as discretely as I'm sure you'd like, but we can obviously cut it by what we believe to be overall market growth and then the impact of our initiatives, whether they be market penetration or new products. That's a lot easier to do when you're truly entering a brand new market, which we don't do very often. New products is really the place where you can really put your finger on and see the acceleration. For the water businesses, we got a series of new products that we've launched. You can look at those discretely. For dispense, look at StrongArm, or look at the platforms that we know we're on in HST, you can get your arms around each of those in a pretty discrete way. Across the board, we are modestly taking share. I don't think it's huge share, but if you look at our relative organic growth rates market by market, segment by segment against our competitors, we feel pretty good that we're holding up relative to how the markets are and modestly taking some share.

Okay. Great. Thank you.

Thanks, Matt.

Good morning, everyone.

Hi, Nathan.

If we could just start on the reversal of the accrual for the earn-out. I think it looks like it was on the CIDRA acquisition. And I know you would've preferred to pay that money out, because it would mean that business was performing better. Can you talk about what caused it to miss those expectations for the earn-out?

Yeah. So that was an acquisition that we did that's a very important acquisition; small but important for HST, specifically, Scientific Fluidics. We went into the acquisition with a very specific point of view of what we thought the performance would be of that business. Our partners are still engaged and excited about being part of IDEX and are doing a terrific job had a more aggressive point of view. We agreed that we put a construct in place, and if they delivered over and above, meaningfully, over the base case, they would receive more consideration. Like always, when you do that, you put that on the balance sheet, and each quarter, you have to make an estimate. As we sit here today, a part of that, we don't think they're going to get that accelerated growth on top of what we thought was already a nice chunk of growth in a good piece of business. The accounting rules really dictate that. Yes, I would have loved – it would be terrific if they had hit their aggressive case. But the base business is still doing quite well and very much in line with the model we've put together.

Okay. So, it's not out of line with where you thought it would be?

No. No. Sometimes it happens when you've got a buyer and a seller and you have points of view that are different. This is a way to figure that out, and it gives both real stakes in the game around it. Everyone knows what they're getting into; that’s how it works out sometimes.

Understood. So you did about minus 3% percent organic growth in the first quarter. You're forecasting flat the second quarter, which means to get to the midpoint of the full year guidance that was minus 1% to plus 1%, you need about 1.5% in the back half. Is there any assumption of improving markets in the back half? Because it doesn't really look like your revenue comps get that much easier as we go through the year.

They do get a little bit easier. When we're talking about 1.5 points, you're really talking about $10 million.

Rounding errors.

Yeah. These are real rounding errors. There are some easier comps when you go to the third and fourth quarter particularly. The weakening last year really started midway through the second quarter. We still had a pretty decent second quarter overall last year, but we saw that weakening happening in June. As I look forward, the important ramp for us was going to be where we're going to ramp from a weaker first quarter to a stronger second quarter. That, for us, was the telling sign. Given the backlog we built and the visibility we have, unless you start to see something deteriorate meaningfully that we don't see today, we feel pretty good about where the top line should end up for the balance of the year.

Okay. And then, just one more, I guess, more philosophically on the M&A front. You guys have done a great job over the last several years. Earned a premium multiple out there in the market. Are there properties out there that would interest you that would require the issuance of equity? Is that somewhere that you would be prepared to go? Would seem that there's an arbitrage there on your valuation at some point here? Can you just talk about how you think about using equity? Any properties even out there that would be big enough to require that for you?

So, yes, we would, but it would be very selectively. Even though we do have a premium valuation arbitrage, that equity is extremely valuable, and being able to use cash or debt tends to be a much better mechanism for us generally. We prefer to do that. If the right thing were there and that was the requirement, yes, we would consider it. The reality is, and we talked about this a lot in the past, there just are very few things of the scope and size that would require us to do that. There are some things out there. Some larger businesses would be a great fit with IDEX and could drive a huge amount of value; there aren’t very many. If that rare circumstance were to happen, we don't find them very often, but would we do it? Sure, we'd do it.

All right. Thanks very much.

Thank you, Nathan.

Hey. Good morning, guys.

Hey, Mike.

So, first, just talking about the signs of stabilization you're seeing out there on the industrial side, is that on the order book? Is that in the customer conversations? Is it in what you're seeing just maybe more normally sequential starting to play out? Maybe just some color on what the contextual things you're seeing specifically that point to the stabilization side.

Sure, Mike. We started to see this in the third quarter and the fourth quarter. As you saw third quarter, fourth quarter developing last year, you are still – if you went back, you would have seen sequential downticks. What we've seen now is that sequential stability, call it, for the last four to five months, and maybe I'll call it that sense of anxiety or panic that a lot of people have when you're seeing sequential downticks; you start to see that level off. Yes, it's happening in conversations. It's happening in how people are setting their inventory levels. We’re really talking about industrial distribution, and so I'm going to call it stability. Part of it is we don't have that big exposure or direct exposure to oil and gas. Places that do still have that there's still a lot of volatility. Even with oil creeping up here over the last few months, there's still a lot of volatility around that marketplace. We’re still in the midst of rig reductions. We’re not experts in that part of the world, but the places that we do touch have a lot of volatility. The base industrial business, both in terms of numbers and how people are responding subjectively, feels like it's leveled off to a degree.

Okay. That helps. And then kind of a modeling question. When you think about the onboarding of Akron here, how does that change the seasonality on that FSD segment?

Hey, Mike. It's Heath. Not a ton. Akron's activity doesn't have a tremendous amount of seasonality to it. Once we fully layer in the Akron numbers to our diversified segment, inclusive of all the ongoing intangible amortization and so forth, it will have an impact on operating margins down as we begin the journey to build up Akron's profitability closer to IDEX-like levels. But in general, the order book for Akron doesn't have a tremendous amount of seasonality.

What that will do, though, Mike, is because as we do – because you do have some volatility across that segment, more than others, and you have more seasonality because of dispensing, that will probably, to some degree, not huge, but to some degree, mute that a little bit, the whole segment. It will be a little bit more muted in terms of volatility, but not big numbers.

That makes sense. And then on the HST side, anything new coming from a new product introduction side? Things you're working on with core customers that are going to be significant in the near term?

Nothing that's going to blow the doors off. The stuff that we're going to launch here this year, next year, are the stuff we've been working on. If you were to go back and look two years ago, we'd have told you that we're going to start to see some stuff coming out in late 2016-2017 that are really attached to new products that our customers are going to launch. We're in design cycles with them and we follow them. Success now for those is really based on do they hit their unit volume expectations. They're pretty good at nailing that down generally. Nothing that's a barnburner, but really consistent growth around that strategy we've had for a long time, which is more high-value content per platform.

Great. Hey, appreciate the time.

Mike, just to follow on with that, as we think about the second quarter, as I know you're doing your modeling, we do have a little bit of lumpiness on a year-over-year basis in Q2 for HST, specifically. That's not so much related to the instrumentation customers; it's more related to our MPT, the material process technologies. Q2 will have a couple of more difficult comps that we're coming up against that don't repeat later in the year. So, I just guide that to help you calibrate.

Thanks, Heath.

Good morning, guys.

Hey, Steve.

Just a quick question: do you have other earn-outs – acquisition earn-out agreements in place across the portfolio?

We don't.

Okay. And was pricing your typical 1% this quarter positive or something different?

Steve, this is Heath. It was a little bit lower in the quarter, mainly driven by HST. As we've gotten further along with some of the bigger OEM contracts, that's become a bigger piece of the pie. For HST, we don't generally reopen those contracts for pricing-related things. But it was a little bit lower than the 1%. For the year, I think modeling probably just inside of 1% is a good number for IDEX.

Okay. And I'm just trying to get my head around the FSDP organic growth again. Outside that trailer project, last year, organic was down 15% because of the dispensing comps. How should I think about or how were you thinking about what real organic was in that unit?

If you look at the base overall business, it looks kind of flattish. We did see year-over-year order rates that were up a little bit. Overall, it's kind of flattish with strength in dispensing, decent performance in fire, offset by weakness in rescue and BAND-IT.

Okay. All right. That's helpful. And then just one more quickly. With Akron Brass now, are you guys thinking that your cash availability and debt availability capacity for M&A this year is on the $0.5 billion range or something?

That's right. You hit it on the head. We got about $0.5 billion that we could tap into from our balance sheet. Think of it over the next three years as being about $1 billion.

Okay. I'll pass it off. Thanks, guys.

Thank you.

Hi, guys. Good morning.

Good morning.

On water, Andy, you talked about some projects getting pulled forward because of the weather. Is that going to impact, I guess, the seasonality or lack thereof this year? Is that how we should be thinking about?

No, it's not a huge number. For IDEX, it's not a huge number for water itself. It's a few million dollars here or there, so I don't think it impacts us looking forward enough to consider it.

Okay. Perfect. And then just bigger picture, a lot of talk on the stabilization on the industrial side, the panic behind it. Trying to be positive here, is there any thoughts or views that maybe we could see an incremental lift as we move into the back half of the year?

I feel really similar to how I felt when we talked after the fourth quarter. I still think there's more downside risks than upside. I know it feels better for a lot of people, and I know equities in our space have run here in the last month or so. But when you look at the underlying conditions and take away the emotion of it and look at the data, the data does not suggest that there's a really strong upside case. I'd love to be wrong, but, as you know, we've always said this pretty consistently, we are much better at managing for a tighter scenario, and we can move on the upside very quickly. But, given the impact of incremental margins, we don't want to be caught on the downside. While I certainly don't feel like the risk has gotten higher in the last quarter, I still think that there's overall more downside than upside.

Great. Thanks. That's very helpful.

Yeah.

Hi. Thanks. Good morning, guys.

Hey, Charley.

Just going back on – you touched on a little bit earlier kind of beginning of the year things looked like a disaster. We had a pretty good snap back on the industrial space. But, I’m wondering, from your standpoint in terms of order intake, did you see a really sharp dip in the beginning of the year, and you've come back to stabilization or plus? I’m trying to get a sense, I guess, of the cadence on really the orders through the quarter, first three months of the year.

Well, Charley let me clarify first. I think that the overall commentary I have today versus the commentary after the end of the year is the same. The difference is you got three more months of stabilization, right? You got a quarter more of stabilization. We started seeing some of the elements of it as we ended the year. Things did get sequentially stronger as we ramped from our first month through our third month, but they also tend to get sequentially stronger. If you look at how a normal quarter flows, it's not that different than the norm – maybe a little bit better. Everyone is looking for a sign of strength. I really don't think it has materially strengthened. What you have is another quarter of stability, and the emotional pieces of it that were really pounding in the early months of the year and the late months of last year. That real fear is starting to fall off. The data itself is not dramatically different.

Okay. That's helpful. Thanks. And I guess, just kind of bigger picture, on the energy exposure that you guys have had, what do you think, in your mind, that your customers are going to have to see? Is it a function of oil going back to $50 plus a barrel? Obviously, you're not really much in the upstream, so that's less of an impact on you guys. I'm just trying to get a sense, from your point of view, when you're looking down the road, 12 to 18 months, what happens in energy to kind of get things back on track and maybe get some growth there?

The radical swing in capital spending and in MRO. If I were to go back in time and say what do I think that most of us got wrong, I think we got two things wrong that have amplified this downturn more than any of us expected. The first was, I think people didn't fully appreciate how much the energy capital spending over the last several years was pulling along the things that we define as general industrial. The reverberation of that, as things got weaker, it hurt the general industrial more than people expected it would. The second thing that we got wrong is that we're seeing the amount of pirating that's happening for parts off of things that are being taken offline is pretty dramatic. Why does that matter? It matters because that’s going to leave a deficit to the overall lifecycle of the markets with suppliers. If and when that turns around and capital spending even picks up modestly, you have an MRO deficit now that needs to be filled. I can't pick a timeframe, but it feels like the amount of capacity that's coming out – the supply/demand imbalance, if that turns over, you could see the excess capacity snap back.

Thanks. That's helpful.

Thank you, Charley.

Thanks. Good morning.

Hey, Kevin.

A couple of follow-up modeling questions on Akron. You've got it neutral to earnings this year. The contributions are offset by the step-up costs and the interest expense. Can you just talk about where you think margins will be on that business and what's the associated interest expense here this year?

Kevin, let's see. Let's tackle the easy one first. The interest expense is going to be $0.02 per share. The incremental is what we're anticipating for the year. That includes, potentially, what we may or may not do in terms of trimming out some of the balance sheet as we think about that through the second half of the year. So it's a $0.02. The other piece to think about is there's certainly going to be a timing element of that. We're going to work our way through the total purchase price accounting, step-up cost, for the inventory in the first and second quarters. So, that'll have a bigger negative impact in the first and second quarters. In the third and fourth quarter, we won't have those same costs. You'll get the full on Akron Brass operating contribution. So, in terms of modeling, there's a little bit of differences, neutral for the year, but it does have a difference between the first and second half.

Right. And then thinking about next year in terms of accretion, so there should be more for two reasons: that $7.6 million of step-up costs goes away, that you just mentioned, but also you're expecting to grow and improve the margins on this acquired business. Can you talk a little bit about the improving of the margins and where they are now and what you think your potential is here now that you own it?

Sure. Absent purchase price accounting and absent any intangible amortization, let's just stick with EBITDA because I think that's the best apples-to-apples comparison, it runs about 500 basis points lower than our existing Fire Suppression business. Our existing Fire Suppression business is plus or minus in line with the rest of IDEX, maybe just a tad lower. There's 500 basis points that as a stand-alone Akron Brass business that we're going to tackle out of the gate. I would suggest that the timing of that is going to take a couple of years to get it up to speed. Some operating decisions and some footprint discussions are underway as we bring the two businesses together. As those things happen and we integrate the commercial teams and go through all of that, I think we'll start to realize the synergies in the next two years.

Okay. Thank you.

Thanks, Kevin.

Hey. Good morning, guys. How are you?

Good.

Question I have is about the energy and chemical impacts that you guys have laid out at the top, Andy. You named the businesses. We know them all well. Could you tell us, first of all, the percent of sales from chemical and energy right now?

Energy in total is somewhere north of about 10% of the company, right? So, around 10% to 12% of the company. The upstream piece of that is about 2%. It was 3% last year. That's just the reality of that. The stuff that's midstream and downstream makes up the vast majority of what you're looking at what we call energy. When you think about the chemical piece, the overall chemical piece is a bigger piece, but we're mostly talking about playing in specialty chemicals, not the broad base stuff.

Got you. Now, on that, you have a business that obviously – the mobile business; could you give us a carve-out of that as well? You went out of your way in the slides here to talk about truck builds, and honestly, I’ve never heard you talk about that before.

The reason we do is, again, when you talk about energy, people tend to think of it in a very specific way. The biggest piece of what's in our energy business is Liquid Controls. A good chunk of that overall business is going into these mobile applications. Mobile applications mean meters on trucks, right? That's the way to think of it. You split meters on trucks into two things, kind of road applications and that serving aviation. The reality is that if we don't follow the Class 8 to Class 6 truck build that you would think about for heavy industry; we don’t necessarily follow that trend. But the reality is that truck builders and how these guys think about building do connect to that. We're not selling into the average Class 6 or Class 8 truck. We're selling very specifically mobile energy applications. But there is some correlation between the truck builders producing kind of the general Class 6 or Class 8 and the folks selling into these mobile markets. There is a connection.

That's very interesting, the way you look at that. Okay. Thank you.

Thank you.

Hi. Good morning, Andy, Heath.

Hi, Jim.

I just have one question. I was wondering if you could just size the amount of business you may have potentially lost due to oil prices. As we look out to the next 12 months with oil firming up and the business coming back, can you just try and figure out how much you can recover as we kind of see the reverse of this?

Let's talk about the easy piece of that, Jim, which is the piece that's close to the wellhead. We've probably had a total of 1% negative on that. So if that was 3% of our business a year ago, it's now 2% of our business. It's truly a 1% headwind on IDEX. You probably have another 1% to 2% if you scope across the rest of IDEX. Call it $10 million to $20 million more of incremental revenue that has been impacted that you can kind of put your finger on directly. So, call it 2 points of organic growth headwind, up to 2 points of organic growth headwind that's directly tied to that. It gets a lot more muddled and a lot less clear as you think about these ripple effects that have impacted everybody. The story that I tell often is a few years ago we looked at this business in North Dakota that had nothing to do with the energy world; you couldn't drive into the parking lot; you couldn't get a parking spot at Wal-Mart or a hotel room. You go there today, and the parking lot at Wal-Mart is empty, and you can get any hotel room you want at half the cost. What I guess the reason I tell that story is that I think we all, again, underestimated the rippling effect in certain areas of that energy cycle. As it comes back, I don't think it’s going to be as dramatic. I wish I could pick a timeframe, but that's for you guys to do. Not only do you get the direct impacts of what happened in the energy industry, but I think you will get some positive residual impact to the general industrial.

Do you think that number would match that 2% of direct headwind that you see?

Again, I think the upside and the downside were pretty dramatic. What you got pre-2015 was pretty dramatic on the upside, and what we lived with last year was pretty dramatic on the downside. Do I think it’s going to snap back one for one? I think that would be optimistic.

All right. But it's something like – it's somewhere between $50 million to $100 million of revenues, potential revenues...

No. No, that’s too heavy. It's somewhere between $20 million and $40 million.

Okay. Great. Thanks so much.

Yeah.

Hey. Good morning, guys.

Good morning.

So, my question revolves around HST. You've done a good job improving margins here. If I look back historically, this segment underwent some restructuring. Where do we think margins would actually progress in the second half of FY 2016? Holistically, where do you think Health & Science in terms of new products, especially with exposure to MPT, some of the long-cycle businesses here, where do you think – as you progress into 2017, can you give us some color on that?

So, I apologize; you broke up a little bit in your question. If I heard you right, you were asking what do we think the back half HST margin looks like? I heard that clearly. I didn't hear the second part of your question clearly.

Yeah. The second part of the question was kind of holistically, if you look at HST, you've done a good job improving margins here. How do we think – what is actually driving the core sales for the business in terms of when you have – when you look at the exposure to MPT and Sealing Solution businesses?

Okay. So, we've done a nice job of getting this business up to speed. The way I break it down is on the revenue side and then let's talk margins. While they’re interconnected, there are a couple of different stories in here. On the revenue side, there's consistent strength on the scientific side. Life sciences, semiconductor, electronics – these have been good and have strong profitability. We've also had strength improving margin to parts of the portfolio that were weaker. In MPT or Optics, over the last couple of years, we've done a nice job of moving profitability up. You've seen the op margin move, but the top line is slightly deceptive. Much of that is still really industrial. We've got a big chunk there. Good chunk of even Optics that's more industrial-related. We've had some nice strength overall on the scientific side offset by weakness on the industrial side, but overall, margins have improved.

Got it. Thank you.

Thank you.

Hi. Good morning, guys. Thanks for sneaking me in here.

You got it, Jim.

So my question is on your organic growth investment dollars and where you're funneling those. I understand it may be early in the year for you to be shifting those, but can you talk about where you're focusing, specifically, your organic growth investment currently? What businesses the focus is squarely on improving returns? Where growth investment won't be dedicated anytime soon? Have you shifted your thoughts just given any surprises over the last six months, whether that's market based or just the efficacy of execution of internal strategies from specific business lines? Thanks.

When you look at our investments like this, they tend not to have radical swings in the short term. The time you decide you're going to aggressively go after an idea until it's fully absorbed into the marketplace are really long. That really works to our benefit around when you win market share or new applications, the stickiness of those is a fundamental driver to the economics of IDEX. It takes a long time for that to happen, requiring sustained long-term investment. We tend not to jump around a lot in that. If you look at the portfolio and our businesses, we've got about two-thirds of our company in revenue and about three quarters in profit that I would put into the growth category. These are franchise businesses with clear number one or really strong number two positions. If you look at our franchises, Health & Science, Scientific Fluidics business, Viking, Warren Rupp, Gast – even though our Rescue business is struggling, if you look at the brands within rescue, they're outstanding. There are some businesses we think that can move and can fix. You can think of them squarely as ones we define as 'fix' as we change resource allocations for those businesses in need of improvement. There’s a much larger part of our business compared to new products and new channels than it is anything else. There's a small portion of the business that we define as 'outperform', meaning we want you to win in your markets; we expect you to keep up.

That's helpful. Thank you.

You bet.

Thank you, Rob. I appreciate that. Everyone, first of all, I appreciate you taking the time to spend with us to talk about the first quarter. Our comments, hopefully, everyone's walking away with clarity of our message, which is we think we're executing quite well in a continued challenging market. There has been some stability, which is good. But we still think there are lots of challenges ahead, but we're very, very well-positioned, and I'm thrilled with how our teams have performed. Our folks throughout IDEX have really performed well to ensure we deliver value for our customers, for the people who work at IDEX and very importantly for you, our shareholders. I appreciate your time and look forward to talking to you in the future. Take care.