Idex Corporation (IEX) — Q4 2016 Earnings Call Transcript

Great. Thank you, Doug. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for a discussion of the IDEX fourth quarter and full-year financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the quarter and year-ending December 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 at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We will begin with Andy providing an overview of the fourth quarter and full-year financial results. And then he will provide an update on our markets and our geographies and discuss our capital deployment. He will then walk you through the operating performance within each of our segments, and finally, we will wrap up with an outlook for the first quarter and full-year 2017. Following our prepared remarks, we will open the call for your questions. If you should 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 877-660-6853 and entering conference ID 13652250 or you may simply log on to our company’s home page for the webcast replay. Before 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. I appreciate you all joining us for the discussion of our 2016 fourth quarter and our full-year results. Before I get going, I want to introduce Bill Grogan, our new CFO. Bill, welcome to the senior executive team and the CFO chair. Bill has been with us for more than five years and most recently was Head of our Financial Group for Operations working side-by-side with Eric Ashleman. And so he really did an outstanding job there with building the teams, driving the operating model, and has been a key part to our overall success in terms of driving results in the last half-decade. So congratulations, Bill, and welcome to the team. Also, I want to thank Mike Yates. Mike has really stepped in in the late summer when we had the interim chair open up and did an outstanding job. And I think it’s a real testament to Mike that we did not miss a beat through this process and really we are incredibly fortunate to have somebody of Mike’s caliber on our team and continuing on our team as we go forward. So thank you, again, Mike, very much, I appreciate it. I’m going to take a second here and just summarize 2016. As everyone knows, it was a difficult year in terms of the top line with a challenging global industrial environment. At the same time, we did a really nice job on the bottom line and with cash flow. And so even with these mixed economic conditions throughout 2016, there were some bright spots and they were really around our Scientific Fluidics business, municipal and commercial markets, and all of those actually performed reasonably well in the year. And then we had some major headwinds really around the global industrial markets clearly within FMT and the industrial pieces of HST. But I will say, as we had organic quarter growth in the third quarter and again organic growth in the fourth quarter and a promising start to January, we’re cautiously optimistic that we’re beginning to see a recovery. With that said, I’m hesitant, because I’m not convinced yet that we’re seeing a comprehensive turn because the global economic environment and very much the global political environment is volatile and it’s uncertain. And I think it’s prudent at this stage to be more conservative than aggressive. And as we built our plan for this year, we took into mind all of the volatility that’s out there. And as you guys full well know, we can respond very well on the upside. We have a very flexible operating model. We have a low overall labor content in our business. We really have no capacity constraints in terms of machinery, equipment, or facilities. So really it’s supply chain that becomes the sticking point on the upside. So we can respond very quickly. We would have outstanding flow-through in case that happened, but we’re going to be prudent right now. And so as we exited 2016 and I look back, I’m very proud of how our team executed. We drove productivity. We improved working capital, and we continue to invest in our teams and the culture of this business. And we come into 2017 with a very strong balance sheet. We have gross leverage of 1.8 times and obviously, net leverage significantly below that. Cash flow was strong and we’re in a great position to exploit this via our capital deployment strategy. That’s fundamentally unchanged here for almost a half-decade that we’ve been using and has been driving returns for us. As I mentioned, we did see positive order trends in the third and the fourth quarter. The initial signs in January are decent. And we’re hoping that the global growth challenges are leveling off. And, but as I said, we’re going to remain cautious with the uncertain environment. We do believe that there’s a backdrop of low growth as we think about planning our 2017. And so we’re going to be prudent with this uncertainty of the economic and the political environments.

Thanks, Andy.

As we look at the year, orders grew sequentially each month in the fourth quarter and the improvements were broad-based across our portfolio, so virtually every business saw improvements as we move through the quarter. This resulted in organic order growth of 3%. In the second half, we had our first two sequential positive order growth quarters since the beginning of 2014. And so again, that’s encouraging. We also deployed over $0.5 billion last year. We acquired three businesses, as you know, and we also divested four businesses, and I’ll get into more detail here in a minute. But the four businesses that we divested weren’t aligned with our strategic objectives, and I’ll walk you through that here in just a little bit. As you know, deep segmentation has been a critical element of our success and really the foundation of our operating model. The improvements in profitability, cash flow, and return on investment these past years have really been driven by these efforts. Over the last 18 months, we’ve taken this segmentation, which really has been focused on the product line and the customer level, and we’re thinking about our entire business portfolio. We’ve categorized our businesses into growth outperform and fix. As we sit here today, about 70% of our portfolio is in the growth category, 10% is in the outperform, and 20% is in the fix. Our strategy with all of the businesses within these different categorizations is to provide complete clarity of mission, goals, and resource deployment across the portfolio, that’s going to allow us to drive innovation, improve customer service and satisfaction, drive profitability and improve return on investment. As we look at 2017, we’re going to continue to invest aggressively around a series of areas and we think that’s critical to our long-term success. So in our growth businesses, we’re going to put about $0.10 or $0.11 of earnings so to speak into incremental investments in those businesses. That’s been key to us winning these past few years and it’s going to be very important to us for winning going forward. Our fixed businesses, which again, I said is about 20% of our portfolio. In 2016, these businesses improved by about 300 basis points in profitability. So, it’s been an important part of the profit execution seen across their businesses, particularly in FMT, which you saw really strong margin improvement. These businesses are either going to graduate to growth or outperform, or eventually if we don’t think we can move them out of the fix category, we would consider divesting some of them. I will say that that 20% is largely on track to graduate here, and we kind of give it a two-year timeframe. They’re going to find growth in the future and our teams are executing very well around that. With that let me pivot here and talk about our markets and some regions. So on the market side, energy – the trajectory is modestly better than it’s been obviously with the improvement in the price of oil that certainly is helpful. But there are going to be headwinds, right. The CapEx cuts that came in the midstream and downstream are going to impact us this year and that’s going to hit our energy platform Band-it and ceiling to some degree. The downhole business, I think will improve and we are starting to see that on the banded side in particular. I do think that the LPG market is going to be soft here in 2017. On the industrial side, and that’s really been the story for a couple of years now and the industrial markets remain challenged in 2016. We did see some stabilization towards the middle part of the year and as we move forward. We are hopeful that we’re turning a corner, but obviously, we’re going to wait for more evidence before we’re willing to make a bet on that. Ag, depressed commodity prices and low farm incomes have been a huge headwind there. We have seen a slight improvement and we think that’s going to continue into 2017. Life sciences has been a real bright spot for us. It’s been an outstanding year in that market. Our core markets in bio, analytical, and IVD have all performed well, and we think that’s going to continue to do so here in the future. Finally, municipal, all the indicators point towards continued modest growth in 2017. So, we think that will be a plus. In terms of geographies in North America, the story goes back to the industrial recession that really existed here for a couple of years. Obviously, we’re hopeful of the signs of recovery, but again, we’re going to be cautious. Europe is really a mixed bag, it depends on the country and it really depends on the business. Our dispensing and our water businesses, which are two of our bigger European-facing businesses have done quite well. But the performance across Europe is pretty spotty. We think that will probably continue in 2017. In Asia, India has been terrific for us. We really won in terms of market share and the business focus there. But China has been more difficult with really the industrial recession there also as they move from an investment-driven economy to a consumer economy. We do expect some improvement in China, however, in 2017. Let me turn to a little bit of conversation on capital deployment. We’ve had this balanced discipline capital deployment strategy for some time, and I think it works very well. Our overall goal is to drive strong shareholder returns and we have four pillars of this strategy. We’re going to fully fund organic growth. We’re going to take assistant quarterly dividends. We’re going to opportunistically repurchase stock and we’re going to execute strategic M&A. Here we are with a very strong balance sheet, strong free cash flow, and this is going to give us leverage as we go forward, and we used that leverage well in 2016. As I mentioned before, we deployed over $0.5 billion in three acquisitions; Akron, AWG, and SFC, and those hit two different markets in three different countries. They really spread nicely across our portfolio and our ability to manage and integrate those businesses. The Akron and AWG really changed the face of our fire and safety business, and SFC did the same for our sealing group. The integrations across the board are going well and so we’re very positive about these acquisitions going forward and the benefits that we expect to see in 2017 are identical to what we talked about in the third quarter, and I’ll detail that here in a little bit. We did decide to divest some businesses this year, four relatively small businesses; Hydra-Stop and two Optics businesses; one in Japan and one in Korea, and then our IETG business, which is in the UK. In total, those businesses had about $40 million of revenue for us in 2016, which obviously will trade-off against the benefits of the three acquisitions that we did. I’ll walk you through the puts and takes of that here toward the end of my remarks. As we think about organic growth, we have continued to invest in organic growth across our businesses. As we go into 2017, there are a few businesses that are going to get even more money and we’re going to get more aggressive around it. That’s around our bio, biopharma businesses, some product launches in water, next-generation of rescue tools, and local for local products in India, and then, to some degree, an increased investment in China, where we’ve recently opened a facility. We’re going to put money really about the future. Investments for us takes time to germinate. The markets move slowly, but you have to be committed and you have to invest year-in and year-out, and that’s what will allow us to be successful in the long-term. On the capital deployment front, in 2016, we increased our dividend by 6% and we returned 38% of net income to our shareholders. We also bought back 739,000 shares in the year at a cost of about $55 million, which is about 1% of shares outstanding and that happened very early on in 2016. I’m now on the 2016 financial results. A reminder, these results exclude the impact of restructuring actions, the gain and loss in divestitures in 2016 and 2015, as well as the pension settlement. Overall, orders and sales were $2.1 billion, up 6% and 5%, respectively. Orders were flat organically and sales were down 1% organically. Organic orders and sales were really pressured by the weak economy I’ve already talked about in detail around oil and gas in North American industrial. Our margin has a good story. We finished the year at 20.6%, which was down by 40 basis points year-over-year. But keep in mind that had $14.8 million of fair value step up versus $3.7 million in 2015. If you neutralize that, our margins were up about 10 basis points year-over-year. This has a diluted impact of acquisitions. If you look at apples to apples, so if you remove the acquisitions and look at the base business versus base business, 2016 versus 2015, margins were up 80 basis points to 22.5%, so that really shows terrific execution in the base business pre-acquisitions and demonstrates that operating model continues to work. Cash flow is a great story. Cash from operations was $400 million in the year, $362 million of free cash flow, and that was up 12% over last year and 125% of net income. GAAP EPS was $3.53, adjusted EPS is $3.75, which was up $0.20, or 6% on an adjusted basis. Let me take a second and walk you through that $0.22 between the adjusted and the GAAP EPS. We had a $0.03 charge from restructuring actions, I’ll talk about the benefits here in a moment. We had a $0.16 loss on the sale of four divested businesses and we had a $0.03 charge from the pension settlement. On a final note, of the $3.53 in GAAP EPS, there’s also about a $0.04 related to a favorable transaction FX regard to the intercompany loan that we acquired when we bought SFC. So that was favorable by about $0.03 in the fourth quarter and $0.01 in the first quarter. We have hedged that loan so we won’t see the volatility in the future. I will also note that we did have significant translational FX as we saw the dollar strengthen significantly in the quarter and that cost us about $0.02 in the fourth quarter. For the fourth quarter, organic orders were $547 million, that was up 10% overall and 3% organically, continuously seeing an uptick in those orders we started to talk about in the third quarter. Revenue was $530 million, up 6% flat organically, and organic sales were up slightly 0.3% in the fourth quarter. Although that is modest, it’s the first positive organic sales growth that we’ve seen since the fourth quarter of 2014. Adjusted op margin for the quarter was 20.5%, that was down 50 basis points year-over-year, but again, entirely due to the fair value inventory step up. Exclusive of this charge, we actually improved margins by 40 basis points over last year. Fourth quarter free cash flow is very strong at $106 million, that was up 20% from last year and 143% of net income for the fourth quarter. GAAP EPS were $0.75, adjusted was $0.96, that was a $0.02 increase over last year. We had $0.21 between the Q4 adjusted and the GAAP EPS. These are all the items that I mentioned before except there was a $0.01 of that that fell into the third quarter, so $0.21 fell into the fourth quarter. I will also note that we did have significant translational FX as we saw the dollar strengthen significantly in the quarter, and that cost us about $0.02 in the fourth quarter. As I discussed earlier, the four divestitures, we incurred about a $20 million pre-tax loss on the two businesses that we sold in the fourth quarter. That’s a $14 million net loss after the $6 million tax benefit that we realized. We also incurred a $3.6 million pension settlement in the fourth quarter. This charge was related to employees taking a lump-sum distribution rather than future monthly pension payments. We did talk about this in the third quarter, and it was on the low end of our expectations. We also incurred about $3.7 million of restructuring costs that we noted we were going to have some restructuring costs we talked about in the third quarter. These are related to severance and facility closures around acquisitions and plus an announced facility consolidation with our MPT platform. We will get about $4 million of benefit in 2017. Okay, let’s pivot now and let’s talk about the segments. I want to start with fluid metering. We finished 2016 with organic orders were down 2% in the fourth quarter and down 3% for the full year. Sales were flat in the quarter and down 1% for the full year. Op margin was a great story, up 190 basis points for the quarter and up 100 basis points for the year, really terrific execution around productivity and even with difficult market conditions. Great improvement in our fixed businesses and many of those sit in FMT and we’re a major portion of the margin improvement in the segment. In terms of some of the areas, water services has been strong. It was strong in the fourth quarter. Again, we think it will be solid as we think about 2017. Industrial, the story I told already many times, is softness across the North American landscape. The impact of oil and gas has certainly been substantial and weakness in the chemical market in Europe also. While we do see some beginning signs of recovery, we’re pretty cautious here around this marketplace. Energy remains a tough story. Our mobile business, the downstream portions of the business that CapEx cuts just started late last year. Those are going to play negatively to those businesses, I think, in 2017, they will be behind the curve relative to what you’ll see in the downhole side, which I think will pick up faster. Finally, Ag, as I mentioned earlier, we have seen some positive indications, so we’re looking for kind of very small improvement in 2017. Let’s turn to health and science, at the end of the day no real changes in our perspective in the health and science markets. Our overall life sciences and scientific businesses are doing well, offset by weakness in industrial very similar to everything I’ve talked about with FMT. We had a very strong organic order quarter, up 7% on the heels of a strong third-quarter order. For the year, organic orders were up 2%, but certainly, we finished strong in the order front with HST. Our sales were down 1% both in the fourth quarter and for the year, but obviously, we come into the year with momentum. On the op margin side, I think there will be a number of questions here on this. Let me take some time on this. They were down 330 basis points in the fourth quarter and down 100 basis points for the year. Both of these decreases were primarily impacted by the step-up in SFC. If you exclude that, margins would have been down 100 basis points for the fourth quarter and 20 basis points for the year, and really all of that is due to mix. In 2015, we had a very strong overall profitability in our material processed business and that flipped around in the fourth quarter of this year and had relatively weak margins in MPT, and that really accounts for that balance. We expect margins in HST to be in that 23% range in 2017, so we expect that to rebound nicely going forward. In terms of the overall segments within health and science, industrial looks a lot like FMT, as I’ve already talked about, and we have seen again some early signs of improvement, but cautiousness generally. Scientific Fluidics and Optics, really strong overall performance. The markets are growing. We’re winning share on new platforms, so overall, we have a lot of confidence in that business going forward around life sciences. Ceiling solutions is a mixed bag. Oil and gas has been weak, while the semiconductor market has been strong, and those two have really kind of balanced each other off. Finally, MPT, as I mentioned has been mixed. This is a pretty lumpy business. It had a strong fourth quarter order book. We think we’ll come out of the gates relatively strong with MPT. But it has been a mixed bag between pharma and industrial businesses. I’m on the last segment, diversified. It’s just an outstanding year for the teams here in diversified. The two major acquisitions really changed the landscape for our fire and rescue business, and now it’s all about driving the execution here. We finished very strong. Organic orders were up 9% in the fourth quarter, up 2% for the year. Our sales were down 3% for the year, but following orders, we had a strong finish at sales being up 3%. Op margin was down 150 basis points, but entirely due to the step up that we had $7.5 million. Again, we are performing well and expect a solid margin profile in 2017. Our dispensing was solid across North America, Europe, and Asia. The X-Smart product line continues to have momentum and generally the dispensing outperformed. In fire and rescue, a nice uptick in the fourth quarter. As you know, this has been a business that has been weak for some time and we saw strength across the markets, and we had some nice wins in Asia, which we hadn’t seen in some time. The team did an outstanding job with new product launches and they’re doing a nice job of integrating Akron and AWG. We’re on track to hit our goals with those acquisitions. On Band-It, the transportation business was solid. We are seeing some modest improvements on the oil and gas side that would be a good sign here for Band-It going forward. A couple more slides here, all about guidance for the year and for the fourth quarter. We anticipate organic growth to be about 1% to 2% for the year and this should give us somewhere between $0.15 and $0.23 of incremental earnings for 2017. We’re going to have a significant $0.12 headwind from FX. As you know, the dollar has strengthened significantly. We have exposure to the euro, the Swiss franc, the Canadian dollar, and the pound. Those are meaningful headwinds. As I mentioned before, that’s broken down into about an $0.08 headwind on translational FX and the $0.04 that’s related to the intercompany loan that I mentioned earlier that we’ve hedged going forward. But, in total, as you guide into the back-half of the year and really sort of the back month or so of the year as the dollar strengthened, we lost a lot of ground, a $0.02 in the fourth quarter, and now in total, $0.12 of headwind for the year. As we look at acquisitions, last quarter we told you that that net of divestitures we thought acquisitions would add about $0.25 to earnings incrementally. That number is now $0.24, but that’s entirely due to the fact that we sold two other businesses in the fourth quarter. Share count will creep a little bit and it’s going to be a $0.03 headwind for us. The restructuring actions mentioned before are going to be a $0.03 tailwind, and they’re really related to rooftop and severance consolidation – severance items. We had a couple of one-time corporate items in 2016 that are not going to repeat in 2017. About $0.04 is from the earn-out reversal we talked about in the first quarter of last year. We had $0.02 of benefit from compensation-related items as the CFO change happened and some compensation was forfeited. We’re going to get about $0.02 of benefit from productivity net of inflation. Our teams have done a nice job of offsetting wage inflation and very modest material inflation, but we will get $0.02 of net benefit. As I mentioned before, we’re going to keep investing even with this backdrop of continued low growth. We think we need to continue to put money into our best bets, which is going to be about $0.10 or $0.11 in 2017 of incremental spend. I’m on our last page here, and a couple more items here on Q1 2017 and full-year 2017 guidance. In the first quarter, we think EPS is going to be $0.91 to $0.93, organic growth kind of 1% to 2%, and operating margins ranging from 20.5% to 21%. The tax rate should be around 27%, and we are going to see a 2% FX headwind here on the top line. This is all based on the December 31 rate. Corporate costs in the first quarter will be about $17 million. If you look at the 2017 just a few more items. So full-year EPS should be $3.87 to $3.95, revenue growth 1% to 2%, and full-year operating margins at 21.5%. Again, we’re going to have about a 2% FX headwind based on the December 31 rates. Corporate cost will be around $66 million for the year, and the tax rate should be around 27.5% based on the current U.S. tax rates in the global tax rates. Always, we think about these things, we exclude the impact of acquisitions, costs, or benefits associated with them or any further restructuring that they might have. So with that, let me pause here, and Doug, let’s turn and open this up for questions.

Hey, good morning, guys.

Hey, Mike, good morning.

And congrats on the new role! I would say welcome aboard, but you’ve been here for a while, so let’s start on that bridge. Obviously, super helpful providing the puts and takes, because there’s a lot of them. Maybe you could frame the growth investment side. You said you’re basically putting the foot down and really reinvesting this year. Two-fold question there, one, frame that level of growth investment that you’ve got in the 2017 bridge to what a typical year would look like? And then two, what do the main focus areas look like? Is this to deal with a lot of the acquisition pieces? Is it relative to that 80% of the company that’s really kind of in that growth mode, where the piece is going?

So, Mike, this is if you go back and you were to look in time, this is not a typical, right. So this is kind of how we thought about things over time. I think why it stands out a little bit now is the backdrop of slower overall organic growth. A very importantly, we made a conscious decision that we were not going to trim back on those, given the backdrop. It takes an awful long time for these investments to germinate. If we were to go and cut $10 million, $12 million on that cost, we could easily cover the FX headwind that developed in the latter part of the year. We decided that was not the prudent thing to do. For us, I think it is key to target a few mostly product-related areas. In the bio, biopharma area I think that whole life sciences world has taken off for us. We’ve got some very interesting new products that will take a few years to germinate, but we’re going to have to put several million dollars a year into those while those take off. We’ve got a series of new product launches in our water world, a lot of those businesses have been in the fixed category and they’ve done a great job. We’re doing more local needs. The X-Smart has been a home run in India and we’re seeing success and doing more like that. Next-generation on rescue tools, hydraulic has been a big win for us, so we’re going to continue to invest there. And finally, around the AWG Akron acquisitions and sealing group, there are some really important product development opportunities that together will enhance our overall capabilities. Those are the major areas that will drive growth.

And then seeing on the growth side, as we look through the year, obviously highlighted caution going into the year, which I think is prudent. Maybe one, give a sense for what you’re seeing on the industrial side of your pieces once a little more short cycle maybe have some movement that could help the industrial side of Band-it, Viking Warren Rupp. Trends in the last couple of quarters have they been stable, slightly better, you’re seeing some choppiness and what that lead into for the year?

So, Mike, if you remember kind of back in the summer, I mentioned we’re seeing some stability, right, things had really been at a decelerating pace in the industrial landscape up until kind of after the first quarter of 2016 and I mentioned some stability. What we saw in the third quarter was a kind of the back end of the quarter got meaningfully better, but still spotty. It was still pretty spotty. What we saw in the fourth quarter was much more broad-based, and I’d say January has continued that trend. Let me be candid. We have a lot of internal debate about the top line market and what number we’re picking around the market. Everything that we’re talking about here is based on market estimates. We believe we’ll beat the markets by a point or two. My point of view is people have gotten over their skis on the positive sides of some things that have been talked about and not enough attention has really been put into the potential downsides. For us, we’re really weighing both sides of this equation, which has led us to be more conservative. We know how our operating model flexes. If things are better, we’ll flex very quickly up and the incremental margins will be attractive. If things are worse than some people are talking about right now, we’re already positioned to deal with it.

And then last and an easy one. If you just look at the guidance, is the underlying thought process here stability from current levels normal sequences as you look to the year, or are you embedding any improvement, it doesn’t sound like you are, but I just want to clarify?

Yes, so we’re talking first quarter being up one to two, no real big hockey stick built-in. So we don’t have, I think that's probably the first quarter is going to be telling for us to be candid with you, right. And that’s going to be an important barometer for how we think the rest of the year will play out, January is decent.

Okay. Thanks. I appreciate your time.

Thanks, Mike.

Hi, good morning, all.

Hi, Steven, how are you?

Good. Hey I’d love to just start at a little higher level on capital deployment, Andy.

Yes.

So if you think about the pace that you are running at a $0.5 billion this past year based on what you are looking at in the pipeline, obviously, you have the capacity. I mean, are your expectations for something as good this year?

I think that would be a real challenge to be honest with you. When we at this time last year, we were really bullish on the overall ability to deploy. We had line of sight at that point with a lot of confidence around a couple of things, while we have a very typical funnel right now. If we deployed $0.25 billion, that would be terrific. We don’t have things kind of sitting right in front of us like we did this time last year. That being said, it’s a good pipeline. It’s across the portfolio, and we have, obviously, we have the buyer power to do it, it’s just going to be actionability.

Okay. All right. And then on that 2017 guidance bridge, I would have thought maybe more than $0.02 on productivity net of inflation. Can you just talk through maybe the pieces there, what are you baking in and why?

Yes, so you’ve got about – what you have is, you’ve got about $20 million of headwind plus or minus and that’s mostly driven by wage inflation. It is not a lot of material inflation. You’ve got some metals here and there that seems a little bit. We’re in a position and obviously, we’re really cognizant of potential inflation spikes that we’re paying a lot of attention to. The material side should be modest, the wage side is very typical. So call it $20 million. We’ll get kind of $22 million of total productivity. That will net us kind of a $0.02 in total.

Okay. All right, that sounds great.

Again by the way, right, that does not include restructuring, right? So you’ve got another $0.03, $0.04 on the restructuring side. I would call all of that productivity, but we just happened to break it out specifically because we called out restructuring charges.

Right. No, and then normally that’s how we’d see it, so that’s helpful. I’ll pass it on. Thanks, guys.

Great. Thank you.

Good morning, everyone.

Hi, Nathan.

Andy, I’d like to go back to the growth investments for a minute, and you’ve never been shy about funding growth investments in the company regardless of the environment. $0.11 is a pretty big step up. Is this something that we should anticipate continuing at that level for the next few years? Will it step up again in 2018, step down in 2018?

I think it’s what you would expect, right. The incremental benefits that we’ve always talked about that 30% to 35%, even including these investments is there, right. Those incrementals are there. Especially when you step back and think about the one-time thing that we benefited from in 2016. We’re not going to compress our incrementals by these kinds of investments, Nathan. But I think the variable here is obviously in a higher growth environment you’re going to get much better incrementals, in a lower growth environment you get more towards kind of the downside of where guided historically.

Understood. I was more talking about the level of investment that you’re putting in to the growth investments?

I’m sorry, Nathan. Yes, so I would say that proportional to the size of our business, this feels about right. So as the business gets bigger, the dollars will get bigger, but I don’t think – and proportionally it’s going to change dramatically from what we’re talking about here.

Okay. And then there’s a $0.03 headwind from higher share count. I think IDEX typically looks to offset dilution, is that not the case this year?

No, our practice has been to – we have a really disciplined process that we go through. We just said, hey, these levels will probably see some creep, but that could push one way or the other to be honest with you. We’re just kind of basing on the activity that we’ve had here in the last six months.

Fair enough. And then just one on North American industrial, do you have any visibility into the parts of North American industrial, where you’re seeing improvement or is this going through distribution and you lose visibility into it?

Well, so I think the way I’d say it is you do lose some visibility going to distribution. But what I’d say is what we saw in the fourth quarter and what were seen early in January, and I want to be – the reason I’m being so cautious here around this is – a few months does not make a trend, right. But I will say that what we saw through the fourth quarter early in January is pretty broad-based. Whether you’re talking about classic distribution at Viking, or gas as an example of Warren Rupp, or you’re talking about more value-added distribution, or you’re talking about even on the OE side, it’s been pretty broad-based.

All right. That’s helpful. Thanks very much.

Thanks, Nathan.

Thank you and good morning.

Good morning.

Hey, I just want to go back to the 2017 guidance bridge and maybe I missed it. But it seems like the incrementals from the $20 million to $40 million of organic growth going down to $0.15 and $0.23 of EPS seems very high. Can you talk about the incrementals you’ve assumed on that?

Yes. So, you’ve got to remember that includes price, right. So, that’s not just volume. The price side of it flows through at 100%, and so when you’re looking at numbers that are that granular, that call it 7 to eight-tenths of a point will get price in 2017 that’s going to flow through very high.

All right, got it. So assuming that, let’s call it 80 basis points in price. What should we be thinking about if you were able to do as far as incremental go, if you were able to go from 1% to 2% growth to 3% or 4% like what would an additional incremental 100 basis points of growth give you?

Yes, a really simple rule of thumb for us is a point of organic growth, it’s going to give us about $0.08 on earnings.

All right. And then on the health and science technology side, I’m just curious what you’re hearing from customers around the expectations for pharma and biotech in 2017. And if you saw any change in scientific fluidics in the fourth quarter?

So, Matthew, if you recall, even kind of two years ago at this time, we were talking about a product cycle in the industry that was going to get a lot better starting in 2017. We said we had a lot of visibility to that and that’s playing itself out now. The product launches we’re seeing across the industry are pretty good. You could pick your submarket; they’re generally pretty healthy, and we’re well positioned in terms of content by platform, so we think that 2017 and 2018 are going to be pretty good years. If you look at the analytical instrument, IBD, bio genomics, you pick your market, it’s going to be pretty good. Obviously, we don’t know how policy might impact that. That’s one wildcard that we really – everyone needs to pay attention to with the uncertainty that we’ve seen in early days, but generally, in current conditions we think both the industry is going to be pretty good and we’re well positioned.

Thank you very much.

You bet, Matthew. Thank you.

Thank you. Good morning. This is Andrew Krill on for Deane.

Hi, Andrew.

Hi, good morning. Thank you. So I want to ask, there’s been a lot of speculation on tax reform in the U.S., can you comment on how IDEX might fare, given these various proposals, including the border adjustability please?

It’s really tough to put your finger on it. Let me kind of walk you through a couple of things, and Bill, if you want to add some color to this. If you just assumed a 10-point U.S. tax cut, a way to think of that is you can put some math on that again. We said 10 points. We have about $100 million pre-tax in the U.S., so you’re talking $0.09, $0.10 of earnings impact if you went down to a 25% statutory tax rate in the U.S. That’s one way to put your finger on it. In terms of the cross-border issues, Bill, any commentary on that?

I don’t think we have any material risk if there were significant tariffs and replace NAFTA. For the most part, our production and supply chain is local for local, so not a lot of exposure there.

Yes, probably not a ton of negative. I mean, obviously, the thing that I’m most worried about, Andrew, is a trade war. I think everybody in my seat is nervous about that same possible reality. It’s one of the reasons why, frankly, we’ve hedged our bets here going into 2017.

Got it. Thank you. That will make sense. And there’s a quick follow-up like in terms of a customer weighing with if there’s any favorable repatriation holiday, can you remind us how much of your cash is overseas and I guess maybe what this could be used for?

Yes, I mean, there’s about $200 million kind of overseas, primarily within Europe. If there was a repatriation, we’d have to look at that and see we’ve done several deals in Europe so to pay a 10%, the repatriation tax might not be worth it if we have line of sight to some uses for that cash within Europe or abroad.

Great. Thank you.

Thank you, Andrew.

Hi, this is Nick Chen from Matt Summerville this morning. Thanks for taking my question. You guys touched on it a little bit before, but I just wanted to dig a little deeper into M&A. I was hoping you could talk about sort of some of the multiples you’re seeing following the recent melt-up in the market? Additionally, what verticals are seeing the most activity from your view?

Yes. Generally, Nick, the world has not changed that much that we look at. The biggest changes have really been around the public markets. Obviously, we don’t play a role in that world. We have bought some businesses from public companies in the past. But that level of volatility we haven’t seen it play itself through the broader M&A funnel that we look at. That being said, we’re in the same position we’ve been for an awful long time, which is things are expensive. There’s no doubt about it. You’ve got to be incredibly disciplined, and you’ve got to be disciplined around price, but you also have to be really disciplined around what fits in your operating model. So, there’s very few things that can make a deal go sour faster than overpaying, and we’re just not going to do that. We like our funnel, but we’re going to be very disciplined about prices in the marketplace, and that fundamentally hasn’t changed here in the last few months.

Great. And then just finally, I was hoping you could talk about in terms of improvement in energy in the industrial – general industrial markets? What’s your guys view there?

I’m going to call it cautious optimism, right. As I said before, we have seen some sequential improvement and it’s relatively broad-based. The downhole-related things, which we don’t have a lot of exposure to, right, it’s kind of 2%, 3% of our total business, that has been, obviously, the much more volatile piece where people are calling for more potential upside, it’s a really small piece for us. I don’t get too excited about that on either side. The things that are further downstream from there, those CapEx cuts came a lot later in the cycle and they’re still playing themselves out now. We think we’ll actually be behind that curve to some degree as that plays itself through and then we’ll see if capital investment makes its way downstream more quickly. So, I’m cautious generally with industrial and oil and gas. I’m more favorable in general industrial. I think the oil and gas stuff will take more time to play itself through.

That’s great. Thanks so much, guys. I’ll jump back into the queue.

Thank you.

Hey, good morning, Andy, Mike, and welcome, Bill.

Thank you, Scott.

Did you say Eric was there as well?

No, he is not.

A lot of questions have been answered, but I do have a couple others. The acquisition divestiture, this is just a simple one. Is that sort of like a 75, 35, 80, 40 territory on the acquisition adds versus divestiture subtracts on revenue?

Scott, I’m not exactly sure what you mean?

The $40 million of incremental sales from acquisitions?

So the $40 million is the amount of revenue that we had in IDEX in 2016 from the businesses that we sold. So we had $40 million of revenue in those businesses. If you look at it kind of on an apples basis, on a trade-off basis, incremental revenue of what we’re going to lose from divestitures versus the incremental that we’re going to get from the acquisitions because of where they landed in the year, you get somewhere around $40 million, $45 million of incremental good revenue in 2017. Does that makes sense?

Yes.

Yes, I was just looking for the two numbers that net?

So you’re talking about $40 million of divestiture that we won’t get next year against about $80 million, $85 million of revenue that will get incrementally this year netting out to call it plus $40 million to $45 million.

Yep, that’s exactly what I was looking for.

Yep.

So let’s say things don’t get better from here and your conservatism is valid on your organic side. Where do you have flexibility down the bridge here, obviously, I’m talking more specifically about the restructuring savings, the corporate expenses, productivity, where can you flex up a little bit to make sure that you make the guidance maybe even at the high end?

Yes. I’m not really worried about our ability to execute here, right. We’ve proven our ability to manage these items operationally manage the investments. If the business were to slow, could we accelerate some restructuring? Yes, we could. Could we slow down some timing of investments? Certainly, we could, and I think we’ve demonstrated a pretty good ability to do that over time.

Fair enough. Last question on the M&A pipe. So, obviously, you had a big year in 2016, based on kind of where you sit today with things at various levels in the funnel. Can you get halfway there? I mean kind of where is your head?

At this stage, it’s tough to say because as I mentioned, I think it was Steve who asked the earlier question around this. We’ve got a decent funnel. We don’t have anything kind of imminent. My hope would be that we get somewhere between. At the end of the day, it’s not something that I can peg at this point.

It’s fine. Thanks.

Thanks, Scott.

Hi, I’m standing in for Charlie Brady this morning. Thanks for taking my questions.

You bet.

Just one more, I guess for you guys on the growth investments, I know you guys have been talking about it quite a bit on the call. How should we think about sort of the margin impacts on each segment from these investments? I’m looking at FMT right, the adjusted margin at 27.2%.

Yes. I don’t – I wouldn’t think about the growth investments kind of how they would impact that is not going to be material so to speak. If you look at the overall margin performance that we expected in 2017 by segment, I think FMT for the year should be in the 25% range, maybe a little bit higher, 26%. HST in that 22% to 23% range, and FSD in that kind of 25% range. At the segment operating level, that’s what you should expect next year. So the investment should materially impact that. Again, as I answered before, even with the investments, we’re still very much in line with our expectations for incremental operating margins.

Gotcha. Thank you. And then just last one for me. What are you guys seeing sort of the exit order rates in January? I mean, obviously, 2% growth in organic orders in 4Q is obviously a welcome sign. How do you guys sort of see January shaping up? Is that progressing more in February?

So far things have been decent in January. The trend that we saw at the back-half of the fourth quarter have continued. But at this stage again, I’m hesitant to get more aggressive because it’s such a short period of time with a level of uncertainty that’s out there economically and politically, it’s prudent to be cautious.

Right, thanks. That’s all I have.

Thank you.