藝達思 (IEX) 2012 Q3 法說會逐字稿

Good morning. My name is Sarah, and I will be your conference operator today. At this time I would like to welcome everyone to the IDEX Corporation's Q3 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Michael Yates, Vice President and Chief Accounting Officer, you may begin your conference.

Thank you, Sarah. Good morning, everyone, and thank you for joining us for our discussion of the IDEX third-quarter 2012 financial highlights. Last night, we issued a press release outlining our Company's financial and operating performance for the three- and nine-month period ending September 30, 2012. 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 from IDEX management are Andy Silvernail, our Chairman and CEO; and Heath Mitts, Vice President and Chief Financial Officer. The format for our call today is as follows -- we will begin with Andy providing some insight from his first year as CEO and a summary of our strategic planning process that was recently completed. And then we will provide an updated view on our capital allocation strategy. Next, we will discuss the third-quarter 2012 results, followed by a walk-through of our three business segments. And finally, we will wrap up with our outlook for the remainder of the year. Following our prepared remarks we will then 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 855-859-2056 and entering conference ID number 40918415; or you may simply log onto our Company's homepage 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. Andy?

Thanks, Mike. Good morning, everyone. I would like to thank you for joining us as we talk about the third quarter.

In the quarter, we beat the high end of our expectations in profitability and cash flow through good execution across the Corporation. I am proud of how the team is delivering in the face of a difficult macroeconomic environment. As Mike said, before going into the quarterly results and our outlook for the balance of the year, I am going to take a few minutes to give some insights from my first year as CEO and a brief overview of our recently completed strategic plan.

As I stepped into the role in August 2012 -- excuse me, 2011 -- a new wave of issues started to roll through the global economy. The US government faced off over the debt ceiling; Europe's financial issues came to the front; and China began aggressively to work to avoid a hard landing. Month to month and quarter to quarter, we've seen markets, regions and customers launch from one side the other, from rapid demand to hesitant restraint and back.

This volatility has been a hallmark of the global economy since muddling out of the Great Recession. I feel very good about how our team is engaging these challenges, delivering solid results, particularly in profitability and cash flow. Our attitude -- the attitude we have internalized -- is that we need to take advantage of these times. We need to outcompete to win for our customers, our shareholders, and our employees. In doing so, we can consistently position ourselves to be the partner of choice and earn the right to grow.

Leadership emerges in difficulty, and our team has done that in 2012. This is been one of the most satisfying aspects of the past 15 months. My top priority is to foster outstanding leadership throughout IDEX. It is this dedicated leadership, leadership on the ground, that drives innovation, quality, outstanding service, and productivity. In the past year, building off a strong foundation we raised our commitment, investment, and expectations in order to deepen our leadership capabilities. We have enhanced leadership development programs throughout IDEX, and our most senior executives have been asked to play an increasingly critical role in development and mentorship. We have also strengthened our acquisition integration capabilities, and are using our integration teams as a way to stretch and grow people while achieving our value creation objectives. These investments will pay dividends for years to come.

A second important aspect of the past year has been the embrace of our global platform strategy. Our six strategic platforms were created to accelerate profitable growth. The platforms help us leverage innovation, applications, channels, and cost. They also give us better ability to source, conduct diligence, and integrate acquisitions. In the past year, we've executed three deals, all of which fit into different platforms. We're finding already that this gives us significantly more ability to achieve our strategic and financial objectives while reducing risk.

Let me share a final observation from this past year. We're fortunate to have businesses that are differentiated, well-positioned, and highly profitable. We can do better, however. We started early, tackling the realities of the slowing end markets and geographies. We have made difficult structural decisions. While these decisions are never easy, they allow us to be more competitive, to reduce our fixed cost base while increasing investment for growth. It is our intention to have all of the significant restructuring activities behind us as we enter 2013.

With that, I'll turn to slide 5 and give a brief summary of our annual strategic planning process that was completed in September. Every year, we prepare a three-year strategic plan that focuses on accelerating profitable growth through competitive differentiation. These plans are developed by business, and they are a critical input to the overall enterprise strategy. Based on these assessments, our investment choices become clearly defined. I was very pleased with the output of the planning process. While I wish the macro trends would put more wind at our back, our teams are facing reality and are determined to win in any environment.

Overall, we believe we will continue to operate in a muted macroeconomic environment. Our goal, regardless of the macro trends, is to outperform global growth by 2 to 3 points organically; and deliver consistent double-digit earnings growth, great cash conversion, and superior return on invested capital over our business cycle. To deliver these results, our global strategy is simple -- to build global platforms and defensible niches in attractive, highly-engineered markets where we can create a leadership position and successfully apply the IDEX operating model.

This strategy is consistent with the division we outlined last year, excuse me, division we outlined last year. To deliver this strategy we have become increasingly more focused on three themes. First, we will accelerate organic growth in our core businesses. This will be executed through our platform strategy.

We will increase alignment to end markets in regions with the most attractive growth profile. Today, about 75% of our revenue is aligned to faster growing end markets. We want to consistently improve the mix while also moving our emerging market exposure up. Today, that stands at about 20%. While some of the emerging markets challenge the present, we are confident that the long-term trend for superior growth is regions East and South. To enable our growth, we will increase investment in business development, product management, and product development.

Second, we identified execution initiatives specifically focused around core customers and product segments. We've had great success over the years deploying mixed-model [lean] and commercial excellence capabilities. We are known by our customers for keeping our promises. The bar must be continually raised, however. In a world of slower overall economic growth, we must continue to have the best quality, lead times, and costs. This will enable us to win the competitive battle today and invest in innovation and growth for tomorrow. Our mandate is to overserve our best customers while eliminating non-value-added complexity that continually creeps into a highly engineered model.

And lastly, we are emphasizing more flexible capital deployment to maximize total shareholder returns. Strategic acquisitions will continue to be our primary use of excess cash; however, we plan to repurchase IDEX stock in a more-consistent manner, and will increase share repurchases when deemed advantageous. Let's go to the next slide to talk more about capital deployment.

I am now on slide 6. We have the ability, and it is our intention, to deploy $1.5 billion of capital over the next three years. We will maintain a conservatively-structured and long-term focused balance sheet. We will have ample capacity to support concurrent investments. Consistent with past practices, organic growth will always receive our first dollar of investment. With respect to dividends, we will return approximately 30% of our earnings to our shareholders each year.

In addition to organic growth and consistent dividends, strategic acquisitions will remain a priority. We have a long-standing and disciplined approach to M&A, the current pipeline is solid, and we are at various stages of diligence on a number of small and mid-size deals. Our acquisitions will focus on building out our platforms to expanding our geographic reach, building technology gaps, and accelerating into adjacencies. As I mentioned earlier, we closed on three smaller deals this year, most recently Matcon in early Q3.

We believe that our capital deployment must also be flexible. We need to be able to react and take advantage of dislocation and asset pricing when opportunities present themselves. As an example, in 2012, we've seen the valuation for reasonable quality medium to large businesses become excessive. Buyers -- strategics and private equity -- are paying up due to weak GDP growth expectations and the availability of cheap short-term money. Let me be clear -- this is not our game. Instead, we've been active with reasonably priced small to medium deals, and we repurchased shares throughout the year. We deployed over $150 million between the two.

We will continue this approach as long as current market conditions persist. In terms of share repurchase, last night we announced that our Board of Directors approved an additional $200 million. This is on top of the approximately $50 million that remains from our prior authorization. Generally, we will target buying a minimum of 1% to 2% of our total outstanding shares annually. The larger authorization gives us the flexibility to increase our share repurchase beyond the 1% to 2% when IDEX is trading at a meaningful discount to the Company's intrinsic value and the M&A market is overpriced.

We have outstanding cash flow and a terrific balance sheet. To deliver the best total returns to shareholders, we will use these powerful assets intelligently, investing $1.5 billion for organic growth, consistent dividends, as well as a flexible approach to strategic acquisitions and share repurchases. Taken together, we believe we can consistently deliver double-digit annual earnings growth and high returns in capital over the business cycle.

With that, let's move on to the quarterly results. I am on slide 7, everyone.

We had a solid quarter delivering earnings above the top end of our expectations and with outstanding cash flow. We are executing well in these uncertain times. Demand remains inconsistent, however, particularly in Europe and China. The headline news is real. Europe is very soft, especially in the South, while Germany and pockets of Eastern Europe are okay. India and China are decelerating, but on the positive side, Southeast Asia is holding strong. And broadly speaking, North America has remained resilient. Furthermore, we've seen very tightly managed inventories throughout distribution and OEMs. I will go into this in more detail in our segment discussions, but the overriding theme is ongoing volatility in challenging market conditions.

For the quarter, sales were up 1% organically, but orders were down 3%; down 4% organically. And for the first time in several quarters, more sales were generated domestically than internationally, demonstrating the relative strength in the US and weakness in several other geographies. Third-quarter adjusted operating margin of 18.3% was equal to the third quarter of last year. But on an apples-to-apples basis, excluding the benefit in 2011 from the forfeited CEO equity, Op margin was up 60 bps.

Third-quarter EPS, adjusted for restructuring charges, was $0.66, $0.02 above the high end of our expectations. The third-quarter 2011 EPS, as you'll recall, benefited from two one-off items -- specifically, the forfeiture of CEO equity compensation mentioned above, and a true-up of the 2011 year-to-date tax rate. Absent these two discrete items, and the restructuring costs in both periods, EPS would have equaled in the quarter. Q3 included approximately $7 million of restructuring as we continue to proactively reduce structural costs. As I've said in the past, it is our intent for our restructuring activity to be completed by the end of the year.

In Q3, we generated free cash of $92 million, up 7% from the prior year. The $92 million of free cash flow is a quarterly record for the Company. The balance sheet remains extremely strong, providing us flexibility I've already highlighted. I'm pleased with the team's success in spite of the challenging external conditions.

Let's start the segment discussions with Fluid and Metering -- I am on slide 8. For the fourth quarter, orders were up 3% organically, while organic sales were down 1%. Our ag business continues to shine. Demand remains strong with double-digit growth coupled with significant margin expansion. We continue to be optimistic about the growth potential within this business.

Within our Energy platform, we remain bullish on the broader energy distribution outlook. While the Americas and South Asia remained strong, the rest of the world, especially China, face pressure in Q3. The current economic environment has clearly impacted the project activity for our Chemical, Process and Food business, with orders slowing in Q3. With that said, this platform continued to deliver productivity through cost-reduction initiatives and operational enhancements.

As we've highlighted previously, our Water business continues to bounce along the bottom. The industrial portion of the business is solid, while municipal continues to wait for meaningful changes in funding, specifically in Western Europe. The pattern of high [quote] volume is biased toward operating spending, but we still see very weak capital spending. These trends are unchanged. FMT's operating margin of 21.4% was 130 basis points higher than last year, which once again demonstrates the outstanding job the team is doing in delivering in a difficult environment.

Let's move on to Health and Science -- I am on page 9. The segment performed as we expected for the quarter. As we discussed during the second-quarter call, we knew we would have difficult comparisons for Q3 in orders and sales. Orders were down 9% for the quarter on an organic basis, while sales were up 2%, but down 4% organically. Geographically, Europe and China were weak across the segment while results in North America were reasonable.

The Scientific Fluidics business has found equilibrium. While the concerns about government funding persist as we approach the election and the questions of sequestration, we saw a solid rebound in the Analytical Instrument and Diagnostic markets, and we expect to have positive comparisons in Q4. Within our Optics and Photonics platform, we're beginning to see the benefits of all the actions we've taken over the past year to right-size the business. Orders improved sequentially and margins expanded as we have driven cost out of the system. We also built Optics backlog in the quarter for the first time since the CVI acquisition.

Overall, in the quarter, the HST Segment reduced backlog by approximately $10 million. This is primarily attributed to softness experienced in our Material Process Technology platform and the businesses with heavier industrial exposure. Our MPT platform produces large capital equipment for pharmaceutical, chemical, and food production lines. In the third quarter, MPT started to feel pressure driven by the constraints of our customers' capital budgets. This softness is most pronounced in Asia, but it was a trend in most markets. Operating margins of 17.3% were up 70 basis points sequentially for the segment. And, on an apples-to-apples basis, adjusting for the impact of recently completed acquisitions, margins were up 140 basis points sequentially. The sequential improvements demonstrate the benefits from the aggressive structural actions we've taken this year.

Okay, I am moving onto our final segment; I am on page 10. Fire, Safety and Diversified total orders in the quarter were down 10%; organically they are down 7%. As you know, the project activity tends to create lumpiness within this segment. Overall, end market demand for the segment was mixed and largely followed geographic trends. Sales increased 10% and were up 13% organically. As I previously discussed, this quarter benefited from the delivery of large dispensing replenishment order we received in Q1. This order will continue to ship [ratibly] into Q1 of 2013.

In the quarter, our Dispensing business commercially released our X-Smart, an entry-level automatic color dispenser that will provide a tinting solution to a broader base of customers. The initial interest has been tremendous in the emerging markets, as well as smaller retailers in developed economies. X-Smart is a global product for the paint-dispensing market that is being manufactured in our shared facility in India. We believe this innovation is another example of IDEX responding to the voice of the customer and delivering a market-demanded product.

The Municipal Fire market is playing out like we anticipated. The US is stable, while Europe is becoming more challenged as budget cuts are limiting capital spend. However, our fire suppression business continues to offset the European headwinds through penetration in adjacent markets both domestically and internationally. The Rescue business is experiencing similar trends as Fire. However, one unique aspect is that Chinese budgetary funds are currently being held up in connection with the upcoming provincial elections. We fully anticipate funding and expect to see the benefits in 2013.

BAND-IT continues to be a product innovation execution story regardless of market pressure. They continue to find applications for growth while remaining focused on execution. I am very pleased with the entire platform in the quarter. Along with delivering on organic growth, profitability was impressive, with operating margin up at 24.8%, up 360 basis points from the third quarter of last year. The margin expansion is largely attributed to structural cost actions previously taken, volume leverage, and truly excellent productivity.

Okay, I am going to wrap up my prepared remarks with our guidance update on slide 11. Q4 organic revenue growth will be relatively flat. FX will have a modestly negative year-over-year impact in Q4 sales. We have maintained our full-year 2012 EPS guidance to be in the range of $2.65 to $2.70, with organic revenue growth of approximately 3%. Given the current macroeconomic environment and starting backlog, we are trending more towards the bottom of our range. In order to achieve the high end, we would need to see near-term improvement in Europe and China, and channel inventory fill from current low levels.

Full-year operating margin for the company will be between 18% and 18.5%. Some other modeling items to consider, which remains consistent with our prior guidance -- the 2012 tax rate is anticipated to be approximately 30%, relatively in line with our year-to-date rate. Full-year CapEx will be roughly $38 million, and as we have always demonstrated, we will continue to convert cash extremely well in excess of net income for the full year. Finally, our earnings projections exclude future restructuring, future acquisitions, or cost and charges associated with acquisitions.

All right -- in summary, IDEX demonstrated resilience in the face of [volatile] times. Our businesses are very flexible and they know how to react to changing market conditions while always maintaining our customers is our number one priority. We do continue to see and experience difficult market conditions, but we are committed to executing through our proven operating model, which has really demonstrated our ability to support organic growth while expanding margins despite external market pressures.

With that I'm going to conclude my prepared remarks for the third quarter, and I will open things up to questions. Operator?

(Operator Instructions)

Allison Poliniak, Wells Fargo.

Good morning, guys.

Hi, Allison.

On the organic revenue growth assumption for 2012, it seems like you guys have obviously ticked it down a little bit. Is there anything specific from Q2 to Q3 that is driving that? Or is it just general macro overall?

Allison, it's really the general macro. I think like we've all seen here in the news and in the recent releases, the big trends continue to be Europe. That's kind of been, overall, the biggest hole. China in the quarter, as we've talked about before, we saw deceleration happening really late this last time last year, fourth quarter last year, and we saw that in 2Q and 3Q.

Then, I would say the one thing that might be a little bit different is we get a sense that capital spending, larger capital spending, really tightened up in the third quarter. And from the quote activity that we have, it doesn't look like that's a long-term trend. It really looks like that's some clamping down in advance of the elections and the end of the year issues relative to the fiscal cliff.

Great. Then, you guys did a great job on the execution side. Obviously, there's a lot of uncertainty out there. How should we be thinking of that going forward in terms of, say we get core down 5%, do you still have the ability, do you think, to hold margins relatively flat at this point? I know without the volumes?

Allison, with core down 5%, that's awfully tough to offset, right? At the same time, we believe that if we saw a recession like we did in 2008, 2009, as you might imagine we get this question a lot -- we took out mid-$40 million of cost when that happened. And just to be clear, we don't have that kind of same amount of cost to take out. We didn't add back anywhere near the cost that we took out in that time period. But we think we can take out in the neighborhood of $20 million or so, if we had a substantial drop. So, the way that I kind of couch people to build up a model and those things is think about the contribution margin flow-through of a drop like that, and then add back, on an annualized basis, kind of that $20 million rate.

Great. Perfect. Thank you.

Thanks, Allison.

Scott Graham, Jefferies.

Morning, Scott.

Same track, cost side. You've taken restructuring charges in a number of successive quarters, Andy, and I am just wondering what the cost savings benefit it will be from them? How much have we seen of it, and how much is still in front of us?

You know, Scott, we haven't been real specific with it. Let me give you some general guidance though. The cost that we took out, again, referencing back to '08, '09, those were costs that came out of regions that typically had a quicker payback just frankly because of the structural costs and severance associated with them are lower. The costs that we have been going after here this year are more expensive costs with a little bit longer payback.

If the other ones recall at 12 to 15 months, these are more 18- to 24-month paybacks, generally. I would say we've gotten less than 25% -- is that fair, about less than 25%, Heath, in the cost out that we think we will see on an annualized basis? The reason being is a lot of the stuff is going to get finalized in the fourth quarter, the actual cost finally coming out.

Heath, anything to add there?

No. That's right. You'll see additional restructure in the fourth quarter as we wrap up the internally-announced items that are in play as we speak. And then obviously, you saw a $7 million restructuring number in the third quarter, most of which that we start to see the benefit from late this year but really more into next year.

Yes. So, think of two-thirds to three-quarters we will see in 2013 and beyond.

But when you say payback, are you saying dollar for dollar on the charge?

Yes, that's kind of how we think -- we think of it as kind of a cash basis, you bet.

Okay. Now, is this incremental to what has historically been this $20 million to $25 million of productivity?

It is. It is, Scott. Now, most of that $20 million to $25 million is going to be more around sourcing activities than restructuring, right? That $20 million to $25 million has kind of shifted more towards -- 75% of which is more sourcing or material savings, and the remaining piece being more the operational excellence savings.

As you would expect, coming out of the last recession, we just don't have the direct labor base to work from in terms of that side, so it tends to be things more around things that are associated with on-time delivery, scrap reduction, overtime reduction and those types of things. But the restructuring dollars we're really talking about here are in a different bucket, in the sense that they tend to be more associated with facilities going away.

Overhead -- (multiple speakers)

Good. Thank you. Last question is -- this picture of this balance between acquisitions and share repurchases is a pretty big departure from what we've seen historically from the Company. So, I'm just wondering kind of why are we there? I mean, I certainly understand the tenets of returns on invested capital and your focus on them, it is just that historically you have been much more tilted, obviously, toward M&A, and I'm just kind of wondering what landed us here? Is it a change in the M&A environment? Are prices too high? Or is this just Andy Silvernail's stamp?

That's a great question, Scott. I appreciate it. We put an awful lot of thought into this over the past year, and it really is a combination of things. So, let me first state that strategic acquisitions remain number one. All things being equal, once we fully funded organic growth and we've paid the dividend as we've set in a range, all things being equal, we want to do strategic acquisitions.

That being said, acquisitions don't exist in a vacuum. They exist in a market, and there are going to be times when acquisitions are not as attractive, and there are going to be times when IDEX is more attractive. And we think the same valuation techniques and the same level of disciplined thinking ought to go into both of those. And so, when we see dislocations, we think we ought to be flexible enough to do so.

I think we want to be very, very clear. We don't intend to be a company that is consistently on the far end of share repurchases. That is not our intention. But when the opportunities present themselves, we want to be prepared to take advantage of that.

And then, when you look at today's market, as I mentioned in my prepared remarks, if you look at medium and large acquisitions, or M&A properties that are of any quality at all, there is a dislocation versus any historical standard that exists right now. You are seeing industrial properties trading at 12, 13, 14, 15-plus times EBITDA for things that are substantially, substantially of lower quality than IDEX as a whole, and so we are not interested in that game. I guess, that's funny math that we can get our head around.

Now, at the same time, when you look at the small- to medium-sized market, there is still stuff out there. We've got stuff in our funnel today that we're very excited about. We could potentially close some this year, we'll see; it's a little bit tougher to do right now. But that is smaller, that are of high quality, and we can put capital to work that really fits our strategy. As an example, if you look at the three deals we have done this year, they average 7 to7.5 times EBITDA pre-synergy. They all fit nicely into our platform strategy, and that's the kind of game we want to play. Now, we would love it if they were bigger, if they were 3 times the size of what they are, but we're going to be disciplined.

Thank you very much.

Thanks, Scott.

Robert Barry, UBS.

Hello?

Hi, Robert.

I just wanted to clarify on the 4Q outlook for sales, I think you said about flattish organically. It sounds like FSD up nicely, HST up maybe a little, and FMT down a fair amount perhaps, is that kind of directionally how you are thinking about it?

Robert, this is Heath. We didn't specifically guide by segment, but I think directionally that's -- you're not that far off.

Okay.

We are going to continue to benefit in FSD from some of the replenishment activity, as well as there is a little bit of seasonality in FSD, especially with the Rescue Tool business that tends to have -- strongest quarter of the year tends to be the fourth quarter.

Yes.

So, as you think about things on either -- on a sequential basis, you'll see a little bit of uptick there. On a year-over-year basis, it's really more of the dispensing activity going on.

Yes. I wanted to just drill down into FMT a little bit on the Chemical Project activity. I know a big theme we've been talking about for a while is cheap shale gas and investment there. I mean, maybe there is less drilling for gas, but the gas is still cheap. Has that dynamic changed? Or maybe within Chemical, what's the dynamic that is causing that slowdown?

Well, there are a couple of things in there. One is the impact of shale gas more broadly, and two is what is going on in CFP, we call it Chemical Food and Process. So, on the shale gas play, as we've said consistently, we don't play really big in that. We play in the custody transfer side, and in the storage side to a degree. We never had that kind of crazy ramp-up that happened over the past 24 months, and we didn't have the crazy ramp down. So, then we kind of put that to that side.

I was just talking in the context of the chemicals investment that it was engendering? Sorry.

Yes. That's a good point. What we are seeing in the overall CFP platform is what I would call it is really a leveling off right now. A big piece of it -- there are two things that we are seeing. Number one, the project business that is kind of driven at the OEM level, specifically as you look at Asia, that did tighten up in the quarter. There's no doubt about that.

The day rate business, the kind of flow business that's coming through distribution, generally that looks pretty good. So, less concerned about that than I am about some of the capital stuff. But there is some leveling off generally of that business. As you know, that has been a horse that we have ridden. It has been incredibly strong for us for a long time here. And we've seen growth slow down a little bit.

Yes. Maybe if I could quickly shift focus to the margin side and in HST. I know that you had talked about exiting the year at about an 18.5%, mid-18%s I think was the comment? How is that trending? I know that the margins sequentially tick down a little bit in the quarter. I don't know if a lot of the restructuring costs should be adjusted out of that 17.3%. Just maybe a little color on how you're thinking about the outlook for the margins in HST.

No, Robert, the sequential margins for the segment actually ticked up about 70 basis points, so --

And 140 apples to apples. Yes. Apples to apples it's about 140 because we did have some acquisition impact with the Matcon deal and the costs associated with that deal, both the step up as well as just the acquisition-related costs there. So, we're on track from the cost-out perspective, and that is mainly around the Optics platform that we discussed at length last quarter. I would say, at the current volume rate, we are probably somewhere between mid-17%s to 18% in terms of where that segment is going to end up for the year on an exit rate. So, we're down a little bit, but that's really more following the volume trends than anything else. If anything, I would say we are exceeding our expectations from a cost-out perspective relative to what our plans have been for that segment.

Yes. Okay, that's helpful. Thank you very much.

Thanks, Robert.

Thanks, Robert.

Mike Halloran, Robert W. Baird.

So, on the commentary you made about refocusing or continuing to focus or even more aggressive focus on higher-growth end markets, higher-growth product categories, higher-growth geographies, does that have any implications for a divestiture strategy? Any change there?

We've really remained very consistent with how we thought about any type of divestitures. One of the challenges that we have, and the things that get talked about often is that they are very, very high return on cash-on-cash returns. And unlike some of our businesses that sit within HST and FMT, you don't have what I'll call -- there aren't really a lot of strategics out there that are going to get synergy benefits and, therefore, can really pay up in this market. They're really more businesses that would likely be a private-equity-type transaction. And even with the frothy markets that we are seeing today, those kind of properties aren't seeing 10, 11 times multiples.

So, the answer to your question, Mike, is we are not going to sell a business unless we believe it's absolutely the right thing for the shareholders, overall. And that would really have to mean that it got at the right price with the right partner, and candidly, that is hard to see happening in the intermediate term.

So, no real change there. And then, just kind of walking through that $1.5 billion-plus capital deployment in trying to put the categories into buckets. If you continue your dividend growth at the pace you're at, you are probably in that $75 million-plus of expenditures per year on that side; buybacks, $40 million to $70 million give or take, maybe a little bit less. Could you kind of then split how you are thinking about the internal organic investment side? Maybe give us some perspective on how much capital you've been spending on that side over the last few years? Or maybe percent of revenue, percent of cash flow, something like that? And then, maybe compare and contrast a little bit on that side?

Yes. Great question, by the way, Mike. As we think about this, you are right, the dividend is kind of [$225 million to $250 million], all up. I'm thinking about the $1.5 billion as a whole. The range you laid out for buybacks, if all things were equal, that's probably about right, too. So, you end up, let's just call that $150 million, $200 million, plus or minus, somewhere in there. And so you end up with about $1 billion left, right?

And the reason I say $1 billion left is, in that number we are already thinking about organic investments being fully funded. We very, very rarely say no to an organic investment. The return on tangible capital of our businesses is very, very high and, therefore, we're able to make these investments and to feel very good about them. And even with that, they just simply don't absorb, can't absorb the kind of free cash flow that we throw off.

So, now, that being said, you can tell from my prepared remarks around product development, around business development and around product management, we want to move some more resources across the business into there. But we think we can fund that by taking cost out of other places, some of the overhead costs we have been taking out, and reinvesting them without having to give up the margin expansion opportunities we talked about. So, what that really does is that leaves about $1 billion for either strategic acquisitions, or in the likelihood if we were to have some kind of an event where you can't do acquisitions and absorb that kind of capital, we'll redeploy it elsewhere. So (multiple speakers) go ahead --

So, realistically then, when you think about it, you guys have been talking about it on an annualized basis, $300 million-plus of acquisitions pretty consistently now. You flexed up and flexed down a little bit in certain years over the last couple of years. But honestly this sounds like not much of a change from the acquisition standpoint, from an intent standpoint. Just recognizing that the external environment maybe might not be as conducive at periods of time, so augmenting it more with the share repurchase side, but not much of a change in the overall acquisition stamp from an overall acquisition deployment standpoint?

Yes. I think that's a fair statement. I guess the only thing I would make exception to is that we're certainly growing. We think that that EBITDA is going to grow, and gives us more leverage over time, but generally we think -- we agree with you.

That's great. Thanks for the time, guys.

Thanks, Mike.

Matt McConnell, Citi.

Hey, Matt.

I'd like to follow-up on that -- how you get at the $1.5 billion. Because it looks like that's a nice multiple of what you would have in earnings over the next three years, and even if we give you credit for good free cash flow conversion, what else is in there that can get you that $1.5 billion? And had you been talking about a number of $1 billion to $1.2 billion previously?

Matt, this is Heath. We have been talking about a number of $1 billion to $1.2 billion, and it does assume, on top of our free cash flow generation, some moderate room for taking on some debt to flex up into somewhere between 2 and 2.5 times EBITDA if we needed to fund the acquisitions and do everything else that Andy just laid out there.

Okay, great.

Matt, we have $600 million today on our revolver that's untapped. And then you've got the cash flow, and incremental leverage on the cash flow.

Okay, great, that's helpful. Then, if I could touch on CVI -- is there anything big left to do from a cost perspective? And maybe if you could give us an update of what the revenue run rate is and maybe where it would need to get? I know you had been talking about a mid-teens operating margin, how much more incremental revenue would you need to kind of bring that back to the discussion for CVI?

So, generally, from a cost execution standpoint, we'll finish what we had laid out in Q4. And I will say that we are very much on track to execute what we've laid out, and we talked about in detail, or more detail rather, in our Q2 call. As I said, the platform as a whole, built -- overall, we've built backlog in the quarter, and that was nice because we had not done that in a while. So, I think we are on track to that.

Now that being said, the defense markets and the semiconductor markets our still not being particularly helpful, right? So, the overall demand is still not great. We did see a bounce back on the scientific side in Life Sciences generally, in the quarter, which is good news. But to get to that kind of mid-teens that we're talking about, we still need a little bit of help on the top line, but not a ton.

Okay. All right, great. That helpful. Thanks very much.

Thanks, Matt.

Charley Brady, BMO Capital Markets.

Andy, could we go back to your comment toward the tail end of your prepared comments when you said something along the lines of you were trailing towards the lower end of your guidance. Can you give us a sense of the tenor of business as you went through the quarter? And has that changed much going into the first part of October that leads you to make that kind of comment?

Thanks, Charley. Actually, the order and sales book was pretty level throughout the quarter. I will say it improved a little bit towards the back end of the quarter, but that's kind of typical. That's not atypical. October has been okay, and when I say okay, it's been kind of in-line with our expectations.

We are pretty hesitant to call anything different from the trend of what we've seen in October just because it is so early on, we really only have two weeks of view from it. There is nothing in there that, at this point, I think threatens the bottom end of that expectation that we are talking about. At the same time, I would say that we are definitely tracking.

If the results that we are seeing today, and the backlog we came into the quarter with, we expect that we would finish at the low end of those expectations. And I think that's a safe thing to do. If you see some rebound from capital spending, if we see any rebound at all in Europe, which we don't expect, China, which could happen, and potentially some inventory fill, that's what gets you to the higher end of that expectation. But I think it's very, very safe to say that that lower end is what we expect at this point.

Okay, thanks. And on the Fire and Diversified and the dispensing side of the business, how much of that organic growth is being driven by that fill of the large order that is going to kind of fill out into Q1 of '13? Is it the bulk of that organic growth, or is there other stuff within that business that's also seeing up?

Everything in the quarter was up modestly. Rescue tools and BAND-IT did okay. So, I mean obviously we are getting some significant help at the segment level from that order. But it wasn't the whole thing, no.

Okay, and then just on --

Even the Fire piece on an organic basis has held in okay, given the macro trends.

Okay. That's helpful. Thanks. And just on a larger sort of bigger-picture, longer-term outlook, as we look -- your commentary about how you want to grow above global GDP by 200 or 300 basis points, and your M&A outlook right now, what do you think the mix is on longer-term organic growth -- I guess that's 200 or 300 basis points above global GDP. But how much more leverage on organic growth kind of across the cycle -- or not organic, rather acquisition growth do you think you can get across the cycle, given your current framework of how you are positioning your M&A strategy?

Yes. If we assume that we can buy at reasonable multiples, so let's pick an average of, let's just say 8 to 8.5, let's just pick a number like that. In that kind of environment, you can add 5 points-plus of growth to the top line a year, if you are buying at those kind of rates, plus or minus. Assuming that you are buying businesses that aren't quite as good from a profitability standpoint as IDEX as a whole, but have the ability to get there, you can add kind of that 5%-plus in top line.

Okay, thanks.

Yes. Thanks, Charley.

Mike Wherley, Janney Capital Markets.

On the Fire and Safety segment, it looks like BAND-IT and Fire Suppression have been doing a great job of finding new markets for their products. And I was just wondering if the sales strategies being used there can be used or are already being used by your other segments?

Yes. Absolutely. BAND-IT has long been really our shining star in taking applications and finding new vertical markets and going really deep in there. They've been very, very successful. For Fire, that's kind of a recent phenomenon, and they've really moved into the nuclear side of the market, and had some success here this year. You had some impact from the Fukushima event that really has driven some safety initiatives across the global nuclear power front that they've taken advantage of. So, that's the first thing.

The second part is absolutely. The focus of grabbing onto some vertical markets and going deep is very valuable. At the same time, I think what's really important is you've got to stay close to your core. Our core businesses are exceptionally good, and even in places that we have what I'll call high market share, there is still lots of room for growth on a global basis, in new applications or near adjacent applications. And my real focus with the teams here is -- let's maximize our core so that the customers that we're exceptionally successful with, that we over-serve today and that we know we can make money by creating real value for them. And so, that's really priority one, but we do do it, but focus is absolutely on the core.

Okay. And then, on the Rescue side, you said that you think that this sort of pullback in China is temporary, and you expect to get these sales in 2013. What gives you that confidence?

A couple things. The biggest chunk of the business that we're talking about right here is relative to the Chinese army. And we had some real success in actually signing a long-term agreement there, and I feel very, very good that that spending is going to continue. So, we have an agreement that we think is going to be successful. Unlike the other players who are in the market, we have an exceptionally strong local presence in China. So, we feel good that that's going to play out.

Okay. And last of all, just on your strategy page, you said that you want to reduce complexity through business segmentation and simplification. Can you just add a little bit more detail there?

Yes. Absolutely. When you look at any one of IDEX businesses, the beauty and the curse of a highly engineered model is you bring an awful lot of complexity into the mix. And as we focus around our best customers and our best products, you can actually take product design -- you can simplify in product design, you can simplify in channel management, you can simplify in supply chain execution. So, getting really tight around those core products and core channels.

Then, the long tail -- in businesses like ours, the long tail tends to creep in over the cycle, back in and back in again, and so you've got to take out that complexity and make sure you are servicing that long tail well, but they are going to be treated differently than the core. And how you resource in terms of how you align people, how you align really throughout the entire supply chain is pretty important.

All right. Thanks a lot.

Thanks, Mike.

Andrew Noorigian, Vertical Research.

I just wanted to touch base on Water real quick. I think last quarter it kind of sounded like things had turned the corner, and maybe you mentioned some signs of life. Now, it seems like it could push out past 2013. I was just wondering if anything had changed there in the quarter, and what you are seeing in that end market?

You know, what we started to see kind of in the second quarter, specifically in the US, is we started to see the quote activity really turn up, and in just the number of quotes that started to play out. At the same time, if you'll recall, what we said was -- those quotes where it looked like they were coming out of operating budgets were smaller over a longer period of time, and they look like things, call it, necessary maintenance or necessary programs, so to speak. We said we were cautiously optimistic, and I think what's happening here, and I am talking about the US very specifically, municipal water, is the funding just has not broke yet. And until you see municipal receipts substantially change, and we've said this a couple times in the past, that's just going to be tough for that to play out.

Europe -- the Europe piece we've been relatively pessimistic about. I would say that that pessimism was realized in the third quarter, and you are just seeing real tightness across the European municipal budgets as they deal with their fiscal issues. The industrial water piece is okay. That's been solid, especially in North America, but it's the municipal Europe that's the biggest problem, and just we're not seeing quotes turn into orders yet in the US.

Then, just going back to M&A real quick. Can you maybe flesh out where the priorities to allocate the dollars are? Is it more in HST, FMT, is it a balanced approach, and what kind of end markets are you looking at?

First of all, we really like the balance between FMT and HST. We think that's an excellent balance over a business cycle. It certainly takes out cyclicality. It gives us leverage across multiple platforms, and so how we've thought about M&A is we have the three strategic platforms in HST and three strategic platforms in FMT, and we've built organizational muscle around each of those. And it's our belief that we will be able to far better balance and take advantage of the markets when they are more attractive to us by having that balanced approach.

And also, and I think very importantly, that organizational structure gives us more muscle to integrate. And if you look at the acquisitions that we have done this year so far, yes, all three happen to be in HST, and pricing, by the way, is better in HST generally in the marketplaces. We paid very reasonable multiples, and each of those sit in a different platform, and really eases integration and reduces risk. So, you should expect to see that over time. As you move through a cycle, you're going to get emphasis in one area over another in periods of time, but generally as you go through the cycle, our intent is to really have balance.

Great. Thank you.

Thanks.

Jim Giannakouros, Oppenheimer.

Your targeted ROIC, can you put some numbers to that as far as, I guess, what your hurdle rates are for internal investments, or just how you are thinking about ROIC over time on future acquisitions, specific to your strategic plan?

No problem, Jim. So, let me talk about ROIC more holistically. The way we're thinking about it, and I know people kind of measure it sometimes a little bit differently, so just to be very consistent, the way we think of it is EBITDA, with the tax rate, so EBITDA times one, minus the tax rate, divided by total capital. So, we're looking at a cash-on-cash returns, that includes all the goodwill, et cetera. So, it's cash-on-cash return.

As we sit today, we're sitting at about 11.5% on that measurement. Our goal over time is to increase that, and I think a reasonable goal -- it's going to take a few years to get there -- is to get to that closer to 15%. Our return on tangible assets is multiples of that. It's very, very good.

And our return on investment for our acquisitions, our goal is 12% by year three, and 15% by year five, so we can bring up that average closer to the 15% in total. So, that's how we're thinking about return on invested capital for the businesses, and it's not a fast metric. It doesn't move quickly, but with expansion on the operating earnings side and with good capital management, we think we can get there.

Okay, thanks, that's helpful. And just one other quick one. I noticed that your CapEx -- I am sorry if I missed it, if you commented on it earlier, but it seems that you lowered it just a smidge by about $2 million or so versus your previous guidance. Is there anything specific you can call out there?

Jim, this is Heath. No, it is just really where our run rate is coming in for the year. I mean, our CapEx items tend to be things with average ticket prices of $50,000 or less, so it's not that we deferred a project or anything like that. But we are at about $28 million year to date, and with our anticipated fourth-quarter number, it will be somewhere between $37 million and $39 million, expect about another $9 million or $10 million in the fourth quarter. No changes there, just $2 million off of our earlier expected run rate.

Okay. Great, thanks very much.

Thank you.

Matt Summerville, KeyBanc.

I just want to follow-up on Health and Science, make sure I understand some of the dynamics here. So, orders were down 9% organically, but it sounded like, from a comment made earlier in the call, you expect that business to grow organically in Q4. Can you just help me fill in those blanks, or bridge that in terms of how you guys get there?

Yes, I think you might be confusing one of the comments I was talking specific about the Scientific Fluidics platform, so that would fall into analytical instrumentation, diagnostics, biotechnology. As you know, that's been a business that's really faced the most of the funding concerns, call it governmental funding concerns, and we saw some of that track down in fourth quarter of last year, so, frankly, we've got some easier comparables.

If you look at the segment as a whole, we're still going to comp against the stronger backlog that we had from the Optics and Photonics platform, and from -- we had a very strong backlog build coming out of Material Process. So, organics for HST are probably down 3% to 4% in the fourth quarter, somewhere in there, but I would say improving sequential trends certainly from Optics and Photonics, and certainly from Scientific Fluidics.

Got it. So, the Fluidics piece grows a little bit, the MPT piece and the Industrial side are the worst kind of hit in Q4?

They are. We had a really, really strong third and fourth quarter in MPT last year, and it's a little bit longer cycle business than you folks are used to seeing with us, and so that was pretty weak from a third-quarter perspective in this quarter. And the industrial businesses were also weaker, but that takes a little bit longer to play through the backlog.

Great. Thanks, Andy.

Thanks, Matt.

There are no further questions at this time.

Well, thank you all again very much for joining us for the quarterly call. Again, in a difficult market environment, we think the teams are executing well, specifically on profit and cash flow, and that really is going to be our focus as we move forward, continuing to out-compete in a difficult environment and make very good decisions on how we deploy our capital. So, again, thank you very much for your time, and we will see you in the next quarter. Thank you.

This concludes today's conference call. You may now disconnect.