藝達思 (IEX) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the IDEX Corporation fourth-quarter 2012 earnings 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. I would now like to turn the conference over to Mr. Michael Yates, Vice President and Chief Accounting Officer. Sir, you may begin your conference.

Thank you, Paula. Good morning, everyone. Thank you for joining us for our discussion of the IDEX fourth-quarter and full-year 2012 financial highlights. Last night we issued a press release outlining our Company's financial and operating performance for the three- and 12-month period ending December 31, 2012. The press release, along with the presentation slides to be used in 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 CFO.

The format for our call today is as follows. We will begin with Andy providing a summary of the fourth-quarter and full-year 2012 financial results. He will then walk you through the operating performance within each of our segments. And finally, we will wrap up with our outlook for the first-quarter and the full-year 2013. 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 86510532. Or you may simply log onto our Company's home page for the webcast replay.

As we begin, a brief reminder that 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 our CEO, Andy Silvernail. Andy?

Thanks, Mike. Good morning, everyone. Thank you for joining us as we talk about our results for the fourth quarter and for the full-year 2012. I'd like to start on slide five.

As you have all seen in our press release, we had a solid operational finish at the close of IDEX's 25th year. Throughout last fall and on our third-quarter call, we outlined our strategic priorities of accelerating organic growth, execution excellence and disciplined capital deployment. Our goals over a business cycle are to deliver compound, double-digit earnings growth, strong free cash flow, and superior returns on invested capital. We made good progress toward our strategic priorities in 2012.

As we transition into 2013, we anticipate a continued low-growth macro environment, but we have positioned ourselves well to deliver solid EPS growth.

In 2012 we reduced structural costs by $29 million through five facility closures and reducing headcount 6% prior to acquisitions. These actions allow us to invest aggressively in organic growth while continuing to expand margins. Further, our focus on execution improved our already-strong cash flow performance. We are in great shape to deploy our disciplined capital strategy that we outlined last year. We remain committed to a consistent and growing dividend, strategic acquisitions, and share repurchases as appropriate.

Turning to 2012, we, once again, achieved record sales, orders, and free cash flow. For the year, orders were up 7%, and sales were up 6%, and we exceeded $1.9 billion. Sales in 2012 were split evenly between domestic and international. I'm proud of how the team executed in the face of a volatile macro environment.

Operating margins for the year were 18.4%, up 30 basis points, driven more by more than 50% flow through on incremental organic revenue.

Full-year adjusted EPS of $2.68 was $0.12 or 5% higher than the prior year EPS. We also improved working capital to [$22 million], helping drive our free cash flow up 30% to 132% of net income, or $3.53 per share.

Now, on to Q4. Earnings were toward the high end of our expectations and cash flow was outstanding. For the quarter, organic sales were flat, but orders were up 8%, up 5% organically. Free cash flow increased 7% in Q4 to $79 million. We achieved broad-based productivity in 2012, the details of which I will walk through as we get into the segments.

As we enter 2013, the US economy has improved modestly, Europe continues to struggle, and China has improved from the lows of last year. While more stable than when we spoke last fall, we continue to expect a challenging environment that will require tough-minded, disciplined execution to deliver superior results.

Before I walk through the segment results, I want to address the completion of our restructuring efforts and the fourth-quarter impairment charge. Early in 2012 in anticipation of a slower global economic environment and with opportunities from recent acquisitions, we decided to aggressively reduce structural costs. Q4 restructuring charges totaled $18 million.

In total, we reduced structural costs $29 million during the year, and we will invest $17 million into growth. These investments include product management, product development, and geographic expansion.

Prior to global recession, our large-scale restructuring is complete.

In Q4 we also recorded an estimated $198 million impairment charge in our Optics & Photonics and water platforms. The impairment in Optics was primarily related to the acquisition of CVI Melles Griot in 2011.

As we've discussed in the past, the Optics market softened significantly in late 2011 and has yet to recover. Unfortunately, our Optics platform is not immune to these market conditions. We continue to believe in the investment thesis, however. The space we are targeting is fragmented with attractive structural margins and good long-term growth prospects, and it is full of highly-engineered content. This is a good business that we will invest in and grow.

The impairment within the water platform is related to the 2008 acquisitions of IETG and AVS. It is a result of the reorganization of our water platform and the underlying softness in the municipal end markets, which we anticipate will continue throughout 2013. Over the past year, we have worked diligently to rightsize these businesses and build the appropriate organizations for long-term success. We are confident that these impairment charges are behind us, and going forward there will not be any impact to our ongoing financial performance.

As we discussed in our third-quarter call, we are emphasized more flexible, disciplined capital deployment to maximize total shareholder returns. We have $1.5 billion in cash flow and balance sheet availability over the next three years. We've studied our past decisions in depth, made changes in our organization structure, hurdle expectations and integration approach. Our acquisitions will focus on small- to medium-sized deals that build on our platforms to expanding our geographic reach, filling technology gaps, and accelerating into adjacencies.

To complement acquisitions, we target buying a minimum of 1% to 2% of our total outstanding shares annually and accelerate repurchases when we believe the shares are trading at meaningful discount to intrinsic value and M&A is challenging. We currently have over $175 million available on our authorization.

These important changes were in place throughout 2012, and I'm pleased that we've seen significant progress. After fully funding organic growth, we deployed over $220 million to dividends, strategic acquisitions and share repurchases. We go into 2013 having taken tough structural actions and shifted more resources toward organic growth. We are in an excellent position to execute on our long-term growth strategies and drive total shareholder return.

With that, let's move to the segment discussions in fluid metering. I am on slide six.

For the year, FMT orders were up 4% organically; sales were up 2%; margins expanded 150 basis points, primarily on the execution of productivity. For the quarter, orders were up 9% organically, while organic sales were down 1%. Margin expansion of 120 basis points was broad across the segment. FMT is well positioned.

Our market-leading ag business, Banjo, had another record year, driven by share gains and strong OEM demand. We remain very bullish on the outlook for North American Ag where Banjo is heavily concentrated.

Within our energy platform, the broader energy distribution outlook is positive, specifically in the BRIC regions. As I mentioned earlier, the end-pipe water services business that is most closely tied to municipal budgets remains challenged. However, we are optimistic that we have hit the bottom. While we are not anticipating much market help in 2013, we are well positioned to win business when funding constraints ease.

The remaining water businesses, which focus on dosing pumps used in both industrial and water treatment applications, are performing well and continue to grow in the US and Asian markets.

Our chemical industrial businesses were solid in Q4. We saw project activity pick up sequentially and year over year, specifically in Asia.

Of equal note, our teams continued to execute and deliver productivity improvement.

Within the chemical platform, Warren Rupp and their Mansfield, Ohio site was recently named one of Industry Week's 2012 Best Plants. They are the only AODD manufacturer to ever receive this award, which recognizes North American plants on the leading edge of efforts to increase competitiveness, enhance customer satisfaction, and create a stimulating and rewarding work environment. We're extremely proud of their achievements. Congratulations to John Carter and his team in Mansfield.

All right. If you can now flip to slide seven, will talk about Health & Science. For the year, orders were up 13%, down 2% organically, and sales were up 14%, down 1% organically. In the quarter, orders were up 5%, down 4% on an organic basis, while sales were up 6%, down 3% organically.

As I mentioned in Q3, HST will face some difficult comps in the first quarter, but flat to up sequentially. Overall, we expect growth in the year and improving operating margins.

Scientific fluidics saw a solid rebound in the analytical instrument and diagnostic markets year over year, and we experienced a meaningful sequential order increase. We are off to a good start in January, and we believe our business will achieve modest organic growth in FY 2013, particularly driven by strength in the Asian markets.

In line with prior quarters, our Optics & Photonics platform is delivering margin expansion as a result of the restructuring activities and productivity initiatives.

As I previously highlighted, despite the end market challenges, we believe our market position, combined with recovery in these end markets, will deliver long-term accretive growth.

Our long-cycle material processing technology platform produces capital equipment for pharmaceutical, chemical, and food production lines. MPT's business is supported by capital spend and was down compared to prior year. However, some of the Asia softness has firmed up in the last 90 days. Also, after six months of Matcon ownership, I am very pleased with the integration synergies achieved in the business outlook.

Finally, the portion of HST that is more industrially expose are performing as expected, and we are off to a very good start in January 2013.

All right. I am on our final segment, diversified, and I am on page eight. For the year, orders were up 12% organically, and sales were up 11% organically. As you will recall, in Q1 2012 we received a large replenishment order in our dispensing business, which will continue to ship through Q1 2013. Outside of this particular order of dispensing, our fourth-quarter orders have been stable with stronger trends in the US, while we have seen more volatility from Europe.

In the quarter, diversified orders were up 14% organically, while sales were up 10% organically. It's a similar story in our fire suppression platform where we are experiencing continued stability in the US municipal markets, while Europe remains soft.

Our team has done a great job with steady order growth and expect an increase from Asia in 2013. Also expected in 2013 is a realization of cost savings from the successful site consolidation of our Pennsylvania facility. Site consolidations are always complicated. Our team did a great job with the execution of this project.

The rescue business has experienced similar geographic trends as fire and dispensing with North America markets remaining strong. We're also excited about the traction in growth we are seeing from our Central and South American initiatives. The European markets have remained slow, but we are getting some growth that is in our re-railing and lifting bag product lines.

Moving to BAND-IT, the team continues to find ways to innovate and deliver new applications for fastening solutions. BAND-IT had strong sales in the vehicle and oil and gas markets in Q4, and we look to continue that trend in 2013. Distribution sales softened early in Q4, but the last couple of months have shown improvement.

I'm very pleased with the entire segment's performance. We delivered organic growth while driving profitability. Operating margin of 24.2% in the quarter is up an impressive 200 basis points from the fourth quarter of last year.

Okay. Let's move to slide nine. We will talk about guidance for the year. I'm going to start at the top of the bridge.

In 2013 we anticipate low- to single-digit growth across all platforms, which will provide $0.10 to $0.20 of EPS. FX is expected to be a $10 million tailwind for the full year. The full-year impact of ERC and Matcon acquisitions will be about $0.03. ERC was acquired in April and Matcon in July.

The impact of our restructuring will generate another $0.24 of benefit in 2013. As I mentioned earlier, our restructuring efforts successfully concluded in the fourth quarter, and we anticipate the opportunity to reinvest $0.14 back into the business. This will help fund organic growth. These investments will focus on product management, new product development, and continued push into new geographies. As these and other investments are made in our global operations, there will be a net $0.07 of pressure on wage, healthcare, and material inflation weighing against our productivity and sourcing gains.

Okay. Let's go to the next slide. I'm on slide 10. I'll wrap up my prepared remarks with Q1 and full-year 2013 expectations, along with a few other modeling thoughts.

We're projecting 2013 organic revenue growth will be low- to mid-single digits. We're expecting full-year 2013 EPS to be in the range of $2.85 to $2.95. Q1 EPS is expected to be $0.70 to $0.72. Q1 is projected to have flat organic growth with operating margins of approximately 18.5%.

Some other modeling items to consider. The 2013 tax rate is anticipated to be 29% to 30%, relatively in line with 2012. Full-year CapEx will be roughly $40 million to $42 million, and as always, we will convert cash well in excess of net income.

Finally, our earnings projections exclude future acquisitions.

In summary, in 2012 our businesses responded extremely well to the volatile marketplace and demonstrated our commitment to performance. We achieved record sales, orders, and free cash flow.

Importantly, we are successfully implementing our strategic priorities of accelerating organic growth, execution excellence, and disciplined capital deployment. We look forward to a very good 2013.

That concludes my prepared remarks. Operator, let's now open it up to questions.

(Operator Instructions). Matt McConnell, Citi.

Could you give us an assessment of where you expect the revenue growth to fall within the segments? So within that low- to mid-single-digit range that you have given for the Company, where would the segments fall within that range?

Sure. Good morning, Matt. No problem at all. Generally, if you look at it, we'll see FMT to be mid single digit; HST to be low single digit and FSD will be in the low single digit, but that is going to comp off of the order that we had this year. So that is inclusive of comping off that order.

Okay, great. That's helpful. And then just to start the year out, I mean can you reconcile the 5% increase in organic orders in the fourth quarter versus the expectation for flat organic revenue? Was there -- I mean there was a lot of quarterly noise Q3 to Q4. Is there anything else that would contribute to that start to the year meaningfully below fourth-quarter orders?

Yes, Matt. I think there are really two things there. One, I think, as you will recall, the fourth quarter of last year was a little bit soft, and so we are comping off that a little bit. And if you look at the sequential improvement quarter to quarter, you do have sequential revenue ramp to some degree in the first quarter versus fourth quarter on a year-over-year basis.

So that's pretty consistent with how we see our order patterns fall and day rates, etc. So I don't think there's really anything surprising in there.

Okay, great. Thanks very much.

You bet, Matt.

Allison Poliniak, Wells Fargo.

Can we just touch on the margins? I guess particularly is Health & Science. I know there's a lot of moving parts with that. Is this 18% floor a good run rate for us next year, or are we still building off of that comment just given some of the restructuring you have been able to do?

Well, we said that coming into -- getting toward the end of the year, we thought we'd get near that 18.5%, which we are very happy we got to. So we've seen nice sequential margin expansion here throughout the year. So that is number one.

Second, we do expect to build off of that going through this year, and we would expect an exit rate that is closer to 19% at the end of 2013.

So we should continue to see the benefits. Obviously, we've done a lot of restructuring. A fair bit of that has been in HST, so you should expect to see some margin expansion.

Great. And then could you just give us a little bit more color on the acquisition environment? I know your focus has really been that FMT and HST segment. Is there a discernible difference between multiples in either of those two areas at this point and just what the activity is there?

Let me handle that in two ways, Allison. So, first, let me comment on the overall acquisition environment, and then I'll talk specifically to the FMT/HST split.

The overall environment I would say it's very consistent with what we saw coming out of the third quarter of last year, and what I mean by that is really around the pricing. The activity levels tend to be -- they tend to peak and valley with how private equity comes in and out, generally.

But what I would say is we continue to see a bifurcated market where things of size and of stability and any kind of growth continue to have very, very high premium expectations in the marketplace, and we have just shied away from those, frankly. That doesn't make sense for us.

Things that are in the small to medium size, which is really our area of focus, there still are properties that are available. Our pipeline is pretty good, and we work it very, very diligently. So that is the general comment.

Relative to FMT and HST, on the FMT side, I would actually say right now that the multiples are higher historically, right? So if you went back five years ago, the environment is completely flipped from that where you had very high HST multiples and relatively conservative FMT multiples. And what we're seeing today is higher relative multiples in FMT, and I think that's just because of the historic stability of cash flows even cyclically in those businesses. And then some of the HST stuff has fallen a little bit out of favor. So there are some actually very attractive multiples in that segment.

Great. Thanks so much.

Thanks, Allison.

Scott Graham, Jefferies.

Two questions for you, Andy. What was really the final trigger for you here on the charge? Obviously, I'm assuming a lot of that is on the CVI side in particular? Just what happened in the fourth quarter, or is it just the timing of the remetricment? Was this something that you were thinking about in the third quarter? Just a little bit more on that as far as what maybe was the final straw in this for you.

Thanks for the question, Scott. We test all of our impairment in October of every year. So we start that process. We take a look at it in conjunction with our auditors. And, as you know, it's a very detailed math exercise that has an awful lot of complexity in it in terms of future outlook, discount rates, premiums, market multiples -- there's an awful lot that goes into that.

So we test everything -- we look at everything quarterly. We test everything annually. That's the way to look at it.

And when you factor that in, when you put all those pieces together, it really showed that this was a necessity. In reality what it is, it is accounting catching up with operational reality. That's the way to look at it. And this is not something that's really debatable, it is math-driven. So when the auditors move forward with that, that is how you move forward with that decision.

So even though you've been restructuring this business for a while and increasing its competitiveness and the end markets that that business serves are not terrible, the math still worked out to a charge of this size?

It did. It did. And you have to look at the basis of where you are from a revenue standpoint. Structurally, we think we're in very good shape with what we finished at the end of the quarter. At the same time, it's driven off of discounted free cash flows that are well into the future, right? You are looking at terminal values.

The other thing to look at -- and you cannot understate this -- is it's also driven across competitive market multiples, and those multiples have changed significantly. And so that's something that we don't control, and we don't get to opine on as this is looked at.

Okay. I didn't consider that part at the end there. Okay. So the other question that I had for you is on your EPS bridge. The structural benefits of $0.24, now is that restructuring that you have done that rolls through the pipes? Does that include current year productivity? what is that number?

Scott, it's Heath. That number is really the absolute restructuring, the programmatic headcount that has come out, as well as the facility consolidations. That does not include the ongoing productivity initiatives around sourcing initiatives, as well as OpEx activities that are constantly going.

So if you were to look forward in our bridge, the productivity initiatives and so forth, that $20 million number that we've talked about in the past, is included in the net inflation. So that netted out to a number of about a $0.07 drag once you factor in roughly 3% for wage inflation, a little bit less than 1% on material inflation, fringe inflation specifically around healthcare costs, and then you net against that productivity and sourcing savings is where you get the $0.07 drag.

Okay. I do see that footnote now, as small as it is. I needed the electron microscope to see that one. (laughter)

What I'm wondering then is further on that though, Heath. Boy, that is a lot of inflation that you are expecting in an environment right now that isn't very inflationary. Is there -- I'm not going to ask you to say the word, conservativism, but it seems to me as if the inflation environment, even if you can circle labor as one of the factors, would be hard-pressed to [offset] $20 million to $25 million of productivity, no?

We will actively manage the costs throughout the year as we always do, and we will battle down any inflationary pressures. So there might be a little bit in there. I don't want to call out too much conservativism. The wage inflation alone is about $15 million, Scott, and you have got healthcare costs that factor into the fringe benefits. And that is up 5% to 6%, so 7% this year in our guidance. We will do everything we can to keep that down, but those do factor in. And then a moderate amount of real material input inflation factors in a little bit.

So we will do everything we can. There may be a tad bit of conservatism in there, but we will keep you posted throughout the year.

Very good. Thanks.

(Operator Instructions). Charley Brady, BMO Capital Markets.

On the impairment charge, can you give us the breakdown between water and the optics platforms?

Yes, it is about three-quarters optics, a quarter water, and that is plus or minus.

Okay. And just on the fire emergency diversified, on the dispensing part of that business, can you just dig into it a little bit and kind of update us on where that business is today? And I imagine it's still tough splitting on that, but maybe a little more detail on how that's running.

Well, you've got a few things happening there. So if you separate out comparisons against one-times and you look at that base, it's actually pretty good. We've had -- I'll call it a decent bounce back in the US, which I think is driven by the activity levels that happened as investment is coming back through housing into equipment.

As you look back as far as 2009, that area really was starved for investment as stores were closed throughout the US, etc. So you are starting to see some replacement revenues starting to flow through there. So it's decent.

Europe is softer. Europe didn't see the same kind of decline and generally is a little bit softer, but it's still decent.

Asia is quite good. It has been actually very strong for us, and that's really driven by a few things. One, as you recall, we moved a significant amount of our business from Australia to China into India in expectation of those growing markets, and that has worked out real well.

The other side is, as we said in the third quarter, we just launched a new product called X-SMART, which is a low-cost automatic dispenser that we think is really a gamechanger. Now, we're still early days in that, Charley, but we think that's going to be a winner in that business.

Great. That's helpful. And just one more. On FMT on the orders, that 10% organic order growth in FMT in the quarter, it is about -- looks like the best you've had in about five quarters or so. I know you talked a little bit about it in your prepared remarks, but can you just maybe dig into that a little bit more so where you are really seeing the strength in some of that incoming order rate?

Yes, a couple of things, Charley. As much as I'd like to get very, very excited about that, and I am reasonably excited, we had a pretty weak Q4 of last year, if you would recall. The order rate in the Q4 of last year was pretty soft as China weakened. And then if you will recall, we had a pretty strong bounce back in Q1 across the business but specifically in FMT.

So now that being said, we are seeing a decent pickup. It's pretty broad-based, excluding the pipe side of water. Ag is still pretty good. Chemical and industrial has been pretty good. We are seeing a bounce back in Asia. If you recall, starting in the late spring of last year, really through most of the third quarter, China had gotten very soft, and we started to see that improve in the fourth quarter.

I was just in China two weeks ago doing our business reviews and finalizing our implementation plans, and the business had definitely improved, and I would say the overall opinion was much more positive than if you went back in the summary or even the fall.

Thank you.

Matt Summerville, KeyBanc.

A couple of questions. First, with respect to the businesses that you had to take the writedowns, can you -- maybe let's talk about CVI first. Can you remind us where that business was from a revenue and operating margin standpoint when you bought it, where it bottomed, and importantly, the progress you've made off that bottom if, indeed, you have as a result of the restructuring?

Matt, this is Heath. As you recall when we bought the business in June of 2011, we talked about a run rate of about $180 million. It is fair to say that that has crept into somewhere in the $130 million to $140 million. But a chunk of that -- the largest piece of that is the market compression. There's also some business within there that we've chosen to walk away from, just given where we want to situate the business from a long-term market perspective.

So specifically -- that's not our entire Optics platform, that is specific to CVI, though.

And then the same walk forward on profitability?

Well, the profitability is -- obviously, it's a business that is very dependent upon revenue given the high contribution margins in the business. The structural cost actions that we've taken have gone a long way to clawing back on a rate basis where we want to be. But just given on an absolute profitability, dollar perspective, just given the lower revenue run rate, we are not back where we want to be from that side.

As you look at, let's just say it is a $130 million business run rate, if you look at the structural cost improvements you've made, how much revenue -- you shouldn't have to get back to $180 million to get margins back to where they were. I guess, how much more revenue growth do you need to be back in the high teens margin area where the business was, I believe, when you bought it?

We are going to get tremendous flow through on the next uptick of revenue in this business. We are talking about contribution margins in this business that are north of 50%, sometimes even higher than that. So I don't want to quantify what it needs to be, but it's another $20 million of revenue is going to go a long way in this business.

And then just one final one, do the charges you have taken impact the intangibles amortization schedule of these businesses going forward, Heath?

Not materially, no.

Okay. Thank you.

There's push -- there's things that go both directions on that in terms of the way tradings are handled and reverses intangible that had actually been written off, but it nets out to a de minimis amount. Sub $1 million.

Got it.

Mike Halloran, Robert W. Baird.

So could you just specifically talk about the acquisition side of things? In light of the impairment charge and in light of the commentary you have been making about a greater focus on returns here, maybe you could just specifically address how the hurdles have changed for you internally when it comes requisitions?

Sure Mike. No problem. I think, first of all, what we're talking about today is no different than what we started talking about really starting in the spring and summer of last year, which is we took a pretty hard deep dive starting in late 2011 and throughout 2012 looking at really all the decisions we've made around deals, frankly. And what came out of that, one of the biggest things, was around hurdles.

So, as we look at deals, we are looking at how do we cross a 12% ROIC by year three and a 15% ROIC by year five, understanding those are very tough hurdles. They are different than the vast majority of folks talk about them. Most folks are talking about 10% and 12%. And so we think we have taken a tougher view of that.

The other part is we've really discounted the impact of cheap money. A lot of the discussion around accretion and whatnot around cheap money, we know that eventually that will go the other way. And so when we look at things, we look at things on an absolute return basis, and I think that is pretty important.

Also, Mike, I think what's important in that is just generally how we think about capital. We are still absolutely committed to strategic acquisitions that fit our platforms. It is a critical piece to our strategy. And as we look at our six strategic platforms that we've talked about consistently, acquisitions will play a role in filling technology gaps, allowing for adjacency expansion, and going into new markets. At the same time, we believe that a more flexible, more disciplined approach is the way to go.

Makes sense. And then just another question about underlying assumptions as we think about the guidance range here and trying to get a sense for the level of conservativism I suppose built into it. When you back out the restructuring benefits that you guys expect to see and the structural cost benefits you laid out, on a year-over-year basis, your earnings look closer to flattish because of the gross investments and the net inflation offsetting some of those other things. So maybe you could talk about structurally from a profile standpoint what the progress looks like as you work through the year here, and maybe just comment on what sorts of internal improvements you are expecting to drive or things like that? Does that question makes sense to you?

I think so. If I don't answer it exactly right, why don't you follow up with it?

First of all, you can't separate the growth investments from the cost out, right? As we took that $29 million of costs out of the business, we really have two options, right? We can take the $29 million and put every penny in our pocket, which we absolutely could have done, or we could have positioned ourselves even better for organic growth. And as you know well, in the last decade, IDEX has done, I think, a very good job of pivoting the business from principally a North American company to a much more global business and into end markets that are less cyclical and have better long-term growth rates.

Our success, our ability to deliver better than peer returns is going to be determined by if we are able continuing to do that -- continuing to make those pivots geographically and into faster growing end markets and products. And when I look at the $0.14 that we are investing back into the business, that is what that's all about. Organic growth for us is far and away the single-most valuable thing we have. You are talking about return on tangible assets that are well north of 30%.

And so for us, that is the game. It's the most important piece of the game, that is. And so while there is -- we're giving some of that back to make those investments, we absolutely think that is the right thing to do.

So that is the first part of the answer to your question, Mike.

This second part, which is what are we doing internally for the year, our consistent approach to productivity and to ongoing costs out into margin expansion doesn't stop with the closing of this restructuring window. We still absolutely expect to get that $20 million-plus in productivity to offset what our inflationary pieces that are nonmaterial, right? Wage inflation, health-care inflation are real, and we need to at minimum offset those. And so that will absolutely continue.

So funding organic growth is number one and continuing to drive productivity improvements day in and day out is number two.

Did I answer that for you, Mike?

Yes, that makes sense. At the end of the day, I was trying to get a sense for what the core earnings feel like, if you exclude the restructuring. And I suppose your comment is, excluding the restructuring specifically, is probably not fair when looking at the total picture and the earnings progression that you are driving from a core standpoint.

Absolutely. And also, don't forget, it's not like these costs out happened on December 31, right? This has been ongoing throughout the year. We did ramp it up in the fourth quarter to close it out, but this has been something we have been executing incredibly aggressively on here throughout 2012.

Makes sense. I appreciate the time.

Thanks, Mike.

John Moore, CL King.

A quick question on FSD. It looks like -- well, obviously, margins this year were really great with the structural actions you took. But to get to the guidance range for next year and taking into account what you said about the other divisions, it looks like you've got to model margins in FSD down in 2013, and I'm wondering why that would be?

No, John, you're really -- they are looking to be flat, generally. You've got a reasonable headwind that is going to come on in the second, third, and fourth quarters as you full well know.

At the same time, the team has done a great job of taking costs out. So the facility closure in Pennsylvania and integrating that into Florida certainly helps. The growth, core growth that we are going to see in dispensing outside of the one-time order, and certainly in rescue will help offset that. So I think you're going to call it flat.

Okay. And can you translate into what that means for free cash flow then? As I know, that division generates a lot of free cash. You did about $294 million, about 130% of net income this year. It seems like -- I mean, is $290 million to $300 million probably a reasonable free cash flow estimate for 2013?

John, this is Heath. We don't break out cash by segment that way. But if you look at it in aggregate, we had tremendous efforts toward working capital reduction in 2012. We feel very good about where inventory came out in terms of some of the activities that the operating team took on. We will continue to go aggressively after that. We were able to reduce our working capital as a percentage of sales by north of 100 basis points in 2012. And as we look forward to 2013, I think your numbers are directionally correct. Ultimately, we would like to see a 3 in front of it.

Okay. Perfect. Thanks, Heath.

John, I want to add to that for a second. These calls often are exclusively focused on one side of the financial statements. And I've got to say, this team did a really fantastic job with free cash flow in 2012. The kind of numbers that we are talking about here are really pretty exceptional. When you look at it on a per-share basis, you're talking about $3.53 a share in free cash flow in 2012, which is far and away a record for the Company and really demonstrates the focus on execution. And it sometimes gets lost in the mix here.

So I congratulate the team. Cash is a major piece of our focus because it enables everything that we do as a Company, and I think it's a great story.

Absolutely, guys. Thank you.

And today's final question is a follow-up from the line of Matt Summerville of KeyBanc.

Real quick one. Heath, what should we be thinking about, full-year corporate expense?

For 2013?

Yes.

It will be roughly in line with where we exited 2012. There are always some pushes and pulls in terms of that, in terms of certain things where compensation is bucketed and so forth; generally around long-term incentive plans, stock options and so forth, but it will be in that range of roughly $50 million.

Okay. And then just one final one for Andy. You talked about your acquisition process a little bit. As you've had to go through this impairment process on a couple of the biggest transactions IDEX has ever completed, are there any other changes you are making to the process beyond how you're thinking about the return metrics? Are you willing to do a deal if one were to come across tomorrow, the size of CVI, or does this make you a little gun shy going forward? Can you talk about your mentality around that a bit?

Matt, it is a very fair question. Let me cut that question into two parts -- first, the changes, and then I'll call it openness or intent for large deals going forward.

On the first side of it, we made a number of changes. The hurdles are one. Frankly, that's an easy paper exercise that you go through.

The bigger ones are, if you went back 18 months ago, our platform strategy was really just developing. And if you look at overall at our platforms now, they are fully functioning. They have organizations that are very strong around them, and they have what I call the organizational muscle to drive the organic growth at the platform level and give you the capacity to do integrations. And as an example, the deals that we did last year -- a couple of things, first of all, the pricing was 7.0 to 7.5 times EBITDA. So you see the discipline around that, and they've gone real well.

The other thing is each one of them fell into a different platform. And so you don't over-stress the organization in any one place with your ability to do deals.

So I would say that's, number one, the first change.

The second one is is we made a decision in the summer of last year to repurpose a number of our resources, corporate and otherwise to really have a dedicated acquisition and integration team. That is not something that we had in the past. We really relied on the businesses to do most of what I will call the physical post-deal execution and integration. It's not a big team, don't get me wrong. We are not big fans with lots of overhead, but it's a group of people who that's what they do. They live and breathe it -- from the diligence and creating the value proposition in understanding what the value drivers are going to be, and then partnering with the platforms to make sure that they happen. And I sit with that team every month to look at the deal flow and every quarter to look at how we are executing against our deliverables.

So those are two pretty significant changes to how we think about it along with hurdle rates.

The other question -- this is an important question, so let me answer it in two ways.

The first one is is our bias is toward small- to medium-sized deals that really fit our strategic platforms. That is definitely our bias. There are, however, a handful of larger transactions that would significantly change the positioning of a platform or of IDEX. There are not that many, don't get me wrong. And they would fit very, very clearly into the sweet spots of what we have today. So there are a few. But our bias is very much toward small- to medium-sized.

Thanks a lot, Andy.

You bet. Thank you very much, Matt.

This concludes the allotted time for today's question-and-answer session. I would now like to turn the floor back over to Andy Silvernail for any closing remarks.

Well, thank you all very much. I appreciate your time here today in walking through our 2012 results and as we look at 2013. Obviously, we've done a tremendous amount of work to prepare ourselves for a successful 2013, and we think we're in excellent shape to do so.

Hopefully what you take away from this call is our commitment to driving organic growth in this business and really executing exceptionally well and being very, very disciplined around capital deployment.

So I am proud of the team. They've done very good work, and we look forward to a good 2013. Thank you all.

Thank you. This concludes your conference. You may now disconnect.