藝達思 (IEX) 2014 Q3 法說會逐字稿

Greetings and welcome to the IDEX Corporation's third-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Michael Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you. You may begin.

Thank you, Diego. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third-quarter financial highlights.

Last night, we issued a press release outlining our Company's financial and operating performance for the three-month period ending September 30, 2014. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our Company website at www.idexcorp.com.

Joining me today is Andy Silvernail, our Chairman and CEO; and Heath Mitts, our Chief Financial Officer. The format for our call today is as follows. We will begin with Andy providing an update on the market outlook and what we are seeing in the world, and then he will review the third-quarter financial results. He will then walk you through the operating performance within each segment. And finally, we will wrap up with our outlook for the fourth quarter and full-year 2014.

Following the prepared remarks, we'll 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 877-660-6853 and entering conference ID 13589617, or you may simply log on to 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 Safe Harbor language in today's press release and in IDEX's filings with the Securities Exchange Commission.

With that, I'll turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike. Good morning, everybody. I appreciate you all joining us here for our third-quarter call. Before I get into the color on the quarter, I did want to have a little shout-out here for the Kansas City Royals going to the World Series for the first time since 1985.

I had to say that because sitting beside me, our Chief Financial Officer, Heath Mitts, is a born-and-bred KC boy and a long-time season ticket-holder. So good luck to them tonight.

Look, throughout the year, and really for a long time now, we've been talking about controlling our own destiny. And we did that in the third quarter and will do so going forward. In the quarter, we had 7% organic sales growth. We had sales and operating margins increase in all segments, and we delivered 13% EPS growth. For the year, we are going to be up 5% to 6% in sales; we are going to have EPS of between $3.52 and $3.55, and that's going to be up 14% to 15% for the full-year.

I'll get into more detail in the numbers here in just a moment. But before that, I want to take just a little bit of time and talk about what we are seeing around the world in terms of geographies, and also in the different markets. I also want to take a moment and talk about the improvement in our cost structure and investments for growth that I outlined in the press release, and then just take a minute and talk about the acquisition environment.

So, first, let me get to end markets and geographies. We did see some order softness in August and September. The good news is that we had a nice rebound here so far in October and we're off to a good start in the fourth quarter. If you look around the world, in North America, demand has just remained very, very solid. You could pick almost any of our businesses, and we've had strength in the US all this year. And it's really been the beacon for the Company for quite some time now.

In Europe, we did have softness in the quarter. And I think the idea of a contraction in Mainland Europe is very possible, with one really kind of bright spot, and that's the UK where we are continuing to see a nice performance. China, the term that we use here is kind of uninspiring. It's been a volatile, kind of choppy environment here for some time. It's a market we're going to continue to invest in and grow in, but the overall -- the underlying growth rates have been softer than we have expected, really, throughout the year.

And then, finally, in the Middle East, we did see some slowdown here in the quarter. And that's really the conflict from the region. We've had a decent amount of business that has been awarded but hasn't been ordered or shipped, that we do expect at some point to happen, but certainly what's going on in that region has pushed some things out for some time.

If we turn to the markets that we are in, energy and chemical really mirrors what we are seeing geographically. We've had some large project order delays in Europe and the Middle East, and that's really affected our SAMPI business in energy and our Richter business on the chemical food process side.

The large orders that got pushed out -- they had pushed the second and the third -- and frankly, we don't expect them to land here in the fourth quarter. If we do, it will be some upside. But we expect that that business is going to push out into 2015. The rest of the markets that we are in -- or the rest of the regions that we are in, in terms of energy and chemical, have been very solid.

On the industrial side, again, North America remains very, very solid. And we've had some pretty good business across the globe in the industrial businesses.

Analytical instrumentation, in the second quarter, I mentioned that we had some order softness that did continue into the third quarter. And that's really primarily tied to equipment sales there, happened in North America and Europe. This principally impacts our Scientific Fluidics business. The good news here is we have seen a pickup in the fourth quarter. And that's a market that we have -- we think is very, very strong and will continue to be so over time. But we think we've had a pause here in the last couple quarters.

On the agricultural side, the original equipment business has slowed down, as we expected it would, with the OEMs dropping volumes. But aftermarket has remained quite good.

Finally, I'll comment on municipal. We have seen availability of funds increase slightly, kind of 2% to 3% -- excuse me, 1% to 2%. In our iPEK business, which is a pipeline inspection business, launched a great new product here early in the year. And that has really been a home run for that business. The only other note I'd say on municipal is we have seen in Asia a real slowdown in funding. And that's impacted our rescue business.

I want to take a second here and talk about the Q4 cost-out and reinvestment actions that I mentioned in the press release. In the last couple of years, we have really tightly aligned and organized IDEX to deliver for our customers and for our shareholders, all while really funding more and more organic growth. And the success that we've had here is allowing us to take some targeted cost-out actions in the fourth quarter that are going to allow us to continue to reinvest aggressively, continue to expand profitability, and also close the gap on some of the difficult comps that we know we have in 2015 from some of these large projects that happened this year, principally in the first half of the year.

We are fortunate that the good work that we've done has availed these opportunities. And, like I said before, we are going to continue to control our own destiny, regardless of the environment. And this is going to allow us to continue to do that. We'll get real specific on this in the fourth quarter when we give out the detail in the call, but I'd also ask you to note that this has not been included in the guidance that we mentioned in the press release or what we're talking about today. But, of course, we will give you that detail in the fourth-quarter call.

Finally, on capital deployment, we've increased capital spending this year, all around enabling organic growth and driving productivity. And year-to-date, CapEx is up 46% to $34 million. So it's up $11 million versus last year year-to-date. And that's all about how do we drive profitable growth in our businesses?

We also, early in the year, increased our dividend 22% to $0.28 a share. And we're going to keep in that 30% ratio that we've talked about consistency.

Finally, if you look at share repurchases, we have continued to buy shares. We're going to end up with about 2% annual reduction this year. In the quarter, we bought 831,000 shares. But I will note that as the market weakened, we had a well-planned 10b5-1 in place that accelerated repurchases as the market softened. So, I think we'll end up buying a few more shares here in the quarter because of that.

Lastly, I'll talk about the M&A market. At the end of the day, not much has changed since we talked a quarter ago. It's still a seller�s market and valuations remain high. Even though the public markets have corrected, you certainly have not seen that in the near-term in the private markets. And so, again, it really still is a seller�s market.

And we've got, at any one time, we've got 4 to 6 opportunities that are in the diligence phase. And when we talked a quarter ago, we had two that we had pretty darn close to the finish line. And, at the last minute, I'd say valuations really ran, and we decided to opt out of both of those, because they really fell out of our parameters for sensible capital deployment.

We are going to remain very disciplined. And we're committed to building through acquisitions as well as organically, but it's got to fit strategically and it's got to fit financially.

All right. With that, let's move on to results for the quarter. I'm on slide 4.

As I mentioned before, organic sales were up 7% in the quarter. The total sales were up 9%. And we had increases across all segments. Orders were down 5% in total, 6% organically, to $507 million. But if you take out the dispensing order and the large material process order that we had in this quarter, orders were flat. Operating margins were 20.8%, up 100 basis points over year-over-year. And the improvement was really driven by outstanding performance in health and science, and at diversified. And I've just got to give credit to the teams across the board in continuing to drive excellent profitable growth in the business.

Free cash flow was $92 million. It was down from last year, but we still delivered 130% of net income. And there were two things that really affected cash flow in the quarter. One was CapEx, as I mentioned before, being up 46% year-to-date; and also, with the accelerating volumes that we funded some more working capital. But overall, still a great job on cash flow.

And finally, as I mentioned before, EPS was $0.88. It was up 13% from last year.

All right. I'm going to turn to the segment discussions. I'm on slide 5, and we'll start with fluid metering.

Third quarter, we had a 1% decrease in orders. And that decrease was really attributed to what we are seeing in the ag OEM side with Banjo, and a little bit here of the non-US energy stuff that I mentioned before. Organic sales were up 4% in the quarter. Op margin was up 10 basis points to 24.5%. But I will mention that we had $800,000 in inventory step-up with Aegis in the quarter. And we would've been up another 40 basis points had that not happened. And, also, we would've been in the low 30's in terms of flow-through, if you don't include the inventory step-up of Aegis.

We had -- sales across FMT were up in all platforms except for ag. And let me just touch on the platforms here for a second. Water has continued to have just a really good year. It's been a good story the whole year. Municipal spending is up slightly, but the better story is that we continue to drive growth through new products and targeted share gains. And it has really allowed us to outpace the market. And Florian and his team have just done an outstanding job the whole year.

Quote activity remains relatively strong, and we're excited as we look at the opportunities going forward. Energy, I have already talked a bunch about what's happened in some of the project side. Again, we continue to have strength in North America. It has been offset by what we've seen in Europe and the Middle East. And we're going to have some volatility, as I mentioned before. And we're okay with that, because we like our positioning overall in the energy business.

In terms of chemical food process, it's followed some of the same trends that I mentioned before. But some of that's been offset by really outstanding execution and new product development at Viking. Our North American distribution business is up, and they've had some great new products that have hit the market recently that have really surprise to the upside.

Finally, I've already talked about what's going on with ag. But remember that when we talk about Banjo, only one-third of that business is tied to the OEM business. And the aftermarket remains solid, and the industrial actually remains very, very good. So we've got a good backlog going into the fourth quarter. And we've segmented that business more and more. So as we look at 2015, we still think we can have a pretty decent year there.

All right, let me go on to health and science. I'm on page 6.

In the third quarter, orders were down 2%, and that was entirely due to that -- the MPT order that I mentioned from a year ago from China. Organic sales were actually up 5% in the quarter, and we expanded margins 150 basis points. So, really nice job.

Scientific Fluidics -- I've already touched on this a little bit -- but the trends have followed the overall equipment sales trends. There is some hangover from inventory in the channel and some big new product launches that were early in the year. But again, as I mentioned, our share is very much intact, and we've had a nice solid start to the fourth quarter.

Optics and Photonics, it's remained stable in the quarter. We've had outstanding profitability improvement, really from productivity and favorable product mix in the platform.

Material Process Technologies -- I've talked about this a bunch already. We did have the tough comp here in the quarter, but we had great sales growth really from our Asian industrial and pharmaceutical businesses; terrific leverage, as we've gotten the sales out the door. And just remember that this is the lumpiness business within health and science, so we will kind of see that from time to time. But we see real nice order stability and sales stability through the balance of the year.

The industrial facing businesses, the core distribution businesses in North America, Western Europe, and China have all been solid. And these guys have just done a terrific job of segmenting businesses, having new products in place, and having great plans for profitable share growth.

All right, I am on our final segment, on diversified. That's slide 7.

Orders were down 20%. Really, all of it due to the dispensing order from last year. This segment is our lumpiest segment. Dispensing, fire and rescue all rely on projects. I will say, however, that the underlying organics that they are doing are really terrific. If you look across those businesses, the organic sales growth and order growth that we've seen has been excellent.

And that's what's really turned into great sales growth here in the third quarter. So it's a flip side of the order equation. We had 18%, up in the segment. We had really outstanding performance by BAND-IT; strong conversion in our fire and suppression business with the trailers being shipped. So, really, outstanding performance on the top line, and even more impressive on the bottom line. We had 420 basis points of margin improvement from leverage and from great productivity across the segment.

Really, if you look at sales and profit, they were up year-over-year in every business within diversified. BAND-IT has just been a great story all year long. Each market and geography is up, and they just continue to have outstanding execution and leadership in the markets.

Dispensing has continued to execute and improved productivity. If you take out that one large order that we shipped here, we've had good growth throughout Western Europe and North America. And additionally, X-SMART, that's just been a terrific story in Western Europe and emerging markets. That's been a great new product for us here for some time.

On the fire suppression side, the team has done a very nice job executing on orders to get those fire trailers out the door. And we expect that the core business in North America and China is going to continue to be flat -- the markets are; but we think we'll have the opportunity to continue to take some share and grow those businesses.

Now, finally, on rescue, I mentioned before that the Asian municipal markets have weighed on this a little bit, but we continue to have really outstanding results in North America with new product introductions. And we continue to be high on the rescue business.

Okay. Let's -- we'll flip to slide 8, and we'll talk about guidance for the quarter and for the full-year.

And again, just remember that the guidance here, it doesn't include the impact from the cost initiatives that I talked about earlier. In Q4, we expect EPS to be $0.85 to $0.88; operating margin around 20%; and a tax rate of about 28.5%. And this assumes that the US government improves the R&D tax credit by December 31. We also think we are going to have a 2% topline headwind from FX, and that's going to translate into about $0.02 a share loss from our earlier expectations that we talked about a quarter ago.

For the full-year, we are raising the low-end of our guidance by $0.02. We now expect EPS to be $3.52 to $3.55, and organic growth to be 5% to 6% for the full-year. Full-year operating margin is going to exceed 20%. And just some final modeling items for you guys to think about. Full-year tax rate is going to be around 29%. CapEx should be $48 million to $52 million. And we think free cash flow will be about 120% of net income. As always, we exclude from this any impact from acquisitions or cost charges with any future acquisitions -- and again, also the impact of the fourth-quarter cost-out initiatives.

So with that, let me stop here. And Diego, I'll turn it over to you, and we can open it up for questions.

(Operator Instructions) Charley Brady, BMO Capital Markets.

Just a couple of questions on the orders. And I jumped on late, so I apologize if you covered this. On FMT, did you give the orders organically ex-acquisitions?

Yes. Yes, we did. We had that in there. Hold on a second here, Charlie. Just let me make sure I actually speak about this correctly. We said that overall FMT orders were down 1% organically. And that was really entirely due to the OEM business within ag. And we also had some non-US energy stuff that has gotten pushed out.

Okay. I guess I was -- without the acquisition, it was made in Q2.

Yes, organically, organically. When we say organic, we are excluding that.

Okay. I just wanted to make sure I was clarified on that. And what's the -- on FMT, excluding that large dispensing order last year, what would have orders been up or down?

What, you mean diversified?

Yes.

You know, we don't -- we have never kind of characterized it like that, but you can kind of back into the math of it. So, it was down 20% in the quarter, and all of that was due to that large order -- that comp.

Got it. Thanks.

Yes. No problem at all.

Nathan Jones, Stifel.

Just on FST for a minute, I mean I think we are through that diversified order now. None of that shipped in the third quarter, correct?

Oh, no, no. We've been past that since the early second quarter.

So obviously a very strong performance for margins in that business now. Assuming we don't have another large diversified or dispensing order or something like that, are we at margins that are sustainable now? Or was there something in the mix or something else that drove them higher than you expected?

Nathan, this is Heath. This segment, the diversified segment, is always going to have some element of mix, just relative to the four businesses that are in there. BAND-IT is performing very well. And we obviously enjoy very healthy margins out of the BAND-IT platform. So, I wouldn't tell you to model it at 26, but I would say somewhere in that 24 to 20-ish -- 24-ish range is probably a good modeling, but understand that it can swing a couple-hundred basis points on either side of that, given mix in a given quarter.

Okay. So we shouldn't expect it to stay up at 26?

No.

No. I (multiple speakers) -- well, some quarters it might be.

We don't internally model it but, again, it's going to swing on project activity and it's going to swing on mix within that business.

Okay, that's cool. 24% is more like a baseline number there. Obviously, invested quite a bit of money in CapEx this year relative to what you usually spend. It's still not that high even at these levels. When you are looking forward into 2015, are there still opportunities to deploy CapEx to drive growth in 2015? Have you exhausted those? Will they be less next year?

We actually think that it's going to continue to ramp up. So part of what you're seeing in the cost-out that we are doing here in the fourth quarter, it's really a combination of cost reduction and pretty aggressive reinvestment. And a lot of this has come down to the segmentation we've been doing here for a couple of years, just really aggressively segmenting our markets and our businesses, to understand more deeply where some of these profit pools are.

I mean, a great example of that is Viking. So in this quarter alone, they've had a handful of new products that have come out of segmentation that we have funded really aggressively. And they are winning. And actually, just yesterday, we received a pretty good-sized order at Viking for those new products that have launched. And so we're pretty excited about that.

So we think there is more. And as we are challenging the teams more deeply to find more organic opportunities, we are finding them to be more aggressive in terms of asking for money. And as I've said in the past, we'll fund organic stuff all day long as aggressively as we can.

So should we expect a higher CapEx number next year?

Well, Nathan, I think a fair number to still model with is still around 2% of revenue. This year, we're going to be a tad more than that. And in prior years, we've been just under 2%. But I still think 2% plus or minus $5 million is probably a good number. So, yes, I do think it ramps up to Andy's point next year, but we're not talking about doubling going forward (multiple speakers) -- you know, going from 45 to 90. We are talking about going moderately higher.

And just -- and these are not made up -- just as you know, as we've talked about and as you can imagine, given our decentralized nature, these are not made up of any one or two items that are driving this. These are a series of opportunities across the entire IDEX portfolio

Okay. But we should consider -- we should think about 2% of revenue as being your CapEx number for the foreseeable future?

Yes, okay. (multiple speakers)

Yes, plus or minus.

Plus or minus, yes.

Okay, cool. You talked about some push0outs of projects in Middle East and Europe. What's your sense for the possibility that those turn from delays into cancellations?

You know, honestly, I'm not sure. We're not -- in our forecast this year into next year, we have it at zero. And so we don't bet on that kind of stuff. So we've got it there. We know that they are out there. But, in particular, if you look at what's going on with the SAMPI stuff, it's going right into the Middle East. And we've been awarded the business. It's sitting there, but they are shooting at each other. So, I don't expect that's going to happen any time soon.

The chemical stuff I'm not as concerned about. That's much more of what I think is a push-out. And plus, that's being made up for in spades what's going on in the US. So, I'm not -- the energy stuff I'm willing to put a full zero on for the foreseeable future into the Middle East. And then the chemical stuff I do think is a push, and that does happen.

Well, I have always known you to plan for the worst, Andy, so (laughter). On the inventory step-up charges, are they complete now?

Yes, they are.

It was $800,000 this quarter. And what was it last -- $500,000 last quarter. So that's done. So you should see a tick-up there, improvement for FMT.

All right, thanks very much, guys.

Thanks, Nathan.

Allison Poliniak, Wells Fargo.

Can we -- just going back to energy again, North America. Obviously concerns crudes and somewhat collapse, obviously, we are seeing it in the energy there, concerns about investments in the US. Are you guys seeing that? Are people talking about that yet?

No. Just remember where we play principally. Right? We are playing in the midstream. So we are not playing, for the most part, where holes are being put in the ground. And so we are much more affected by the production equation than we are by the hole in the ground equation.

So, we haven't seen that yet. I suspect that -- I don't think that that's going to be a material impact to our business kind of one way or the other for the most part, just because of where we sit today. I do think it's likely to have some impact on acquisition valuations that are out there. And that might actually open up some doors to some opportunities.

Okay, great. And I guess that leads me into my next question. You know, you talked about maybe multiples compressing a little bit on the energy. But multiples have been here -- we've been at this level -- it seems like you've been at this high level for quite a number of quarters here.

Yes.

I mean, is there -- I mean, what's your thought -- I mean, do we need to change criteria here if this is a sustained level? Or are you just expecting that at some point this will kind of come back to you guys?

Well, you know, the way I look at it is, we first start, Allison, with saying, does this matter to us strategically? And once we answer that question, we've historically said 12% to 15% ROIC, cash-on-cash ROIC.

I -- there are some businesses that we would buy that would be lower than that, in terms of a hurdle, to be candid with you. There are some things that we would buy that would be kind of in the 10-ish-percent range because they matter to us, and we're willing to stretch. And, obviously, the spread of capital is pretty attractive.

So, there are a few things out there that we would do that for. But for the most part, I really think that you've got to remain disciplined. We've all seen this movie many, many times. And it -- eventually, it does tip over. And even what we saw in the public markets here in the last month or two months, that has availed some opportunities in terms of capital deployment that weren't as good at that period of time.

So, I think you've got to be patient. We've got a great balance sheet, outstanding cash flow. And we are going to keep disciplined here.

Okay, great. Thanks, guys.

Thanks, Allison.

Paul Knight, Janney Capital.

If I look at the bookings growth on the health and science side or the order of the 2% decrease, it seems to go counter to kind of a low-single digit revenue growth of your customers. Can you talk to that spread?

Yes, yes. A couple things. First and foremost, we are tied to the equipment side, not to the consumable piece. And that has been the piece that has been outperforming lately, has been the consumables piece of businesses. And also, we don't perfectly match, in terms of quarter-by-quarter -- both because of how new products ship, how inventory moves through the system. But certainly within two or three quarters, you'll see a pretty good correlation. So I'm not particularly concerned about what we're seeing in the marketplace right now in terms of a gap between us and our major customers.

Do you think that China is improving or kind of the same?

It's kind of the same. I think that what's being talked about in the press now is more accurate to what has been happening here for some time. So I think the news cycle has caught up with reality. I will say that I don't think it is deteriorating further. I think that's important. Because if you'd asked me that question this time last year or even into the first quarter, I think we would've said that growth rates had deteriorated significantly. So, I think that's -- I think we're kind of in a relatively steady-state, but also realize that steady-state in China is a lot of volatility.

Okay. Thank you, Andy.

Thanks.

Scott Graham, Jefferies.

Nice quarter, guys. (multiple speakers) So I'm looking at the orders across the businesses, and I know, Andy, you mentioned at the top that you saw August and September softer, and then October better, which does explain some things.

You know one of the things I think we are trying to gauge here is the impact of the headlines on order patterns, you guys are particularly short cycle with your product sales. Do you think that that was a reaction to what some of the negative headlines that have come across over the last couple of months? And then maybe October picked back up again because it needed to, because they had under-ordered? How are you looking at that?

I think -- Scott, I think that's partially correct. I think, number one, I think we should recognize that Europe in particular, and the Middle East in particular, they actually -- the business has softened because of what's going on in those regions, right, in terms of the economic growth and also some of the conflict in the region.

So I think that's very much real. I think that got exacerbated by some of the news cycle and some people pulling back on those things. And probably what we are seeing a little bit in October is a rebound from that. So, October for us, in the order book, has been pretty solid. And so, it's encouraging. And I don't think that what we're seeing in October is necessarily sustainable. I think there is some snapback.

Right. But since you are short cycle, that at least gives you, call it, the first three weeks of the month of the quarter, that at least gives you some confidence on your fourth-quarter organic sales guide, yes?

Yes. If you remember, right, we go into any quarter, and we've got about -- plus or minus, we've got half our business booked going into a quarter. So we've got to book and turn the other half. And so, generally, if the first four to six weeks of our quarter are strong, we are in good shape.

Understood. I want to maybe just, with my follow-up question, just go back to a prior question about M&A.

Sure.

And you have a lot of directions to go here. I mean, obviously, I'm sure nothing has changed; FMT and SHT are still the main areas of focus. Here's a question I just maybe want to ask you, I don't know if you can answer it. But if you say that, in the second quarter, you had two situations where you were at the finish line but then needed to walk, but now that you have four to six, are those four to six or any of them or all of them as close to the altar as the two? Or further away?

No, I wouldn't say they are necessarily as close. The difference is that both two that we walked away from were auctions. And so, you live with that volatility, right? So you eat the cost of the diligence. And then, at the end of the day, if someone decides to write a big foolish check, that's their business.

And so, that's just -- there's not much you can do about that one. So, what we are seeing right now is we do have more proprietary stuff right now. And I feel good about that. But also, a couple of things that we are looking at are in Europe. And, as you know, the diligence cycle is a little bit longer. And if you get anywhere close to the holidays being pushed into next year, that's just reality. So, not quite as close but a little bit better in terms of profile, not being auctions.

Got it. Hey, thanks a lot.

Mark Douglass, Longbow Research.

Andy, can you discuss IOP in the quarter and what the outlook is there?

Yes. So, orders were basically flat year-over-year; not concerning for us. Great profitability improvement. As you remember, we had a really strong order quarter last quarter in IOP. So, feel good about that.

The -- some of the end markets, Mark, aren't quite as robust as I think maybe we thought they would be. We kind of thought that some of the semi-business would even be stronger than it's been. So, it's not quite as strong as we thought maybe going into this.

I think the fourth quarter, I think we are in pretty decent shape in total. And just, generally, the overall profit improvement there has been great. And I think we've said this before in the past, but we are now into the 20's in terms of EBITDA margins in the platform. And it's performing like we hoped it would.

Okay. So, semis is still --?

Yes, it's still soft. You know what -- I don't know what you thought, but we thought it would be stronger here at this time this year. And it kind of softened up.

I thought it would be stronger for multiple quarters.

Yes, yes.

It keeps getting pushed out kind of like the energy stuff.

Yes.

Speaking of energy, what is your exposure -- you talk about North America is good, but with the petrochem buildout expected in 2015 and beyond in North America --

Yes.

-- how does IDEX benefit, or will you benefit on the petrochem side?

Yes. So, we actually capture that in our chemical food process platform, for the most part -- not totally, but for the most part. And we feel really good about that. So we've done a handful of things.

First and foremost, we've actually -- we've put a bunch more resources down into that region from our long-standing businesses. We also, the acquisition of Aegis was important for us. We are putting a new facility in the Houston area for Aegis. As you know, Aegis is out of Baton Rouge. And we are actually putting a new facility in Houston, because that's a high-touch business; very, very high-touch business.

And Aegis actually allows us to bring our Richter business closer to the US market. One of the things that we'd struggled with in the past was not really having the right kind of channel into the US for our Richter pumps and valves. And we've got that now. So -- and also, and our Corken business touches it too. So, we feel pretty good about that exposure. And we think 2015 is going to be a good year.

Would you say it's still less than 5% of sales, though? Or --?

In total, the petrochem piece, less than 5% of sales, Heath?

For IDEX?

Yes, it's more than that.

It's more than that.

Yes.

Yes.

It's -- I'd have to come back to you and exactly quantify it, because you've got to kind of break apart some different businesses. But you could probably say -- it's 5% to 10% definitely.

Yes, it's in that range, and it touches multiple areas of IDEX. That's the only reason we have to go and look at all the different spots in IDEX that are impacted by that, Mark.

I mean, you've got -- you figure you've got Viking itself, which is 10% of sales, and a good chunk of Viking goes there. You've got a big piece of Richter, and all of Aegis, right? So, you know. (multiple speakers)

And you've got elements of Seals (multiple speakers) --

Yes, elements of (multiple speakers) --

-- and you've got elements of BAND-IT.

So you've got pieces of the Company that touch in so many ways.

Right. And then finally, on the cost-outs in 4Q, are you planning on excluding those? Is that why you're not inputting that in (multiple speakers) --?

No, we'll take it in our P&L. It's just that we didn't have it nailed down exactly, because there are going to be some moving parts here before it's all finalized. But we'll actually take it in the P&L.

Okay, but it's not in guidance at this point?

No, it's not in guidance at this point. No.

Okay. Thank you.

Thanks, Mark.

(Operator Instructions) Kevin Maczka, BB&T Capital Markets.

Can we go back to the 20% margin guidance for Q4? It seems like you've been guiding that level all year, and to your credit, exceeding it. I know you talked about FSD, and maybe there is some mix shift. We shouldn't necessarily think that that margin continues at that high level. But is there anything else going on in terms of mix or currency or the segments that you can point to as to why that would come down like that sequentially?

Yes, there are really two things. So one is the very, very strong performance in FSD, as you think about that sequentially. That's going to be a big impact. But also, to be fair, the MPT had a really strong quarter within health and science. And that was a nice profitability in terms of incremental profitability that, on a sequential basis, we won't see in the fourth quarter. So, that 20% I think is a pretty good number.

Okay. And then, just in terms of currency, on slide 8, you mentioned the 2% FX headwind. I'm assuming that's a revenue headwind. Can you bring that down to the bottom line and comment on what that means at EPS? And then, as we look forward and think about 2015, assuming rates kind of stay where they are, can you just quantify at all or give some goal posts on what that might mean to 2015?

Yes, Kevin, this is Heath. It really is just the currency translation, but it's the flow-through. And in the quarter, we are expecting somewhere around $9 million -- at current rates; we don't try to predict what the rates will do throughout the rest of the quarter -- but at current rates, we are anticipating around a $9 million headwind. And so it's just really the statutory flow-through of that $9 million impacts our earnings by a couple of cents. But it's really just the translation, not so much that we have some type of hedge that's out of place.

How about next year?

Next year, we haven't quantified it yet, to be honest. We need -- we'll need some time to see where the fourth quarter settles in. But when we give our guidance for next year, we'll certainly come out with that.

Okay, thank you.

Thank you.

Matt Summerville, KeyBanc.

With respect to the margins in HST, I went back and looked. They are at the best level they've been in three years-plus. I guess, this breakout -- is it really related just solely to mix? Or is there something else sort of driving that? And I guess what's the right way to think about margins in this business going forward?

Yes. So, Matt, if you exclude the sequential improvement from Material Process and you look at the underlying other pieces that make that up, those are all still positive. So, it's a good story almost no matter what you're talking about.

And so, we feel pretty good that you are seeing improvement. And so, where is that coming from principally? It's coming from a couple of places. We continue to see better overall profit execution at Optics. That's been a really good story. But also on the industrial side, our gas business sits in there, and they have just done a great job over the last -- really, the last couple of years of continuing to expand profitability.

You know, that's a business that has just done -- really, if you'll go back five years and you looked at today, that's an entirely different business than it was five years ago, in terms of overall profit profile and growth rate. So, those are the big pieces.

And then is there any way you can quantify the magnitude of business that you've sort of zeroed out at this point related to the Mideast and energy? Is it $2 million? Is it $20 million? Can you at least triangulate on that a little bit?

It's around $10 million. So, if you actually looked at what got pushed into the second, to the third, and now into the third, and we're not going to kind of count it. It's about a $10 million impact in the quarter.

Great. Thanks, Andy.

Yes. No problem, Matt.

Joe Giordano, Cowen.

Hey, guys, thanks for taking my call. (multiple speakers) So I guess order of weakness, if we could talk about HST a bit on a sequential basis. You mentioned -- you talked about it on a year-on-year versus the one order, but it is -- it's down a bit from where we've been over the last three quarters. So could you talk maybe more on a bit of a sequential?

Are you talking about order rates? Sales rates (multiple speakers) --?

Yes, order rates in HST.

Yes. You know, nothing that's particularly meaningful, Joe, when you look at that. I mean, you'll have some swings here and there quarter to quarter. It's not that big a deal. So, it's -- there's nothing in there that you look at and you'd say there's a big yellow flag or red flag.

Okay. (multiple speakers)

Joe, the thing -- I'd jump in. There's -- this is Heath. There's a -- the element of the segment that is dependent upon kind of daily book and bill is humming along according to expectations, which would be fine. It's -- the noise -- and it comes generally from the project activity on a year-over-year basis. (multiple speakers)

Okay. Okay. And then I guess more of an esoteric question, I guess. But how should we think -- how would you gauge and characterize the level of your conservatism when you are giving your guidance now? Since five quarters in a row, not just meeting the midpoint but meeting the -- beating the top end. And obviously, a credit to you guys, that would be better if more companies did that. But how would you gauge, like, the level of conservatism inherent in your guidance now, as it was maybe late last year or something like that?

Well, first and foremost, Heath can't spell esoteric. So we have (laughter) --

(laughter)

No -- you know, I don't know. I kind of look at that and -- you know, we try to guide in a way that is responsible. And we feel that we have real confidence in delivering on that. And by the way, it's also how we manage the business. So one of the things that I've said time and time again is, we are a company that can respond very, very fast with an uptick in business, because our direct labor is single digits. And so we can move quickly on the upside.

On the downside, as you think about how high our contribution margins are, that's a painful equation. So, like, as you look at what we're going to do here in the fourth quarter, we've done a lot of hard work here to prepare our organization to be able to do that, to get in better and better fighting shape. But another piece of that is that it continues to lower that breakeven point for the Company.

And so, that's just -- that's how we manage the business. And so we -- you know, we're not trying to be overly conservative; at the same time, the bottom line is we're just trying to be responsible.

Okay. And just last from me. Have you talked about at all where -- like which businesses the cost-out might be? And then last, what are you seeing in European Union right now? You've mentioned Asia; you mentioned North America.

So, this is not some big company-wide thing that we are doing -- meaning we haven't, like, picked some random number. It's really been excellent organization and segmentation of businesses have opened up opportunities across the Company. So, we are able to do this in kind of rifle shots.

And it's the kind of thing that in any one place, you wouldn't really notice it; but when it adds all up, it becomes meaningful. So, it really is across the Company. And by the way, that's on the cost side, but it's also on the investment side. So we are moving a whole bunch of resources from some areas to other areas all around growth and productivity.

And so, what you're seeing is, we kind of use the term cut-and-build. And that's how we think about it here. So, it's pretty broad-spread, but it's not in any kind of a massive swath anywhere. And pretty much all that stuff will be done by the end of this month, for the most part, you know, here and there.

So, in terms of European municipal -- still weak. Still weak. There is no two ways about it. You've seen a couple of projects that have come out of the woodworks in recent months, specifically out of the UK; but, for the most part, it's still pretty soft.

Okay, that does it for me. Thanks a lot, guys.

Thank you.

Ladies and gentlemen, there are no further questions at this time. I'll turn the conference back to management for closing remarks. Thank you.

Thanks, Diego. Well, thank you very much for joining us here today. Obviously, we are proud of the results we have. And most importantly, really, congratulations to the team in the field at IDEX who has continued to execute time and time again. So, we appreciate your support, and we look forward to talking to you at the fourth-quarter call. Take care.

This concludes today's conference. All parties may disconnect. Have a great day. Thank you.