IDEX's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: IDEX Corporation (IEX)

IDEX Corporation (NYSE:IEX)

Q4 2012 Earnings Call

February 05, 2013, 10:30 am ET

Executives

Michael Yates - VP & Chief Accounting Officer

Andy Silvernail - Chairman & CEO

Heath Mitts - VP & CFO

Analysts

Matt McConnell - Citi

Allison Poliniak - Wells Fargo

Scott Graham - Jefferies

Charlie Brady - BMO Capital Markets

Matt Summerville - KeyBanc

Mike Halloran - Robert W. Baird

John Moore - CL King

Operator

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.

Michael Yates

Thank you, Paula. Good morning everyone and 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 today, 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 on the full year 2013. Following our 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 855-859-2056 and entering conference ID 86510532 or you may simply log on to our company’s homepage 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?

Andy Silvernail

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 would like to start on slide five. As you've all seen our press release, we had solid operational finish to the close of IDEX’s 25th year. Throughout last fall and in our third quarter call, we outlined our strategic priorities of accelerating organic growth, executing excellence and disciplined capital deployment. Our goals over business cycle are to deliver compound double digit earnings growth, strong free cash flow and superior returns on invested capital. We made good progress towards 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 am proud of how the team executed in the face of a volatile macro economic environment.

Operating margins for the year were 18.4%, up 30 basis points, driven by more than 50% flow through on incremental organic revenue. Full-year adjusted EPS of $2.68, were $0.12 were 5% higher than the prior year EPS. We also improved working capital by $22 million helping drive our free cash flow up 30% to 132% of net income or $3.53 per share.

Now onto 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 entered 2013, the U.S. economy has improved modestly, Europe continues to struggle and China has improved from the lows of last year; while more stable than what we spoke last fall, we continue to expect the challenging environment that require tough minded, disciplined execution and 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 cost. 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. Barring the global recession, our large scale restructuring is complete.

In Q4, we also recorded an estimated $198 million impairment charge in our optics and photonics and water platforms. The impairment in optics was primarily related to the acquisition of CVI Melles Griot in 2011. As we have discussed in the past, the optics market softened significantly in late 2011 and is 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 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 our IETG and ADS. It’s 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 right size these business 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 emphasizing 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, making changes in organization structure, hurdle expectations and integration approach. Our acquisitions will focus on small to medium sized deals that build on our platforms and expanding our geographic reach, filling technology gaps and accelerating into adjacencies.

To compliment acquisitions, we’re 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 as challenging. We currently over $175 million available on our authorization.

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

With that, let's move to the segment discussions of Fluid and Metering, I am on slide six. For the year, FMT orders were up 4% organically, sales were up 2%, margins expanded a 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 a 120 basis points was broad across the segment, as FMT is well positioned. Our market leading Ag business, Banjo had another record year to 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 in-pipe water services business that is most closely tied to the initial budgets remains challenged. However, we are optimistic that we’ve hit the bottom; while we are not anticipating much market help in 2013, we are well positioned to win business from funding [constraints]. The remaining water businesses which focus on (inaudible) 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 field was recently named one of IndustryWeek's 2012 best plants. They are the only AODD manufacturer to ever receive this award which recognizes North America plants on a leading edge of efforts to increase competitiveness, enhance customer satisfaction and create a stimulating and rewarding work environment. We are extremely proud of their achievements, congratulations to John Carter and his team in Mansfield.

Alright, if you could now flip to slide seven, we will talk about health and 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 during the year and improving operating margins. Scientific fluidic 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'13, particularly driven by strength in the Asian markets.

In line with prior quarters, our optics and 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 process technology platform produces capital equipment for pharmaceutical, chemical and food production lines.

MPT's businesses support of a capital spent 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'm very pleased with the integration synergies achieved in the business outlook.

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

Alright, I'm on our final segment diversified and I'm 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 shift through Q1 2013.

Outside of this particular order dispensing, our fourth quarter orders have been stable with stronger trends in the US while we see more volatility from Europe. In the quarter, diversified orders were up 14% organically while sales were up 10% organically. It’s a similar story on 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 is experiencing similar geographic trends as fire and dispensing, with North America markets remain strong. We are 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's in our re-railing and (inaudible) 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 soften early in Q4 but the last couple of months have shown improvement. I am very pleased with the entire segments 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 am 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 above $0.03. ERC was acquired in April and Matcon in July.

The impact of our restructuring will generate another $0.24 to benefit 2013. As I mentioned earlier, our restructuring efforts successfully included 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 continue to push into new geographies. As these and other investments are made in our global operations, there will be a net $ 0.07 [suppression] on wage, healthcare and material inflation, weighing against our productivity and sourcing gains.

Okay, let’s go to the next slide. I am on slide 10. I will wrap up my prepared remarks with Q1 and a 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 285 to 295. Tier 1 EPS is expected to be $0.70 to $0.72. Tier 1 is projected to have flat organic growth with operating margins of approximately 18.5%.

Some of the 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 respond extremely well to volatile marketplace and demonstrate 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 discipline in capital deployment. We look forward to a very good 2013.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt McConnell of Citi.

Matt McConnell - Citi

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

Andy Silvernail

Sure good morning, Matt no problem at all. Generally, if you look at it will see FMT to be mid single-digit, HST to be low single-digit and FST will be in the low single-digit but that’s going to comp of off the order that we had this year, so that’s inclusive of comping off that order.

Matt McConnell - Citi

Okay, great that’s helpful. And then just to start the year out, can you reconcile the 5% increase in organic orders in the fourth quarter with the expectation for flat organic revenue, I mean, there is lot of curling noise 3Q to 4Q, is anything else that wouldn’t contribute to that start to the year meaningfully below fourth quarter orders?

Andy Silvernail

Yeah, Matt, I think there are really two things. One, I think as you 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 ramped 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 on day rate etcetera. So I don't think is really anything surprising in there.

Operator

Your next question comes from Allison Poliniak of Wells Fargo.

Allison Poliniak - Wells Fargo

Can we just start on the margin, I guess particularly its health and science, I know there is a lot of moving part with that, if there is 18 sort of a good run rate throughout year, are we still building out for that just given some of the restructuring you’ve been able to do?

Andy Silvernail

Well, we said that coming into or going towards the end of the year, we thought we did near that 18.5% which we are happily we got to. So we've seen nice sequential margin expansion here throughout the year. So that's number one, Allison.

Second, we do expect to build off of that going through this year and we were expecting exit rate just closure to 19% at the end of 2013. So we should continue to see the benefits. Obviously, we’ve done a lot of restructuring, fair bit of that has been in HST. So you should expect to see some margin expansion.

Allison Poliniak - Wells Fargo

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 discernable difference between multiples in either those two areas at this point and just sort of the activity there?

Andy Silvernail

Let me handle that in two ways Alison, so first let me kind of comment on the overall acquisition environment and then I will talk specifically to the FMT, HST split. The overall environment I would say is very consistent with what we saw coming out of the third quarter of last year. What I mean by that is it’s really around the pricing. The activity levels kind of tend to peak in valley with how private equity kind of 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 in any kind of growth continue to have very, very high premium expectations in the marketplace and we've 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's 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 are 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 is falling a little bit out of favor. So there are some actually very attractive multiples in that segment.

Operator

Your next question comes from the line of Scott Graham of Jefferies.

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 [remetriment], was there something that you were thinking about in the third quarter, just a little bit more on that as far as what maybe the final straw in this for you.

Andy Silvernail

Well we test all of our impairment in October of every year. 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, and 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 kind of the way to look at it. And when you factor that in, when you put all those pieces together, it really shows that this was a necessity. In reality what it is its accounting kind of catching up with operational reality, that's the way to look at it and this is not something that's really debatable, it’s math driven. So when you auditors move forward to that, that's how you move forward with that decision.

Scott Graham - Jefferies

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.

Andy Silvernail

It did, and you have to kind of look at the basis of where you are from a revenue standpoint. Structurally we think we are in very good shape at what we've finished in 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, it is 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.

Scott Graham - Jefferies

Let me tell you 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 to the pipes? Does that include current year productivity, what is that number?

Heath Mitts

Scott, its Heath. That number is really the absolutely restructuring in the problematic headcount that’s 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 go or either are constantly going. So if you were to look forward in our bridge, the productivity initiatives and so forth kind of that $20 million numbers we've talked about in the past is included in the net inflation. So with that netted out to a number of $0.07 drag once you factor in, roughly 3% for wage inflation, little bit less than a 1% on material inflation, fringe inflation specifically around healthcare costs and you net against that productivity and sourcing savings is where you get the $0.07 drag.

Scott Graham - Jefferies

Okay, I do see that footnote now as small as it is. I needed the electron microscope to see that one, but I guess what I am wondering then is further on that though, Heath, is that you know, boy that’s a lot of inflation that you are expecting and in the environment right now that is very inflationary. I am not going to ask you to say the word conservatism, 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 20 million to 25 million of productivity.

Heath Mitts

We will actually manage the costs throughout the year as we always do and then 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 conservatism. The wage inflation alone is about $15 million Scott, and you got healthcare costs that factor into the fringe benefits and that’s up 5% to 6% and so 7% this year in our guidance. We will do everything we can keep that down, but those do factor in and 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.

Operator

(Operator Instructions) Your next question comes from the line of Charlie Brady of BMO Capital Markets.

Charlie Brady - BMO Capital Markets

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

Andy Silvernail

Yeah it’s about three quarters optics, a quarter water and that’s plus or minus.

Charlie Brady - BMO Capital Markets

Just on the fire emergency diversified on the expensing part of that business, can you just dig into a little bit kind of update us on where that business is today. I imagine it’s still kind of tough explaining on that, but may be a little more detail on how that’s running?

Andy Silvernail

Well you got a few things happening in there. So if you separate out kind of comparison against one times and you look at that base, it’s actually pretty good Charlie. I will call it a decent bounce back in the US which I think is driven by the activity levels that have happened as investment is coming back through housing into equipment. As you look back as far as ‘09, that area really was start for investment, as stores were closed throughout the US etcetera. So you start to see some replacement revenue start to pull through there, so it’s decent.

Europe is softer. Europe didn’t see the same kind of decline and generally it’s a little bit softer, but it’s still decent, Asia is quite good, it’s 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 to India in expectation of those growing markets and that's worked out real well. The other side is as we said in the third quarter, we’ve just launched a new product call X-SMART which is a little cost automatic dispenser that we think is really a game changer. Now we are still early days in that Charlie, but we think that's going to be win on that business.

Charlie Brady - BMO Capital Markets

Great, that's helpful. And one more on FMC on the order, is that 10% organic order growth and FMT on the quarter is about, just like the best you had about five quarters or so, and you talked a little bit about in your prepared remarks, but can you just maybe take into that little bit more from where you are really seeing the strength in some of that incoming order rate?

Andy Silvernail

Yeah, couple of things Charlie, as much as I would like to give very, very excited about that and I am reasonably excited, we had a pretty weak Q4 of last year, if you recall the order rate in the Q4 of last year was pretty soft as China weekend and if you then 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 pick up, its 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 kind of 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 when if you were back in the summer or even the fall.

Operator

Your next question comes from the line of Matt Summerville of KeyBanc.

Matt Summerville - KeyBanc

A couple of questions; first, with respect to the business you had to take the write downs, 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?

Heath Mitts

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; its fair to say that that has crept into somewhere in the $130 million to $140 million range. But a chunk of that, the largest piece of that is the market compression, there's also some business within there 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's specific to CVI though.

Matt Summerville - KeyBanc

And then the same kind of walk forward on profitability?

Heath Mitts

Well, the profitability is obviously it’s a business that's 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 calling back on a rate basis where we want to be. But just given on an absolute profitability dollar perspective, just given lower revenue run rate, we are not back where we want to be on that side.

Matt Summerville - KeyBanc

If you look at let's just say it’s 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, how much revenue growth do you need to be back in that kind of high teens margin area where the business was I believe when you bought it?

Heath Mitts

We are going to get tremendous flow through on the next up tick of revenue in this business. And 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 another $20 million of revenue is going to go a long way in this business.

Matt Summerville - KeyBanc

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

Heath Mitts

Not materially. No.

Matt Summerville - KeyBanc

Okay.

Heath Mitts

I mean it appears there's push, there's things that go both directions on that in terms of the way things are handled and reverses intangible that have actually been written off, but that's out to a de minimus amount, so $1 million.

Operator

Your next question comes from the line of Mike Halloran of Robert W. Baird.

Mike Halloran - Robert W. Baird

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

Andy Silvernail

Sure, Mike, no problem. You know, I think first of all, you know, what we're talking about today is no different than what we started talking about and really starting in the spring and summer of last year, which is you know, we took a pretty hard deep dive, you know, starting in late ‘11 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 kind of hurdles. So as we look at deals, we're looking at how do we cross the 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 and 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. One of the discussion around accretion and what not around cheap money, we know that it eventually that will go the other way and so when we looks at things, we look at things on an absolute return basis, and I think that’s pretty important.

Also Mike, what's important, that is just generally how we think about capital. We're still absolutely committed to strategic acquisitions if there are platforms. It is a critical piece to our strategy and as we look at our six strategic platforms that we talked about consistently, acquisitions will play a role in filing 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.

Mike Halloran - Robert W. Baird

Makes sense and then just another question about underlying assumptions as we think about guidance range here and trying to get a sense for the level of conservatism, I suppose, built into it. You know, when you back out the restructuring benefits that you guys expect to see the structural cost benefits you laid out on a year-over-year basis, your earnings looks closer to flattish because of the growth investments than 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 may be just comment on what sorts of internal improvements you are expecting to drive or things like that, does that question makes sense to you?

Andy Silvernail

I think so, if I don’t answer it exactly right do you want your follow up. First of all, you can’t separate growth investments from the cost out, as we took that $29 million of cost 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 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 able to 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’s that is 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’s the game. It’s the most important piece of the game that is. And so while there is, we are giving some of that back to make those investments, we absolutely think that is the right thing to do. So that's the first part the answer to the question, Mike.

The second part which is, what are we doing internally for the year, our consistent approach to productivity and to ongoing cost out into margin expansion doesn't stop with the closing of this restructuring window. And we still absolutely expect to get that $20 plus million in productivity to offset where our inflationary piece that are non-material, right, wage inflation, health care inflation are real and we need to minimum offset those and so that will absolutely continue. So funding organic growth is number one and continue to drive productivity improvement day in and day out is number two, does that answer for you Mike.

Mike Halloran - Robert W. Baird

Yeah, that makes sense (inaudible) of the day, I was trying to get sense for what the core earnings feel like if you exclude the restructuring and I suppose your comment is excluding the restructuring and specifically as probably not fair when looking at the total picture and the earnings progression that you are driving from the core standpoint?

Andy Silvernail

Absolutely, and also don't forget, it’s not like this cost happened on December 31, right, this is been ongoing throughout the year. We did ramp it up for in the fourth quarter to close it out, but this is been something we have been executing incredibly aggressively on year throughout 2012.

Operator

Your next question comes from the line of John Moore of CL King.

John Moore - CL King

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’ve said about the other divisions, it looks like you've got a model margins in FSD down in ’13, and I am wondering why that would be.

Andy Silvernail

John you are really looking to be flat generally. You've got a reasonable headwind that's going to come on in the second, third and fourth quarter as you full well know. At the same time the team has done a great job of taking cost out. So the facility closure in Pennsylvania and integrating that into Florida, certainly helps the 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 are going to call it flat.

John Moore - CL King

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 and about a 130% our that income this year, it seems like, I mean is $290 million to $300 million probably a reasonable free cash flow estimate for ’13.

Heath Mitts

I think we don't break out cash by segment that way but if you look at it in aggregate we did we had a tremendous efforts towards working capital reduction in 2012. 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 ’13 I think your numbers are directionally correct. Ultimately we would like to have see a 3 in front of it.

Andy Silvernail

John I want to add to that for a second. These calls often are exclusively focused on one side of 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 talk about $3.53 a share in free cash flow in 2012, which is far away a record for the company and really demonstrates the focus on execution and sometimes it gets lost in the next year. 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.

Operator

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

Matt Summerville - KeyBanc

Heath what should we be thinking about full year corporate expense.

Heath Mitts

For 2013, it will be roughly in line with where we exit ’12. There's 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 plan, stock options and so forth. But it will be in that range of roughly $50 million.

Matt Summerville - KeyBanc

And just one final one for Andy, you sort of talked about your acquisition process a little bit, as you've had to kind of 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 are 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 a little gun shy going forward. Can you kind of talk about your mentality around that a bit?

Andy Silvernail

Matt that's a very fair question, but let me cut that question in to two parts. First, the changes and then I will call it openness or intent for large deals going forward. On the first side of it, we’ve 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 things, first of all, pricing was kind of 7 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 in to a different platform and so you don’t over stress to organization and any one place for the ability to do deals.

So that’s number one, first change. Second one 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 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 physical post deal execution, integration. It's not a big team, don’t get me wrong. We're not big fans of what’s overhead, but it is a group of people, that’s what they do. They live them breathe from a diligence in creating the value proposition and 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're 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 our bias is towards small to medium size deals that really fit our strategic platforms that is definitely our bias. There are however a handful of larger transactions that will significantly change the positioning of a platform or of IDEX, but 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 few but our bias is very much towards small to medium size.

Operator

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 now for any closing remarks.

Andy Silvernail

Well thank you all very much. I appreciate your time here today and walk in to our 2012 results and as we look at 2013. Obviously we have done a tremendous amount of work to prepare ourselves for a successful 2013, and we think we are 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 have done very good work, and we look forward to a good 2013. Thank you all.

Operator

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

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