IDEX Q4 2008 Earnings Call Transcript

| About: IDEX Corporation (IEX)

IDEX Corp. (NYSE:IEX)

Q4 2008 Earnings Call

February 05, 2009 10:30 AM ET

Executives

Heath A. Mitts - Vice President, Corporate Finance

Larry D. Kingsley - Chairman, President and Chief Executive Officer

Dominic A. Romeo - Vice President and Chief Financial Officer

Analysts

Ryan MacLean - Janney Montgomery Scott

Mike Schneider - Robert W. Baird

Wendy Caplan - Wachovia Securities

Scott Graham - Ladenburg

Ned Borland - Next Generation Equity Research

Walter Liptak - Barrington Research

Charles Brady - BMO Capital Markets

Christopher Glynn - Oppenheimer

Operator

Good day, everyone and welcome to the IDEX Fourth Quarter 2008 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Heath Mitts, Vice President of Corporate Finance. Please go ahead.

Heath A. Mitts

Thanks, Mark. Good morning and thank you for joining us for our discussion of the IDEX fourth quarter 2008 financial results.

Yesterday, we issued a press release outlining our company's financial and operating performance for the three and 12-month period ending December 31st, 2008. 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 from IDEX management are Larry Kingsley, Chairman and CEO; and Dom Romeo, Vice President and CFO.

The format for our call today is as follows. We will begin with an update on our overall performance for the quarter and full year and then provide detail on our four business segments. We will then wrap up with an outlook for 2009 and update on our balance sheet and summarize our priorities. 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 888-203-1112 and entering the conference ID 1364347, or simply log on to our company homepage for the webcast replay.

As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in IDEX's filings with the Securities and Exchange Commission.

With that, I'll now turn the call over to our CEO, Larry Kingsley. Larry?

Larry D. Kingsley

Thanks, Heath. Good morning, everyone.

As you know we were early in our assessment of the weakening economy, we took action through the second half '08 to reduce our cost structure. We realized $25 million of annual savings with $20 million of '09 savings associated with these actions as well.

In addition, we continue to drive material cost reduction and productivity within our company-wide operational excellence strategy. We anticipate more than $10 million of '09 savings from specific supply chain initiatives with $5 million of labor productivity. Again, both of these are in addition to the restructuring associated sales.

None of the actions taken will impair our ability to grow or achieve the strategic initiatives that build longer term shareholder value. As I'll highlight later in this call, we anticipate a soft first quarter as we realize the ramp up of cost savings on top of a slow Q4 and early Q1 order rate.

As 2009 progresses, we'll reassess our view of the economic environment, our markets and the best courser for further cost actions to ensure a solid bottom line performance for the year. Thus far, our team has quickly identified required actions and very cleanly executed as necessary to adjust to the decline in order rates.

We have a very good understanding of a cost structure, we have the ability to manage through these volatile environment.

I'm now on a slide that's titled Q4 and Full Year Financial Performance. For the quarter, orders were down 3%, and sales were up 3%. The results in this slide are adjusted for the restructuring charges and the goodwill impairment charge and dispensing.

Fourth quarter adjusted operated margin of 15.1% was down 270 basis points from Q4 '07, primarily due to the impact of '08 acquisitions. Excluding the impact of the acquisitions, adjusted operating margin was 16.3%.

Overall, given the top line pressure, I was pleased with the majority of our businesses operating margin performance. Fluid & Metering, Health & Science and Fire & Safety; all held up quite well.

Obviously, we're disappointed with the margin performance at dispensing and albeit only 7% of the company, the negative margin rate was certainly dilutive to the total company performance.

Q4 adjusted EPS at $0.41 was down 13%.

For the year, orders were up 9%, sales were up 10%. Full year adjusted operating margin at 17.5% was down 130 basis points from the prior year, again primarily due to the impact of the acquisitions. Excluding the impact of the acquisitions, adjusted operating margin was 18.2%.

Full year adjusted EPS was up 4% to $1.98. And for 2008, free cash flow of just under $200 million, a record for the sales company was over 125% of adjusted net income.

So now let's walk through the components by segment, I am turning to slide six. For Fluid & Metering, orders were up 11% in the quarter. Organic orders were down 8, reflecting a significant slowdown in November and December. Sales increased 21%, including 25% from recent acquisitions and a decline of 1% on an organic basis. Excluding acquisition, adjusted operating margin of 21.3% was up 110 basis points from the Q4 '07 number.

We expect selective fluid metering end markets to remain slow throughout the first half of '09. Given the strength and diversity of our market content though and the stability of our customer base, we believe that we are well equipped to operate effectively in a challenging environment.

Our long-term outlook remains very positive. We continue to diversify our business; nearly half of fluid metering is now outside the U.S. The three recent acquisitions added product capabilities and will enable increased market share. The integration process is going as planned for the three acquisitions, and they will be accretive to our top and bottom line this year. And we'll see a nice traction with our internal sales growth investments that we made over the past two years, particularly in Asia and in the Middle East, we made appropriate investments and otherwise to drive global expansion.

In this turbulent environment, our team is focused on what they can control. New product launches are on track, and we've not had to reduce our investment, nor will we accordingly.

In our Health & Science segment, total orders were down 1% for the quarter, down 4% organically. Sales were down 4% in total, 7% organically. The core HST business was effectively flat year-over-year.

The impact to organic growth in the quarter from the run-off of two OEM contracts, which we talked about before, represented nearly 300 basis points organic growth. Q4 is the last quarter where we have the organic comp associated with those two commercial OEM contracts.

Operating margin of 20.1% was up 130 basis points compared to the prior year. Our core market focus, the fluidic devices used in analytical instrumentation and clinical diagnostic applications continue to provide powerful platforms for growth, and we continue to anticipate growth driven by end market demand for our new generations of equipment, and increased IDEX content in these newer generations of equipment.

We secured new global customer business in the quarter, which will bode well for the mid-term. Our Integrated Systems Group continues to grow and is now providing full systems to customer specifications.

Our markets for life science equipment appeared to be more favorable than industrial CapEx in the short term. However, our OEM customers have indicated that they expect total instrument demand to decline moderately through 2009, with more significant slowdown expected during the early part of the year. And we anticipate our share gain in the segment will partially offset their unit volume forecast.

In Dispensing on slide eight, total orders in the quarter were down 43%, organically down 37%. Sales decrease 39%, organically were down 33%. Margin was down significantly compared to the prior year, primarily due to the lower volume, and that's in both North America and in Europe.

Recently, there has been some specific project activity within the North American retail channel which we believe will provide a nice lift to the current market trend. However, we still expect softness in broader economic conditions and lower capital spending in this segment, which will continue to impact demand for capital equipment within retail.

To mitigate the impact of these challenges, we've taken appropriate cost actions to size the Dispensing business, and we're well positioned to address market conditions and ensure long-term improved profitability and strong cash generation. We expect that the North American and European market will remain soft through the 2009 year.

And moving now to Fire & Safety on slide nine. For the quarter, total orders were down 10%, down 4% organically. That's primarily due to our band clamping order rate late in the quarter. Sales were down 3%, organically sales were up 3%. Operating margin at 23.9% was up 210 basis points compared to the prior year.

We continue to be the leading provider of superior technology providing our customers with robust and easy to operate equipment that will continue to drive share gain in this environment. Global product demand continued to be strong at the project level. We expect this trend to remain positive through the entire year, and that will drive growth in this environment as well.

We are monitoring the domestic municipal market closely and expect flat to modest growth to continue through the first half of '09. The band clamping business, which is about a third of the segment, has slowed with the decline of manufacturing and spend in energy projects. We don't anticipate a return of strong growth in this portion of the segment for '09.

In total, within Fire & Safety, we will continue to perform relatively well, with flat to low single-digit growth rates, generating very sound margins.

So moving on to this year, based on our current knowledge, our '09 outlook is for $1.50 to $1.80 of diluted earnings per share. This range is based on the assumption of organic growth being down 6% to 10%. FX at the current rates will have a 3% adverse impact to sales. The incremental impact of acquisitions will add 5% to 7% to the top line and $0.05 to $0.08 to EPS, that's includes of intangible amortization expenses.

And finally, restructuring will add $0.16 EPS in '09. Given the weak orders at the end of last year, we are anticipating Q1 EPS to be in the range of $0.32 to $0.38 based on that organic revenue for the quarter. And that is then down in excess of 10% year-on-year.

The effective tax rate assumption is 34%, CapEx is projected to be $25 million or so in '09 and we expect another very strong year of free cash generation.

Before I wrap up, I want to provide a brief update on our balance sheet. Our debt ratios and debt structure are in great shape, with no financing requirements until December of 2011. In addition, we've taken advantage of the interest rate markets to lock in some very low rates and our debt for the next three years.

We had a very strong year of free cash flow in '08. In Q4, we were able to repurchase 2.3 million shares of our stock and we'll continue to be opportunistic with our share repurchase program. And that's to augment our primary cash deployment strategy.

Our primary focus will continue to be to deploy cash in a disciplined manner on acquisitions in attractive markets. And we will continue to evaluate proprietary bolt-on acquisitions in '09 with the intention of securing good strategic additions to the company.

So in summary, while the economic outlook is uncertain and clearly we anticipate a much more difficult organic growth environment, the combination of the cost actions already completed and the contribution from the new acquisitions last year has set us up for solid performance in the short-term without jeopardizing our long-term strategic execution.

Internally, we're focused on what we can control. We continue to execute on our new product developments and we're satisfied with our geographic build out, and we're focused on making sure that we execute our operational excellence initiatives to achieve both the material and labor productivity saving as planned.

So certainly, we're taking a sober look at the general outlook and I'm confident that we will with those assumptions in mind deliver solid performance in the face of challenging market dynamics.

So with that, we'll open it up to your questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Our first question today will come from Jim Lucas with Janney Montgomery Scott.

Ryan MacLean - Janney Montgomery Scott

Hi, this is Ryan MacLean on behalf of Jim. I just wanted to go through the Fluid & Metering segment real quick. Larry, you mentioned that there were selective end market difficulties. I was wondering, if you could do go into a little bit more detail as to what it is that you are seeing down there?

Larry Kingsley

Sure, Ryan. I'll take the question in two parts; one what we have seen from Q4 through the other part of Q1, and then one and secondarily, what we see through the body of the year. For what we've seen over the last several weeks, there has been a relatively dramatic slowdown in the water and the chemical segment. We see positive signs of projects now fraying up in the water segment and we do anticipate that we'll see some nice improvements for the course of this year, and that's somewhat irrespective of what comes out of current federal funding mechanisms.

On the chemical side, which is, if you added up, in the neighborhood of about 10% of total company sales, we expect that to be relatively low in the new project side through the entire year. We'll still see some MRO spending. And then beyond that, what's in Fluid & Metering, I think it will track plus or minus around the GDP numbers.

So, two big issues from last several weeks perspective are kind of bottleneck and project funding associated with water and certainly with chemical. We expect water to improve, we don't expect chemical to improve all that much at least as far as we can see forward right now, everything else is kind of plus or minus what we expect.

Ryan MacLean - Janney Montgomery Scott

And I guess on the petroleum side, is that much change there?

Larry Kingsley

No, you don't care. And we talk a lot about the fact that where we are in petroleum or energy in general is not upstream, so we don't cycle up or down heavily with exploration activity as others do. We work downstream, and we're more in the logistics of getting energy to market. So we think that CapEx maybe certainly softer than it's been the last couple of years, but it's not a fall off the cliff situation at all.

Ryan MacLean - Janney Montgomery Scott

Okay. And then just switching a little bit to the $25 million of CapEx that you spoke about. I was just wondering if you could kind of detail or go into a little bit about out of that $25 million, what kind of growth projects you are still focusing on.

Larry Kingsley

Sure. The bulk of that $25 million will go toward tooling still and we will talk little bit later in the year about a planned facility expansion in the region that we think represents a great growth opportunity. It will be little premature to go there now. But on a percentage of that total CapEx, over half of that is still focused toward product and manufacturing sales growth.

Ryan MacLean - Janney Montgomery Scott

Okay, thank you very much.

Larry Kingsley

You bet.

Operator

Our next question will come from Michael Schneider with Robert W. Baird.

Mike Schneider - Robert W. Baird

Hi, guys.

Larry Kingsley

Hi, Mike.

Mike Schneider - Robert W. Baird

Larry, maybe just some specificity on your water comments because I guess I've not heard of water projects being freed up since the first of the year. Is it something unique yourselves or maybe you could just give us some example of things that have actually been kicked off again?

Larry Kingsley

Well, I'm not going to go into specific municipal project for the obvious reasons, Mike but what we've heard just in the last couple of weeks is that there is no funding in place for a number of state-based municipal-based programs that we were participating in with our new acquired businesses that are ADS and Europe over with IETG, but also on the some of the plant-based worked for fresh water spend, we are seeing certainly more positive signs than we would have spoken to at the very beginning of the year.

So, I am not going to, at this point every week is a little bit of a different story and we're all live in volatility, but certainly things are trending positively right now with respect to some of that project activity in the U.S. and abroad.

Mike Schneider - Robert W. Baird

So these are projects that you would have expected this in your revenue in Q4 and launches in Q4 that did not launch and now appear to be restarted here in January already?

Larry Kingsley

Like in water, some of it is backlog that we had that we would have seen flow through to the revenue line through the course of Q4 and in this quarter that is still there, not cancelled, it's just pushing. Others are projects that we know are approved within their respective authorities, they are going to be funded and we expect that they will at some point related to this quarter or through the course of the spring.

Mike Schneider - Robert W. Baird

Okay. And then in terms of this volatility, because you give yourself such a substantial amount through the distribution channel both here and globally, can you describe, I guess the status of what you saw as Q4 unfolded in your distribution channels and then what specifically has happened week-by-week now and throughout January?

Larry Kingsley

First of all, I'd say the issue of work downstream inventory is today and what's bottlenecked flow through either the distribution channel or the OEM base or in some cases even a dealer network, is somewhat specific to each of the segments, not just the IDEX segments but the end markets. What we've seen is where OEMs do take some stock, instrumentation builders for example, they're obviously closely managing inventory and they turn down that dial quite a bit through the course of the fourth quarter.

In the case of the Fluid & Metering segment, the summer distribution is obviously gotten a bit more concerned with monitoring their relative inventory levels and distribution is 40 or 45% of sales for Fluid & Metering, which again is half of our company.

And then selectively otherwise around the company where we've seen I'd say some portion of the slowing associated with what's downstream in inventory, whether it's actually in distribution or somewhere in the food chain.

Mike Schneider - Robert W. Baird

And what have you seen thus far in January from those same channels?

Larry Kingsley

What I'd say to you right now is I think it's too early to call in terms of how much sequential improvement we'll see through the course of the quarter and '09. I think that we are going to still see pressure through much of the first quarter, but then that does purge through the first quarter. We should see some lift as we head in without frankly a lot of consumer demand or macro economical.

Mike Schneider - Robert W. Baird

Okay. And I guess on pricing, what do you think you issued on January 1 what's baked into the guidance in terms of net price for the year and I think the obvious question is in this environment, why do you expect to hold any price at all?

Larry Kingsley

The short answer to your question, Mike, is that the assumption that's built into what you have in the way of guidance is flat pricing. And then to the longer portion of how we'd answer the question, some of the pricing lift is that the function of pricing actions taken through the course of '08 which you get the full year impact down in '09. And also a portion of that lift comes from the fact that as you know, we're highly customized products. So, we tend to pricing that on a per project for customer basis. So, there still is a price component that's positive as a function of doing so.

The offset to that will certainly be relatively strong competition in some standard product areas and I'm sure all of us will see that through the course of the year. I think a flat price assumption is conservative to realistic in terms of how we bake it into our overall profit thinking.

Mike Schneider - Robert W. Baird

Okay, thank you.

Larry Kingsley

You bet.

Operator: And next, we'll hear from Wendy Caplan with Wachovia.

Wendy Caplan - Wachovia Securities

Good morning.

Larry Kingsley

Hi, Wendy.

Wendy Caplan - Wachovia Securities

Hi. Questions on your operating margin implications or assumptions for '09, you enjoyed wonderful incremental margin during volume uptime, revenue uptimes. What should we expect, what are you expecting in terms of decremental margin during top line downtime?

Larry Kingsley

Well, Wendy why don't I -- let me start and then we can jump into as much detail as you want to. Dom can piggyback what I have to say, but if you look at the way that we guided on a down 6% organic assumption translating through the $1.80 of EPS, that you could make the argument for that's slightly conservative and that we could do better than that given the components that I spoke to, with restructuring our employees with certainly a typical lift of what we'll see in the way of incremental savings from material cost and labor productivity. But then that net calc on the upper end of the range translates to what's the incremental percentage Dom, about 23, 24, 25%. And in the bottom end of the range, you could, I would say making an argument that it's pretty conservative and that we shouldn't have any trouble at all protecting the bottom end of that range. That frankly, we feel very comfortable with.

Dominic Romeo

And Wendy, maybe the other way to think through this if you get into it by segment as Larry mentioned I think the relative profitability in the quarter of FMT, HST and FST was very good, once you impact the amortization of intangibles. So obviously the dispensing cost recovery actions that we put in place are key to that. And I think if would add it all up, $1.80 of EPS perspective, we are not going to give you the operating margin details at this point, but our margin rate relative to the last low is 300, 400 basis points higher than the historical low.

So I think the relative profitability of the company is still very strong. So almost have to get into it by segment to look at the pluses and minuses. But when you look at that, you find that it's a very strong performance, not only for the quarter but as we look at the upper end of our guidance for next year.

Wendy Caplan - Wachovia Securities

Thank you. And in Fluid & Metering, you mentioned water projects specifically. But on the chemical side, or in other process end markets, are you seeing cancellations or delays of projects?

Larry Kingsley

We can call them cancellation of projects, delays the projects, yes, in chemical. And I would say not cancellations nor significant delays right now in downstream energy nor in food or pharma. But still the project component of the total sales expectation is anticipated to be lower, capacity is certainly quite a bit down, in chemical in particular. And I think that we'll see a stronger portion of our sales content, the MRO through the course of '09.

Wendy Caplan - Wachovia Securities

Okay. And on Dispensing, obviously a small piece of the business, but distracting given the loss suffered in the quarter. Is this the time that we are kind of looking at this business and making a strategic assessment or do we have confidence that the losses will lessen or go away in the near term?

Larry Kingsley

Again, short answer is yes, but it's yes universally. Well, we are always strategically looking at all the businesses, if you think about its contribution to the company; it's 7% of revenue, not huge impact. At the same time, this business will be profitable in '09. It will generate great cash and so, is it going to be the growth engine for IDEX short term, absolutely not. There aren't any planned acquisitions obviously around the segment. At the same time, the team has done a super job getting cost out and going after new business and we expect that will translate into some sequentially improved numbers relatively short term.

Wendy Caplan - Wachovia Securities

Okay. Thanks, Larry. And one more question, is there any opportunities from any of those Fed stimulus programs that we should keep our eye on that might benefit IDEX as you know of today?

Larry Kingsley

That's a great question, Wendy. What I can tell you is that we have come through our known backlog with ADS and the stuff that we see in water in general, to see the kind of the lineated stuff that is so called shovel ready and that gives funding more quickly. And we feel pretty good frankly about that work translating into incremental revenue, it's very difficult right now to lay that into some kind of a schedule, where we as management could track at or we could articulate to you that you've got a similar lift of x percent accordingly. And I think the administration has got to figure out how they are going to do this out and everybody is in line to get their piece and from that we think that we will see some nice because we do have some shovel ready stuff, some nice impact but I think it's don't count your chickens too early.

Wendy Caplan - Wachovia Securities

Okay, thanks Larry.

Larry Kingsley

You bet.

Operator: Next is Scott Graham with Ladenburg.

Scott Graham - Ladenburg

Hey, good morning.

Larry Kingsley

Hi, Scott.

Scott Graham - Ladenburg

How you're doing Larry, Dom, Heath, Harold, how are you guys?

Larry Kingsley

Good, Scott. Good to hear from you.

Scott Graham - Ladenburg

Hear you guys on a line here and I know that we pretty quickly moved Larry and John toward doing a restructuring and taking out cost, I guess my question is several fold from that. Number one is, with the sales now I think looking weaker than what perhaps we were all thinking maybe even three months ago. Is there an opportunity now to expand the scope of the restructuring and is that under consideration?

Larry Kingsley

Well, I would tell you that one, we executed the plan according to what we thought made sense given the top line environment at the end of last year and I was, as I said in the prepared comments, very pleased with the team's ability to get it done, and frankly to deliver right to the number. So it's hats off to our operating team for doing just a super job.

When we look at the environment now, we certainly still have levers that we can and pull and we're looking at what makes sense. Obviously, we're not going to impair our ability to grow, so we want to do things that make sense structurally for the company and yeah, sure, we can do things that are if necessary that will help us improve our cost position further. And I am very confident frankly that the team is going to be able to pull off just as nicely as they did through the course of late Q3 and all of Q4.

Scott Graham - Ladenburg

The second question off of that same one is, Larry, you talked about 10 million of supply chain, 5 million of labor, incremental to the restructuring. Where does that overlap, if anywhere, with your typical 20 million of productivity and is that 20 million of productivity still on the table for 2009 even if it's inclusive of those numbers?

Larry Kingsley

Essentially, Scott, it's 15 million, the 5 and the 10, as the substitute for the plus or minus 20. And the reason for that is that getting labor productivity when your top line is soft is a more difficult task and all good operators certainly know that.

And secondly, that you do capture some of that labor productivity pieces of it in the restructuring. So, now you can't unfortunately have your cake and eat it too. And that's where we are at this point. We believe that 5 million for labor productivity is very achievable.

And then on the $10 million associated with supply chain initiatives, I think that's also very achievable. That includes some time for current material cost to work its way through our inventory. And we are going to see I think a pretty nice recapture with where commodities are headed through the course of '09. So, we are not assuming the same direct translation on material cost down that you're seeing on some of the metals prices for example, or on energy cost and how we get the 10 million. And in the back half of the year, we could see again a little bit of improvement if things do remain where they are.

Scott Graham - Ladenburg

So the supply chain, are you saying Larry that includes raw materials deflation or we are talking about two different buckets here where there is only the natural raw materials deflation that you benefit from, and then supply chain is something you're doing structurally?

Larry Kingsley

The two really aren't separate from the way we do our accounting. The supply chain initiatives are incremental savings that we get out of global resourcing varieties of products by way of using our organization principally out of China and India, but also with what we're resourcing to places within North America and Europe. And the initiatives at this point that are integrated within our plan stack up to that $10 million number, same kind of accounting that we talked about historically with respect to how we think about it.

And then the only point is that yes, somewhere between what happens with material cost in total, there could be a little bit of a margin opportunity through the course of particularly the back half of the year.

Scott Graham - Ladenburg

Helpful, thanks. Now, two final questions for you. We have seen in FMT declines in net operating margin attributable to acquisition now, you'll admit obviously for some time. It started in the first part of... actually in the fourth quarter of 2007, and it has continued on really through today. I guess my question is Larry, is this a situation where we maybe need to go back to these acquisitions and revisit them from an integration standpoint because the margin that you're taking on these things are pretty significant?

Larry Kingsley

No, not at all, Scott. Actually, if you look at the comments that I made here with respect to the fourth quarter, that was with the assumptions of just the '08 acquisitions that flaunt in the prior year comparison. If you look at X acquisitions we're at 21.3% for the segment, which is up 110 basis points. So that's not take you away from your question, that's the real IDEX year-over-year operating performance. Then there is two pieces that bridge between the 17.5 and 21.3, that's the performance of the acquisitions made in '08, so let me get back to that to your point, and then end the impact of amortization.

On the pieces, the performance most all of that was in the fourth quarter, a bit of a one-off associated with some higher cost and anticipated in a project with ADS within water. And so that won't in anyway repeat, and those are pretty large projects.

In the breakdown of which piece of that is amortization associated, roughly is...

Dominic Romeo

About half of the margin.

Larry Kingsley

About half of the gap.

Dominic Romeo

For the quarter.

Larry Kingsley

for the quarter. And as you know, as we roll forward, we certainly don't go back and excuse acquisition impact beyond those typical initial quarters where they do have a year-over-year impact and we get to on an integrated basis, FMT like margins basically within the plans that we set forth for the ones that we are acquiring.

Scott Graham - Ladenburg

Now, it's fair enough, all right. Last question is this that the first quarter organic sales assumption is minus 10, full year is minus 6 to 10, which if I had my math right, that assumes that we're expecting things to be a little bit better in the second half than in the first half. And is that, Larry, based on some of the comments you've made about some of the visibility you have with OEM projects and assignments in winds or was that more of an easy comparison thing or is it both, just may be color that for us if you would?

Larry Kingsley

The short answer, Scott is that most all of that is some things that we know, we have some pretty decent visibility into that are going to sequentially pick up. So if you go back to my earlier comments, some of that we think is inventory as it works its way through the system, some of that is known projects that we are seeing activity on now that we think will be in a position to talk about fairly shortly and some of it is just the overall segment level expectations, that we are going to see based on known demand, it's a combination of new project and MRO spending.

Scott Graham - Ladenburg

Very good. Well, thanks a lot for that detail. I appreciate.

Larry Kingsley

You bet, Scott. Take care.

Operator

Ned Borland with Next Generation Equity Research has a question.

Ned Borland - Next Generation Equity Research

Good morning, guys. Just looking at HST, you said that you have some new business wins. I am assuming that it sounds like it's going to be kind of flattish from an organic standpoint early on. But if you could just walk through how expect some of that new business to ramp?

Larry Kingsley

Yeah. We are not going to quantify expectations now for what we see for the segment for the year beyond what we've already talked about. We'd say the following that the bigger instrumentation OEMs have put forth forecasts which talk about unit volume being down 6, 7% or so. We have bottom built some assumptions in terms of content in the systems, so, for the mix of customers and then the mix of platforms that we have in the customers that allows us to think we offset some of that unit volume decline that the market is forecasting. And on top of that, we did close some nice new business in the fourth quarter internationally that will have an incremental little bump to it for us, and we don't have the comps associated with the large commercial OEMs that we did through the course of 08, which was all of that was 400 plus... yeah, 450 basis points of headwind growth.

Ned Borland - Next Generation Equity Research

Okay. And then on the restructuring savings expected, I mean taking up the savings expected from the line, can you give us sort of a breakdown of what the percentage is per the non-dispensing segments and where you see the savings?

Larry Kingsley

No, I don't think we're going to go there. We, through the course of the fourth quarter, did integrate another facility in Fluid & Metering. So the next largest consumption of the restructuring cost and also the larger benefit will be Fluid & Metering, but then it's pretty well spread across actions taken through the company.

Ned Borland - Next Generation Equity Research

Okay, fair enough. Thanks.

Larry Kingsley

You bet, Ned.

Operator

Walt Liptak with Barrington Research has our next question.

Walter Liptak - Barrington Research

Good morning, everyone.

Larry Kingsley

Hi.

Walter Liptak - Barrington Research

Hi. Question on the acquisitions for Dom. What was the fourth quarter cash outflow for acquisitions and the 2008 total?

Dominic Romeo

Fourth quarter cash flow for acquisitions was about 181 million.

Walter Liptak - Barrington Research

Okay.

Dominic Romeo

I think that will be our cash flow statement event.

Walter Liptak - Barrington Research

Right. And then total rate?

Dominic Romeo

What was your other question?

Walter Liptak - Barrington Research

For the full year?

Dominic Romeo

Full year, closer to 400 if you look at the full year. It gets a bit on the cash flow statement, as you know we funded ADS right at the end of the last year but the total proceeds for acquisitions in the year were about 400 million.

Walter Liptak - Barrington Research

Okay. And you mentioned in your commentary, Larry, that the acquisitions, obviously were still part of the IDEX strategy. What should we expect in terms of 2009 and I guess looking at the different factors, pricing and I guess everyone's EBITDA is sort of suspect at this point, how should we think about your activity for this year?

Larry Kingsley

Yeah, sure. Well first, the list of acquisitions is still long. There is a number that we would like quite a bit from a strategic fit for the company that we would want to make at the right price at any point in time. And we look at those first and foremost. If those acquisitions don't have a good visibility to their next 18 to 24 months, then we are going to discount what we think the businesses were and obviously several of the conversations we're having are of that order right now.

Certainly, what we are going to benefit from is and what we are seeing, I think this play out through probably the middle part of this year is folks giving a bit more realistic with respect to the price of their business and this is going to represent, frankly, a great opportunity for us to move into some businesses that pretty attractive prices that we are going to see some fantastic returns on.

So, in terms of quantifying impact of acquisitions incrementally to the 09 numbers, we don't do that. We don't typically forecast that, so, I won't. But I think you ought to expect M&A activity that's not fairly similar to what we've averaged over the last few years and it will be a bolt-on kind of acquisitions that we can make sense of more likely than it will be large new repositioning strategies that frankly, those I don't make a lot of sense unless you have a completely good grip on what's going on in this business.

Walter Liptak - Barrington Research

Right, okay. And in your Fire & Safety/Diversified segment, the organic revenue held up pretty well and even orders are holding up okay. But you mentioned that you are watching municipal markets, I presume that's North American Fire & Rescue. We've heard about tightness in municipal budgets, what do you think I guess some of your municipal products?

Larry Kingsley

Walt, first remember our business is a global business and the growth continues to get driven out of emerging country markets and we saw nice funding continue and still continues to those federal programs where they're buying best tools and decontamination cans and all the guns that go onboard of various different fire fighting apparatus. And so that global picture right now is actually pretty good.

In the U.S., it's kind of counterintuitive to some degree that it's not bad either, and backlogs are actually reasonable within the apparatus builders. And we see pretty positive performance out of the mid-sized truck builders right now. And there is frankly still a fair amount of the municipal spend in the U.S. being dedicated to Fire & Safety all up. I'll ask Dom...

Dominic Romeo

Yes, right here, right now the OEMs are holding it, actually held them pretty well throughout month of December and the order rate is very much into fairly solid. I think the other thing to mention is this is the enterprise where the last couple of years we've done the most with cost to get cost out of the equation and you obviously see that in the margin rate. So, we are fairly well positioned on the cost side as well.

Walter Liptak - Barrington Research

Okay, got it. Thanks very much.

Larry Kingsley

Sure, Walt.

Operator

Charlie Brady with BMO Capital Markets is next.

Charles Brady - BMO Capital Markets

Good morning.

Larry Kingsley

Hi, Charlie.

Charles Brady - BMO Capital Markets

Just based on the FX impact, the exchange rate you are using, is that as of the end of the quarter 12/31 or is it a more recent exchange rate?

Dominic Romeo

As Larry mentioned, that assumes the rates in effect, so in regard to the 2009 guidance that negative 3% assumes rates stay where they are...

Larry Kingsley

At the end of January.

Dominic Romeo

At the end of... yes.

Charles Brady - BMO Capital Markets

At the end of December or end of January?

Dominic Romeo

Basically, at the 130 or so range for the euro is the flops here.

Charles Brady - BMO Capital Markets

Okay, thanks. And with regard to the Dispensing business, in your prepared comments you mentioned telling along opportunity in the retail. Could you just explain on that, may be give a little more granularity of what that would entail?

Larry Kingsley

We have very high expectations that there is going to be some commitments to fairly large replenishment activity here very shortly, and I won't get more granular than that for now.

Charles Brady - BMO Capital Markets

Okay. Will that be among several customers or a large customer?

Larry Kingsley

At least one.

Charles Brady - BMO Capital Markets

Fair enough. Can you just remind us your debt covenant level ratios where they stand? I know you are well above that, but just so we have that information?

Dominic Romeo

Yes, 3.25 for the coverage ratio, as you see from the chart we're well below that. We've got plenty of capability planning to the close to being initiative this point in time.

Charles Brady - BMO Capital Markets

Again, one final question and I'll get be back in the queue. On the inventory levels, they are obviously up in the Q4, but you made some acquisitions. If you were to back out acquisitions that you made, where would that inventory level have been, would it have been down in the fourth quarter?

Dominic Romeo

If you look at the fourth quarter, we did realize a bit of a reduction, but if you look at it on annual basis, almost the entire 214 that we report versus the 177 is all acquisition. So when you look at turns and that sequence of events, we are relatively flat on turns as well year-over-year.

Charles Brady - BMO Capital Markets

Great, thanks very much.

Larry Kingsley

Sure Charles.

Operator

Next we'll hear from Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

Good morning.

Larry Kingsley

Hi.

Christopher Glynn - Oppenheimer

Just wanted to go into a little review of the customer concentration by segment, don't know what the best way to talk about it is, maybe top three approximation by segment?

Larry Kingsley

Okay. I am not going to quantify it. But to tell you, again on relative basis, our highest concentration is in Health & Science. And then you, for top three get to similar levels of concentration for Dispensing and Fire & Safety on a global basis. And Fluid & Metering is thousands of customers. Top three for any of the segments does an aggregate tally to more than been about 15%, 12% actually.

Christopher Glynn - Oppenheimer

Okay, 12%. Great, thanks. I had to add, with there literally every other questions been asked.

Larry Kingsley

Sure.

Operator

Next we'll take a follow-up from Michael Schneider with Robert Baird.

Larry Kingsley

Hey, Mike.

Mike Schneider - Robert W. Baird

Guys, just on the low end of guidance, you made it clear you are comfortable with that number. I guess I am trying to figure out what gets you there because as I run the math, it looks like if you do not account for the 19 million, 20 million in savings from restructuring, you are assuming a decremental margin on that 10% organic decline of something around 170%. And what I've done there is taken the top line down by 10% organically, added in 100 million from the four acquisitions yet to contribute in 2009, and it looks like again you're assuming a very dramatic number in decremental margins. And even if now you add back the 19 million, you're still over 100%, so the $1.50 number on minus 10% seems almost inconceivable. I am wondering what gets you there. Is it something more than minus 10% organic, is it something about the acquisitions or is it something within the cost structure that we should be aware of that gets you there? Or indeed is this just your worse case estimate?

Dominic Romeo

Mike, the way I described it, and I didn't follow your acquisition scenario. There is nothing in the acquisitions, you may have double counted the way you think of that. But think of the 1.50 as absolutely how you describe, it's kind of the worst case. And I would also say that we've got plenty of available cost action to avoid that kind of a scenario, but obviously this is the book end. I think the 1.80 we can all do the math, and the negative 6 and see how the productivity and FX and acquisitions play through. And once you go to negative turn, obviously there would be another set of discussions around cost actions that give a bit circular at the 1.50 as you might guess relative to another repositioning action.

So, I think your points are well taken, but we felt the need to kind of show that bottom, but that bottom is truly a bottom that we think we could avoid with cost actions which fundamentally is in your logic when you think about flow through and how the companies operating model would work.

Mike Schneider - Robert W. Baird

Great. And the flow through on the way up in this tough cycle has been 35% to 40% ex-acquisitions and currency pretty consistently. So I know Q1, its somewhat of a below that for everybody, but as we get into Q2 and inventories at least somewhat normalized throughout the system, production rates are presumably back up to that base rate of demand.

Is there any reason that decremental margins, again ex-acquisitions and currency wouldn't be the reverse of that plus 40 and or minus 35 to 40? And again just coming at this question, different direction, because the assumption in the low end is two or three times that number?

Dominic Romeo

I think Mike your points well taken. I think it... once you get to I guess anything call it normalized growth, but if you get to that negative 4, 5% versus a negative 10 as you might guess, the productivity equation is much different. So yeah, I'd expected to see our Q2, Q3 and Q4 margin as it expand sequentially from Q1 absolutely.

Mike Schneider - Robert W. Baird

Okay. Thank you again.

Larry Kingsley

Thank you Mike.

Operator

And Scott Graham with Ladenburg has a follow-up.

Scott Graham - Ladenburg

Yes. Question for you, Dom, on the cash flow statement, can you tell us what for the full year or the quarter doesn't matter, can gross cash from operations was, the change in working capital and then cash from operations?

Dominic Romeo

Sure. We'll issue this with our Q and our K. Let me do the quarter only, Scott. Cash flow from operating activities was roughly 54 million. Within that, we realized about 9 to $10 million reduction in working capital, primarily receivables. We spent about 9 million of cash on plant, property and equipment in the quarter, which translates to the 45 we show in the release.

Scott Graham - Ladenburg

Thank you.

Operator

And that does conclude our question-and-answer session. I will now turn the conference over to our host for any closing or additional remarks.

Larry Kingsley

Well, we just like to thank everybody for joining the Q4 '08 call. We'd also like to thank you for your interest in our company. I'd like to again acknowledge the really strong work done by both our corporate team and our operating leadership through the course of Q3 and Q4, really just fantastic work done to I think properly position us for where we think we are now and undoubtedly in really good shape to execute well through the course of '09.

So we'll look forward to talking with you all three months from now, if not many times in between. Thanks very much.

Operator

And that does conclude our conference call. Thank you for joining us today.

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