IDEX's (IEX) CEO Andy Silvernail on Q2 2016 Results - Earnings Call Transcript

| About: IDEX Corporation (IEX)

IDEX Corporation (NYSE:IEX)

Q2 2016 Earnings Conference Call

July 19, 2016 10:30 ET

Executives

Michael Yates - VP and Chief Accounting Officer

Andy Silvernail - Chairman and Chief Executive Officer

Heath Mitts - Chief Financial Officer

Analysts

Nathan Jones - Stifel

Jim Giannakouros - Oppenheimer

Steven Winoker - Bernstein Global

Matt McConnell - RBC

Mike Halloran - Robert W. Baird

Allison Poliniak - Wells Fargo

Charlie Brady - SunTrust Robinson

Scott Graham - BMO Capital Markets

Bhupender Bohra - Jefferies

Brett Linzey - Vertical Research Partners

Matthew Mishan - KeyBanc

Walter Liptak - Seaport Global

Matt Summerville - Alembic Global

Jim Foung - Gabelli & Company

Joe Giordano - Cowen & Company

Presentation

Operator

Greetings and welcome to the Second Quarter 2016 IDEX Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Yates, Vice President and Chief Accounting Officer. Thank you, Mr. Yates. You may now begin.

Michael Yates

Thank you, Rob. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for a discussion of the IDEX second quarter financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the three months period ending June 30, 2016. The press release, along with the presentation slides to be used during today’s webcast can be accessed on our company’s website at www.idexcorp.com.

Joining me today is Andy Silvernail, our Chairman and CEO and Heath Mitts, our Chief Financial Officer.

The format for our call today is as follows. We will begin with Andy providing an overview of the second quarter financial results and then he will provide an update on our markets, what we are seeing in the world and discuss our capital deployment. He will then walk you through the operating performance within each of our segments. And finally, we will wrap up with an outlook for the third quarter and the full year 2016. 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 2 hours after the call concludes by dialing the toll free number 877-660-6853 and entering conference ID 13620006, or you may simply log on to the company’s homepage for the webcast replay.

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

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

Andy Silvernail

Thanks Mike. I appreciate everyone joining us here for our second quarter 2016 discussion. As Mike said, I am going to start off here with just a little bit of an overview before getting to some more detailed commentary.

Just as a highlight, as an overview here, we had strong execution, especially from the bottom line perspective here in the second quarter. The second quarter economic picture is still pretty mixed, if you look at the North American industrial markets, especially on a year-over-year basis, that continues to be pretty soft. However, we have started to see some sequential improvement in those markets, specifically within FMT and with HST, which gives us some positive reaction.

If you look at our consumer-facing businesses or those things that touch the consumer in one way or another, life sciences, automotive dispensing and if you look at the municipal facing businesses of water, fire and rescue, those all remain pretty solid. The question marks that really exist out there on top of the overall North American industrial environment in the direction that’s going to take is really around China, which continues to be soft, and obviously, the questions around Brexit and how that’s going to impact the overall European economic condition. And as we look at the industrial markets and we think about the impact and the derivative impacts of the oil and gas business how that’s going to play out here for the balance of the year. The bottom line, however, is given continued questionable market conditions I think our team has done a very good job in the second quarter in terms of execution.

As I mentioned, we did see some sequential improvement. We saw, throughout the quarter, a ratable increase in business. We had $168 million May, $168 million in April, $177 million in May and $184 million June in terms of orders. And in June, we delivered about $200 million in sales, which drove most of the operational improvement that we have talked about. So, we are still very cognizant of the challenges that are out there in the marketplace. We have done a great job controlling cost and driving margin. And overall, this has produced pretty strong results that we saw in the quarter.

Orders and sales were up 5% and 7% respectively. Organically, they were down 2% and 1% respectively. Our GAAP EPS was $0.99, which is up $0.10, 11% higher than a year ago. And we had operating margin of 20.6%, which was down 70 basis points and I will get into that here a little bit, but that was really impacted by the fair value step up for Akron Brass and the remaining continued consideration for CIDRA, but again, I will talk about that in more detail in a minute.

In terms of our commitment to strategic acquisitions, we have continued to drive that strategic priority. On July 1, we completed the acquisition of AWG. They are a leader in the European Fire and Safety markets and they are a terrific fit with Akron Brass and our existing fire and rescue platform. And so really, it’s just wonderful to invite AWG into our family. Additionally, in the second quarter, we completed the private placement of $200 million of senior notes. Our quarterly dividend of $0.34 was up 6% year-over-year. And we continued, albeit at a slower pace, our repurchase plan and our M&A pipeline remains robust.

Like I think everybody out there in the marketplace, we are still not certain exactly what Brexit is going to mean for us in the longer term. In the shorter term, it did have an impact on us in the quarter. And as we look at the second half, if we assume that the rates remain the same between the dollar, the pound and the euro, we will have some translation pressure in the second half of the year.

Let me turn now and talk a little bit about core markets and geographies and what we are seeing out there. In terms of energy, the lack of demand is still a headwind for us, specifically in our energy platform, at BAND-IT and at Sealing Solutions. And as we have stated before, the lower energy prices, they do impact our industrial businesses from a derivative effect and that’s still a condition in the marketplace. As we think about the industrial businesses. Industrial distribution remains challenged, especially when compared to a year ago. But as I said a second ago, we have seen signs of stabilization in the marketplace. Ag continues to be a challenge also. Commodity prices have remained depressed in the second quarter. We don’t expect that to rebound as we have said for some time, but we have seen some stabilization there too. Scientific Fluidics continues to be strong across our markets in bio, analytical instrumentation and IVD and we expect that to remain the same through the balance of the year. And as I said a moment ago, municipal has been a good story for us.

In terms of regions, in North America, the story really all is about industrial distribution and how that’s playing out. Some signs of stability are a good note. But the picture remains pretty much the same as we have been talking about here for a couple of quarters. In Europe, we actually have – we have over-delivered in Europe around our dispensing and our water businesses in a tough environment. But certainly, the Brexit decision leaves some question marks that we will have to play out here over the coming quarters.

And finally, in Asia, it’s really a story of two major economies. One is China that continues to be – continues to struggle, that’s not a surprise at all. We are managing that well. But the good news story for us has been India and we have seen strong demand with fire, rescue, energy and dispensing as we have executed throughout that region.

Let me turn to capital deployment for a moment here. Our capital deployment strategies for investing in long-term growth disciplined M&A, consistent dividends and opportunistic share repurchases remains unchanged. And as we look at our ability to deploy capital here in the future, we are in a really good position. We completed the $200 million private placement. The proceeds of which we paid down our revolver. Today, we have about $500 million of availability on our revolver. That availability, plus cash on hand, gives us lot of capability. In fact, we paid for the AWG transaction completely out of cash from our balance sheet. So, when you put together our balance sheet availability, cash on hand and what will be more than $500 million of free cash flow after paying dividends and after investing full in the company, we are going to have north of $1 billion to deploy here over the next 3 years.

In terms of organic growth, the story remains the same. We continue to make investments to drive profitable growth for years to come. This year, in particular, we have made specific bets in Scientific Fluidics, Sealing and our fire businesses and they are all positioned well for long-term growth. In terms of dividend, as I mentioned, we announced a $0.34 dividend here in the quarter, which is 6% above last year. In terms of share repurchases, we bought back 726,000 shares this year for $56 million, and that’s at about $77 a share on average.

In terms of M&A, we have had an active year as you know. We purchased AWG on July 1 for €46 million, which has about $36 million of sales and that complements well with Akron, which fits into our fire and rescue platform. And together, along with our existing businesses, really makes a market leading platform in that space. In terms of M&A, the pipeline continues to be strong. Really no change from what we discussed earlier in the year. All the work that we have done and continuing to cultivate our M&A pipeline has certainly paid off for us and we expect it to do so again in the future.

Okay. With that, let’s switch now to talk about results for the quarter. I am on Slide 4. In Q2, we had $550 million of revenue, which is up 7%, down 1% organically. Orders are $529 million, which are up 5%, down 2% organically. On an organic basis, both orders and sales, has been challenged. However, as we look at the second half of the year, we are facing easier comps and so we do expect the flat overall organic growth for the year.

Operating margin, as I mentioned earlier, was 20.6%, down 70 basis points year-over-year. Similar to last quarter, our 2Q results include a few moving parts and I will get to here on the next slide. Overall, again, I am very, very impressed with our team’s ability to execute in the challenging environment.

Free cash flow was $80 million. This is 106% of net income. It was down $6 million from last year, but that’s entirely due to the timing of some tax payments here in the U.S. And so we will get the benefit on a comparable basis here in the back half of the year. And finally, net income came in at $75 million with GAAP EPS at $0.99, up $0.10 or 11% from last year.

So, let me just take a minute now and I want to bridge for you the $0.99 of EPS on Slide 5 here compared to the midpoint of the bridge – or the midpoint of the guidance that we gave you last quarter. So turn to Slide 5 for me and you will see the bridge. The midpoint of the guidance from a quarter ago was $0.92 and we delivered $0.99. And just let me walk you through the elements of the bridge. First was very solid execution that gave us about 2 points a beat in the quarter. Lower inventory step up gave us another $0.02 from Akron Brass is lower than expected. We had the reversal of a contingent consideration of $1 million from CIDRA and that gave us $0.01 of benefit. We had lower tax rate from an excess tax benefit for the new accounting for share-based compensation that gave us $0.01. And we also got $0.01 from the rapid change in the exchange rate between the dollar and the British pounds here with the Brexit announcement and that gave us $0.01 too. So all told, when you add that up, that is the $0.07 a beat versus the midpoint of our expectations.

Let me transition now to the segment discussion. I am on Slide 6 and we will start with Fluid & Metering. In the second quarter, organic order has decreased 1 point, while organic sales increased 1%. And I know it’s a small number, but this is the first increase in organic sales we have had at FMT since the first quarter of 2015. Margins were up 20 basis points, driven by an increase in volume and energy. Specifically within energy, we saw a stronger aviation market that was offset with the mobile market that was softer. And we did ship a few large international projects in the second quarter that have been delayed for several quarters. And we had mentioned that in the past, but those kind of all came here in the second quarter. And these – the delivery of this business really was the bulk of the over-performance here in terms of operational over-performance.

Water had another good quarter. Sequentially, they continued to improve and they have over the last few quarters. The municipal markets remain favorable. And we have had just a great profit execution as the team at water. Industrial, as I mentioned before, continues to be soft on a year-over-year basis, but we are seeing some signs of stability, which is encouraging. And we have done really a great job around cost control and profit execution in our industrial businesses in FMT. And then finally, ag continues to be soft. We expect it to be so for the balance of the year, but it’s certainly not deteriorating any further.

With that, let’s turn to Slide 7 and we will talk about Health & Science. Overall, the life sciences and the scientific markets remain strong and steady, with softness in those businesses that are facing the industrial marketplace. Organic orders were flat in the quarter and organic sales were down 2% and operating margins were down 30 basis points, really from the lower volume in the industrial portion of the segment. Scientific Fluidics continues to be a good news stories. Orders and sales continue to be up in all markets over 2015. We have seen strength in analytical instrumentation, bio and IVD. All of those marketplaces continue to deliver and again we expect that to do so for the balance of the year.

In terms of Sealing Solutions, we had an uptick in Q2, really coming out of strength in our semiconductor business, although was offset in many parts by the weakness in oil and gas and heavy equipment. HST Industrial, which I mentioned earlier, that has had dynamics that are very, very similar to what we have seen within FMT and so we are still seeing negatives on a year-over-year basis, but again, some signs of stability on a sequential basis. And then finally, at MPT, we had some strength in Asia with some shipments of some projects. So, we had a decent quarter at MPT.

Okay. I am on our final segment, Diversified, on Slide 8. Organic orders that were down 9 points in the quarter, with sales – organic sales down 1 point and operating margins were down 400 basis points versus prior year. That being said, the real impact here came from the remaining inventory step up at Akron Brass, which was $3.6 million. If you exclude that, operating margins came in at 26.6%, which is down 150 basis points versus last year. But remember, this is our full – our first full quarter of having Akron into the business. And I would also ask you to remember that in the second quarter, we are going to see $2 million more of fair value inventory step up for AWG.

Dispensing continues to outperform. X-Smart has been a true success story for us, especially in developing markets. We have shipped our 25,000th unit in the quarter. And remember, we launched this just three years ago. This is a great example of our team’s ability to drive organic growth.

And fire and rescue, again, we have welcomed AWG and Akron into the family. It gives us a terrific market leading position. Rescue continues to struggle in the international markets and has for several quarters now. But we have had a great launch of our StrongArm technology, which we think is going to be a real success for us.

Finally, BAND-IT, the transportation business within BAND-IT has been strong. But general, industrial and oil and gas continue to be challenged overall. We did see, interestingly enough, some improvement in businesses as oil prices reached over $50. And while I certainly wouldn’t call that a recovery, it’s certainly an interesting data point to see how that tracks so closely as we saw oil break a $50 a barrel in the quarter until it settles back down.

Okay, I am on the final slide, Slide 9. Let me give you some guidance here for the third quarter and also for the balance of 2016. In Q3, we expect EPS to be $0.90 to $0.92, but just please remember that, that includes $0.02 of inventory charge associated with AWG, and we are going to get a $0.01 of pressure from the additional interest expense from the private placement that we did in June. Operating margins will come in at about 20.5%. We expect organic revenue to be flat. And in Q3, the tax rates should be about 27%. If you look at the full year, we are maintaining our guidance at $3.70 to $3.75. Also remember, we have $0.02 of interest expense from the private placement and as well as $0.01 of incremental impact from AWG for the fair value step up charges and we will also have some impact from purchase accounting amortization.

For the full year, we are still expecting revenue to be approximately flat. Operating margins should come in at 20.5% to 21%. CapEx should be $40 million to $45 million. Free cash flow, we are expecting to be at about 120% of net income. And for the full year, we are expecting a share reduction of about 1% for the year. As always, remember to exclude any impact from our guidance from acquisitions, either costs or the benefits in the future.

With that, Rob, let me stop here and let’s turn it over for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your questions.

Nathan Jones

Good morning, Andy, Heath, Mike.

Andy Silvernail

Nathan, good morning.

Heath Mitts

Good morning.

Nathan Jones

Andy, could you just start by telling us how much those international energy projects contributed to the quarter?

Andy Silvernail

Yes, it was about $6 million in total that we shipped pretty much in the last week of the month. So, it was substantial and it flowed through at some pretty decent levels. And so that’s a big piece of the operational execution. And just remember, Nathan, this is stuff that’s been sitting in backlog for an awful long time. It’s pretty unpredictable when it ships and both – or actually two or three of them just kind of broke at the exact same time.

Nathan Jones

Is there more that’s still delayed sitting in backlog? Are there any other orders sitting in backlog or is this truly something we should be thinking about as discrete?

Andy Silvernail

Yes, not of substance, Nathan. We have got some smaller things here and there. As you know, we don’t have a lot of large things that tend to sit in backlog. These are things that are being shipped to North Africa, the Middle East and they require letters of credit and an incredibly painful process to get them shipped. And frankly, they are incredibly unpredictable and we had not had them in our forecast. We actually had them in the forecast for later in the year and they happened to break in the second quarter.

Nathan Jones

Okay. And then just on the guidance for the rest of the year, you had about 2% organic decline in the first half, to get to flat you need plus 2 in the second half. I don’t think the comps are that much easier in the second half than they are in the first half. Organic orders is still running negative. Where does that incremental demand come from that can get you to flat organically for the year?

Heath Mitts

Nathan, this is Heath. Largely, it’s the things that we have visibility to in the fourth quarter. As you know, there is a little bit of seasonality in some of our businesses, specifically around oil and gas and a few things in the rescue tools side. So, it’s our current outlook in terms of where we see the third and fourth quarter coming in. But most of that growth is going to come from the fourth quarter – the fourth quarter numbers. And obviously, we will get smart over the next 90 days and sharpen our pencils if that changes.

Nathan Jones

Okay. And I don’t know that you are going to be able to answer this question. You talked about industrial distribution stabilizing or maybe getting a little bit better sequentially. Do you have any visibility into what kind of end markets are helping there or do you lose visibility once it gets into the distribution channel?

Andy Silvernail

You certainly lose visibility into the distribution channel, although I will say that the businesses that we saw then tend to be pretty good predictors for us, so with the exception of one. So, we saw strength at Viking [indiscernible]. When I say strength, it means stability, so not improvement necessarily, Nathan. But certainly, the decrease stopped at Viking, at Rupp and at the industrial businesses within or the industrial distribution business within BAND-IT. The one counter to that is we still saw some softness at Gast. And typically, Gast kind of goes along with those other three. So, that was the one contra-indicator, but those other three were good signs.

Nathan Jones

And then I wonder if you could just give me a little bit more color on the comment that you made that you saw some improvement in oil and gas markets when the price got to $50 a barrel. Can you talk about where the demand improvement stabilization, whatever we want to call it here, came from being upstream, midstream, downstream, MRO?

Andy Silvernail

That was – so, the comment was really specific to BAND-IT, which has very, very short cycle delivery and it was more around the MRO marketplace. And so I think, again, I want to be really clear. We are not calling for any kind of recovery. Just it really struck us how tightly correlated the improvement in the BAND-IT MRO business was when that ticked above $50. And so I just – what that tells me, Nathan, is just how tight the overall supply chain is. And the fact that when you do see recovery, I think it’s going to be – it’s going to come at a pace that’s going to move pretty quickly, especially around parts and service.

Nathan Jones

That’s very helpful. I will jump back in the line.

Operator

Our next question is coming from the line of Steven Winoker with Bernstein Global. Please proceed with your questions.

Steven Winoker

Thanks and good morning, all.

Andy Silvernail

Good morning, Steve.

Steven Winoker

Just want to push on one of your answers to that last question, I think that second half, not only is a couple percent, but the fourth quarter is – means 4% implied. And in fact, quarter-to-quarter, there really is no comp difference in total from getting easier. So, can you push a little harder there to give us some comfort level that all of a sudden we jumped to 4?

Andy Silvernail

Yes, I think, first of all, Steve, you got to keep it in perspective. That’s a, to get there, that’s a $550 million quarter, which is what we just did. Now, we did burn some backlog in the second quarter. We would expect that to reverse itself to some degree. So, it’s not – while the flat versus 4 or down 1 versus 4 seems like a giant number, recognize it’s that when you look at it from a comp perspective and you look at on a sequential perspective, it’s not that big a number, it’s the same number we delivered this quarter.

Steven Winoker

Okay, that’s fair. And then just getting a little bit into that FSDP order decline to 9%, I think I understood what happened of the sales front. Is it – are you seeing the same dynamics though in the order – would you attribute it to the same areas then?

Andy Silvernail

That’s just a more – remember, that’s the most lumpy of our business, right, when it comes right down to it. And so you will see that disconnect between order and sales that you don’t see in the other businesses. There is nothing there that jumps out to you that says that, that is – has a significant disconnect from history or that’s a big red flag in the future. I don’t see that happening.

Heath Mitts

Yes. Steve, that’s – obviously, that’s the smallest segment. And it’s a little bit of the tyranny of small numbers a little bit in terms of just a couple of million can swing it either way. So, I wouldn’t read anything into that.

Steven Winoker

Okay. And one more question and I have been debating with investors is in your last financial reporting, one of the things you guys had talked about was how revenue from new products introduced in the last 3 years has dropped to 8%. Where is that – and I think it used to be 20% in prior years, where is that trending these days and what’s been driving that number down?

Andy Silvernail

Steve, I think you may have us confused as somebody else. We haven’t reported any new product sales numbers in years.

Steven Winoker

It’s in the last – it’s in the last – it’s in the 10-K on Page 8 from this year.

Heath Mitts

I will have to look at it. I am not sure what you are referencing. I apologize. I am happy to follow up with you on that, but let me take that offline.

Steven Winoker

No problem. But it is there on Page 8. It says new products from – revenues from new products introduced in the last 3 years. So, it’s an NPVI referenced and I looked at it this morning, so I would love to understand that.

Heath Mitts

I will have to get back to you, sorry.

Steven Winoker

Okay, okay. That’s fine, we’ll follow-up offline. I will pass it on. Thanks.

Heath Mitts

No problem. Thanks, Steve.

Operator

The next question comes from the line of Matt McConnell with RBC. Please go ahead with your questions.

Matt McConnell

Thank you. Good morning.

Andy Silvernail

Hey, Matt.

Matt McConnell

You talked about the order ramps through the quarter and certainly each month got better. How does that compare to the normal seasonality within – so, was that ramp up in orders through the quarter the same as what you typically see or was it – were the underlying trends better?

Andy Silvernail

It is a little bit stronger, Matt, than what we had seen. Now typically, you will see some difference between early on in the month – early on in the quarter to later on in the quarter, but it did improve especially on the sales basis. But even on the orders, it was a little bit better than what we have seen in the past.

Matt McConnell

Okay, great. And then on the balance sheet, how much of your cash is accessible right now, because you did the private placement ahead of pretty strong cash generation period over the next couple of quarters, I would expect. So, of that $360 million, how much is kind of available if you were to have U.S. needs?

Heath Mitts

Well, Matt, this is Heath. Most of that, as you can imagine, is offshore. And most of it resides in Europe with some in China as well. So, it would be fair to say we could probably pretty easily get our hands on about $200 million of it without having to do too much on the tax side in terms of dividending things back and forth. But it’s somewhere between $150 million, $200 million will be easily accessible and then all of a sudden, it gets a little more challenging.

Matt McConnell

Okay, great. Thanks very much.

Andy Silvernail

Thanks, Matt.

Operator

Our next question is from the line of Mike Halloran with Robert W. Baird. Please go ahead with your questions.

Mike Halloran

Hey, good morning everyone.

Andy Silvernail

Good morning.

Mike Halloran

Good morning. Hey, just quick follow-up on Matt’s first question. When you look at orders as they track through the quarter, did orders turn positive as you got to that June month with that ramp through the quarter or are you still tracking modestly negative by the end of the quarter on a month-to-month basis?

Andy Silvernail

You mean June versus June comparison?

Mike Halloran

Yes, year-over-year, sorry.

Andy Silvernail

Yes, let me go back and look at that. I am going to say yes, but I don’t have the number right in front of me. Just by the nature of where it was coming out in April versus where we ended for the quarter, the answer to that is going to be yes, but let me caution you on that, right. Any one month of orders and/or sales is not a good barometer for direction.

Mike Halloran

No, no, absolutely, but orders turning positive for the first time in a while. Just curious if that was the case. And then on the CapEx side, you guys lowered that from 50 to, I think, you said in the call 40 to 45, the deck says 45. Anything behind that, Andy, or is that just kind of normal machinations?

Andy Silvernail

No, it’s just normal stuff. You end up typically as you come into the year with a pretty large wish list, right. And as the year gets down, as you look at the ability of the units to actually absorb the capital, it just tightens over time. That’s a pretty natural pattern for us.

Mike Halloran

Alright. So, it’s tightening and not incremental concern from your perspective on the environment and investability?

Andy Silvernail

No, no.

Mike Halloran

Great. Appreciate it.

Andy Silvernail

You bet, Mike. Take care.

Operator

Our next question is coming from the line of Allison Poliniak with Wells Fargo. Please proceed with your questions.

Allison Poliniak

Hi, guys. Good morning.

Andy Silvernail

Hi, Allison.

Allison Poliniak

Andy, can we just go back? I think it was Nathan that asked the question on stabilization. I think last quarter when we talked, you noticed some stabilization, but you still thought there was a lot of risk versus opportunities out there right now. I mean, has that changed at all for you and your thoughts?

Andy Silvernail

Yes, I think the bottom has come up a little bit, Allison. So, I certainly – I am not going to take away all the concern that I had. If I look back toward last quarter, the big concerns that I have really had were around softness on the industrial side potentially moving into a recession and then the really big questions on China and then finally, just kind of the constant concerns in Europe. And so if I were to kind of step forward and say what’s changed instead in China, it stays exactly the same. I think Europe, we have actually performed better. We have had pretty strong performance, specifically in dispensing and in water. But the Brexit stuff, it just puts a level of uncertainty that frankly it’s hard to get your hands around what exactly that could mean. So, I would say, in total, I would say that’s modestly worse than where we were a quarter ago. And in the U.S., with another quarter of stabilization in industrial distribution, I think that’s modestly better.

Allison Poliniak

No, that’s great. Thanks. And then just on acquisitions, you broadened obviously your pipeline. Is there any area that maybe looking particularly more attractive in this environment or a product category that you guys are a little bit more focused on in that pipeline?

Andy Silvernail

Not necessarily. As you know, we kind of think of our pipeline around kind of four major areas, right. So, industrial fluids, HST components, engineered fastening and then around fire and safety. So, if you look at our pipeline, it’s pretty decent throughout. I will say that within the HST world, things are still at really frothy levels and so you have just not seen as many opportunities nor is the cultivation kind of moving along as rapidly as you would love. That being said, in the other three areas, it’s pretty good. So, we are continuing to work that. We work it every single month. So, it’s just an ongoing strategic process for us. And right now, it looks pretty decent.

Allison Poliniak

That’s great. Thank you, guys.

Andy Silvernail

Thank you.

Operator

The next question is from the line of Charlie Brady with SunTrust Robinson. Please go ahead with your question.

Charlie Brady

Hey, thanks. Good morning, guys.

Andy Silvernail

Good morning, Charlie.

Charlie Brady

I just want to comment on the commentary around the Brexit commentary. I mean, are you hearing anything specific subsequent to that vote from our customers or have you seen any movement in terms of projects being slowed or pushed out or is it just kind of, you don’t know what’s going to happen yet, but nothing definitive from a customer base standpoint?

Andy Silvernail

Yes, it’s nothing definitive. And just to give you some kind of some sense of what it all looks like, right. So, if you look at our total revenue, it’s about 5% or so of the business that’s moving through the UK. Our cost base is actually on a comparative basis is a little bit higher. So, we actually have a decent hedge there all in all. So, I don’t think we are going to get pounded from transactional or a translational perspective. It’s pretty well hedged. And so far, we haven’t seen that play it sell-through, except for how currencies have moved and what that’s done on a translational basis. I think the bigger concern for me, Charlie, is if that starts contagion, right. That’s I think the UK in and of itself is, not a huge concern. The bigger concern is that if it starts to kind of snowball such role here throughout Europe.

Charlie Brady

Right, thanks. That’s helpful. And just one more on HST, can you give us a little more granularity on the industrial piece of that business, how much was that off? And did you see, in terms of stabilization of that business, improvements through the quarter as well or was it just kind of soft throughout?

Andy Silvernail

Well, except for Gast, right. So, Gast is a pretty good size business for us and it’s a good profit generator. And unlike what we saw in FMT, where we saw Viking and Rupp, we saw some really nice stabilization there. We did see continued softness into gas. And remember, Gast has a good chunk of its business that’s going into the scientific world and then it’s got the majority of its business, frankly, that’s general industrial. And that’s the general industrial piece that continued to be soft. And so we are keeping an eye on it. But if you look at the four of the – four things that we kind of look at as early indicators: Viking, Rupp, Gast, and BAND-IT. Three of the four certainly saw some positive signs from stabilization, Gast was the outlier.

Charlie Brady

Great, thanks.

Andy Silvernail

Yes.

Operator

The next question is from the line of Scott Graham with BMO Capital Markets. Please go ahead with your questions.

Scott Graham

Hey, good morning.

Andy Silvernail

Good morning, Scott.

Scott Graham

So, you indicated that during the quarter that you felt better about orders. And I know you talked about that more in a sequential basis and I think others then are asking and I was going to ask the same thing about the year-over-year. And you cited, in particular, feeling better about distribution, yet the distributors are kind of saying it went the other way in the middle of the quarter. So, I am hoping you could help us with that a little bit, particularly the year-over-years would be helpful in the month?

Andy Silvernail

You got to remember, Scott, when you – the stuff that came out this morning for some of the distributors are the commodity distributors, right. And we played very minimally there. We are playing more in the value-added side of distribution that bring engineering content to work. So, I fully recognize that what you saw specifically out of Grainger here this morning flies in the face of some of the stuff that what we saw in the quarter, but remember, we just don’t play a lot in their world of distribution.

Scott Graham

Okay. I just would add that MSC Industrial and Fastenal, which are maybe a little bit more engineered than that?

Andy Silvernail

They are really not, Scott. Those guys all play in that same world of pretty much commoditized piece parts. So, I think we touch them very modestly. Now that being said, I fully – we pay attention to them too and what’s going on with in the marketplace. And so I think that’s you are making an important point here. What we are seeing are signs of stability. To be very, very clear, we are not seeing signs of continued erosion. And I think what we are seeing in the marketplace and everybody had been seeing in the marketplace, certainly around anything that was commodities related and then the derivative impact had been continued negatives. And what we are seeing is some stability. I know that’s not exactly the most encouraging statement in the world, but stability to me is encouraging given what we had been experiencing.

Scott Graham

Look, stability is the new up, Andy.

Andy Silvernail

It doesn’t feel very good. Does it?

Scott Graham

No, it doesn’t. The other question I had was around pricing, are you guys still pricing positive?

Andy Silvernail

We are. Yes, we are.

Scott Graham

And there is still a gap between that and inflation?

Andy Silvernail

Yes.

Heath Mitts

Yes, for sure, Scott, this is Heath. We are – the numbers in Q2 were very consistent with what we have seen in the past both on the absolute gross pricing as well as the spread that we would see in this environment.

Scott Graham

That’s great. And maybe more specific to Allison’s questions earlier, is there something that you think in the second half that you guys could close? Anything you are maybe in the further down the funnel that you would say maybe we can get another nice size deal closed in the second half?

Andy Silvernail

Yes, listen, Scott. We are – I will give you an unfulfilling answer and that is that we are always in different levels of diligence for a variety of different things and some things break our way and some things don’t and we will see, but you would expect the process that we have followed historically would be consistent with what we would do for the remainder of this year and going forward.

Scott Graham

Yes, unfulfilling. Okay, thanks.

Andy Silvernail

Thank you, Scott.

Scott Graham

Thank you, guys.

Operator

The next question is from the line of Andrew Bohra with Jefferies. Please go ahead with your questions. Mr. Bohra, your line is open for questions.

Bhupender Bohra

Hey, good morning Andy and Pete.

Andy Silvernail

Good morning.

Bhupender Bohra

A question on the fourth quarter here, you guys mentioned as we looked – we are looking at like core sales decline in the first half and core sales is expected to improve in the second half now, that is more like fourth quarter driven here. Could you give us some more clarity from segment perspective, what is going to drive, which segment do you – we should think about?

Andy Silvernail

To me to get to the $550 million for the fourth quarter?

Bhupender Bohra

Yes.

Andy Silvernail

Yes. So, again, the answer – let me touch two things and then I will get into the question. The first one is I think it’s recognized that the $550 million is the identical number to what we just delivered. So, it’s not like we are looking at a big giant step up here. So, I think it’s important to note that we are not calling for some massive breakout and sequential economic performance here in the fourth quarter. That being said, we do have some visibility with some of the large chunks of business that Heath mentioned earlier that we see kind of moving us sequentially to that number. We do have some natural seasonality. And so when you put those two things together, it’s just not a huge reach to get to that $550 million. And so is it $445 million, is it $555 million, plus or minus, but around that number it feels pretty good.

Bhupender Bohra

Right. Yes, because the second quarter, you just mentioned about like oil and gas few projects which came in the last week of the quarter here, right. So I am just thinking about like are there any big buckets which you are looking at, whether it will be in FMT or HST or we have seen HST and FSD kind of organically weak here for the first two quarters and should we think about like some improvement in those markets or should we bank more on the FMT side of the business to kind of drive?

Andy Silvernail

Our visibility in the fourth quarter is not dependent upon a lot of project activity. There are some natural things that would be more seasonal in nature and for instance the energy business, but not necessarily project activity in that regard. But if you go back over time, I think you would see that Q2 and Q4 largely would have similar profiles.

Heath Mitts

Yes, Andrew, the pattern that we are talking about is not abnormal at all.

Bhupender Bohra

Okay, okay. And another question on the capital spending here, somebody did mention that you lowered the CapEx here. Any particular segment or was it kind of broad-based here dependent on the dollar?

Andy Silvernail

We are fully funding the things that we outlined for the year. We are moving forward with the investment in the facility in China that we have talked about. And we are actively investing in and pursuing investments. So, this is more, Andrew, just the tightening of expectations kind of given what we see, how people are going to absorb capital here through the balance of the year.

Bhupender Bohra

Okay. And lastly just some questions on the incremental interest expense and the AWG step up inventory charge for the third quarter. I think you did give some numbers. I just wanted to clarify if you can give those again?

Michael Yates

Hello, this is Mike Yates. In the third quarter, we will have a $2 million – approximately $2 million charge within cost of sales for the AWG step up fair value inventory charge. And for the back half of the year, interest expense will increase about $0.02, about $1 million each quarter as a result of the $200 million private placement that we completed in June. That’s just the difference between the blended rate on the private placement of about 3.3% compared to the revolving credit facility rate, because we use the proceeds to repay down the revolvers. The revolver is about 1.5%, 1.55%. So, that delta drives about $0.02 of incremental interest over the back half.

Bhupender Bohra

Okay, thanks a lot, Mike. Thank you, guys.

Andy Silvernail

Thank you, Andrew.

Operator

Our next question is from the line of Brett Linzey with Vertical Research Partners. Please go ahead with your question.

Brett Linzey

Hi, good morning.

Andy Silvernail

Good morning, Brett.

Brett Linzey

Just wanted to come back to fire and safety, I was a little bit surprised, down revenues against the down 11% comp certainly have some pressures in the rescue side of the business. Could you just sort of unbundle the different businesses and talk about those trends? And do you see any firming in some of the more challenged pieces as we look into the back half year?

Andy Silvernail

Yes. So first of all, Brett, again, as I mentioned before the disconnect between the 9% down organic in orders, right and the 1% in sales, that’s a very typical – that gap between those two things is not substantial. As you look across the businesses, again the places that have been – have sort of strength, dispensing showed strength. BAND-IT has continued to be weaker, right, whether because of the industrial exposure as compared to last year. Rescue has been weaker, really with the international rescue tools, marketplace continuing to be soft. And the fire business has been okay, generally, so when you kind of put that together, that’s the bulk of the split.

Brett Linzey

Okay. And then I guess as you look at the BAND-IT piece and the Rescue International, as we are looking at the back half here, do the comps start to ease or do you think that’s sort of rolled into 2017?

Andy Silvernail

Yes, they do to some degree. From a BAND-IT perspective, it gets easier really around the oil and gas side of the marketplace. Rescue is a little bit of a wildcard just because – it’s been soft now. We are into 1.5 year here, frankly, of the rescue business, the international rescue business being soft. Mind you, the U.S. business has been terrific. And eDRAULIC 2.0 and now StrongArm have continued to be good pieces of business for us. It’s really around countries that are buying through central purchasing that you have seen the weakness. Obviously, in the Middle East and in Indonesia, with a lot of the crisis that’s going on around the world there. That’s been the weak part. So, while theoretically there are easy comps, we are expecting that business to be pretty soft here through the back half of the year.

Heath Mitts

I think on the organic fronts, the comps, specifically for fire and safety and diversified segment, again much, much easier in the fourth quarter.

Andy Silvernail

In total?

Heath Mitts

In total, for the segment. So, I think in the third quarter, we can still see some pressure just based on where the prior year came in. But in the fourth quarter, without much sequential improvement, we do see quite a step up on the organic side.

Brett Linzey

Okay, great. And I just want to come back to AWG and Akron, you have owned the businesses for a couple of months now, you are kind of working through the integration process. I guess, what’s the margin opportunity you see today? And then separately, as you look at some of the selling channels, top line opportunities as you pull through those different products, how you are thinking about the business and sort of the go forward here?

Andy Silvernail

So I think, with both of them, we are targeting about a 500 basis point profit improvement over a 3-year period. And obviously, we would work to bring that forward as much as possible. So, the basic economics of both businesses look very, very similar to our original fire business. And our fire business has meaningfully better overall economics that we think we can get close to with both Akron and the AWG over time. So, we are going to see a nice improvement in profitability and therefore driving returns on capital both those businesses from that. On the commercial side, the benefits on the commercial side are certainly in the U.S., as you look at the Akron business and our existing fire business, there is a lot of channel overlap, but I think there is a lot of opportunity to bring a better overall product portfolio to market. And to be able to do that in a way where we are bringing kind of all of the high value content from a flow perspective to the OEMs and to the marketplace. So, I think there is definitely some benefit there.

In terms of AWG, AWG and Akron were both the leading players in their respective markets. And so you got the number one player in the U.S., the number one player in Europe. There are some materials in technology differences that will take some time to play through. You are not going to just willy-nilly integrate things that don’t make sense. You want to be really sensible about that. And the channel overlap is a little bit less there. Although there are some nice benefits of having it within the Lucas umbrella, AWG within our Lucas umbrella, which is our principal rescue tool business.

Brett Linzey

Okay, great. And if I could just sneak one more in here, so have restructured the business to some degree, you have done a real good job on productivity. If we do see some modest inflection within this industrial complex, I guess how should we think about incremental margins relative to the 30 to 35 that you guys have talked about in that sort of modest improvement environment?

Andy Silvernail

There is absolutely no reason that we wouldn’t achieve those targets. If you assume that you move from what has been a flattish world to a 2% to 3% world, there is no reason that we wouldn’t be able to deliver at those rates. If you saw something that was better than that, say 3% to 4%, I believe for some period of time, you would see even higher incrementals.

Brett Linzey

It makes sense. That’s all I had. I appreciate it.

Andy Silvernail

Thanks, Brett.

Operator

Our next question is from the line of Matthew Mishan with KeyBanc. Please go ahead with your questions.

Matthew Mishan

Yes, good morning and thank you for taking my questions.

Andy Silvernail

Good morning.

Matthew Mishan

So, you call it – it looks like you can call like $6 million in the quarter from those delayed energy projects. And I am assuming those were not included in guidance for the second quarter. And you still – even with those, did you still came in at a decline of 1% organically versus flat guidance? Does that mean the quarter was actually coming in worse leading up to those orders at the very end of the quarter? And how does that reconcile with the commentary where you are seeing kind of stability in some level of improvement?

Andy Silvernail

Yes. So Matthew, I think you are mixing and matching a few things. So, let me separate them out. The first one is around those projects specifically. About half of that $6 million we had baked into our expectations and about half wasn’t. And obviously, you guys wouldn’t have any insight to that going into the quarter and so you are talking $3ish million or so of revenue that was a little bit better than expected plus or minus. In terms of that relative to the commentary of stability, you are really talking about two very different markets, right. One is the projects we are talking about were principally around energy and things that had set in backlog for quite some time. And the comments around stability were really around the North American industrial markets. So, two different pieces that I think is important to distinguish.

Matthew Mishan

Okay, got it. And then what are you hearing from your life science customers around the timing of spending from kind of increased NIH budgets and what they are spending on?

Andy Silvernail

Yes, nothing that’s material. That’s been a good news story for that part of the business here for a couple of years now as spending has started to increase. As you know, the aggregate spending itself is not that big a deal, right. So, how much is being spent by NIH is not that big a deal. It tends to be a catalyst for the industry, right. So, the $35 billion or so dollars that gets spent by NIH and it gets distributed incredibly broadly across the scientific complex in and of itself does not drive a lot of business. It is really what it does to catalyze the industry around research and around production. So in my view, it continues to be a net positive, but I don’t think it is something that’s an inflection.

Matthew Mishan

Alright, got it. And last question for me is I think you brought down your net share repurchase to 1% to 2% for the full year, is that a function of where the stock is or is that a function of the acquisition pipeline?

Andy Silvernail

The pipeline has been pretty good already with AWG and with Akron, in total. We have put a decent amount of money to work. And we have laid out a very clear capital deployment strategy for people and how we have thought about share repurchase and the combination of those two things are part of our discipline.

Matthew Mishan

Alright, thank you very much.

Andy Silvernail

Thanks, Matt.

Operator

Our next question is from the line of Jim Giannakouros with Oppenheimer. Please go ahead with your questions. And Mr. Giannakouros, your line is open for questions.

Jim Giannakouros

Hey, sorry I was on mute there. Good morning, guys.

Andy Silvernail

Hey, Jim.

Jim Giannakouros

Sorry, if I missed the numbers to this. But just to better understand the trends that you are seeing in HST, if that segment is roughly two-thirds life science, etcetera, one-third industrial, what are the order growth trends that you are seeing in each of those buckets that gets you to that kind of flat that you printed for 2Q or what are the growth expectations for each bucket in the second half? Just to better understand what the orders of magnitude that are contributing to your outlook in HST? Thanks.

Andy Silvernail

So Jim, we don’t break it down that finitely. But just to give you some kind of bigger picture, about half of it, you would call industrial and about half you would call truly scientific. And so you can kind of piece together that the scientific stuff is up low to mid single-digit generally and the industrial stuff is kind of down the same, plus or minus in the quarter. And I think what you get is you get some firming from the industrial side in the back half and about the same kind of rates on the scientific side as you think about the back half. And that those are very general numbers.

Jim Giannakouros

Fair enough. That’s in line with how I was thinking about the scientific side just given with the OE guys are saying. One follow-up if I may just not to harp on Europe, but just to get a better understanding if you can provide it on the end markets, whether you said water is a source of strength, I believe you cited Europe as well as North America. But in Europe specifically, just given your views that Brexit just adds another layer of uncertainty, where would you say is – are you more uncertain or there is more risk, would you say that muni and commercial are just as much at risk or maybe muni-related type of spending might be a little bit more stickier?

Andy Silvernail

I think in the short-term, I think the muni spend generally tends to have more stickiness to it, Jim, just because the budget cycles move much slower. And I think that’s true in Europe as well as in the United States. So with big economic shifts of any kind, municipal tends to be a laggard in one way or the other, right, whether it’s a positive laggard or a negative laggard. That being said, the concern, right, that I have, that concern around contagion, if that were to play itself out, it’s going to be a tough world there, right. And so far, there aren’t kind of screaming indicators of that being the case. But obviously, we are watching pretty closely. If we start to see it unraveling, if we start to see two or three other significant countries decide that they no longer want to play. Our view is that, that gets messy pretty fast.

Jim Giannakouros

Fantastic. Thank you.

Andy Silvernail

Thanks, Jim.

Operator

Our next question is from the line of Walter Liptak with Seaport Global. Please go ahead with your questions.

Walter Liptak

Hi, thanks. Good morning, guys.

Andy Silvernail

Hey, Walt.

Walter Liptak

I wanted to ask about kind of the follow-up to an earlier question about the new products and I will phrase it this way. You guys have done a great job with the operational performance in getting margin even with revenue declines the last 1.5 years or so. Are there programs in place for organic growth? And I guess I am asking about the processes that might be different from the past for new products new markets that might help you get more revenue growth in this very slow growth environment?

Andy Silvernail

Walter, I would not put it in the phrase of programs or processes. It’s what we do, right. And it’s just how you run the businesses. And there is no doubt that the economic conditions have been challenging and we have faced that too. But when you lay us out against our peer group and I actually think we – even though I am not very thrilled with the performance, I think we have performed pretty well organically, even though it’s been a challenge. And if you kind of layer that out against our peer group that we call it in our proxy or really the peer group that we get compared against, I think you would see that we have pretty favorable results both organically and in total. That being said, how we think about this, Walt, is we have got about two-thirds of our businesses that I have squarely put in the growth category. And in our businesses that we are going to continue to very, very aggressively fund and drive for organic performance. And then we have got about 25% that I have put in the world of fix where there is something substantially that needs to be changed in those businesses to position them for future growth and then you got some stuff that’s kind of in the middle that you are really asking to hold their own in the marketplace and certainly win, but you are not asking for giant ambitions around growth. And so our process is really around differentiating where different businesses fit in that world and then investing and have expectations that are differential and that’s how we think about our portfolio and that’s how we think about driving performance. So – and those businesses that are in that fixed category, our expectation is really around total profit growth, right, expansion in margin and total profit growth. And those businesses that are in the growth category, it’s around finding product in market entrants and application that you can drive it differentially. And so that’s how we break it down and think of it not so much as a program or new process.

Walter Liptak

Okay, got it. Okay, thank you.

Andy Silvernail

Thanks, Walt.

Operator

Our next question is from the line of Matt Summerville with Alembic Global. Please go ahead with your question.

Matt Summerville

Thanks. Just a couple of things. First, just in terms of maybe talk about the underlying trends you are seeing as we think about bidding activity in oil, gas and chemical more of those process-oriented markets, just the absolute level, but also then the conversion rates that you are seeing now in terms of converting a bid to an order in an order to a shipment, forgetting the quarter end benefit that you guys have. If you can comment on that, that will be great?

Andy Silvernail

Yes, sure. So Matt, as you know, we don’t touch that very closely. It’s a very, very, very small part of our business. You are talking 2%, 3% that plays in that world generally, yes, that’s playing in that large scale bid world and so we don’t have – we are not going to be the experts on visibility into that world. Except to say, for those places that we do touch it, there has not been a material increase, right. So, the benefits that we got at BAND-IT were around MRO as you saw kind of oil spike. In terms of the other small pieces where we play upstream, there has been no – nothing materially changed in overall activity rates. I know, rig counts have inched up here recently, but we haven’t seen anything that would tell us that there is a significant turnaround on the near horizon.

Matt Summerville

And then just lastly, you hit on this briefly with one of your recent responses, but how are you thinking about both the secular and cyclical factors that impact kind of the life sciences side of things and the water/muni side of things, what inning are we in, in each one of those? And I guess, this is more a question on not necessarily Q3, but just looking out over the next 12 to 18 months how to think about that?

Andy Silvernail

So, Matt, when it comes to the life science side, the cycles tend to be driven more around new products than on kind of market demand. Market demand in many, many ways gets defined by new product introduction, right. So, as you are able to cure, to test, to develop new things with new technologies that tends to be the stimulant for demand around the life science world. And I think we are in a pretty good phase right now, where new products are launching. I think there is a pretty good cycle here in 2016, 2017. So, I expect it to be pretty decent. That being said, we have seen in the past as you get a bulk of new product introduction, sometimes you will see a quarter or so pause as they are ramping up to move through their channels. So, we keep an eye up for that. There is nothing that tells us that’s eminent, but we definitely keep an eye up. But I think generally, we are still in the early to mid innings of that phase there. I think on the municipal side, Matt, we are still pretty early. And what I mean by that is you just got to remember how tight municipal spending was for so long. So, certainly in the Western world, what if you are in 2 years in to the expansion here for improvement and we think you have got another, at least 3 or so years, maybe even longer assuming you don’t get a major macroeconomic shutdown. That would tighten budgets and that would tighten municipal spending, but there is still – there is a lot of backlog in municipal spending in the Western world right now.

Matt Summerville

Great. Thanks a lot.

Andy Silvernail

Thank you, Matt.

Operator

The next question is from the line of Jim Foung with Gabelli & Company. Please go ahead with your question.

Jim Foung

Hi, good morning, Andy and Heath. Good quarter.

Andy Silvernail

Hi, Jim. Thank you.

Jim Foung

Just a couple of questions. So, on the Brexit impact, where would you see this, if the effects unfold not as good as expected?

Andy Silvernail

Yes. So, I mean again, I am not as worried about the UK itself so to speak, because I feel like we are in a pretty good position where our – when you compare our revenue base and our cost base, I think we are in a pretty good spot. So, depending upon how dramatic currencies change, depending upon whether or not you start to see inflation in the UK, the places that you could see is we have got 5% of our business that’s in the UK, you could see some inflation ramp up there, so you got to keep your head around that. And then the other partial there it’s how demand switches patterns. I don’t see a big issue with that again because of the hedges, the natural hedge that we have between where we build and where we sell. Again, Jim, I think the bigger concern for me is if this starts to roll itself through broader Europe. That’s my bigger concern.

Jim Foung

So you eventually just come down to the order rates, right. I mean, but you didn’t see anything in the June order rate, right, because we saw kind of good numbers growing [indiscernible]?

Andy Silvernail

We haven’t seen anything yet. There is just a lot of noise. And so when you see that amount of noise and I am also realistic about the European Union. With everything that’s going on, it’s still – there is a lot of fragility to it. And a major player deciding it doesn’t want to play anymore can have the effects of starting to unravel some pretty important pieces.

Jim Foung

Are you currently seeing delay in potential orders where if we don’t get the worst case scenario with Brexit some of these orders could...

Andy Silvernail

Yes, Jim. No, we haven’t seen anything yet.

Jim Foung

Haven’t seen anything, okay. And then just moving on just to the energy shipments, what drove the customers to take delivery in Q2? I mean, is it because of the confidence in the higher oil prices relative to the past or changing the budgets?

Andy Silvernail

Ultimately, it’s a little hard to tell. And these are things that require cash on hand and letter of credit, so nothing of note.

Jim Foung

Okay, thank you very much.

Andy Silvernail

Thank you, Jim.

Operator

The next question is from the line of Joe Giordano with Cowen & Company. Please go head with your questions.

Joe Giordano

Hey, guys. Good afternoon.

Andy Silvernail

Hey, how are you? Did we hit afternoon already?

Joe Giordano

I guess we are getting there. Quick for me, I think you mentioned with Akron like a 500 basis point margin opportunity over the next 3 years. Would that get you to kind of where the segment is now or is that a little bit – gets you a little bit below where the second was?

Andy Silvernail

It could be a little lower – to be a little lower, but it would be very attractive.

Joe Giordano

Okay. And then just the capital deployment bent more recently towards Fire & Rescue, is that more indicative of just the valuation in that market or rather than like the necessarily the forward prospects, is that just where you are seeing the best long-term value based on what sellers are asking for?

Andy Silvernail

Obviously, with both AWG and with Akron, we got – we bought the businesses at reasonable valuations. A lot of it has to do with what properties are available. And so obviously, with Akron, that was driven by the sellers need. And I think we have mentioned in the past, we had been talking to them and about that business for some time. And as they decided strategically what they needed to do, that really opened up the opportunity. And then of course, Akron was owned – excuse me, AWG was owned by a private equity firm. And as pieces and parts start to move in any one industry, it tends to catalyze other movement and that had been owned for a few years and whatnot and they had done some good things with it. And so I think our purchase of Akron probably started to open up that market a little bit and we were the natural buyer in both cases.

Joe Giordano

It’s another property of size in that market was to come available, is that something you pounce on just – you have put in a lot of capital into those markets over last year?

Andy Silvernail

Personally, I don’t see that happening. There is nothing – there is lots of little things, but there is nothing that would fit that definition today. So, I wouldn’t expect it today. I mean, obviously, it’s the greatest thing in the world at a very cheap price were to come up. Certainly, we would consider it. But as it looks right now, I don’t see anything kind of on the immediate horizon like you have described.

Joe Giordano

Well, thanks guys. Appreciate it.

Andy Silvernail

Yes.

Operator

Thank you. At this time, I will turn the floor back to Andrew Silvernail for any closing remarks.

Andy Silvernail

Well, thank you all very much. I appreciate the questions here today and I appreciate your interest in IDEX and the support of the business. When it’s all said and done, the conditions that remain today are very similar to what we have seen in the past year or so, with some benefits of some industrial stability here in the United States that we saw in the quarter. But mostly, it’s really around the team’s ability to execute and that’s what I am most proud of is our ability to continue to drive performance in an environment that is still murky. And so I really appreciate my team and I thank them for all their performance. And I look forward to talking to you all again here in 90 days. Thank you.

Operator

Thank you. This concludes today’s conference. Thank you for your participation and you may now disconnect your lines at this time.