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IDEX Corporation (IEX)

Q1 2012 Earnings Call

April 24, 2012 10:30 AM ET

Executives

Michael J. Yates – VP and Chief Accounting Officer

Andrew K. Silvernail – Chairman and CEO

Heath A. Mitts – VP and CFO

Analysts

James Lucas - Janney Capital Markets

Charlie Brady - BMO Capital Markets

Scott Graham - Jefferies & Company

Joe Radigan – KeyBanc Capital Markets

Nathan Jones – Stifel Nicolaus & Company, Inc.

John Moore – C.L. King & Associates, Inc.

Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the IDEX Corporation Q1 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions). Thank you.

Mr. Michael Yates, Vice President of Corporate Accounting, you may begin your conference.

Michael J. Yates

Thank you, Sarah. Good morning everyone and thank you for joining us for our discussion of the IDEX first quarter 2012 financial highlights. Last night, we issued a press release outlining our Company's financial and operating performance for the three month period ending March 31, 2012. 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 from IDEX management are Andy Silvernail, our Chairman and CEO and Heath Mitts, Vice President and Chief Financial Officer. The format for our call today is as follows. We will begin with a summary of the first quarter 2012, followed by a walk-through of our three business segments. And finally, we will wrap up with our outlook for 2012. Following our prepared remarks, we’ll then open the call for your questions.

If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll free number 855-859-2056 and entering conference ID 40915423 or you simply may log onto our Company's homepage for the webcast replay.

As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to 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 this call over to our Chairman, Andy Silvernail. Andy?

Andrew K. Silvernail

Thanks Mike. Good morning everybody. I want to thank you for taking the time today to participate in the call. We appreciate the interest that you all have in IDEX. Let’s get started. As Mike mentioned, I’m going to walk-through the quarter and segment results and share my perspective on where we see the markets going and how it’s impacting our performance.

Bottom line is we had a very strong start to the year. We built significant backlog during the first quarter and our end markets and geographies are performing as we expected. These factors have positioned us very nicely for the remainder of the year, providing us confidence in our improved 2012 outlook. Additionally, the CVI integration is on track. We’ve put a lot of focus on our Optics and Photonics platform and the team has responded extremely well. While there have been some end market headwinds, I am pleased with the progress today. I’ll go into more detail on the CVI integration when I give an update on the segment later.

In the last two earnings calls, we’ve talked about our platform strategy. This strategy has continued to mature and gain traction and I’m pleased with the execution and the delivered results from our team.

With that, I want to jump into Q1 for financial performance. I’m on slide five. For the quarter, orders were up 20%, 11% organically. Sales were up 15% and that’s up 6% organically. And as you can see, we built $42 million of backlog in the quarter. I’ll detail this as we walk through the segments.

In the quarter, just over half our sales were generated outside the US. We saw broad based strength in North America. Europe was generally flat, but it was stable. The Middle East growth was driven by upstream activity in our energy platform and increasing demand in our Fluid and Metering business. Our Asian markets growth remains strong, particularly outside of China. Altogether, the external environment is playing out as we expected.

Looking at profitability, first quarter adjusted operating margin of 18.3% was up 10 basis points from the comparable quarter last year. The improved profitability is a result of leverage on the organic growth and benefits of our previously taken restructuring actions. This is partially offset by the dilutive impact of 2011 acquisitions. When excluding restructuring charges and acquisition impact, all three segments experienced year-over-year margin expansion.

Q1 EPS, adjusted per structuring charges was $0.66, up 16% versus the first quarter of 2011. We incurred approximately $5 million of restructuring costs as we continued to consolidate operations. Further restructuring actions will take place throughout the remainder of the year as we complete selective facility consolidations by year end. It’s important to note, however, that organic growth is the best return on our investment and we continue to invest aggressively in innovation and market expansion.

In Q1, we generated free cash of $52 million, up 161% from the first quarter of 2011. This is a first quarterly record for IDEX. I am very pleased with the execution and the focus on cash generation by all of the operators in the field.

Lastly, with regard to capital deployment, on April 10 we announced an 18% increase in our quarterly dividend. In the first quarter, we also repurchased approximately 239,000 shares of common stock for $10.2 million. And as you may know, two weeks ago, we announced the completed acquisition of Precision Photonics Corporation, which is effectively a product line extension for our IDEX Optics and Photonics platform. PPC provides a growing platform with specific technical capabilities that we can leverage across the business, including bonding and advanced metrology. More notably, we continue to progress in late stages of diligence on additional acquisition targets and we have a full field pipeline.

So the bottom line is that we had an outstanding quarter, both operationally and in capital deployment. So now let’s jump into the segment details. I’m on page six everybody.

In FMT, orders were up 5%. They were 6% when you exclude FX. FMTs backlog grew $14 million and it was broad based across the segment. Sales increased 7%, 8% organically. Adjusted operating margin of 22.2% was up 120 basis points from Q1 of 2011. The margin improvement is largely attributed to the benefits received from volume and from outstanding productivity.

Within CFP, we experienced continued strength in North America, Asia and Latin America. And as we’ve highlighted before, our investments in the BRIC and Middle East countries are definitely paying off. Versus last year, we’re seeing slower growth in Western Europe, but we maintain great market positions and we’re prepared to handle anything that comes out of the European economy.

Our energy platform performed well with order strength driven from both downstream and upstream domestically and internationally. And our Ag business has experienced tremendous overall growth, which is largely driven by favorable growing conditions and new product introductions.

Finally, within our water platform, the industrial side remains solid and the municipal side has stabilized. This was evidenced by sequential order growth which is a positive signal to the platform.

All right, let’s turn to page seven and we’ll discuss health and science. Total orders for the segment were up 30% for the quarter, down 2% organically. Sales were up 35% in total, up 2% organically, while operating margin of 18.3% was down 450 basis points compared to prior year. Again, that’s driven by the dilutive impact of our 2011 acquisitions and the related acquisition and tangible amortization. Importantly, within each of the HST businesses, we experienced sequential orders and sales acceleration. Our material process platform or MPP as we call it, plays largely in Pharma and Food and is performing well. The orders increased for the first quarter as their end markets remained strong and we achieved the global growth synergies we expected when we built this platform over the last 18 months.

As expected, our scientific – fluidic platform was faced with a very difficult Q1. In early 2011, we saw extremely strong order growth as customers brought a number of highly successive products to market. Further, the end market dynamics are playing out as expected. As discussed in the past few quarterly calls, end markets have slowed with global funding concerns and inventory reductions. Our view was and continues to be that Q1 and Q2 will be soft with some rebound in the back half of the year. We remain very confident in the prospects of this business overall.

To turn to our Optics and Photonics platform are consistent with what we talked about last quarter. The scientific and industrial markets and reasonably robust, but we continue to feel pressure for semiconductor and defense. Importantly, the trend seemed to have stabilized year-over-year and sequentially.

While we’re on HST, I want to take a minute and give you an update on the Optics and Photonics integration. At this point, we are halfway through our 18 month planned integration process for CVI Melles Griot. The integration remains the highest priority for the company. When you go in into the acquisition, there was heavy lifting to be done, integrating the units and creating a single platform. At this time, I am pleased to say that we’ve completed nearly all of the planned HR, finance, IT and compliance integration. And we remain on track to complete the remaining functional and platform level integrations in 2012. Further, we’ve completed one facility consolidation in Q1 and additional rationalization is in process.

We’ve been appropriately aggressive with our productivity efforts and have increased the focus as we’ve been challenged by the weaker than expected semiconductor and defense markets. Organizationally, we’ve made several changes to bolster the platform’s capability. We are fortunate to have a level of depth of talent within IDEX to support acquisitions and accelerate improved performance. Within Optics and Photonics, we have upgraded talent in sales and marketing, product development, operations and finance. We are building a platform team that can win now and put us in a position to continue to grow organically and through acquisitions.

Along with strengthening the team, we are driving increased rigor around execution. We are deep into the process of deploying our commercial and operational excellence tools on the areas we know will accelerate profitable growth. As in any acquisition, we begin the process by doing in-depth voice of the customer research to understand the critical priorities. We know from the research that in Optics and Photonics, the customers have a strong affinity for our products and our technical problem solving ability. We’ve also heard that we can differentiate and create substantial value through best in class lead times and service.

Along with the commercial and operational excellence tools, we are benefiting from the combined technical prowess of the platform. For example, we’ve transferred our Semrock developed optical monitoring system to select locations within the platform. The proprietary software and hardware packages already began to deliver impressive results. This includes lead time reductions, higher yields and much more consisting quality. Most importantly, we are harnessing the innovative technology and product development capabilities of the platform. We have outstanding technical talent and experience across the business, including from our new acquisition Precision Photonics. We’ve integrated our capabilities into what we call the office of the CTO. In 2012, this team is focused on three key optical technologies. One, high-speed pulse laser optics. Two, advanced policing in metrology and three, optic fluidic engines. And optics fluidic engine is really a terrific example of where we get leverage across the broader portion of IDEX. This technology uniquely leverages IDEX strengths by combining the best of micro-fluidics, Optics and Photonics in a engineered compact solutions that will be used in the next generation Biotech and the Diagnostic systems.

We’ve got another nine months of our original integration plan to go. In that time, we’ll continue to build the team and leverage the growth and cost opportunity across the platform. There remains a lot of work to do, but we are making great progress.

To wrap it up HST, despite the orders in Q1, we still believe our full year organic growth will be in the mid-single digits for the segment and our long term prospects are very encouraging. Not only do we like the end markets, we see product innovation delivering growth in excess of our served markets.

Alright, let’s move into our final segment. I’m on page eight. We’re going to talk about Fire Safety and diversified. Total orders in the quarter were up 41%. Organically, they are up 43%. Sales increased 5% and were up 7% organically. As I highlighted in the earnings release, we received a larger replenishment order in Dispensing that will ship over the next several quarters. However, even without this order, the overall segment orders were up strong double-digit. I’m very pleased with the team’s execution in the quarter. Along with delivering on organic growth, profitability was impressive at an operating margin of 23.3%, up 190 basis points from prior year. The margin expansion is largely attributed to structural cost actions taken, volume leverage and excellent productivity.

Overall, end market demand for the segment has been very good, particularly in the emerging markets for our rescue tools which continues to be very robust. The municipal markets in the US and western Europe have stabilized and I am pleased to say that our fire suppression business has been able to demonstrate solid growth and this has offset headwinds in the US municipal fire market and they’ve done a very, very nice job in adjacent markets and geographies.

Our Band-It business, which is our clamping business and participates in very diverse end markets, has proven its ability to grow at two times or even more and the general market through product and innovation and continues execution. This remains true in the first quarter and we expect Band-It to deliver these results throughout the year.

In our Dispensing business which has always been lumpy due to programmatic order activity, we received a nice replenishment order that will ship over the next several quarters. In addition, we’ve seen the global end markets stabilize for Dispensing. As we’ve discussed in the past, we have a lot of restructuring work in the business over the last few years and our cost structure enables good margin expansion. The team has really done an outstanding job of delivering results.

All right, we’re going to close out the presentation with our guidance and our update on slide nine. We expect Q2 EPS to be in the range of $0.70 to $0.72. Q2 revenue will be mid to high single digits organically. FX will have a negative year-over-year impact on Q2 sales of approximately 2%. We’ve increased our guidance and solidified the lower end of our range. We now expect fully year 2012 EPS to be in the range of $2.80 to $2.85 with organic revenue in the mid-single digits.

Full year operating margin for the company will be approximately 19% as a result of our 30% to 35% flow-through on incremental organic volume.

Other modeling items to consider, which remain consistent with our prior guidance, the 2012 tax rate is anticipated to be about 30%. Full year CapEx should be around $40 million and as we’ve always demonstrated, we will continue to convert cash extremely well in excess of net income for the full year.

Finally, our earnings projections excludes future restructuring, future acquisitions or costs and charges associated with acquisitions.

All right, we’re going to wrap things here. Again, we’ve experienced broad based growth which provides a favorable outlook and there is only limited softness that we see out there in the world today. I’m very pleased to see our outstanding global team deploying our platform strategy in executing very well. Our proven operating model is driving organic growth while expanding margins.

Finally, we are well positioned to continue to intelligently deploy capital. Our balance sheet and cash generation are strong and our acquisition funnel is in very good shape.

Alright, that concludes my prepared remarks on an excellent quarter. And I’ll now turn it over to questions. Operator?

Question-And-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Jim Lucas with Janney Capital Markets.

Jim Lucas - Janney Capital Markets

Thanks. Good morning guys. I wanted to start first on HST. If we take a look at the continued softness in the orders there with the different pieces of HST, what exactly is giving you comfort in the second half picking up and not continued inventory corrections from your customers?

Andrew K. Silvernail

There are really two things and first you’ve got to segment it out a little bit, Jim, right? The first thing is that if you look at MPT and industrial, those are solid, they are okay. And it's the micro-fluidic business that has been the gap that we've talked about is consistent with what we’ve talked about. And there are two things that give us confidence in a back half on a year-over-year basis being better than the first half. The first one is really the market’s outlook. So what they are talking about and we are very, very close to this customer base on a global basis and it really is a global customer base.

The second piece is that the comps frankly just become a lot easier when you look at the second half. The comps in the first half of this year, we are going against very strong product releases that happened last year and were really a bubble in that business. So those are really the two things that give me confidence that we see a better year-over-year comparison as we get into the second half.

Jim Lucas - Janney Capital Markets

And in terms of the inventory corrections that you were seeing from the customers in the fourth quarter, has that dissipated?

Andrew K. Silvernail

It’s still there to some degree. There are some earnings releases that have been coming out here and there. And so we’ll see how that places itself through. It’s still a factor, Jim, but I think it was a bigger factor in the last half of last year.

Jim Lucas - Janney Capital Markets

Okay. And then switching gears on the FMT side where things continue to go fairly well, it looks like and even the weaker area is stabilizing. You talked about Asia being stronger outside of China. Can you give update of what you are seeing in your China market today?

Andrew K. Silvernail

Yeah, no doubt. Well first, I think the – on the positive side, very positive side, India and Southeast Asia are really strong. We’re seeing nice activity across the board in day rate and in projects. So we’re feeling pretty good there. I think we’ve seen like everybody else has seen Jim, that the China market has slowed and we’ve got to be careful about saying softness, because softness when you’re talking about China and softness when you’re talking about Western Europe or the US are two different things. So it’s still solid growth, but you remember we were posting very, very strong year-over-year growth rates for a long time with markets that were double-digits. And that’s coming down some and we are slowing to some degree too. But it’s still very attractive.

James Lucas - Janney Capital Markets

Okay. And then final question, with regards to the M&A pipeline, can you talk about what you’re seeing in terms of valuations as well as the size and scope of the deals that are in the pipeline today?

Andrew K. Silvernail

Yeah. Jim, most of the deals that are down in the pipeline now are kind of our sweet spot stuff. $25 million to $100 million fits exceptionally well into an existing platform. PPC is a great example and it’s a really small deal, but it solves really a pretty good size strategic need for us and it tucks right in there. So we’re seeing a lot of things like that pretty balanced between HST and FMT generally across the board. So we feel good about that. So in the sweet spot and pretty balanced generally within the pipeline. In terms of valuations, I would say that what we’re looking at are really look. They’re not nosebleeds like we saw at this time last year. At the same time it’s not bargain basement. But I would say there are deals that we feel very, very good about being able to get a really nice return on invested capital.

James Lucas - Janney Capital Markets

Great. Thank you very much.

Operator

Your next question comes from the line of Charlie Brady with BMO Capital Markets.

Charlie Brady - BMO Capital Markets

Thanks. Good morning guys.

Andrew.

Hi Charlie

Charlie Brady - BMO Capital Markets

Just talk on HST for a second. If I missed it I’m sorry, but what was the margin impact from acquisitions specific just to HST?

Andrew K. Silvernail

It was 450. Right, Heath? Margin impact of acquisitions, that’s what we get.

Heath A. Mitts

HST was down 450 year-over-year. Most of that was attributable to the acquisitions, the results of some mix impact where we had higher MPT material sales, material process technology sales in the quarter versus some of the scientific fluidic business. So there’s a margin differential between those two. But the acquisition impact was the lion share.

Charlie Brady - BMO Capital Markets

Can you quantify then what I guess organically margin would have been for HST?

Heath A. Mitts

It’s almost impossible to do that now because the integrations both on the MPT side as well as on the optic side have been integrated in with the existing incumbent properties in those platforms. So it’s almost impossible because we’ve shifted costs around so much and as we’ve built out those platforms it wouldn’t be meaningful.

Charlie Brady - BMO Capital Markets

Okay. And can you quantify the size of that large dispensing order and was it from a domestic customer or international?

Heath A. Mitts

It’s a global customer and we’re not able to quantify it. But it’s a global customer that we do business with.

Charlie Brady - BMO Capital Markets

But correct to that and I think I heard you correctly say that excluding that FFD still would have had a positive order growth in the quarter?

Heath A. Mitts

Yeah, absolutely. We had very good risk control performance especially in the emerging markets and Southeast Asia and in the Middle East. The fire business, fire suppression business actually where it’s been a bump along the bottom and we’ve talked about for several quarters, is beginning to see a little bit of upside. Not so much a big recovery in the US market, but some of the international opportunities and then Band-It has been very strong, continues to grow double digits. So we would have definitely been into the double digits.

Charlie Brady - BMO Capital Markets

Where are you seeing the strength in fire suppression? That’s surprising given the economic backdrop.

Andrew K. Silvernail

Well, I think you’ve got a couple of things, Charlie. This is Andy. The first one is that this whole municipal market took a heck of a hit coming out of the recession and unlike a lot of the rest of the world, didn’t rebound until, if you recall from our earlier calls over the last really two years, this business hasn’t seen the rebound that most of the other industries and segments have seen. And so we’re coming up pretty low bottom, number one. Number two, they’ve done a nice job in some adjacent markets and they’ve done a nice job internationally of penetrating some business that we hadn’t had before. So we’re seeing some progress there. We have not seen what I would call a rebound in the US fire truck market which is the biggest segment of this business. So this is really about the team doing a very, very good job of executing and what I’d still say is muddling around the bottom. Now that being said, we think over time as tax receipts improve and that has started to happen, this is a business that will pick up some with a much better cost structure by the way.

Charlie Brady - BMO Capital Markets

Great. Thanks very much.

Operator

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

Scott Graham - Jefferies & Company

Hey, good morning. Can you hear me?

Andrew K. Silvernail

Sure Scott.

Scott Graham - Jefferies & Company

Great. So I did have two questions for you. The first one related to really the optical platform itself. Would you be able to tell us what the year-over-year organic was of the optical platform if you could kind of pro forma that somehow?

Andrew K. Silvernail

That’s not something we’ve typically done. Go ahead.

Heath A. Mitts

I’m sorry. Scott, this is Heath. That would get into pre-ownership for most of it, with the exception of Semrock which we owned from 2008 forward. So to be honest with you, I’m not trying to be evasive, but I couldn’t even tell you what that is. That would be hard.

Scott Graham - Jefferies & Company

That’s fair.

Andrew K. Silvernail

We don’t get into financials that weren’t ours.

Scott Graham - Jefferies & Company

Okay. So would you guys agree that the reason why we’re seeing weakness from the farm and drug areas, that it’s kind of year where the product cycle is not really working with us and if so that are the indications from your customers that the product cycle will work with us next year?

Andrew K. Silvernail

Scott, that’s a good insight. That’s exactly right on the first half of the question. If you would back this time last year and even the previous 18 months to that, what you saw were some outstanding organic growth driven by strong product cycles. So you hit that on the head. The product cycle now I’d say generally is not as robust as it was. It’s still pretty good though. So I wouldn’t discount it all the way. So these guys are very innovative. The business has moved globally aggressively over the last three to five years. And so I expect there to continue to be very strong innovation, very strong product development.

These are not businesses that sit down for two, three years in a row from a product innovation. So our expectation is that that pipeline is going to continue to be full and that these businesses – you just look at the external environment about – I always ask the question, you think more is tested next year than this year in terms of the overall testing that happens in the world that these analytical instruments are touchy? And that answer is absolutely yes and these are very innovative growth companies that we think will drive growth over time

Scott Graham - Jefferies & Company

Got it. My follow up question is simply, for a long period of time now we’ve had a $20 million to $25 million cost reduction target from productivity in ’12. I know you’re aligned up with that, Andy, but certainly you’ve come on board and been a little bit more aggressive with the cost structure. I’m wondering if that’s a number that you agree with. If that’s a number that maybe you think you should be doing better than because it really hasn’t been updated in the last several years and the company is bigger now. So just wondering what your thoughts were on that level of – on that target at least.

Heath A. Mitts

Yeah. The $20 million to $25 million is a number we’ve talked about for three or four years I want to say in there and you’re absolutely – you’re right, Scott. We have focused in the last two years even more on getting cost benefits that we think are out there and some low hanging fruit that we didn’t get at frankly in the ’08, the early ’10 timeframe. And so there’s more benefit to be gotten. The $20 million to $25 million is a good rule of thumb, frankly. We were internally reaching for more than that.

Scott Graham - Jefferies & Company

Thanks a lot for your time.

Operator

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

Joe Radigan – KeyBanc Capital Markets

Hi, good morning. This is actually Joe Radigan on for Matt. In terms of the mid to high single digit organic growth guidance that you gave for the second quarter, is it safe to assume that HST is going to come in below that range and followed by a stronger back half, just given on what you’ve said?

Andrew K. Silvernail

Yes, Joe. That’s right. I think that should definitely be the expectation. We think that HST as we said before will have a little bit softer second quarter than the other businesses and we think that FSD and FMT will be a little bit better than that.

Joe Radigan – KeyBanc Capital Markets

How much price is embedded in that five to six organic growth guidance for IDEX overall?

Andrew K. Silvernail

A point.

Joe Radigan – KeyBanc Capital Markets

Okay. And then on the restructuring side, can you give a little more color on either segment or geographic? Is that CVI related? Is it stuff that you had planned already or is it pull forward based on just trying to be proactive on your forward outlook?

Andrew K. Silvernail

First of all, it really has been pretty broad based. If you recall last summer when we -- actually we got into the fall when we were doing our third quarter earnings release, we talked about taking advantage of some of the softness that was out there in the summer of last year and accelerating these things. It’s pretty broad across the company and as we’ve talked about in the past, Joe, we have some more work to do on CVI in terms of integration and facility consolidation that we’re going to get done by year-end. And I think it’s important to know our goal is to have the vast, vast majority of this kind of stuff behind us, unless we have other acquisitions that will need some restructuring. But our intent is to kind of shut that window at the end of this year.

Joe Radigan – KeyBanc Capital Markets

Okay. And then, Andy, could you just clarify, I think you said was it – when you were commenting on FMT, was the water – Wastewater business, did you see sequential order growth in that business or was that…?

Andrew K. Silvernail

We actually did and that connects back to the fire statement that I had a second ago which says that if you look at the overall drivers in that industry, certainly in the western world, it’s driven by tax receipts and what we’ve said pretty consistently is we didn’t expect a rebound until you started seeing tax receipts go up. Tax receipts have increased modestly. I think that’s the way to say it. Modestly at the municipal level and there’s some pent up demand. But don’t get me wrong. I don’t see this thing taking off like a rocket ship in the near future, but it is a good sign.

Joe Radigan – KeyBanc Capital Markets

Okay, great. Thanks very much.

Operator

(Operator instructions). Your next question comes from the line of Nathan Jones with Stifel Nicolaus.

Nathan Jones – Stifel Nicolaus & Company, Inc.

Good morning guys.

Andrew K. Silvernail

Hi Nathan. How are you?

Nathan Jones – Stifel Nicolaus & Company, Inc.

Well, thanks. How are you?

Andrew K. Silvernail

Very well. Thank you.

Nathan Jones – Stifel Nicolaus & Company, Inc.

So just a little bit further on the CVI acquisition. With the 450 basis point dilution in margins from CVI and correct me if my math is wrong here, I calculate CVI is doing about 5% EBIT margin and about 11% if you add back the intangibles. I’m sure this is lower than where you intended to run in the long term. Can you talk about if there’s still inventory step up charges or integration expenses or something else in there that’s holding margins down and what your target is for that longer term?

Heath A. Mitts

Nathan, this is Heath. I think your math is directionally correct. There is a couple of factors at play. One, the biggest driver for not just CVI, but some of our broader optics is a softness, a continued softness in the top line relative to softer semi-con and defense businesses that we do participate in. As you know, roughly a third of CVI does tackle into those markets. So that is the biggest driver. But from a profitability perspective, I think, like I said your numbers are directionally correct. What I would say is we would expect from a GAAP margin perspective what we said was when we bought it, we would have it up into the mid to high teens and that still is the case. Some of the restructuring actions, some of the new product development as we build out the IOP platform, we feel confident about our ability to get there from an exit rate perspective for 2012.

Nathan Jones – Stifel Nicolaus & Company, Inc.

And that mid to high teens is including the amortization?

Heath A. Mitts

That’s correct. Some of that is going to be dependent upon a little bit of recovery in the markets. But in terms of how we’ve laid things out now and how we have set up the cost structure in our modest growth improvement perspectives for 2012, we feel good about the exit.

Nathan Jones – Stifel Nicolaus & Company, Inc.

Okay. And in FMT, can you flesh out the order growth by end market in a little more detail? Maybe which markets are stronger, which markets maybe not as strong as the average for the segment?

Andrew K. Silvernail

So generally the trends look like they’ve looked in the last couple of quarters, meaning you’re seeing really nice stuff out of Ag which is very, very strong and has been strong here for a long time. And then chemical food and process and energy, all of them, they’re solid, Nathan. There’s nothing to complain about in any of the three. And then the water business, right, while it’s certainly trailing relative to the other three, has had some positive signs that are encouraging.

Nathan Jones – Stifel Nicolaus & Company, Inc.

And industrial?

Andrew K. Silvernail

Well, we don’t break it out quite like that. We talk about it by the platform. If you look at it by platform is how we think of it. To answer your question, industrial markets generally is pretty good. It’s pretty solid.

Nathan Jones – Stifel Nicolaus & Company, Inc.

Okay. Thanks a lot.

Operator

Your next question comes from the line of John Moore with C.L. King.

John Moore – C.L. King & Associates, Inc.

Morning guys.

Andrew K. Silvernail

Hi John.

John Moore – C.L. King & Associates, Inc.

Just starting with dispensing. The dispensing order that you booked this quarter, has any of that begun to ship in the first quarter?

Andrew K. Silvernail

No, not yet. We’ll see that flow over the next several quarters. I think it’s a well planned process, but nothing in the first quarter.

John Moore – C.L. King & Associates, Inc.

Okay. And then if I remember these replenishment orders, the margins on them tend to be pretty good. So I’m just curious as to what your expectations are regarding the FSD margins throughout the back half of the year. I imagine the dispensing business is going to be back up over 20% operating margin level with this order coming through. Is that right?

Andrew K. Silvernail

Yeah. You’re right. The larger orders generally have nice contribution margins. That’s true. But also recognize that it’s a relatively – even within FSD, it’s still not a giant chunk of the overall business. It’s not like 50% or 60% of the business. But it will have a nice impact on that segment. But also recognize that the profitability is materially driven by rescue and Band-It which have much higher margins. So there’s a long catch up before you get to those.

John Moore – C.L. King & Associates, Inc.

Got you. Okay. And then just focusing on the guidance a second here, it looks like when you back out this quarter you raised your expectations for the rest of the year by maybe a penny or two and you’ve got this nice dispensing order coming through that might provide some of that benefit. Just want to get a feel – have your expectations for the second half changed at all since you gave guidance in February? Or you just don’t want to I guess make a forecast here for the second half given what’s going on like globally and in Europe?

Andrew K. Silvernail

Well, what we did here, John, is we took the bottom range up by $0.06. So we took the bottom of the range up by $0.06 and we took the top of the range up by about three and what that comes down to is given kind of how the first quarter played out, given what backlog looks like, what order trends look like, we feel real confident at the low end of that – at that range. At the same time, once you start to get into the high end of that range, there are still a lot of things that can go wrong out there in the world. And so we’re trying to be cognizant of that and make sure that we think about this business appropriately. We are one quarter into a four quarter game and we think there’s a long way to go this year and there are some pitfalls out there. We feel very good. We’re happy with how the quarter turned out. The team is doing great, but at the same time we want to make sure that we’re being prudent.

John Moore – C.L. King & Associates, Inc.

Fair enough. And last question on the guidance here. It looks like the impact from acquisitions for 2012 is now at 3%. I think you had guided 5% when you initially gave the 2012 guidance. Has anything changed regarding your expectations to acquisition contribution this year?

Andrew K. Silvernail

Not materially, no.

John Moore – C.L. King & Associates, Inc.

Okay. That’s all I got. I’ll get back in queue.

Operator

At this time there are no further questions. With that, do you have any closing remarks?

Andrew K. Silvernail

Well, first of all just again thank you everybody for your attention to IDEX and your support. Bottom line, we had a really good start to the year and we’re happy about that and the platform strategy that we’ve put in place and the focus on execution I’m very pleased with. Our teams out in the field have just done an outstanding job and we’re exceptionally proud of them. And we’ve got some integration work to do and we’re tackling that head on. So we’re very happy and again thank you very much all of you for taking the time this morning. Take care.

Operator

This concludes today’s conference call. You may now disconnect.

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