IDEX's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.23.12 | About: IDEX Corporation (IEX)

IDEX Corporation (NYSE:IEX)

Q3 2012 Results Earnings Call

October 23, 2012 10:30 AM ET

Executives

Michael Yates - Vice President and CAO

Andy Silvernail - Chairman and CEO

Heath Mitts - Vice President and CFO

Analysts

Allison Poliniak - Wells Fargo

Scott Graham - Jefferies

Robert Barry - UBS

Mike Halloran - Robert W. Baird

Matt McConnell - Citi

Charlie Brady - BMO Capital Markets

Mike Wherley - Janney Capital Markets

Andrew Noorigian - Vertical Research

Jim Giannakouros - Oppenheimer

Matt Summerville - KeyBanc

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 Q3 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 and Chief Accounting Officer. You may begin your conference.

Michael Yates

Thank you, Sarah. Good morning, everyone. And thank you for joining us for our discussion of the IDEX third quarter 2012 financial highlights.

Last night, we issued a press release outlining our company’s financial and operating performance for the three and nine-month period ended September 30, 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 Andy providing some insights from his first year as CEO, and a summary of our strategic planning process that was recently completed. And then, we will provide an updated view on our capital allocation strategy. Next, we will discuss the third quarter 2012 results, followed by a walk-through of our three business segments. And finally, we will wrap-up with our outlook for the reminder of the year. 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 number 40918415 or you may simply log on to our company’s homepage for the webcast replay.

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

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

Andy Silvernail

Thanks, Mike. Good morning, everyone. I’d like to thank you for joining us as we talk about the third quarter. In the quarter, we beat the high-end of our expectations, profitability and cash flow to good execution across the corporation. I’m proud how the team is delivering in the phase of a difficult micro-economic environment.

As Mike said, before going into the quarterly results and our outlook for the balance of the year. I’m going to take a few minutes to give some insight from my first year as CEO and a brief overview of our recently completed strategic plan.

As I stepped into the role on August 2012, excuse me, 2011, a new wave of issues started to roll through the global economy. The U.S. government faced off over the debt ceiling, Europe’s financial issues came to the front and China began an aggressive -- aggressively to work to avoid a hard landing, month-to-month and quarter-to-quarter we’ve seen markets, regions and customers want from one side to the other from rapid demand to hesitant restrained and back. This volatility has been a hallmark of the global economy since modeling out of the great recession.

I feel very good about how our team is engaging these challenges, delivering solid results, particularly in profitability and cash flow. Our attitude, the attitude we have internalized, that we need to take advantage of these times. We need to out compete to win for our customers, our shareholders and our employees and doing so, we can consistently position ourselves to be the partner of choice and earn the right to grow.

Leadership emerges in difficulty and our team has done that in 2012. This has been one of the most satisfying aspects of the past 15 months. My top priority is to foster outstanding leadership throughout IDEX. It is this dedicated leadership, leadership on the ground that drives innovation, quality, outstanding service and productivity.

In the past year, building up a strong foundation, we raised our commitment, investment and expectations in order to deepen our leadership capabilities. We have enhanced leadership development programs throughout IDEX and our most senior executives have been asked to play increasingly critical role in development and mentorship.

We have also strengthened our acquisition integration capabilities and are using our integration teams as a way to stretch and grow people, while achieving our value creation objectives. These investments will pay dividends for years to come.

A second important aspect of the past year has been the embrace of our global platform strategy. Our six strategic platforms were created to accelerate profitable growth. The platforms help us leverage innovation, applications, channels and costs. They also give us better ability to source, conduct diligence and integrate the acquisitions.

In the past year, we’ve executed three deals, all of which fit into different platforms, we are finding already that this gives a significantly more ability to achieve our strategic and financial objectives while reducing risk.

Let me share a final observation from this past year. We’re fortunate to have businesses that are differentiated, well-positioned and highly profitable. We can do better however. We started early tackling the realities of the slowing end markets and geographies.

We have made difficult structural decisions. While these decisions are never easy. They allow us to be more competitive to reduce our fixed cost base, while increasing investment for growth, is our intention to have all the significant restructuring activities behind us as we enter 2013.

With that, I’ll turn to slide five and give a brief summary of our annual strategic planning process that was completed in September. Every year we prepare three-year strategic plan that focuses on accelerating profitable growth through competitive differentiation. These plans are developed by business and they are a critical input to the overall enterprise strategy.

Based on these assessments, our investment choices become clearly defined. I was very pleased with the output of the planning process. While I wish the macro trends will put more [winded] a back, our teams are facing reality and are determined to win in any environment.

Overall, we believe we will continue to operate in a muted macro-economic environment. Our goal, regardless of the macro trends is to outperform global growth by 2 to 3 points organically and deliver consistent double-digit earnings growth, great cash conversion and superior return on invested capital over a business cycle.

To deliver these results, our global strategy is simple, to build global platforms and defensible niches in attractive, highly-engineered markets, where we can create a leadership position and successfully apply the IDEX operating model. This strategy is consistent with the division we outlined last year, excuse me, division we outlined last year.

To deliver this strategy, we have become increasingly more focused on three themes. First, we’ll accelerate organic growth in our core businesses. This will be executed through our platform strategy. We will increase alignment to end markets and regions with the most attractive growth profile. Today about three quarters of our revenue is aligned to faster growing end markets. We want to consistently improve the mix while also moving our emerging market exposure up.

Today that stands at about 20%. While some of the emerging markets challenge the present, we are confident that the long-term trend for superior growth is regions east and south. To enable our growth, we will increase investment in business development, product management and product development.

Second, we identified execution initiatives, specifically focus around core customers and product segments. We’ve had great success over the years deploying mix modeling and commercial excellence capabilities. We’re known by our customers for keeping our promises, the bar must be continually raised, however.

In world of slower, overall economic growth we must continue to have the best quality, lead times and costs. This will enable us to win the competitive battle today and invest in innovation and growth for tomorrow. Our mandate is to over serve our best customers, while eliminating non-value added complexity that continually creeps into a highly engineered model.

And lastly, we are emphasizing more flexible capital deployment to maximize total shareholder returns. Strategic acquisitions will continue to be our primary use of excess cash. However, we plan to repurchase IDEX stock in a more consistent manner and we’ll increase share repurchase -- share repurchases when deemed advantageous.

Let’s go to the next slide to talk more of our capital deployment. I’m now on slide six. We have the ability and is our intention to deploy $1.5 billion of capital over the next three years. We will maintain a conservative structured and long-term focused balance sheet. We will have ample capacity to support concurrent investments.

Consistent with past practices, organic growth will always receive our first dollar investment. With respect to dividends, we will return approximately 30% of our earnings to our shareholders each year.

In addition to organic growth and consistent dividends, strategic acquisitions will remain a priority. We have a long standing and discipline approach to M&A. The current pipeline is solid and we are at various stages of diligence on a number of small and mid-sized deals.

Our acquisitions will focus on building out our platforms to expanding our geographic reach, filling technology gaps and accelerating into adjacencies. As I mentioned earlier, we closed on three small deals this year, most recently Matcon in early Q3.

We believe that our capital deployment must also be flexible, we need -- we need to be able to react and take advantage of dislocation and asset pricing when opportunities present themselves.

As an example, in 2012, we’ve seen the valuation for reasonable quality medium to large businesses become excessive, buyers, strategic and private equity are paying up due to weak GDP growth expectations and the availability of cheap short-term money.

let me be clear, this is not our game. Instead, we’ve been active with reasonably priced small to medium deals and we repurchased shares throughout the year. We would -- we’ve deployed over $150 million between the two.

We will continue this approach as long as current market conditions persist. In terms of share repurchase, last night we announced that our Board of Directors approved an additional $200 million. This is on top of the approximately $50 million that remains from our prior authorization.

Generally, we will target buying a minimum of 1% to 2% of our total outstanding shares annually. The larger authorization gives us the flexibility to increase our share repurchase beyond the 1% to 2% when IDEX is trading at a meaningful discount the company’s intrinsic value and the M&A market is overpriced.

We have outstanding cash flow and terrific balance sheet. To deliver the best total returns to shareholders. We will use these powerful assets intelligently, investing the $1.5 billion for organic growth, consistent dividend, as well as flexible approach to strategic acquisitions and share repurchases. Taken together, we believe we can consistently deliver double-digit annual earnings growth and high returns and capital over the business cycle.

With that, let’s move on to the quarterly results. I’m on slide seven everyone. We had a solid quarter, delivering earnings above the top end of our expectations and with outstanding cash flow. We are executing well in these uncertain times. Demand remains inconsistent, however, particularly in Europe and China. The headline news is real.

Europe is very soft, especially in the south, while Germany and pockets of Eastern Europe are okay. India and China are decelerating, but on the positive side, Southeast Asia is holding strong and broadly speaking, North America has remained resilient.

Furthermore, we’ve seen very tightly managed inventories throughout distribution and OEMs. I will go into this in more detail on our segment discussions but the overriding theme is ongoing volatility in challenge market conditions.

For the quarter, sales were up 1% organically but orders were down 3% -- down 4% organically, and for the first time in several quarters, more sales were generated domestically than internationally, demonstrating the relative strength in the U.S. and weakness in several other geographies.

Third quarter adjusted operating margin of 18.3% was equal to the third quarter of last year. But on an apples to apples basis, excluding the benefit in 2011 from the forfeited CEO equity op margin was up 60 bips.

Third quarter EPS adjusted for restructuring charges was $0.66, $0.02 above the high-end of our expectations. The third quarter 2011 EPS as you recall benefited from two one-off items, specifically, the forfeitures CEO equity compensation mentioned above and a true-up of the 2011 year-to-date tax rate. As of these two discrete items and the restructuring cost in both periods, EPS would have equal in the quarter.

Q3 include approximately $7 million of restructuring as we continued to proactively reduce structural costs. As I’ve said in the past, is our intent for our restructuring activity to be completed by the end of the year.

In Q3, we generate free cash of $92 million, up 7% from the prior year, the $92 million of free cash flow is a quarterly record for the company. The balance sheet remains extremely strong, providing us flexibility, I have already highlighted. I’m pleased with the team success, in spite of challenging external conditions.

Let’s start the segment discussions with Fluid & Metering. I’m on slide eight. For the fourth quarter, orders were up 3% organically or organic sales were down 1%. Our Ag business continues to shine, demand remains strong with double-digit growth, coupled with significant margin expansion. We continue to be optimistic about the growth potential within this business.

Within our Energy platform, we remain bullish on the broader energy distribution outlook, while the Americas and South Asia remain strong, the rest of world especially China faced pressure in Q3.

The current economic environment has truly impacted the project activity for our chemical processing, food business with orders flowing in Q3. With that said, this platform continues to deliver productivity through cost reduction initiatives and operational enhancements.

As we’ve highlighted previously, our water business continues to bounce along the bottom. The industrial portion of the business is solid, while municipal continues to wait for meaningful changes in funding, specifically in our Western Europe. The pattern of high quote volume is biased toward operating spending, but we still see very weak capital spending. These trends are unchanged.

FM team’s operating margin of 21.4% was 130 basis points higher than last year, which once again demonstrates the outstanding job the team is doing and delivering in a difficult environment.

Let’s move on to Health & Science. I’m on page 9. The segment performed as we expected for the quarter. As we discussed during the second quarter call, we knew we’d have typical comparisons for Q3 in orders and sales. Orders were down 9% for the quarter on an organic basis, while sales were up 2% but down 4% organically.

Geographically, Europe and China were weak across the segment, while results in North America were reasonable. The Scientific Fluidics business has found equilibrium, while the concerns about government funding persist as we approach the election and the questions of sequestration. We saw a solid rebound in the analytical instruments and diagnostic markets, and we expect to have positive comparisons in Q4.

Within our Optics and Photonics platform, we are beginning to see the benefits of all the actions we’ve taken over the past year to right size the business. Orders improve sequentially and margins expanded as we’ve driven cost as a system. We also built optics backlog in the quarter for the first time since the CVI acquisition.

Overall, in the quarter, the HST segment reduced backlog by approximately $10 million. This is primarily attributed to softness experienced in our material process technology platform and the businesses with heavier industrial exposure.

Our MPT platform produces large capital equipment for pharmaceutical, chemical and food production lines. In the third quarter, MPT started to feel pressure driven by the constraints of our customers’ capital budgets. This softness is most pronounced in Asia, but was a trend in most markets.

Operating margins of 17.3% were up 70 basis points sequentially for the segment and on apples-to-apples basis, adjusting for the impact of recently completed acquisitions. Margins were up 140 basis points sequentially. The sequential improvements demonstrate the benefits from the aggressive structural actions we’ve taken this year.

Okay. I’m moving on to our final segment. I’m on page 10. Fire, Safety and Diversified, totaled orders in the quarter were down 10%, organically they were down 7%. As you know, the project activity tends to create lumpiness within this segment.

Overall, end market demand for this segment was mixed and largely followed geographic trends. Sales increased 10% and were up 13% organically. As I previously discussed, this quarter benefited from the delivery of large dispensing replenishment order we’ve received in Q1. This order will continue to shift radically into Q1 of 2013.

In the quarter, our dispensing business commercially released our X-SMART, an entry-level automatic colorant dispenser that will provide a tinting solution to a broader base of customers. This initial interest has been tremendous in the emerging markets, as well as smaller retailers and developed economies.

X-SMART is a global product for the paint dispensing market that is being manufactured in a shear facility in India. We believe this innovation is another example of IDEX responding to the voice of the customer and delivering in market demanded products.

The missile fire market is playing now like we anticipated. The U.S. is stable while Europe is becoming more challenges. Budget cuts are limiting capital spent. However, our fire suppression business continues to offset the European headwinds to penetration in AJC markets both domestically and internationally.

The rescue business is experiencing similar transpire. However, one unique aspect is that Chinese budgetary funds are currently being held up in connection with the upcoming provincial elections. We fully anticipate funding and expect to see the benefits in 2013.

BAND-IT continues to be a product innovation and execution story. Regardless of market pressure, they continue to find applications for growth while remaining focused on execution. I’m very pleased with the entire platform in the quarter.

Along with delivering on organic growth, profitability was impressive with operating margin up at 24.8%, up 360 basis points from the third quarter of last year. The margin expansion is largely attributed to structural cost actions previously taken, volume leverage and truly excellent productivity.

Okay. I’m going to wrap up my prepared remarks with a guidance update on slide 11. Q4 organic revenue growth would be relatively flat. FX will have a modestly negative year-over-year impact on Q4 sales.

We have maintained our full-year 2012 EPS guidance to be in the range of $2.65 to $2.70, with organic revenue growth of approximately 3%. Given the current macro environment and starting backlog, we’re trending more towards the bottom of our range. In order to achieve the high end, we would need to see near-term improvement in Europe and China and channel inventory fill from current low levels.

Full year operating margin for the company will be between 18% and 18.5%. Some other modeling items to consider, which maybe consistent with prior guidance, the 2012 tax rate is anticipated to be approximately 30%, relatively in line with our year-to-date rate.

Full year CapEx would be roughly $38 million, and as we have always demonstrated, we will continue to convert cash extremely well in excess of net income for the full-year. Finally, our earnings projections exclude future restructuring, future acquisitions or cost and charges associated with acquisitions.

All right, in summary, IDEX demonstrated resilience in the face of all times. Our businesses are very flexible, and they know how to react to changing market conditions, while always maintaining our customers is our number one priority.

We do continue to see and experienced difficult market conditions, but we are committed to executing through our proven operating model, which has really demonstrated our ability to support organic growth while expanding margins despite external market pressures.

With that, I’m going to conclude my prepared remarks for the third quarter and I’ll open things up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Allison Poliniak with Wells Fargo.

Allison Poliniak - Wells Fargo

Good morning, guys.

Andy Silvernail

Hi, Allison.

Allison Poliniak - Wells Fargo

On the organic revenue growth assumption for 2012, it seems like you guys have obviously ticked it down a little bit. Is there anything specific from Q2 to Q3 that is driving that or is it just general and macro overall?

Andy Silvernail

Allison, it’s really the general macro. I think, like we’ve all seen here in the news and then the recent releases. The big trends continued to be Europe, that’s kind of been and overall as the biggest hole. China in the quarter, as we’ve talked about before, we saw deceleration happening really late this kind of last time last year, fourth quarter last year.

And we saw that in 2Q and 3Q and then, I would say the one thing that might be a little bit different is we get a sense that capital spending -- larger capital spending really tightened up in the third quarter. And from the quote activity that we have, it doesn’t look like that’s a long-term trend. It really looks like that’s some clamping down in advance of the elections and the end of year issues relative to the fiscal cliff.

Allison Poliniak - Wells Fargo

Great. And then you guys did a great job on the execution side. Obviously there is a lot of uncertainty out there, how should we be thinking about going forward in terms of daily get quote down 5%? Do you still have the ability that you think will hold margins relatively flat at this point, I know without the volumes?

Andy Silvernail

Allison, with core down 5%, that’s awfully tough to offset, right. At the same time, we believe that if we saw in our recession, if we saw recession like we did in 2008, 2009 as you might imagine we get this question a lot. We took out mid-$40 million of costs when that happened.

And just to be clear, we don’t have that kind of same amount of cost to take out. We didn’t add back anywhere near the cost that we took out in that time period. But we think we could take out in the neighborhood of $20 million or so if we had a substantial drop. So the way that I kind of encourage people to build up a model and those things is think about the contribution margin flow-through of a drop like that, and then add back on an annualized basis kind of that $20 million rate.

Allison Poliniak - Wells Fargo

Great. Perfect. Thank you.

Andy Silvernail

Thanks, Allison.

Operator

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

Andy Silvernail

Good morning, Scott.

Scott Graham - Jefferies

Same track horse side. You’ve taken restructuring charge in a number of successive quarters, Andy and I’m just wondering, what the cost savings benefit it will be from them? How much have we seen of it and how much is still in front of us?

Andy Silvernail

Scott, we haven’t been real specific with it. Let me give you some general guidance. The cost that we took out again kind of referencing back to ‘08, ‘09, those were costs that came out of regions that typically had quicker payback just frankly because of the structural costs and severance associated with them are lower.

The costs that we’ve been going after year here this year are more expensive cost with a little bit longer payback. If the other ones were called 12 to 15 months, these are more 18 to 24 month paybacks generally.

I would say, we’ve gotten less than a quarter. Is that fair? With less than a quarter eaten in cost out that we think we’ll see on an annualized basis. The reason being is a lot of the stuff is going to get finalize in the fourth quarter, right, the actual costs finally coming out. So, Heath, anything to add there?

Heath Matts

No. That’s right. You’ll see additional restructuring in the fourth quarter, as we wrap up the internally announced items that are in play as we speak. And then obviously you saw the $7 million restructuring number in the third quarter, most of which that we start to see the benefit from late this year but really more in the next Jan.

Andy Silvernail

So think of kind of two-thirds to three quarters, we will see in 2013 and beyond.

Scott Graham - Jefferies

So, but when you say payback, are you saying dollar-for-dollar on the charge?

Andy Silvernail

Yeah. It’s kind of how we think. We think of it as kind of a cash basis. You bet.

Scott Graham - Jefferies

Okay. Now is this incremental to what has historically been this $20 million to $25 million of productivity?

Andy Silvernail

It is. It is. Scott, most of that $20 million, $25 million is going to be more around sourcing activities than restructuring, right. That $20 million to $25 million is kind of shifted more towards three quarters of which, is more sourcing material savings, and the remaining piece being more the operational excellence savings.

As you would expect coming out of the last recession, we just don’t have the direct labor base to work from in terms of that size. There tends to be things more around things that are associated with on-time delivery scrap reduction, overtime reduction and those types of things, so. But the restructuring dollars we are really talking about here are in a different bucket in the sense that they tend to be more associated with facilities going away.

Heath Matts

Overhead. Got it. Right.

Scott Graham - Jefferies

Good. Thank you. Last question is this picture of this balance between acquisitions and share repurchases are pretty big chunks we’ve seen historically from the company. So, I’m just wondering kind of why we hear, I mean I certainly understand the tenants of returns on invested capital and your focus on them.

It’s just that historically you’ve been much more tilted obviously toward M&A, and I’m just kind of wondering, what landed it here? Is it a change in the M&A environment, are prices too high or is this just Andy Silvernail stamp?

Andy Silvernail

That’s a great question, Scott. I appreciate it. We’ve put an awful lot of thought into this over the past year, and it really is a combination of things. So let me first state that our strategic acquisitions remain number one. All things being equal, once we fully funded organic growth and we’ve paid kind of dividend as we’ve kind offsetting range.

All things being equal, we want to do strategic acquisitions. That being said, acquisitions don’t exist in a vacuum, they exist in a market. And there are going to be times when acquisitions are not as attractive and they are going to be times when IDEX is more attractive and we think the same valuation techniques and the same level of discipline thinking are going to both of those.

And so when we see dislocations, we think we ought to be flexible enough to do so. I think we want to be very, very clear. We don’t intend to be a company that is consistently on the far end of share repurchases, that’s not our intention. But when the opportunities present themselves, we want to be prepared to take advantage of that.

And then when you at today’s market, as I mentioned in my prepared remarks if you look at medium and large acquisitions or M&A properties that are of any quality at all, there is a dislocation versus any historical standard that exist right now. You’re seeing industrial properties trading at 12, 13, 14, 15 plus times EBITDA for things that are substantially, substantially of lower quality than IDEX as the whole.

And so we’re just, we are not interested in that game. I guess that’s funny math that we can get our head around. Now at the same time, when you look at the small to medium-sized market, there’s still stuff out there. We’ve got stuff in our funnel today that we are very excited about.

We could potentially close some this year, we will see. It’s a little bit tougher to do right now, but that is smaller, that are of high quality and we can put capital to work that really fits our strategy. As an example, if you look at the three deals we’ve done this year, they average 7 to 7.5 times EBITDA pre- synergy they all fit nicely into our platform strategy and that’s the kind of game we want to play.

Now, we love if they were bigger, if they were three times the size of what they are but we’re going to be disciplined.

Scott Graham - Jefferies

Thank you very much.

Andy Silvernail

Thanks Scott.

Operator

Your next question comes from the line of Robert Barry with UBS.

Robert Barry - UBS

Hello.

Andy Silvernail

Hi, Robert.

Robert Barry - UBS

I just wanted to clarify on the 4Q outlook for sales. I think you said about flattish organically. It sounds like FSD up nicely, HST up maybe a little and FMT down a fair amount perhaps. Is that kind of directionally how you’re thinking about it?

Heath Mitts

Robert, this is Heath. We didn’t specifically guide by segment but I think directionally that’s you’re not that far.

Robert Barry - UBS

Okay.

Heath Mitts

We’re going to -- we’re going to continue to benefit in FSD on the -- from some of the replenishment activity as well as there is a little bit of seasonality in FSD especially with rescue tools business. It tends to have the strongest quarter of the year. It tends to be the fourth quarter.

Robert Barry - UBS

Yeah.

Heath Mitts

So as you think about things on either on sequential basis, you will see a little bit of uptick there. On a year-over-year basis, it’s merely more of the dispensing activity going on.

Robert Barry - UBS

I wanted to just drill down into FMT a little bit on the chemical project activity. I know a big theme, we’ve been talking about for a while is cheap shale gas…

Heath Mitts

Yeah.

Robert Barry - UBS

…investment there, I mean, maybe there is less drilling for gas but the gas is still cheap. Has that dynamic change or maybe within chemical, what’s the dynamic that’s causing that slow down?

Andy Silvernail

There are a couple of things, one is kind of the impact shale gas more broadly and two is is what’s going on in CFP, we call it chemical, food, process. So the shale gas play as we kind of say consistently we don’t play really big in that. We play in the custody transfer side and in the store side to a degree.

We never had that kind of crazy ramp-up that happened over the past 24 months and we didn’t have crazy ramp down. So then we can put that to that side.

Robert Barry - UBS

Yeah. Just talking in the context of a chemical investment that it was engendering?

Andy Silvernail

That’s a good point. What we’ve seen in the overall CFP platform is what I would call is really leveling off right now. A big piece of it, there are two things that work on C. Number one, that the project business that this kind of driven at the OEM level specifically as you look at Asia, that did tighten up in the quarter. There is no doubt about that.

The day rate business that is a kind of flow business is coming through distribution. Generally, that looks pretty good. So less concerned about that than I am about some of the capital stuff but there is some leveling off generally of that business as you know that that has been a horse that we’ve ridden. It’s been incredibly strong for us for a long-time here and we’ve seen growth slowdown a little bit.

Robert Barry - UBS

Maybe if I could quickly shift focus to the margin side and in HST, I know that you had talked about exiting the year at about an 18.5%, mid 18, I think was the comment. How is that trending? I know that the margins sequentially take down a little bit in the quarter. I don’t know if a lot of the restructuring cost should be adjusted out of that 17.3%, just maybe a little color on how you’re thinking about the outlook for the margins on HST?

Andy Silvernail

No, Robert, the sequential margins for the segments actually ticked up about 70 basis points.

Heath Mitts

140 apples-to-apples.

Andy Silvernail

Yeah, apples-to-apples, it’s been 140 because we did have some acquisition impact with the Matcon deal and the costs associated with that deal, both the step up as well as just the acquisition-related costs there. So we’re on track from the cost. Our perspective and that is mainly around the optics platform that we discussed, I think last quarter.

I would say at the current volume rate, we’re probably somewhere between mid 17’s to 18% in terms of that -- where that segment is going to end up for the year on an exit rate. So went down a little bit but that’s really more following the volume trend than anything else. If anything I’d say we’re exceeding our expectations from a costing -- from a cost-out perspective relative to what our plans have been for that segment.

Robert Barry - UBS

Okay. That’s helpful. Thank you very much.

Andy Silvernail

Thanks Robert.

Heath Mitts

Thanks Robert.

Operator

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

Mike Halloran - Robert W. Baird

So on the commentary you made about refocusing or continuing to focus or even more aggressive focus on higher growth end markets, higher growth product categories, higher growth geographies. Does that have any implications for a divestiture strategy? Any change there?

Andy Silvernail

We’ve really remained very consistent with how we thought about any type of divestitures. One of the challenges that we have in the things that get talked about often is that they’re very, very high return on cash-on-cash returns. And unlike some of our businesses that sit within HST and FMT, you don’t have what I’ll call -- there aren’t really a lot of strategics out there. They’re going to get synergy benefits by and therefore can really pay up in this market.

There are really more businesses that would likely be a private equity type transaction and even with the frothy markets that we’re seeing today, those kind of properties are seeing 10 or 11 times multiple. So the answer to your question Mike is we’re not going to sell our business unless we believe it’s absolutely the right thing for the shareholders overall. And that would really have to mean that you got at the right price with the right partner and candidly that’s hard to see happening in the immediate term.

Mike Halloran - Robert W. Baird

So no real change there and then, just kind of walking through that $1.5 billion plus capital deployment and trying to put the -- put the categories in the buckets, if you continue your dividend growth at the pace you’re at, you probably in that $75 plus million of expenditures per year on that side buybacks, $40 million to $70 million, give or take maybe little bit less.

Could you kind of then split how you’re thinking about the internal organic investment side, maybe give some perspective and on how much capital you’ve been spending on that side over the last few years or maybe percent of revenue, percent of cash flow something like that and then maybe compare contrast a little bit on that side?

Andy Silvernail

Yeah. Great question by the way, Mike. As we think about this, you’re right, the dividend is kind of 225 to 250, all up, I think about $1.5 billion as a whole. It probably -- range you laid out for buybacks, all things you’re kind of equal that, that’s probably about right too, right end up, lets just call that $150 million to $200 million plus or minus, somewhere in there.

And so you end up with about $1 billion left right and the reason I say billion left is in that number, we’re already thinking about organic investments being fully funded. We very, very rarely say no to an organic investment.

The return on tangible capital of our businesses is very, very high and therefore we’re able to make these investments and feel very good about them. And even with that, it’s -- they just simply don’t absorb -- can absorb the kind of free cash flow that we throw off.

So now that being said you can tell from my prepared remarks around product development, around business development and around product management. We want to move some more resources across the business ended there but we think we can fund that by kind of taking cost out of other places, some of the overhead cost we’ve been taking out and reinvesting them without having to give up the margin expansion opportunities we talked about.

So what that really does is that leaves about $1 billion for either strategic acquisitions or in a likelihood we would have some kind of event where you can do acquisitions and absorb the kind of capital. We’ll redeploy it elsewhere.

So go ahead.

Mike Halloran - Robert W. Baird

So really basically then when you think about it, you guys have been talking on an annualized basis $300 plus million of acquisitions pretty consistently. Now you flexed up and flexed down a little bit in certain years over the last couple of years but honestly, this sounds like not much of a change from the acquisition standpoint from an intense standpoint, just recognizing that the external environment maybe might not be as conducive at periods of time.

So augmenting it more to share repurchase side but not much of a change in the overall acquisition stand -- from an overall acquisition deployment standpoint?

Andy Silvernail

Yeah. I think, I think that’s a fair statement that would -- I guess, the only thing I would make exception to is that we’re certainly growing, that we think that EBITDA is going to grow and give us more leverage over time but generally we think -- we agree with you.

Mike Halloran - Robert W. Baird

That’s great. Thanks for the time guys.

Andy Silvernail

Thanks, Mike.

Operator

Your next question comes from the line of Matt McConnell with Citi.

Andy Silvernail

Hey, Matt.

Matt McConnell - Citi

Really, I’d like to follow-up on that, how you get it to $1.5 billion because it looks like that’s a nice multiple of what you have been earnings over the next three years. And even if we give you credit for good free cash flow conversion, what else is in there that can get you that $1.5 billion and had you been talking about the number of like 1 to 1.2 previously?

Heath Mitts

Matt, this is Heath. We have been talking about number of 1 to 1.2 and it does assume on top of our free cash flow generation, some moderate room for taking on some debt to the flex up into you know somewhere between 2 and 2.5 times EBITDA if we needed to fund the acquisitions and do everything else, we just laid out there.

Matt McConnell - Citi

Okay.

Andy Silvernail

Yeah, Matt, we have $600 million today on our revolver that’s untapped.

Matt McConnell - Citi

Yeah.

Andy Silvernail

And then, you got the cash flow, an incremental leverage on the cash flow.

Matt McConnell - Citi

Okay. Great. That’s helpful. And then if I could touch on CVI, is there anything big left to do from a cost perspective and maybe if you could give us an update of what the revenue run rate is and maybe where we’d need to get. I know, you had been talking about the mid-teens operating margin? How much more incremental revenue would you need to kind of bring that back to the discussion for CVI?

Andy Silvernail

So generally, from a cost execution standpoint, we’ll finish what we had laid out in Q4. And I’ll say that we are very much on track to execute what we had laid out when we talked about in detail and we’ve more detail rather in our Q2 call.

As I said, the platform as a whole built, overall we built backlog in the quarter. That was nice because we had done that in a while. So I think we’re on track to that. Now that being said, the defense markets and the semiconductor market are still not being particularly helpful, right.

So the overall demand is still not great. We did see a bounce back in on the scientific side and in life sciences generally in the quarter, which is good news. But to get to that kind of mid-teens that we’re talking about we still need a little bit of help on the topline but not of time.

Matt McConnell - Citi

Okay. Great. That’s helpful. Thanks very much.

Andy Silvernail

Thanks Matt.

Operator

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

Charlie Brady - BMO Capital Markets

Andy, with respect to your comment and towards the tail end of your prepared comments when you said somewhere along the lines that you’re trailing towards the low end EBITDA. Can you give us the sense of the tenor of business as you went through the quarter and has that changed much going into the first part of October that leads you to kind of comment?

Andy Silvernail

Thanks Charlie. Actually, the order in sales book was pretty level throughout the quarter. I’ll say it improved a little bit towards the back end of the quarter but that’s kind of typical. That’s not atypical.

October has been okay and when I say okay it’s been coming in line with our expectations. We’re pretty hesitant to call anything different from the trend what we’ve seen in October, just because it’s so early on. We really only have two weeks of view from it. There is nothing in there. At this point, I think it threatens the bottom end of that expectation that we’re talking about.

At the same time, I would say that we’re definitely tracking if the result that we are seeing today in the backlog we came into the quarter with, we expect that we finished at the low-end of those expectations. And I think that’s a safer thing to do.

If you see some rebound from capital spending, if you see rebound -- rebound at all in Europe which we don’t expect in China, which could happen and potentially some inventory fill that’s what get you to the higher end of that expectation but I think it’s very, very safe to say that we -- with that lower end is what we expect at this point.

Charlie Brady - BMO Capital Markets

Okay. Thanks. And on the fire, diversified dispensing side of the business how much of that organic growth is being driven by that sell of the large order that’s going to kind of fill out into Q1 of ‘13. It did bulk of that organic growth or is there other stuff within that business that’s also seeing up?

Andy Silvernail

Everything in the quarter was up modestly. Rescue tools and Band-It did okay. So I mean, I was still getting some significant help at the segment level from that order, but it wasn’t the whole thing now.

Charlie Brady - BMO Capital Markets

Okay. And then just on a…

Andy Silvernail

Even the fire piece on organic basis is held in okay, given the macro trends.

Charlie Brady - BMO Capital Markets

Okay. That’s helpful. Thanks. And just on a largest sort of bigger picture longer-term outlook as we look kind of your commentary about how you want to grow the above global GDP by 200 to 300 basis points and kind of your M&A outlook right now, I mean what do you think kind of the mixes on longer-term organic growth, I guess that’s 200 to 300 basis points above global GDP, but kind of where how much more leverage on organic growth kind of across the cycle or no organic growth, acquisition growth do you think you can get across the cycle given kind of your current framework of how you’re positioning your M&A strategy?

Andy Silvernail

Yeah. If we assume that we can buy a reasonable multiple, so let’s picking average of kind of just say 8, 8.5 let’s just pick that -- pick a number like that. In that kind of environment, you can add five plus points of growth to the topline a year. If you are buying at those kind of rates plus or minus assuming that your buying businesses that aren’t quite as good from a profitability standpoint of IDEX as whole but have the ability to get there. You can add kind of that five plus percent in topline.

Charlie Brady - BMO Capital Markets

Okay. Thanks.

Andy Silvernail

Yeah. Thanks, Charlie.

Operator

Your next question comes from the line of Mike Wherley with Janney Capital Markets.

Mike Wherley - Janney Capital Markets

On the Fire and Safety segment, it looks like Band-It and Fire Suppression have been doing a great job of finding new markets for their products. And I was just wondering, if the sale strategy is being used there, can be used or already being used by your other segments?

Andy Silvernail

Yeah. Absolutely, Band-It has long band, really are shining star in taking applications and finding new vertical markets and going really deep in there. They’ve been very, very successful. For Fire, that’s kind of a recent phenomenon and they really moved into the nuclear side of the market, had some success here this year. We had some impact from the Fukushima event but they really has driven some safety initiatives across the global nuclear power front they’ve taken advantage of.

So, that’s kind of first and second part is absolutely the focus of grabbing on to some vertical markets and going deep is very valuable. At the same time, I think what’s really important is you got to stay close to your core. Our core businesses are exceptionally good and even in places that we have what I call high market share, this deal lots a room for growth.

On a global basis and new applications or new adjacent applications and my real focus with the teams here is let’s maximize our core to the customers that were exceptionally successful with that we over served today and that we know we can make money by creating real value for them. And so, that’s really priority one. But we do, do it, but focus is absolutely on the core.

Mike Wherley - Janney Capital Markets

Okay. And then on the rescue side you said that, you think that this sort of pullback in China is temporary and you expect to get these sales in 2013. What gives you that confidence?

Andy Silvernail

A couple of things, the biggest chunk of the business that we are talking about right here is relative to the Chinese army. And we had some real success in actually signing a long-term agreement there. And I feel very, very good that that spending is going to continue. So, we have an agreement that we think is going to be successful. Unlike, the other players who are in the market, we have an exceptionally strong local presence in China. So, we feel good that that’s going to play out.

Mike Wherley - Janney Capital Markets

Okay. And last of all just on your strategy page, you said that you want to reduce complexity through business segmentation and simplification, can you just add a little bit more detail there?

Andy Silvernail

Yeah. Absolutely, when you look at, at anyone of IDEX businesses, the beauty and the curse of a highly engineered model as you bring in off a lot of complexity into the mix. And as we focused around our best customers and our best products, you can actually take product design, you can simplify product design, you can simplify channel management, you can simplify in the supply chain execution, so getting really tight around those core products and core channels.

And then the long tail in businesses like ours, the long tail tends to creep in over the cycle back and back again. And so, you’ve got to take out that complexity and make sure you’re servicing that long tail well, but they are going to be treated differently than the core. And how you resource in terms of how you align people, how you align really throughout the entire supply chain is pretty important.

Mike Wherley - Janney Capital Markets

Thanks a lot.

Andy Silvernail

Thanks, Mike.

Operator

Your next question comes from the line of Andrew Noorigian with Vertical Research.

Andrew Noorigian - Vertical Research

I was just…

Andy Silvernail

Hi, Andrew.

Andrew Noorigian - Vertical Research

Wanted to touch base on water real quick, I think last quarter kind of sounded like things have turned the corner and maybe you mentioned some signs of life now. Since I could push out past 2013, I was just wondering if anything had change there in the quarter and that what you are seeing in that end market?

Andy Silvernail

What we start to see kind of in the second quarter, specifically in the U.S. as we start to see the order, excuse me, that the quote activity really turn up and just the number of quotes that start to play out. At the same time, if you recall what we said was those quotes were look like they were coming out of operating budgets with smaller over a longer period of time. And they look like things call it necessary maintenance or necessary programs so to speak.

And we said we were cautiously optimistic. And I think what’s happening here and I’m talking about the U.S. very specifically municipal water is the funding just has not broke yet. And we -- until you see municipal receipts substantially change and we’ve said there is a couple times in the past, that’s just going to be tough for that to play out.

Europe, the Europe piece, we’ve been relatively pessimistic about I would say that pessimism was realized in the third quarter. And you’re just seeing real tightness across that the European municipal budgets that they deal with their fiscal issues.

The industrial water piece is okay, that has been solid especially North America, but its municipal Europe that’s the biggest problem. And just we’re not seen quotes turn into -- into order yet in the U.S.

Andrew Noorigian - Vertical Research

Okay. And then going to be M&A real quick, can you maybe flush out where is the priority allocate the dollars are, is it more in HST, FMT, balance approaching, what kind of end markets are you looking at?

Andy Silvernail

First of all, we really like the balance between FMT and HST. We think that’s an excellent balance over a business cycle. It certainly takes out cyclicality. It allows us, it gives us leverage across multiple platforms.

And so, we’ve thought about M&A, is we have the three strategic platforms in HST and three strategic platforms in FMT, and we’ve built organizational muscle around each of those. And its our belief that we’ll be able to far better balance and take advantage of the markets when they are more attractive to us by having that balance approach.

And also, and I think very importantly, that organizational structure gives us more muscled to integrate. And if you look at the acquisitions that we’ve done this year so far, yet they all three are happened to be in HST. And pricing by the way is better in HST generally in the marketplaces.

We paid very reasonable multiples and each of those sit in a different platform and really eases integration and reduces risks. So you should expect to see that overtime. As you move to a cycle, you’re going to get emphasis in one area over another in period of time, but as you move, generally as you go through the cycle, our intend is to really have balance.

Andrew Noorigian - Vertical Research

Great. Thank you.

Andy Silvernail

Thanks.

Operator

Your next question comes from the line of Jim Giannakouros with Oppenheimer.

Jim Giannakouros - Oppenheimer

You targeted ROIC, can you put some numbers to that as far as, I guess, what your hurdle rates are for internal investments or just how you’re thinking about ROIC overtime on future acquisitions, specific to your strategic plan?

Andy Silvernail

Yeah. No problem, Jim. So, let me talk about ROIC more holistically. The way we’re thinking about it and I know people kind of measured sometimes a little differently, so just to be very consistent.

The way we think of it, is EBITDA multiple -- with the tax rate to EBITDA times one minus to tax rate divided by total capital. So, we are looking at a cash on cash returns that include all the goodwill, et cetera, so cash on cash return. As we sit today, we’re sitting at about 11.5% on that measurement.

Our goal over time is to increase that and I think a reasonable goal is going to take few years to get there, is to get to that closer to 15%. Our return on tangible assets is multiples of that, right, its very, very good. And our return on investment for our acquisitions, our goal is 12% by year three and 15% by year five. So we can bring up that average closer to the 50% in total.

So, that’s how we’re thinking about return on invested capital the businesses and it’s not a fast metric, it doesn’t move quickly. But with expansion on the operating earning side and with good capital management, we think we can get there.

Jim Giannakouros - Oppenheimer

Okay. That is helpful. And just one other quick one. I noticed that your CapEx, I’m sorry, if I missed it, if you commented on that earlier, but it seems like you lowered just a smidge by about $2 million or so versus your previous guidance, is there anything specific you can call out there?

Heath Mitts

Jim, this is Heath. No. It just really where our run rates coming in for the year. I mean our CapEx items tend to be things with the average ticket prices of $50,000 or less, so it’s not, we deferred a project or anything like that, but we’re about $28 million year-to-date and with our anticipated fourth quarter number it will be somewhere between $37 million and $39 million, we expect to have another $9 million or $10 million in the fourth quarter. So, no changes there, just a couple million off of our earlier expected run rate.

Jim Giannakouros - Oppenheimer

Okay. Great. Thanks very much.

Andy Silvernail

Thank you.

Operator

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

Matt Summerville - KeyBanc

I just want to follow-up on Health & Science, make sure, I understand some of the dynamics here. So orders were down 9% organically, but it sounded like from a comment made earlier in the call, you expect that business to grow organically in Q4. Can you just help me filling those blanks or bridge that in terms of how you guys get there?

Andy Silvernail

Yeah. I think you might be confusing, one of the comments I was talking specific about the scientific fluidic platform, so that...

Matt Summerville - KeyBanc

Okay.

Andy Silvernail

… help into analytical instrumentation diagnostics, biotechnology. We -- as you know its been a business is really face the most of the funding concerns, call it governmental funding concerns. And we saw, some we saw -- some of that track down in fourth quarter of last year. So, frankly, we get some easier comparables.

If you look at the segment as a whole, we’re still going to comp against the stronger backlog that we had from the optics and photonic platform, and from the -- we had a very strong backlog build coming out of our material process.

So, organics, for HST, probably down 3 to 4 in the fourth quarter, somewhere in there and but, I would say, improving sequential trends, certainly from optics and photonics and certainly, from scientific fluidics.

Matt Summerville - KeyBanc

Got it. So the fluidics piece grows a little bit the MPT piece in the industrial side are the worst kind of hit in Q4?

Andy Silvernail

They are. We had a really, really strong third and fourth quarter MPT last year. And it’s a little bit longer cycle business than you folks are used to seeing with us. And so, that was pretty weak from third quarter perspective in this quarter. And the industrial businesses were also weaker, but that takes a little bit longer to play through the backlog.

Matt Summerville - KeyBanc

Great. Thanks, Andy.

Andy Silvernail

Thanks, Matt.

Operator

There are no further questions at this time.

Andy Silvernail

Well, thank you all again, very much for joining us for the quarterly call. Again, in a difficult market environment, we think the teams are executing well, specifically on profit and cash flow. and that really is going to be our focus as we move forward, continuing to out compete in a difficult environment and make very good decisions on how we deploy our capital. So, again, thank you very much for your time and we will see you in the next quarter. Thank you.

Operator

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

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