IDEX Corporation (IEX) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Third Quarter 2015 IDEX Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Michael Yates, VP and Chief Accounting Officer. Thank you, Mr. Yates. You may begin.

Thank you, Tim. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third quarter financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three-month period ending September 30, 2015. The press release, along with the presentation slides to be used during today's webcast can be accessed on our company's website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Heath Mitts, our CFO. The format for our call today is as follows: we will begin with Andy providing an overview of the third quarter financial results, and then he will provide an update on what we're seeing in the world and discuss our capital deployment. He will then walk you through the operating performance within each of our segments. And finally, we will wrap up with an outlook for the fourth quarter and the full year 2015. Following our prepared remarks, we'll 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 877-660-6853 and entering the conference ID 13604137, or you simply may log on to the company's homepage for the webcast replay. As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release, and in IDEX's filings with the Securities and Exchange Commission. With that, I'll turn this call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike and good morning, everybody. I appreciate you joining us here for the third quarter 2015 call. As we all know 2015 has been pretty challenging. We talked about in previous calls the softness we’ve seen in the Ag market, in oil and gas within the strong U.S. dollar. In the second quarter we noted that we had seen some slippage in industrial distribution in the first half of the quarter and we definitely saw that come back in the third quarter. And while these market conditions are out there and they remain, we have been very focussed on delivering quality of earnings and cash flow making sure that we are funding our best investments internally and also really leveraging the benefits of our well positioned diversified portfolio. I am pleased overall with the execution that we had in the third quarter and we saw some pretty decent numbers given the conditions. We delivered $0.89 of adjusted EPS which is a penny ahead of last year. We had operating margins that were 21.5% which is 70 basis points better than last year, in particular we had impressive margins increase of 460 basis points in fire safety and diversified and I’ll take some time here a little bit later in the call to give some more color there. We also had free cash flow that is $105 million which is a 132% of net income and we continue to focus our capital deployment. We closed the CiDRA acquisition. We divested a small product line business in Ismatec that had $18.1 million gain and we repurchased 911,000 shares for $66 million in the quarter. As I talked about in the second quarter, we’ve also taken further steps to improve our cost structure through restructuring in all segments. In total we now expect to spend about $8 million to $10 million in the year with significant savings in 2016. For the full year we now expect EPS to be $3.50 to $3.53 and even though we have the challenges that I have noted here in 2015 we’re going to take them head on, we’re going to continue to invest in our businesses, we are going to grow in select areas and we’re going to drive productivity across all segments. Again, I’ll give some color here more in a moment, but before I do that let me talk about what we’re seeing in regions around the world, some end markets and also talk about capital deployment. In North America, as we all know oil and gas in the Ag markets have continued to be pretty difficult. As I mentioned before, industrial distribution did soften in the second quarter and continuing to the third and we do expect these conditions to continue here in the fourth quarter. Europe remained stable although we have seen pockets of growth particularly in water and dispensing and we have seen some uptick in our energy business coming out of our European units. This has been offset by the continued weakness we are seeing in Eastern Europe from the political instability. China, the story really remains the same. It’s been in line with our expectations. It has been weak here for some time, but we don’t expect it to deteriorate any further from here. Even though we are seeing some headwinds there are some pretty nice -- there is some pretty nice momentum across geographies in a number of markets and these include life sciences, municipal and in dispensing. In total, we think that our current guidance captures their market conditions that I’ve talked about here. With that let me turn to capital deployment. This has been a real highlight for us in 2015 as we talked about here for quite some time we have a four pronged approach to capital deployment. Number one is really maximizing organic growth, two, consistent dividends, three repurchasing shares when we believe it’s below the intrinsic value of the company and four importantly strategic M&A. On the organic growth front we’ve been investing aggressively and these conditions although they can be difficult they really are fertile times for investing in organic growth. You see a lot of indiscriminate cutting by a lot of it from competitors, and what we’re able to do is really focus on driving productivity, reinvesting into the growth areas and continue to expand margins and cash flow. We’re going to continue to reallocate people and resources towards our best opportunities where we can drive differentiation, we can drive growth and we can gain high relative market share. Some examples here in 2015 are the Viking Motor Speed pump, our fluidics systems for life sciences, our GAST 86/87 Rocking Piston and our StrongArm and Rescue that we launched earlier in the year. Turning to dividends and share repurchase. In the past three years, we’ve increased our dividend by two thirds and in the recent quarter here we are declaring our $0.32 dividend and for the year we’ve repurchased 2.4 million shares for $179 million and you can expect this year about a 3% share reduction here in 2015. In terms of M&A side, we’ve deployed about $200 million this year in three different acquisitions, Novotema, Alfa Valvole and CiDRA Precision Services and those lay across three different businesses within IDEX and the M&A funnel continues to be strong and we’ve got opportunities across our segment. Going forward you should expect to see us continuing to leverage our balance sheet and strong free cash flows in this important strategic priority. All right, let me now turn to the third quarter results. I’m on slide four. Orders were $485 million; they were down 4% in total, down 2% organically. For the quarter revenues were $504 million down 6%, down 4% organically. We’ve talked about the major contributors in terms of oil and gas the Ag markets and slowing North American industrial, however op margins of free cash flow were both very strong in the quarter. Operating margins as I noted were up 70 basis points to 21.5%. Free cash flow was $105 million converting the 132% of net income and as I said EPS for the quarter was $0.89 up a penny from last year. And again overall I’m pleased with the execution and pleased with the discipline that our team that are bringing to this challenging market place. With that, let me turn to the segment discussions. I'm on Slide 5, and I’ll start with Fluid & Metering. FMT organic orders decreased 3% in the quarter, organic sales were down 4% primarily due to the challenges I’ve already discussed. Operating margins were down 120 basis points in the quarter due to lower volume and non cash acquisition charges. Let me note however that if you remove the impact of the acquisition inventory charges for Alpha, FMT margins were actually flat year-over-year so that’s nice performance in the face of some volume declines. In Water services, we’ve had a strong global municipal market in particular in the U.S. we saw municipal business up about mid single digits of the quarter. The U.K. has also had improvements in the market place and we’ve won share with new products and across the platform we’ve had margin expansion and I expect to see that performance continue to really through the balance of this year and into 2016. In industrial I’ve already talked about what we are seeing in the overall markets and this is true in our pump business and we do expect those conditions to continue through the year. However, if you look at North America and Europe, particularly in the Chemical businesses we are seeing low single digit growth and we’re seeing nice momentum as we enter 2016. In Energy, we’ve actually had a surprisingly good story here. Overall top line remains stable in this environment, we’ve kept price and we’ve seen some business uptick in the European and Middle East and downstream projects that have rebounded here recently. This has been offset however by the issues that we are seeing in North American oil and gas. Outside the large projects if you look at North America we’re seeing strength in aviation due to lower fuel prices but our mobile business has been a little bit slacky as we expect the truck builds to slow down into 2015 and in 2016. On the Ag front you know the story very well. We’ve had weakness here throughout the year as we expected. We do expect that to continue in 2016 but again this is a business that in the long term has been favourable for us and we believe we’ll continue to be overtime. All right let me turn to slide six and we are talking about Health & Science. In the quarter, organic order growth was up 2% while our organic sales were down 3%. Margins -- op margins decreased 40 basis points really driven by business mix. In terms of the different platforms, Scientific Fluidics, it really continues to be a bright spot for us. It’s been loosing strength in Analytical Instrumentation, in bio and in the IVD markets and we expect this demand to continue in 2015 and into 2016 In Sealing there’s been a little bit of mixed bag. We’ve seen some nice share wins in semi conductor. All of that has been offset by the weakness in upstream of oil and gas, but -- and we expect these conditions to really to continue throughout the balance of this year. Optics & Photonics has been stable in the quarter. And we saw the industrial and the laser optics business weaker, but underlying life sciences demand has been very solid, and again profitability continues to expand in this platform. HST industrial looks a lot like what we talked about in FMT with distribution softening, but the team has done an excellent job winning business in adjacent markets and continuing to improve productivity. The Material Process, it’s actually a strong quarter for MPT. We saw strong orders and the momentum going to the fourth quarter really across a number of markets particularly in Asia. We expect to see the benefits of this in the early part of 2016 as you know this is a lumpier business for IDEX and we are seeing capital spending spotty overtime, but this is a good news story right now and into the early part of 2016. All right. Let me move onto the final segment. I’m on Diversified on Slide 7. Organic orders were down 8%, and they decreased and organic sales were down 5%. The decline is principally driven by tough comps compared to the fire trailers of last year and softness with BAND-IT really with their depressed energy prices. As I mentioned earlier, we had operating margins that increased 460 basis points and this is a obviously a very impressive performance for the team, but I will caution you not to set that as a new benchmark. In the last few quarters we’ve had outstanding business mix, specifically within the Dispensing and the Fire businesses and we expect in the future to see more normalized profitability. Dispensing has been a good news story for us across the globe; we’ve seen strength in North America and Western Europe and in Asia. The wins that we are seeing have been driven by the improvement in overall construction markets but very importantly the strength of our X product which is growing to grow another 25% this year over last year. In Fire suppression the core North American and U.K. businesses have been in decent shape and although we don’t expect any particularly large projects this year we are continuing to see nice wins in those domestic businesses and excellent profitability driven by productivity across the platform. In Rescue, we did see some delays in projects internationally but the North American business has continued to be strong, eDRAULIC 2.0 has taken share consistently and we launched our StrongArm tool which is the utility tool for fire and for our law enforcement markets and we think this is going to have nice momentum going into 2016. Finally, looking at BAND-IT and as we talked about the conditions have been difficult. The industrial distribution and the oil and gas businesses have been challenging to BAND-IT, but the transportation segment has continued to grow. You know BAND-IT has been a bellwether for us, continues to perform and we have high expectations for the business going forward. All right. Let me conclude now with the fourth quarter and the full year 2015 guidance. I’m on slide eight. For the fourth quarter we now expect EPS to be $0.88 to $0.91 and operating margins of 20.5%. The Q4 tax rate should be around 27% to 27.5% and we expect about a 3% top line headwind from FX. As I mentioned earlier we now expect full year to be EPS to be $3.50 or $3.53 and we expect revenue growth to decline about 2% to 3% and full year operating margins to be about 21%. All just a couple of the modelling items for you for the full year. We now expect FX to impact us by about $90 million for the year compared to $95 million from prior guidance and that’s about $0.20 of EPS impact for the full year compared to 2014. CapEx should be about $45 million. Free cash flow of 120% of net income and again share repurchases should decrease the share count by about 3% for the year. Finally as always we need to exclude the impact of acquisitions both positive and negative and also take out the impact of restructuring charges and the gain of sale from the Ismatec product line. With that, Tim let me turn it over to you for questions from our audience.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Halloran at Robert W. Baird.

Can you hear me?

Yes, hi Mike.

Okay. So, a couple of one’s here. First, on the HST side, you know I was a little surprised that organic revenue declined in the quarter but obviously the orders were pretty solid. So maybe talk a little bit if there was any blips in the quarter specifically that would’ve maybe changed what the run rate is in that business and how you are thinking about the progression as we move into the fourth quarter in 2016?

Yes so Mike on HST in particular things that were touching the scientific world life sciences in particular we saw strength anything touching food we had strengthened. It really -- that any weakness that we saw in the quarter was due to the industrial portion of it, principally around GAST. You know that been -- a lot more like FMT and that is any slowness we had there. The core scientific and health pieces of the business performed very well.

And as you think about that on a run rate going forward is this an area where you are expecting organic growth in the fourth quarter or is that something that might normalize out as you hit next year in some of those MPT projects that you mentioned start rolling through.

So if you think about 2016, I would expect that to be the case I think you’ve got nice strength in Life Sciences and we will see in the early part of the year the benefit of the projects for MPT shifting. In the fourth quarter, net net I think you end up being flat year-over-year.

And then more broadly as you work into 2015 here -- yeah I understand completely you are still going to be FX headwinds. As you worked into 2016 maybe you can just talk about some of the thoughts you guys are having internally going into next year, what are the buckets where you think that growth is going to be achievable as you hit next year and where do you think the headwinds are going to persist as we go into next year? Is that just an early read on what you are seeing in the environment today and what that tells you about next year?

I think the biggest headwinds we are going to see are going to be in the first and second quarter, which I think they will be meaningful, right. So the fall off in spending that I think everyone has experienced relative to the capital projects in oil and gas I think they really, in terms of from a comp perspective they are going to be tougher in the first and early in the second quarter and get a little bit easy as you get into the third and the fourth quarter next year, I think that will absolutely be the case. You know Ag is a little bit of wild card to be honest with you, Mike it’s a little bit tough to find the bottom there. I think everyone -- you guys have seen what’s happened with the big capital producers, but net net I don’t see that as a big negative. You know going into next year I think that biggest question mark is going to be what happens with industrial because the North American industrial business and what happens with China. Those are the two things that I think are the biggest question marks going into the really the fourth quarter. I think the fourth quarter we got pretty dialled in, but I think as you go into next year those are the biggest things. In terms of upsides, I think municipals can continue to be good. All signs continue to point to that, and I think that the scientific piece of our business in Life Sciences whether it’s analytical instrumentation or bio IVT, those are good new stories to come you know really across the board. And you’ve had a lot of headwind from you know FX that you know we start to lap here as we get into the back half of this year first part of back half of the fourth quarter first part of next year. And we’ll see how that plays itself out. But, Mike I’ve said pretty consistently that I expect 2016 to be a slugfest. I don’t think it’s going to -- that market conditions are going to be meaningfully different from what we’ve seen and it’s going to be about being very smart with internal capital deployment meaning where we invest in our businesses, driving productivity and very smart external capital deployment.

Thanks a lot. And just one last one from me, obviously grade FSD margins, recognizing that those aren’t sustainable, you highlighted the normalization you expect, how do you define normalization? Is that towards something that 26 kind of range for that segment on the margin line or should we be thinking about a little bit different now?

Mike, I think modelling is -- you know given the relative size of the segment within the portfolio you know $1 million here there can swing the percentages round quite a bit. So but I think modelling probably between that 26 and 28 range is fair.

All right. Thanks guys, appreciate it.

Thanks Mike.

Our next question comes from the line of Steven Winoker at Bernstein. Please proceed with your question.

Hi, everybody. This is Peter Lennox-King on for Steve. I was wondering if you could maybe talk me through a little bit more detail on the restructuring front. Is the allocation between the segments for the remaining $3 million to $5 million or so that's in the guidance, is that allocation going to be similar to what you had in Q3? And then could you talk through a little bit of the payback timing, the magnitude and where – how big the benefits will be for each segment as much as you can?

I think the spread as you noticed in our adjustments that we made by segment was a little heavier towards FMT and HST in the third with the Fire and Safety, the Diversified business only receiving about $300,000 of that charge. It will probably be a little bit more ratable in the fourth quarter, but still heavier towards FMT and HST. In terms of the aggregate payback for that, so we're going taking a charge of somewhere between $8 million and $10 million in the second half of the year. You can assume that, that payback has somewhere less than the one year payback, so obviously the benefit from that which we will quantify as we go into next year's guidance here on our January call will be somewhere north of the charge.

Okay. Thanks. And then maybe shifting gears a little bit back to capital deployment. Can you talk a little bit about the M&A pipeline, how you thinking about getting more aggressive, less aggressive in the current environment with other volatility. And then again as much as you can which segment you're sort of targeting or which businesses you're looking to really move on?

So, Peter in terms of the segments we actually looking at things across the three segments. And there are some things that we've been cultivating quite some time piece of things that have deployed in the recent past that make our pipeline pretty attractive. We feel good about where our pipeline is generally both in the near term and in the longer term. And so, we feel pretty good here about our ability to execute on M&A. Maybe in the balance of this year, maybe not, we'll see. As you know these things move around quite a bit, but certainly as we go into 2016 we have an expectation of doing so. And as you know, we've made an important organizational change here in earlier this year and a big piece of it was really freeing the organization to be more aggressive around M&A. We've got a great balance sheet as you know. Our cash flows are terrific. And we think that we have the organizational structure to do it. The environment is an interesting one, right because this is an environment as you pointed out, Peter, is very volatile. At the same time as you say, sometimes you got to take cookies when they are passed. And there are some pretty nice properties that are out there. You may not buy them at the perfect time, but at the same time we understand what we're looking for and we're looking for businesses that are structurally fit over the very, very long terms and are going to deliver high returns for shareholders.

Great. Thank you. And just one final follow-up there. The aggregate spend over time that you're look at, is that still thinking about the same, same sort of size, range there and the same individual – size of individual deals as well?

Yes. I mean, our sweet spot is that kind of $50 to $200, $250 million that really is our sweet spot. As I've said in the past there are few things that are larger that are north of $1 billion, that we look at consistently. Those are few and far between. But there are some that are out there. But our sweet spot and where we really drive value for shareholders is in that $50 million to 250 million dollar range.

Great. Thank you very much.

Thanks, Peter.

Our next question comes from the line of Matt McConnell at RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, guys.

Hi, Matt.

So, guidance for the fourth quarter, it seems like organic revenue declines are moderating. Is that what you intended to incorporate in the outlook? And how much of that it's coming from an easier comp in Fire and Safety versus any kind of stabilization or sequential improvement in the other two segments?

Matt, we're not expecting sequential improvement. It really comes down to comps when you look at the fourth quarter. I think this environment right now is squishy enough that any belief that we're going to see a material change in the external environment in the fourth quarter I think that will be misplaced.

Okay, great. Thanks. And just a quick follow-up, Andy, you made a comment that China, you don't expect to deteriorate from here. Is that based on specific customer conversations or just? What gives you the confidence to make that kind of declaration?

You know, we've had a pretty tight beat on China, if you remember, if you look back even, a year or 18 months ago. Yes, we started talking about the fact that we thought the China was meaningful weaker than call it the headline commentary. And for us it really is kind of looking at the underline business and where we are seeing demand, our Richter business in particular continues to be strong in China and that's been our real winner for us. We do expect our rescue business to pick up here as we look at the balance of this year and into 2016. So, it's much more specific to the businesses that we're in versus a call on the China economy.

Yes. Okay, great. Thanks. And last one just a follow-up on the capital allocation question, could you been really aggressive with the buybacks, but clearly pretty happy about the M&A pipeline and opportunities. Is there a self imposed leverage threshold where you might slowdown the buybacks? Or what kind of deal do you have capacity for right now given that you spend quite a bit of your free cash flow this year?

You know, we're still only sitting at just north of turn in net debt, right. So we've got a great balance sheet. So I'm not awfully concerned about that and obviously the free cash flow is very, very strong. When its all said and done, when you put the two side by side our preference is strategic M&A, it certainly creates more value unless you have a major dislocation in the stock price. And so, obviously as we move down that path and as deals come through we would naturally slow down M&A. But – excuse me, slow down repurchases, but let me know really clearly, our repurchase program is 100% driven and what we believe the intrinsic value is of the company. And you'll see our acceleration or deceleration based on a very, very well thought out analysis of what we think that is. So, as an example when we saw the stock kind of dropdown into the 60s earlier this year, we were lot more aggressive than we are today. And when the stock is up closer to 80 we were then buying back closer to half to 1%. So, strategic M&A is number one, we got plenty of capacity to do that and share buybacks are driven 100% above value.

Great. Thanks very much.

Thank you.

Our next question comes from the line of Kevin Maczka at BB&T Capital Markets. Kevin, please proceed with your question.

Thanks. Good morning.

Hi, Kevin.

So, kind of an encouraging comments here within FMT on the muni water side and really on energy side too. I'm wondering if you can say a little bit more about that muni water spend. What you're seeing, how you think that plays out going into next year, if there's any kind of submarkets that are driving that? And then on the European energy side, what's driving the pickup there?

Sure. On the muni side, couple of things, number one, a general uptick in overall spending driven by tax receipts. And we've talked about for a long time that there is any time you start to see major movements in tax receipt there's kind of 12 to 24 months lag or lead time depending upon which side of a cycle you're on. And so those tax receipts are starting to lift all boats so to speak. There's just more money in the CapEx and in the OpEx budgets in the Western parts of the world than they were 12, 24 months ago, so that's one thing. The second thing is it's really our strategy in particular in water services has paid off. So we have continued to win share in our target markets, target applications and that's what's driving the success above and beyond markets. So as I look at 2016, we know what's in the co-pipeline. We know what we won and we believe we feel pretty confident that market is going to be better than there was this year and certainly better than it's been in the last couple of years. So, in combination its not like it's roaring at high single-digit or double-digit, but a solid mid single-digit in the U.S. in municipal water, that's a good piece of news generally. In terms of the energy side, I wouldn't get too excited about that. And what I mean by that is our holding our topline; you've got to remember a couple of things. First, we really don't play very much in the downhole side of the world, right. So as we said in the past, that's been 2%, 3% of our total portfolio for IDEX, obviously that 2% or 3% has been battered this year with the reductions that you've seen. But we mostly play in that midstream market that is held up better, so that's kind of one thing to remember. Second thing is we've had some really nice wins in aviation, that have been really share wins for us and we've seen that across the globe. The third is there are number of projects that we've been on top of that -- in the past we've talk about the fact, they got pushed out and we didn't win. And we're starting to see those flow through in Europe and the Middle East. I would not say that is commentary about the health of the overall market, but more so our business unit performance.

Got it. And Andy, in terms of price, it sounds like you've held price on the energy side. Are there some other areas whether it's in FMT or beyond where you've been able to get some price or maybe you had some pressure?

Actually, no pressure. I mean, we get the letters that everybody else gets from our customers. But at the end of the day, we'll command what, Health north of a point this year, right around the point. A - Heath Mitts Right, around the point.

Yes. We'll get a point of price here before the inflationary impacts in terms to net it out. But we'll get a point of price this year with no significant places of price pressure.

Got it. And just finally from me on mix, from time-to-time it can be such a big margin mover this quarter. Of course we saw it in FSD. And it doesn't sound like you're expecting that sustain. But I'm just wondering kind of across the portfolio is there anything in terms of the visibility that you do have that we ought to be aware about in terms of mix, either positive or negative as we look at Q4 or maybe even in the next year?

Well, a few things. Generally as a portfolio the only place we see mix impact us significantly is in FSD. In the last two quarters that has been, obviously its been a good news story for and we're caution you guys not to build margin assumptions north of that 28% range to 26% to 28%, that Heath gave earlier, I think that's a healthy place to be. In terms of FMT or HST, I don't expect there to be major mix shifts within those businesses here and there, but not enough to long term change the trajectory of the business. Within FSD in particular, right, on the margins, if you go back in time, the margin there have been moving up substantially. We really improve the profit profile of fire and of dispensing. And that has change the overall profit profile of FSD. We're at the point now where I don't expect to kind of gains we've had to replicate themselves and I think we're in a pretty good spot there in particular.

Okay. Thank you.

Thanks, Kevin.

Our next question comes from the line of Allison Poliniak at Wells Fargo. Please proceed with your question.

Hi, guys, good morning.

Hi, Allison.

Just going back to MPT, obviously more positive on there, when you talk about that order growth was it essentially projects that we should have seen in 2015, got push to 2016 and I guess what the risk if that's the case to 2016 orders right now?

So, as you know Allison, this is – if we have any place that's lumpy, this is it. And you can see some pretty significant swings that can move the organic orders and organic sales for HST in a quarter in a more meaningful way than some of the other businesses. So, what you're seeing right now is we had some nice wins here in the quarter that help certainly on the organic order front and they really going to shift in the second part, excuse me, in the first part of 2016. In terms of what that means looking forward, at this point we don't have visibility kind of for the fourth quarter and third quarter and orders that might look like this. Maybe we got a lot of stuff in the hopper, but there's nothing that makes me particularly excited or particularly concern relative to that and how it would be play out in the fourth quarter and therefore later in 2016.

Great. That's helpful. And I'm sorry to go back to the FSD margin. If I'm looking at nice expansion this quarter, I guess based on your commentary can I assume half of that was driven by mix with the balance being the productivity efforts or is my math off?

It's probably a little bit more than that. In general the mix impact I would say, its probably more like two-thirds to three quarters and I'm kind of thump nailing on it here. But the productivity, we definitely saw nice productivity, but we did have a meaningful mix shift in those two businesses.

Great. Thank you.

Thank you, Allison.

Our next question comes from the line of Joe Radigan at KeyBanc. Please proceed with your question.

Thanks. Good morning guys.

Good morning.

The sequential margin decline in FMT and HST, was that largely a function of the inventory step up and then more generally how do you think about margins sustainability across IDEX, and what looks like its going to be a relatively protracted slow growth environment going forward here?

So, specific to FMT, the step up, that was a meaningful impact from quarter-to-quarter ended I said, it actually normalized for the inventory step up charge on the year-over-year basis FMT margins would have been flat. So you kind of back into what that tells you there. So, really on volume being down modestly, pretty nice performance in the business in terms of profitability. From an HST perspective, nothing really meaningful in there, there's nothing that I would signals one way the other any change in margin profile. If you look at the longer term, we've said pretty consistently that in a low growth environment call it 2%, 3% somewhere near. We can get 50 to 80 basis points maybe up to 100 basis points depending upon what happens in profit improvement. But if you look at – if you're in the 2% range you're probably looking at 50 basis points, you're in the 3% range, you're probably looking at 80 basis points of expansion. Just because our contribution margins are in the low 60s, snd so that plays itself through very helpfully and we can continue to invest in the business. Obviously if we get a benefit and few things pick up faster, you're going to reinvest even more which you're still going to see really, really nice margin expansion. So even if we continue to be in this environment, I feel good that if we see just modest improvements in top line we're going to continue to expand margins in the core portfolio.

Okay. And then, within the optics and photonics business, that I think commentary for the last few quarters has been stable, maybe weaken a little bit this quarter, but what needs to happen for that business to start growing again, is it really the industrial and market that's holding it back or what, any commentary there?

It is, right, so if you look at – if you separate out the life science piece which is performing, continues to perform well in the core life science market. You're now talking about the industrial and the semiconductor market and in both of those and either one of those had been particular strong. So -- and also to be fair to our team running the business there, we have been really tight on making sure that we're going after attractive business, and so part of it has been self-proposed to make sure that we're going after the right business there. But if you get an improvement in the industrial and the electronics world you will see some nice pickup.

Okay. And then maybe lastly Andy, as you look at acquisitions, how do you get comfortable with the forward projections in this sort of demand environment. Is that -- has that been an impediment in getting deals to the finish line? Or how do you think about that?

So, the way I kind of thing about is what's the business is going to look like through a cycle and you'll never buy perfectly, right, but what you're trying to avoid is buying something that's going to have kind of really aggressive secular downturn number one, or something we are really buying on the comp. And those are the two situations that you get yourself into trouble in terms of kind of building in any type of -- from a growth perspective. Generally, we're looking at businesses. I'll use Alfa as an example, right, so, Alfa is a business with 30 plus year still based. You can kind of look at it through a cycle and even if you don't buy it perfectly, buy it from a perfect time in the cycle, by the time you get on the back half of any kind of slowdown you're still thrilled, you own the business. So, you have high cash on cash returns, high cash flow businesses. You know what a cycle generally is going to look like. You may not pick it perfectly, but if you're buying and what I call an IDEX like business you don't have to time the market perfectly or get the price exactly right to having be a huge winner for you over time. And so, we're more looking for a quality of the business to recycle, high cash on cash returns in a business, strong repeat business installed based, a big mode defensibility and high relative market share. When you get that right, timing becomes lesser than issue than one might think.

Got it. Thank you.

Thank you.

Our next question comes from the line Bhupender Bohra at Jefferies. Please proceed with your question.

Hi. Good morning, guys.

Good morning.

You guys actually spoke about industrial distribution business kind of weakness what we have seen here. Could you talk about like destocking, is that one of the issues within that the end market. And how long do you think if you have availability on that like the destocking or the slowdown within the distribution channel will last?

So, as we've said in the past unlike I think some of our peers, we don't have kind of what I would call a traditional industrial distribution channel. So we're not dealing with the big catalogue houses per say. We're dealing much more with value added distributors. So, we don't have huge stocking levels in the channel anyway. You have some obviously that's driving a lead time, and on time delivery, but you don't have months, and months and months of stocking in the channel. So, while I'm sure that is part it. I'm sure, part of what we're experiencing right now and others are experiencing has to do with them being tighter. I do think that you're seeing overall demand slaking. And then inventory in the end market I think it's tightening substantially. So, if you want to put destocking moniker or something, I would say its more at the end user who's gotten cautious. You have seen the repel effects just like we are, right, we're tightening down and working capital has been just slowing and you're seeing that play out across the landscape. And I do expect that to be tightened. And just like we've seen in the past when that starts to loosen again, you'll see a nice pop and that would be surprising upside in the quarter at some point. But right now I really that what we're all seeing is mostly a slowing of aggregate demand with a little bit of impact of the concept of destocking.

Okay. Thanks a lot. And the other question, we have about $8 million to $10 million restructuring this year. Let's say, I don't know how much visibility we have for 2016, but can we actually if need be, if the environment actually slows down further and as we are looking at North America which is half of your business, seeing some slowdown here, again this morning like there were many other reports which came out talking about the weaken in the North America market, like what kind of cost cuts we can further kind of depend or kind of tap into some of the buckets that we can talk about?

Bhupender, rest assured that if we continue to see the market downturn, we'll continue drive this types of savings that we need. I think you've seen that overtime with IDEX and know this. It's built into the way that we think about reacting to positions in terms of where we say cost structure wise. But also know that we do have areas that we need to continue to invest and we're not starving those parts of the business. It's important for the types of businesses that we have or we get spec [ph] on to platforms and instruments and so forth that we continue to invest, not miss those cycles. So, now the balancing act as always is to continue to make sure we free up the dollars to invest in the growth areas and the areas that are more strategic and require incremental investments and then go after the areas that tend to be more volume based and see as we do have pockets that we go after maybe.

Okay.

We feel pretty good about the actions we have relative to our assumptions set for 2016 and we quantify some of that in the January call.

Okay. That's all. Thank you very much.

Thank you.

Our next question comes from the line Joe Giordano at Cowen. Please proceed with your question.

Hi, guys. Good morning.

Hi, Joe.

Just a follow-on with the destocking question and I fully understand, I appreciate what you said about where you guys fall within that, but can you get the sense that your customers are more – are they destocking in an anticipatory fashion like more so than actual demand might require this time or they kind of anticipating even further declines from here? Do you get that feel?

It's hard to get that. Obviously, we're pretty close to our customers. I think cautiousness is out there across the board, and so there probably is some of that – probably the best way to think of it is look at ourselves, right and how we're behaving. And as we see in this environment we are tightening down our overall inventory and being more cautious about what we bring in and what goes out. So I think there is a level of cautiousness out there. They can start to feed on itself a little bit. But to be candid, Joe, I don't think I have tight enough bead to be able to call that exactly what's the mix of actual demand versus cautiousness. I mean, typically as we always see people react too slowly at first and too quickly at the end. It is always a mix of that. But I think right now I think we got a pretty good bead on certainly what the fourth quarter looks like and I think that next year is going to be a pretty slow growth environment.

Great. Appreciate it. Thanks, guys.

Thanks, Joe.

Our next question comes from the line of Matt Summerville at Alembic Global Advisors. Please proceed with your question.

Thanks. Good morning, guys. Couple of questions. First, just in terms of the global chemical market, it's not an inconsequential end market for you guys. It's about 20% or so FMT. Can you give a little more specificity regionally what you're seeing there and I guess again high level, I get it how you're thinking about that for 2016 and then I also have a follow-up?

So, Matt, what we're seeing in North America and in Europe is I'm going to call it a low single-digit growth environment, and so its holding up pretty well. China has been a little bit better, but I think that's driven more by our own actions particular with the Richter brand than it is necessarily what we're seeing in end markets. And India has been pretty good for us too. So, really across the board in the markets that we play in chemical has been – I'm going to call it good new story in a slow growth world. So it's not like its racing ahead, but it's been solid. And I expect that to continue into 2016. If you look at the business in terms of the pipeline what we're looking at, our expectations coming out of our unit, I think expecting a low single digit environment 2% to 3% is probably a good place to put your bets.

And then with respect to China, since you specifically brought it up talking about chemical. When you came in to 2015 what did you expect your organic growth rate to be in China and where do you actually think it ends up for the year?

Are you talking about chemical or you talking about China in total?

Total IDEX, China?

Okay. So total IDEX China. So, we expect it kind of mid single-digit growth China for the year. And remember that said, China is low – it's kind of a 5%, 6%, 7% of our total business, so doesn't necessarily move the needle in total at that level. And we've been plus or minus in that area. We have not been particularly disappointed nor are we overall pleased. So it's about at our expectation so far this year.

And then just one last one with respect to oil and gas, and if you look across all the businesses that get impacted whether they been an FMT, HST or FSD. If you look at that 11% to 12% of total revenue that's in oil and gas, you mentioned that you're going to be relatively flat for the full year. Can you bracket that a little bit upstream is going to down X percent, mid and down are going to be up X percent if that be the case, just a little more granularity there, please? Thank you.

I'm going to spit-balling a little bit here Matt, so don't take this as gospel. But I know well exactly what's going on across our portfolio if you look at the upstream piece. Again, that was kind of 3% of our total business coming into the year, its more like 2% of our total business as we exit the year, so you're talking that's down a third. You think that are upstream. The midstream is going to be decent. So we don't play a lot as you get towards the pump so to speak, we don't play a lot there. But in the midstream which is a bulk of our business, that's going to be kind of flattish with our aero business being strong and our mobile business, it was actually strong in the first half of the year and its going to soften here in the second half of the year particularly as we look at truck built. So you know that net-net that probably ends up being flat for the year.

Got it. Thanks a lot guys.

Thanks Matt.

Our next question comes from the line of Brian Konigsberg at Vertical Research Partners. Please proceed with your question.

Close enough. Thanks, good morning.

Good morning.

Hey I just wanted to touch, just a little bit more on price cost and maybe I just read a little bit too much into it, but I guess I’m used to you guys getting a little bit of net price maybe about 50 basis points net of inflation. It sounds like you are saying that’s kind of more flattish now, I mean is that -- has that deteriorated a little bit or is it just where we are describing it?

No I’m sorry if you are confused by that at all, if we didn’t communicate that well. No we’ll get -- we’ll get a point of price and we’ll certainly get our typical you know half of that net of inflation. So, when it’s all said and done it will be margin accretive to us for the year.

Okay, so about 50 basis points for the year is still the expectation there.

That’s right. And that net of material inflation.

Net of material and bureaucratic inflation?

You see…no net of material inflation is how we think about.

Okay, net of materials. Got it. And then just secondly, just on working capital so there’s just been some discussion about on the energy side which may not affect you as much as some tightening in collecting receivables just with the industrial environment the way it is and are you guys seeing any stress kind of collections within the custom base that might pose a challenge in working capital?

We have and now we have a pretty conservative approach to places of the world that we tend to have in terms of more receivable risk in the emerging markets where we tend to do things on letter of credit or cash advance. But in the more mature markets where credit terms are issued we have not seen any degradation there. You have to remember we are dealing a lot times with people there, larger customers and people that we’ve done business with for many years.

Got it. Great, that’s it from me. Thanks.

Very good. Thank you.

At this time there are no further questions in the audio portion of this conference. With that being said, I would like to turn the call back over to Andy Silvernail for closing remarks.

Thanks Tim, I appreciate it. And you know once again I thank everybody for participating in this call and certainly for you know the support and the interest in IDEX. You know obviously we are facing a world that’s challenging. It’s -- we’ve got some headwinds here and we expect that those are continuing in the balance of the year and into 2016 but across the board I am very pleased with how we are executing and really focussing on where we are going to put our resources in terms of organic growth and margin expansion and on the M&A front. So I appreciate it once again and we’ll talk to you here in 90 days. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful rest of your day.