IDEX Corporation (IEX) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the IDEX Corporation Third Quarter 2016 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, Mr. Michael Yates, Vice President, Chief Financial Officer and Chief Accounting Officer for IDEX Corporation. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer and Interim Chief Financial 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, 2016. A press release, along with the presentation slides to be used during today's webcast, can be accessed on our company's Web site at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO. The format for our call today is as follows. We will begin with Andy providing an overview of the third quarter financial results. We will then provide an update on our markets and geographies and discuss our capital deployment. We will then walk you through the operating performance within each of our segments for the third quarter. And, finally, we will wrap up with our outlook for the fourth quarter and full year 2016. Following our prepared remarks, we will then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering the conference ID 13620008 or you simply may log on to our company's home page for the webcast replay. As we begin, a brief reminder, this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks Mike. Hey, I appreciate everybody joining us here for our third quarter conference call. As we get into the details here, I want to lay out a couple of very important messages. In the face of continuing macroeconomic challenges, I think there are three critical things to take away. The first is our execution has been outstanding. Whether it's profit execution or cash execution or focusing on our critical niche markets in our profit pools, our teams have done really an exceptional job around that. Second, I think we can note the power of our disciplined capital deployment, and I will go into that in detail as we walk through the call here. And, three, we are extremely well-positioned with our balance sheet and our cash flows to continue with our disciplined capital deployment to drive total shareholder return. And so as we go through the discussion today, I think those are the three key messages to keep in mind. In the quarter, we saw a ratable up tick in orders throughout the quarter, as we did in the second quarter. We delivered 2% organic growth, and that's the first time we've seen that in six quarters. And overall, the results were strong. Our orders were up 9%; our sales were up 5%. Again, organic orders were up 2%; organic sales were down 2%. We had adjusted EPS of $0.92, which was up $0.03 or 3%. But please keep in mind that included a $4.6 million inventory step-up charge related to AWG and the SFC acquisitions. Our adjusted operating margin was 20.9%. That was down 60 basis points from last year, but it was negatively impacted by that step-up that I just noted of $4.6 million. In the fourth quarter, we are going to have a remaining $5.2 million of step-up for the SFC acquisition, and I will go through that in more detail. But I think it is important to note that in the quarter, we saw an impact of about $0.04 a share in step-up, and it impacted our operating margin by 90 basis points. In the quarter, we had tremendous cash production $125 million of operating cash production and $114 million of free cash flow, which I will note is a record. We did close the two acquisitions in the quarter, AWG and SFC. AWG was on July 1 and SFC was on August 31. And we are delighted to have both of them as part of the IDEX family. And I will talk a minute more about how they fit and our outlook for those businesses. Additionally, we divested two non-strategic product lines in the quarter, and we did the third here in the first part of October. We also made the decision to utilize $125 million of our overseas cash to partially fund the acquisitions. That did come at a cost of about $5.2 million in the quarter and it raised our effective tax rate to 29.6% versus our guidance of 27%. That had a $0.03 negative impact on our adjusted EPS for the quarter. And, again, I'm going to -- in just a few minutes, I'm going to take some time and walk you through the puts and takes so you can get a clean sense of what our operating earnings were for the quarter and what you should expect going forward. Before I do that, however, let me talk a little bit about what we're seeing in our core markets and geographies. Really the trends remain the same from what we have been talking about for the last three quarters or so. In our energy world, demand does remain weak. It impacts our energy, our banded and ceiling solutions platforms, but it is certainly no worse than we have seen at any one time, and we have talked about stability in some of those markets. And that goes true for our industrial world, especially in industrial distribution. We have seen stability; we talked about that in the second quarter. And we have seen sequential stability from Q1 until today in certainly in our day rate business. On the ag side, ag prices continue to be depressed. We did see a little bit of upside here in the quarter for the first time in quite some time. And although we are certainly not calling an improvement here, we do believe that we've seen a bottom. Life science and scientific fluidics continues to outperform. This has been a great story for us for quite some time and it will be going forward. Our core markets of bio, analytical instrumentation and IBD are all doing well. With that said there has been some news lately about what's going on in the genetic sequencing world, so I want to take a second and just address that. First and foremost, that is a great segment of the market that is going to grow double-digit for the foreseeable future and is going to have legs for a long time to come. And so, we like our position in that market, we like our -- where we are positioned with customers in that market. But also remember we don't have a single customer within IDEX that represents more than 2% of our sales. And so there has been some -- we have seen some commentary lately suggesting that it is substantially higher than that, but I just want to make sure that we were accurate: that no customer represents more than 2% of our sales. We are bullish about these markets as we go forward, and we will continue to make bets aligned with those markets. Municipal, it remains solid, and we do expect to see modest increases going forward, as we've noted in the past discussions. Around certain regions, North America, the story here is really around what is happening around industrial and energy markets, principally around industrial distribution. And we expect that to be, as I just mentioned a minute ago, stable, but really no signs yet of recovery. Europe, obviously with what's going on in the U.K., it brings some volatility. We haven't seen any direct impact to our business in Europe. It has been positive for us this year, especially around our dispensing and our water businesses. In China -- or Asia, rather, China has been muted. And India has been a very good new story for us, especially around our fire, our rescue, our energy and our dispensing businesses. All right. Let me pivot for a moment and move from markets to talk about capital deployment because that's been a big piece of our story here in 2015 and now 2016. If you think about our value creation model, it is very much supported by a balanced and disciplined capital deployment strategy. And we're going to fully fund organic growth. We've always made a commitment to do that, and we will continue to do that. We are going to pay consistent shareholder dividends. We will buy back shares when it makes sense to create value, and we are going to focus on executing in M&A. We've got a great balance sheet, strong free cash flows and a good acquisition pipeline as we think about the balance of 2016 and certainly into the future. On M&A, we have put over $0.5 billion to work here this year including AWG, SFC and also Akron earlier in the year. If you think about AWG and Akron in particular, it has helped us build a terrific fire and safety platform. We have channel opportunities, we have innovation opportunities and we certainly have cost opportunities to drive this portfolio into the future. We also completed the acquisition of SFC Koenig on August 31. That cost us €217 million and we have got a great business here based in Switzerland. They are a global leader around highly engineered metal-per-metals seals. It really focuses on high pressure and high temperature and transportation to hydraulic markets, but it is very scalable. As I think about opportunities in their core business to take market share and in adjacent businesses around aerospace and medical, we have a terrific business in SFC. And we're delighted to have all three as part of the IDEX family. Other elements of capital deployment, this year we have spent $55 million buying back 739,000 shares at an average price of $74 a share. So I think we've executed that well. As I mentioned before, we are going to fully fund organic growth. We've taken an aggressive segmentation to our portfolio thinking about where we have great advantages in niches and where the profit pools are really attractive. And we continue to drive investment in that for above-market growth. And then finally on dividends, we have told you for a long time now our goal is 30% to 35% of net income, and we will continue to execute around that. The last element I want to talk about with capital deployment is really the position of our balance sheet. And I think this is critical as you think about our ability to drive total shareholder return for the long-term. As I noted earlier, we utilized $125 million of our global cash to fund our Q3 acquisitions. This did drive a higher than expected quarterly tax rate, but we thought it was prudent, given where the cash sat around the world, our ability to put money to work in attractive return versus sitting idle. And I think it's important to note that our long-term debt balance increased only $45 million when you compare September 30 to June 30, even while we invested $288 million of capital into AWG and SFC in the third quarter. And so we sit today at only around 2 times leveraged on an EBITDA basis -- on a gross EBITDA basis and we've got plenty of capital availability. We've got $450 million of revolver. And if you think about the last three years, we have averaged about $335 million of free cash flow. And we've got $240 million still sitting on our balance sheet. So as we think about our ability in the next three years to deploy $1 billion of capital, I feel very comfortable that we are able to do that. As I mentioned before, we have divested three product lines in 2016. Two of those happened in the third quarter and one just at the beginning of the fourth quarter. And this is really an emphasis around optimizing our portfolio. We have talked a little bit about this in the future. These are not big businesses, nor do we expect to divest large chunks of business. But we do want to always think about positioning our product portfolio as we go forward. I think it's important to note if you take the acquisitions that we've done and the small divestitures that we've done, I want you to think about the impact that we expect going forward into 2017. The bottom line is that we expect about $0.25 of incremental earnings in 2017 from the combination of our acquisitions minus the small impacted divestitures. So, again, $0.25 of incremental impact in 2017 compared to 2016. All right. With that, let's move to Slide 4, and we will start to talk about the results and then I will get into the segments. So, in the third quarter, we had orders were up $530 million -- or, excuse me, $530 million, up 9% -- 2% organically. And, again, that was the first improvement we have seen since the first quarter of 2015. Revenue was also $530 million. That was up 5%, but down 2% organically. And then operating margin for the quarter was at 20.5%. However, as I mentioned before, it was at 20.9% when you think about the net loss on the divestitures. And that was down 60 basis points year-over-year, but it was due to a 90-basis-points of pressure from the fair value inventory step-up that I walked you through earlier. Cash flow again was a great story -- $125 million of cash from operations, $114 million of free cash flow. That was 163% of net income and that was up $9 million, or 9%, from last year. Net income was $70 million. That delivered GAAP EPS of $0.91. If you take into account the loss in the divestitures, adjusted EPS was $0.92 and again, up $0.03 or up 3% from last year. All right. As I mentioned at my opening, I want to give you some color and some detail around the puts and takes of the quarter because I know there was a lot out there. And I think it's important to be able to link back to our guidance. We had guided adjusted EPS of $0.92 -- excuse me, $0.90 to $0.92. If you take the high-end of our guidance, here is the puts and takes that you should consider. We had $0.02 of pressure from the SFC acquisition. That was $0.03 of fair value inventory step-up offset by $0.01 of goodness from operations. We had $0.03 of pressure from the additional tax expense that I mentioned from our higher tax rate. We had $0.02 of favorability from FX. And we had a $0.03 -- overall, we had a $0.03 operational beat. So a way to look at this from a clean perspective on the operating power of the business in the quarter is we had a $0.95 operating quarter and we improved operating margins on an apples-for-apples basis. So as you think about what we delivered for the quarter, that is the clean view of what we delivered for the quarter. Okay, let's turn now to the segment discussions. I'm on Slide 6, and let's start with fluid metering. In the quarter, orders decreased 1% and organic sales were flat. Operating margin increased 340 basis points. That was driven primarily by the fair value inventory step-up that we had last year when we bought Alpha and that was a $2.5 million impact in the third quarter of last year. Our energy markets, I have already talked about generally. A little bit more detail. Aviation remains good for us. Obviously, the low fuel price and what we're doing to develop channels is helping us improve that market, but certainly being offset by what we're seeing in the mobile markets and in LPG, which remains challenged. Water has been a good story for us. The municipal markets remain solid, especially around water services. Industrial, I talked about quite a bit already. We are seeing sequential stability. Day rates are holding. I think that the biggest thing that we are seeing is that is a negative is we have seen projects -- not big projects because, as you know, we typically are not involved in big projects. But whether it is in FMT or the industrial aspects of HST, we have seen projects pushed out and delayed and/or canceled. And that is putting some pressure on the forward-looking point of view in terms of sales in the fourth quarter of this year. Ag, as I said, it still remains soft, but we have seen some positive movement here in the fourth quarter. Again, while we like the sustained improvement, we are certainly not ready to call it a significant turn. And so I think we're going to see a little bit better results than we've seen here in the past, but -- and we have hit a bottom, but I don't think it's too early to call for a major upturn. With that, let's turn to Slide 7, and we will talk about health and science. As I mentioned before, the life sciences and the scientific markets remain positive. These are businesses that have been on a nice growth trajectory here for quite some time and we're excited about where we sit in the marketplace. That has been offset by the industrial-facing portions of that segment. So about half of HST is traditionally scientific and life science related, and about half has an industrial aspect to it. And so we are seeing the offsets of the strength and the weakness in those markets. We did see 4% organic order growth in HST in the quarter. We did have organic sales that were down 1%. Operating margin decreased 140 basis points really from everything I've talked about with the fair value inventory step-up with SFC. In scientific fluidics, again, continues to be strong. The major end-markets are doing well and exceeding expectations. The three markets of analytical instrumentation, bio and IVD have all delivered at or above our expectations, and we expect that to remain throughout this year and continue to have a good story into next year. Ceiling solutions -- the scientific part of that that is going into semiconductor is doing well. The part that is in oil and gas obviously has been challenged. And we love what SFC brings to this part of our business. Industrial side, I already mentioned the weakness that's been there. We did see some weakness specifically around our industrial-facing businesses in HST, our gas, our micro pump business and the industrial parts of material process. And so we are keeping a close eye on those things going forward. And then finally, in MPT, our material process business, the pharma story continues to be good. But the longer-cycle CapEx has seen some pressure, as I mentioned before. All right. I'm on our final segment; I'm on Slide 8, and that's diversified. Organic orders increased 4% in the quarter, but it was down 6% in organic sales. Margins were down 750 basis points. They are exactly what we expected to happen. You had the impact of the step up from AWG and you also had the mixed impact that we would expect from new businesses coming in that have more amortization and bring down the overall portfolio mix. Going forward, we think an op margin in the 25% range is where we will sit today, but you should expect us to improve that over time as we bring AWG and Akron and those margins forward. We have talked about a 500 basis point improvement over time and there's no reason to believe that that won't happen. Our integration is going -- on both of those are just going well and we're happy with the progress. In terms of dispensing, it's been a fantastic story. The business continues to outperform. X-Smart has been a huge winner for us in this business. We are executing well in all three major regions and we expect that to be a good news story going forward. In fire and rescue, obviously the big news is bringing Akron and AWG into that portfolio, driving the synergies in the business. We are seeing some nice improvements already. Our integration is going well. We did here in early in the fourth quarter announce internally that we are doing some restructuring around facility consolidation and driving the benefits of this business. So you will see a restructuring charge in the fourth quarter, and we are doing exactly what we said we would do. In terms of Band-It, we are seeing strength in transportation. That business offset by weakness in oil and gas are really the same headwinds we've seen in the past. But they have just done, once again, a terrific job on profit execution, focusing on niche markets where they can go get some growth and we really like this business for the long-term. All right. I am on our final slide, I'm on Slide 9, and I want to talk about the fourth quarter and full-year guidance. So, in the fourth quarter, we estimate EPS to be in the range of $0.92 to $0.94. That allows us to maintain the midpoint of our guidance and for the year, $3.72 to $3.74 despite the headwinds that we've talked about. So, there has been a little bit of confusion about, again, the underlying operating earnings, so let me walk you through that a little bit. So we're guiding $0.92 to $0.94 of adjusted EPS. That's going to include about $0.02 of pressure from the SFC acquisition. So that's -- when we think about that, you are going to have some incremental step-up, and then, you're going to have the operating impact. So we're going to get about $0.03 of operating goodness from SFC in the quarter, but it's going to be offset by $0.05 of inventory step-up. So there's going to be $0.02 negative. And we're going to get another -- approximately $0.01 of pressure from the divestitures. So, again, while we're guiding $0.92 to $0.94, the operating -- underlying operating capability is more like $0.95 to $0.97. And you can see how that impacts the quarter and, again, what that looks like for real operating capability for the year. A few more modeling items. We expect organic revenue growth of approximately 1% in the quarter. Operating margins will be 19.5%, but, again, that includes the $5.2 million of step-up. So we're going to have a nice, strong operating profit margin on an ongoing basis as we think about the fourth quarter and exit rate into the year. You should expect the tax rate to be back to its 27% rate, so not at the 29.6% that you saw this quarter. All right. For the full year, we expect organic revenue to be down 1% and adjusted operating margin to come in at about 20.5%. So, really outstanding profit margin given all the things that we have discussed. We expect full-year CapEx to come in at $40 million, free cash flow to be about 120% of net income. And in total, we will reduce our share count by about 1% for the year, given what we have already executed in the year. As always, as we think about our guidance, we don't include anything from future acquisitions or divestitures, any charges related to pension settlements or any costs related to restructuring actions. So with that, let me turn it over to the operator, and we will open it up for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Allison Poliniak with Wells Fargo Advisors. Please proceed with your questions.

Hi, guys. Good morning.

Hi, Allison.

Andy, could you delve into the health and science a little bit more? I would say I guess one of your customers was talking about concerns of oversupply and obviously potentially NIH funding slowing, but obviously orders were strong. So I'm just trying to reconcile the differences in those comments.

Yes. So I want to be careful here. We never talk about any specific customer, right?

Sure.

So I think that generally if you step back and you look at that landscape. So whether it is -- you are looking at genetic sequencing, analytical instrumentation generally, in vitro diagnostics more broadly, we are seeing the trends continuing to be very good. And you see -- if you look at sequencing in particular, that is still going to be a double-digit growth market. It's a market that is going through change as it's moving from, call it, a research tool to a production tool or a commercial tool. And so you will see changes in the landscape there. But we are positioned exceptionally well across that customer base in that market. And, of course, our traditional markets in IVD and analytic instrumentation. What you can see across the board is strength. And if you look at funding that is expected, assuming that the funding trends that we have seen happen that's actually a pretty good news story. So when it's all said and done, as I look at those markets, over the next certainly year and more into the future, I think that's a very good news story for us.

That's great. Thanks. And then obviously, you guys have done very well on the capital deployment side, deployed a lot towards acquisitions this year. Just with the prolonged industrial malaise that we've experienced, have you noticed any sort of changes in the M&A environment? Whether people -- especially smaller business are trying -- are becoming more active in terms of setting themselves up for sale? Pricing declines or anything of that nature?

I don't think there's been a meaningful break yet in that. Meaning that some of the more expensive assets, are they -- are we seeing a more reasonable perspective on valuation. I wouldn't say that yet. When you look at the things that are in the energy markets, a lot of people -- they had outside the expectation some time ago, and now they're struggling with the reality of their operating capability and so they are not ready to part with those businesses and depressed multiples. But our pipeline looks like it has looked for a long time, right? So it's entirely a cultivated pipeline. We have been working on it actively. And so that really doesn't change quarter-to-quarter very much for us. What changes is the activity from the -- really the auction world. And what I would say is that from the auction world, that has slowed down here recently in the last two quarters. But that is not the principal piece of how we think about M&A anyway. But I do expect there to be more activity going forward in our marketplace as people rectify what their operating capabilities really are and prices. So we will keep working at the way we've done it and try to drive it at the same level that you would expect us to.

Great. Thanks so much.

Thanks Allison.

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

Thanks and good morning, Andy and Mike.

Good morning.

Good morning.

Just a couple or a few quick questions. First, the exit rate for Q4, when you're thinking about that looking forward and talking about 1%, we had talked last quarter about the reasonableness of the expectations at the time that you might hit a 4% organic growth in the quarter. And the early reads if you think about it, I guess we talked about rescue tools, X-Smart, oil and gas, distribution. Maybe just give us a better sense for your Q4 read now. What are the biggest drivers of that change?

You mean looking at kind of a 3% or 4% up versus a 1% up? Is that what you mean, Steve?

Yes, yes. Yes, exactly.

The biggest thing in there is really the day rates are actually -- are very much what we have looked at. There's not a lot of change in there. But when you think of things that have a bigger CapEx component to it, you are seeing those things get pushed out. And those aren't a big piece of our overall business. But they are -- if you look at the marketplace, and it doesn't really matter what segment you look in, they are absent right now. And so what I view is happening is kind of continued pause and hesitancy around anything with a larger ticket item associated with it. That is the biggest change. But if you look at general day rates, that looks like it has looked like for a long time.

Okay, okay. And then if I sort of extend that -- I'm not asking for you guys to do this yet, but if I take the 1% exit -- 1% for the quarter, and talk about 1% to 2% organic next year, you guys usually talk about like a 30% to 35% incremental on 3% growth. So if I take 25% to 30% here, that would normally give me another $0.09 or $0.10 on the midpoint plus the -- almost the full $0.25 that you mentioned because there will be some overlap as that goes organic. That still gets me kind of 8% to 10% EPS growth next year. Am I missing any kind of big movers in either direction there?

No. I do think right when we come out with our guidance for the quarter, is it -- the pivot is going to be what do you think the underlying industrial growth rates are going to be, right? So your logic -- I understand your logic. It's not dissimilar to how we're thinking about it. I'm not prepared to make that call here today, but I think your logic is sound.

Okay. Then one last just technical question, maybe more for Mike, I guess. Just help me understand why you didn't just borrow the money given interest rates today instead of repatriating back with the tax penalty and your low leverage levels.

Sure. Well, we've got -- went ahead and made a decision to bring the money back from all over the globe really to get the benefit today and optimize our balance sheet and to get it out of some of the areas in the world where -- we did bring about $50 million out of China, actually. So we wanted to get that money out of China, and it made a lot of sense to us. And there was -- that was the real driver in some of the costs that we incurred in the quarter.

Okay, that makes more sense. Thank you. I will pass it on.

You bet. Thank you.

Thank you. Our next question comes from the line of Scott Graham from BMO Capital Markets. Please proceed with your question.

Hey, good morning, Andy. Good morning, Mike. Very nice quarter.

Thank you. Good morning, Scott.

I just want to maybe ask a previous question a little bit differently around organic growth. Maybe kind of getting to the exit rate is the endgame. But more importantly for the full quarter, if you are expecting organic up about 1% in the fourth quarter and we were kind of down 2% this quarter, could you maybe tell us the segments where you see that delta coming from?

It's -- so there actually isn't a lot of puts and takes. You've got some pretty consistent performance. We are not seeing one thing driving major differences. That being said, if you kind of look at how it's flowing, we've got about 2% incremental order growth in the quarter. And -- so I think we are in a pretty good position relative to delivering on the quarter, but it will be driven by the day rate business. Mike, anything you'd add?

No. I think SFC is a little stronger in Q4, that there's some strength there in the forecast. So that's part of it.

Let me maybe -- if I could just paraphrase this, sort of the better markets are kind of staying better and the weaker markets are getting last weak.

Well, I think -- I wouldn't say they're getting less week. I would just say they're stable. Now, they are getting less weak on a -- as you start to look at year-over-year comparisons.

Yes, that's what I mean. Yes.

But from a sequential standpoint, things are looking like they have looked like for quite some time.

I'm with you. My second question is maybe something we have -- I hope to get back to something we haven't talked about in a while. And your driving of the margin continues to impress. I guess in the past, you guys used to talk about a certain dollar level of productivity savings. And I know you think about that a little bit differently now, Andy. But if we -- for the sake of modeling, one of the things that I talked about with Heath from time to time was something north of $30 million, south of $40 million of productivity has been kind of last couple year goal. Is that still in the realm?

Well, I think -- how we've talked about it for a long time here now, Scott, is you start the year with, we'll call it, natural inflation. And today, given the kind of material prices, that is just not a big number right now. But you go into the year with just wage inflation and basic overhead inflation, it looks like kind of $15 million or so -- could be $15 million to $20 million, right? So to hold your own, you've got to cover that. That is the starting bogie. And then to drive incremental profitability and margin expansion, that's where you start to have to get north of $20 million. And that's been our consistent goal historically is to be able to drive productivity so we are getting net benefit. And so that's why we have always talked about our ability to drive incremental margins even in a low-growth environment. So even if you have a single -- a low single-digit organic growth environment, when you think about our ability to continue to get price, we would expect to see margin expansion.

And that allows price then, Scott, to flow through if we can get productivity to offset inflation and material inflation.

Yes, no, I get it. My number was a gross number, so I think we are on the same page. Thanks a lot.

You bet, Scott. Thank you.

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning, guys.

Hi, Nathan. Good morning.

Andy, I wonder if we could try and parse out a little bit more into the industrial end markets and where you have seen maybe things be better or less bad, and where you have seen things be maybe a little bit worse. I know it's hard seeing that a lot of it goes through distribution, but just any color you can provide there.

One of the surprising things in this marketplace is once we've got past the steep drop in the energy-related markets, then what you saw happen was this ripple effect that went across the general industrial landscape. And so it is a little bit of an unusual situation right now where you are seeing performance across the industrial landscape all look pretty similar, right? So if you were at look at, say, our gas business, our Viking business, Warren Rupp, Band-It, things that are kind of -- that sit centrally -- and I'm going to call it general industrial. It is surprising how evenly split across those different markets the malaise is. And so, again, we had to get past that commodity-driven issues. But I think one of the signals that that sends to me Nathan is, again, back to this -- I'm going to call this just -- it's a big pause that has been out there for quite some time. And people are looking for a catalyst. And so we see it up and down the supply chain. We see it from our customers back through how we are behaving and our supply chain. And everybody is at that pause, and you see it from how capital is being deployed, meaning big CapEx, to the interval of orders. So, where in the past you would see larger blanket orders in annual time frames and quarterly, a lot of that stuff has just gone away, and you are now dealing in a world with general releases. And so it's -- again, it's surprising how general this is. Obviously, I think the energy markets are still worse than anything with some -- volatility depends upon the price of oil. But across the rest of the industrial landscape, it is surprisingly cohesive what we're seeing.

Surprisingly cohesive in a non-cohesive market? So I guess maybe a little philosophical question for you here that maybe talks a little bit about 2017. We have seen a lack of volatility in oil price over the last probably six months. Prices are high, things are better. Is that something that you would expect to play through as that general ripple effect across general industrial markets in a more positive way, if we can maintain that kind of at least stable and maybe improving energy prices?

The short answer to it is yes. I think that the magnitude is what you have to put your finger on. So if you see oil prices back in this $50 to $60 range, it's going to be a slow roll of how that impacts things over time. So you will get the impact of production happening, you will get the wellhead impact, but how that moves its way through the general economy, I think, will take some time.

Fair enough. Could you just give any more color on the different parts of the water markets that you are playing in? There's been a few reports. There is one out this morning from a water player with not such great results -- just what you are seeing there.

The water services is where the strength is right now. If you look at that for us -- so as an example, our ABS business has had terrific results. Some of that, I think, is taking share. Some of that has been a decent spend in the municipal space. I think -- I've said in the past that I thought municipal was going to have some good legs here for the foreseeable future. I still believe that to be true. But let's make sure that we are watching that quarter-to-quarter and what happens there. But for us, water services has been the brightest spot.

All right. Thanks very much.

Thanks Nathan.

Thank you. Our next question comes from the line of Brett Linzey with Vertical Research Partners. Please proceed with your question.

Hi, good morning, guys.

Hi.

Good morning.

Great quarter. Hey, just wanted to circle back on the completed deals for this year. Clearly strong free cash flow generation in the quarter. Do those deals come into the mix neutral to free cash flow conversion? Just trying to get a sense as to what the opportunity is outside margins and growth, but more focused on free cash flow and the 120% conversion you are doing this year and expectations going forward.

Yes, I think -- I will let Mike comment on it this also. So generally, right, these are going to be accretive to free cash flow conversion because of the amortization effect, right? So you are going to see that positively, generally. And they are all asset-light businesses. None of these businesses that we brought on are heavy capital in any way. And so you would expect to see across them really improvements in working capital over time. Improvements in margin. No need to inject big CapEx, so they should be positive. Is that fair, Mike?

Yes, that's right. Both -- all three deals help cash flow in the quarter, right? Because -- they may not help earnings because of the step up in the amortization, but on a cash basis, it definitely helps free cash flow in the quarter.

Okay, no. That helps. And I guess shifting gears to FMT, obviously very good margins there. Are you able to order-rank the contributors of that margin expansion between net restructuring carryover, mix, leverage? It just seems like a very big number just trying to understand the parts of the different pieces there.

Yes, three things happening there, right? The first one is some of our bigger businesses within there, they did restructuring last year and we have certainly seen the benefits of that. Second is you've got some positive mix -- that's not a big number. But third, and importantly we talked a lot about the impact of our fixed businesses and we've had great results from that and a bunch of those businesses sitting in the FMT portfolio. And I really should say -- I should add price. We continue to get positive price in FMT and those -- so really it's four things, not three, that really matter and continue to drive margin expansion.

Okay, great. I will pass along. Thanks, guys.

Thanks Brett.

Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning everyone.

Hi, Deane.

Hi, Deane.

I was hoping to stay in fluid metering for a moment. And Andy, if you could expand on the point about some of the push-outs you saw in the quarter, maybe this was all part of that general pause and some hesitancy on bigger-ticket items, but some context there. And are these pushed into 4Q or is it uncertain when they would actually come through?

I think it's uncertain, Deane. I think we've talked about this in a number of the past quarters that we have seen things get pushed, delayed, whatever. And my view is that until you get some confidence back in, these things are going to sit out there -- so anything with big-ticket CapEx associated with them. So if you look at energy as an example, you're going to see -- if you assume that energy prices are in that $50 to $60 range, you will see excess capacity get absorbed in 2017, and then you will see new CapEx coming in, in 2018. And while it tends to be more cyclical than the rest of the general industrial, I think it's a good proxy for what we're seeing across the industrial landscape.

Okay. That's real helpful. Then just make sure we have got the modeling set up for the fourth quarter, you mentioned a couple different charges. So there's restructuring in fire and safety, and there's also going to be a pension charge?

That's right. That's correct. We haven't put our arms around it exactly what those will look like. But obviously, we will provide the detail. So we will do some restructuring, as we expected we would when we did those acquisitions. And the pension will play itself out here in the fourth quarter.

And that's a mix of cash and non-cash?

That is all cash. The pension will be cash. About 75% of it will be cash, and then the restructuring will be mostly cash also.

Yes, yes.

Got it. And just a last question -- any update on the CFO search? Any timing expectations?

Our general expectation is -- these things take six months or so. And so if you focus in around the end of January, some time into February that would be our expectation for finalizing it.

Great. Thank you.

Thank you, Deane.

Thank you. Our next question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please proceed with your question.

Thank you. Good morning, Andy and Mike.

Good morning.

Hi, Matt.

I wanted to drill down a little bit further into life sciences. The orders were clearly very strong there in the quarter. But the customer that warned, they didn't really see it until late in 3Q and then really took down 4Q expectations. Couldn't that result in a bit of an inventory overhang for you? And then can you also talk a little bit about what you are seeing with some of your broader life science customers later in the quarter and early in the fourth quarter? And should we feel confident that it's a genomics or a single customer -- let's call it a transitory headwind and not a little bit broader?

Yes, so again, I want to be really, really careful. We don't comment on any specific customer. So, what -- we are -- where we sit in the food chain, what we experience in our numbers tends to be -- was already played out for us by the time it has played out in the markets for our customers generally. Just because of how that works in the supply chain and timing, et cetera. And so we don't see a major change in the fourth quarter based on anything you see out there in the marketplace. And also I think it's really important to note that this is -- we're talking about no customer being more than 2% of sales. So we don't have a single customer that is material to the IDEX results as we think about that in the portfolio. So with that said, as I think about the broader life sciences market, I think there's always bumps in there. Every six or so quarters, you'll see a bump in these marketplaces based on when products are shipping, et cetera, product life cycles, supply chain. But the story is a good news story. We have seen strength in those markets; we expect to see strength in those markets going forward and for those to be above the IDEX average in terms of growth.

Okay, great. And just a bigger-picture question for me on the type of -- on the projects that are being pulled. What do you think needs to happen for those to be given the thumbs up from your customers?

I think it's a combination of sustained improvement in a commodities world -- and this sounds like such a weak answer, but confidence. There is a general lack of confidence in spending money and putting yourself out forward and putting a lot of capital forward. And so I think that confidence is a combination of two years of a pretty soft market, a very uncertain political environment that people just aren't comfortable with how things are going to want to play out. And I think that really needs to happen. A little bit of improvement in the overall economic growth rate would go a long way. Certainly people are seeing this is starting to play through in wage inflation. And see what's going to happen in the global marketplace. So you are seeing some elements of it spark there, but in general, you are not seeing that catalyst that is going to push that forward. And as we think about our 2017 planning, we don't see a catalyst. We don't see that happening. We are well-positioned to deal with it if it does. We have always said time and again that we are very able to react on the upside and we never want to get caught on the downside. And so for our ability to mobilize and execute a faster environment, we feel really comfortable around that in terms of supply chain and our ability to produce. And at the same time, we think that this environment is going to continue here into 2017.

All right. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Hi. Thanks. Good morning, guys.

Hey, Walt.

I wanted to ask about the productivity gains that you're getting and wondering what inning you are in the process that you have been doing to get margins to where they are now.

You know, Walt, I feel really comfortable that we can continue to drive productivity. I'll tell you, what has accelerated our gains this year has been around the focus we've had on about a quarter of our portfolio that are fixed businesses. We told you earlier in the year that that makes up about 25% of our business. Into this year, we are almost 300 basis points better in profitability around those businesses. And so that has just been a very, very good news story. And let's keep in mind, too, that we are delivering this kind of margin profile with some of our bellwether, most profitable companies struggling that have really been hit most by this commodity and overall industrial distribution. So if you think about Viking, Warren Rupp, Band-It, Banjo and even rescue tools -- so rescue tools has -- it's a different struggle for rescue tools because of the weakness in emerging markets around sovereign budget. But if you look at those five businesses, those are big profit contributors to this company. And they have been hit squarely with the headwind. And what we have been able to do is be able to really deliver the quality of earnings in those businesses, continued -- very, very high quality of earnings in those businesses and cash flow and at the same time still drive overall margin potential with what we're doing in the rest of the business. So, when I think about our execution and our positioning for any kind of improvement, we are in a good spot.

Okay, all right. That sounds great. Is there a number that we can think of -- I know you give the leverage number. But in terms of where you think you can get operating -- adjusted operating margins if you go a couple years out, is there a number that you think the whole business can get to?

Walt, with modest growth, a couple of points. We can get 50 plus --

50 to 80 basis points of margin improvement, Walt, is what we have kind of said.

Yes, with a couple of points growth. And that breakeven point, when I say breakeven point, I mean the point at which we can still expand margins has gone down substantially and our ability to drive productivity. And so if we continue to see a soft environment, we will still get better margins going forward.

Okay, that's great. All right. Thanks, guys.

Thanks Walt.

Thank you. Our next question comes from the line of Jim Foung with Gabelli & Company. Please proceed with your question.

Hi. Good morning, Andy.

Hi, Jim.

Good quarter -- quarter earnings here.

Thank you.

I want to ask you -- so pro forma for the recent acquisitions, how much of your businesses are now moving to book and ship versus capital projects?

The vast majority of our businesses are -- we are looking at book and ship. I'm not sure I can give you a specific number. But big capital projects, they have never been a big piece of our business. But they can swing -- they can certainly swing in terms of volatility in any one quarter and some of that we're seeing right now. But, historically we go into a quarter with half the quarter booked. And you've got to deliver a book and ship in the quarter of about half the business. And so that is what that kind of looks like. Now for us, no material difference. The difference is I think the larger CapEx really are the things that we have had in the past and were a buffer. Those have certainly been pushed or canceled.

Right. So at the margin, that can be a swing for you…

It can. If you look at where we stand today and our expectations for fourth quarter organic, that is the big pivot. But at the same time, we are finding ways to cover it. We are finding ways to still grow income and do a great job around cash.

Right, okay. And then could you just talk about that 500 basis point improvement from the acquisition, AWG and Akron? And I guess also maybe SFC, what kind of positive surprises you might see there?

I think -- let me talk about SFC first. That's a very high-margin business and that is really around a growth story. So that's our focus with SFC. And by the way, with AWG and Akron, growth is a critical component to the overall story. But recognizing that when we bought the businesses, we saw more opportunity to get the margin profile -- margin profiles in line with our core IDEX business -- and that's about 500 basis points in total. And Akron has been part of the portfolio a little bit longer. Back earlier in the year, we bought the business. We have had great results so far with it, and AWG is a terrific fit. You put that together with our other safety and rescue assets, there's a lot of opportunity to grow the business and to improve margin profile.

Any kind of timetable in terms of when you might see the margin improvement coming?

I think what we have said in the past and I wouldn't change it, is there is no reason you wouldn't see a couple hundred basis points out of the gate for those businesses and then the balance over three years. So I think it takes three years to get 500 basis points, but there's no reason you wouldn't see a couple hundred basis points in that first year.

Great. Thank you so much. That's all I have.

Thank you, Jim.

Thank you. Our next question comes from the line of Jim Giannakouros with Oppenheimer. Please proceed with your question.

Good morning, Andy and Mike. Thanks for taking my question.

Hi, Jim.

Your comments on 4Q restructuring, were they isolated to integrating your recent acquisitions, or are there other restructuring actions potentially in play? Just noting that historically you have taken the opportunity to do some of that activity in other segments.

Yes, Jim, so the bulk of it is from the acquisitions, but there are a few other areas that we are taking the opportunity to do some consolidation and get some leverage. And so we will see some improvement in some other businesses also.

Okay. And then to understand the divestitures, I know that they are small, but was there a certain growth profile that just didn't make your -- you didn't see the outlook as strong as you would like or a certain margin profile that just didn't make the cut? What drove the decision to divest those -- each of those? And did you mention -- and I missed it if you did -- what that third divestitures was in early October?

Yes, let me talk about the rationale behind it. When we think about these things, it's not necessarily just a growth profile that we're looking at. It is really around how are they going to be advantaged or disadvantaged long-term with us as the owners. And so with the things that we have sold, we have sold them principally to people who have one of two things; either a different expectation of long-term performance than we have, but, more importantly, the ability to better position that business with an asset that they own. And so -- and we have elected to not make the investment to get that competitive scale. So what you are seeing us do are sell relatively small things or very small things that don't have a unique advantage today that really need some kind of relative competitive scale. And we are selling those things that we don't -- we have decided that it's not worth the organic or inorganic investment to us, that the opportunities are elsewhere and that's really how we have been making those decisions. And also keep in mind things that are small and don't have the kind of advantage that we look for in business, they take a lot of management time. They are disproportionate in what they require from a management time and we would rather put those resources elsewhere. In terms of -- have we said what our -- the businesses -- their business?

No.

We have not published that yet, so we won't do so. But we're talking something that is small. You'll see it as things roll out here in the next few weeks.

Got it, okay. And one last one if I may and I apologize if I did miss it. When you talk about FMT, you talk about general industrials being the swing factor there as far as your organic prospects. But did you comment specifically on CFP? And if not, could you get a little granular there on what you're seeing in those specific end-markets?

Yes, you are really talking about Viking and Warren Rupp for the most part. When you say CFP that is the bulk of it, right, Richter whatnot. Really the same factors we're talking about generally. Those are the big pieces of us -- of our FMT business is based in the general industrial world. And they have had a tough go in 2017. They have been hit disproportionately to the pressures that we are seeing in energy and the general industrial markets. But, again, all of those businesses have seen sequential stability in their day rate business with some incremental negative on the CapEx side.

Got it. Thank you.

Thanks Jim.

Thank you. Our next question comes from the line of Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

Hey, thanks. Good morning, guys. Just want to -- a quick one on the commentary on ag saying that you saw a slight up tick, I know you are not calling the market, but I can't recall anyone else saying ag is up. So --

That's why we want to be very careful in saying I'm not going to call this an inflection point. I think that would be a mistake. We saw some improvement in the quarter. It's been a tough story overall. But, we did see some sequential improvement in the quarter and some year-over-year improvement in the quarter. But I think -- let's be hesitant on that one. It was good to see, but we've got to have a lot more data points before I make any commentary that I think it's -- we have seen a sustainable inflection.

Can you expand on what you think drove some of that strength even if it was only temporary, what was behind that?

Charley, it was probably depleted inventories just in channel and a pent-up demand for the replacement parts. It's been down for almost seven quarters.

Yes. I think its more replacement parts than it is equipment pick-up. There's still a lot of equipment in the channel. There is a lot of equipment in the field, there's a lot of equipment in the channel, so it's really a replacement part story versus a meaningful up tick in equipment.

Got it. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Joe Giordano with Cowen & Company. Please proceed with your question.

Hi, guys. Thanks for taking my questions here.

Hi, Joe.

In terms of orders at HST and fully appreciating your comments about the materiality of any specific customers, but that segment order has been down -- flat to down four of the last five quarters. So I was a little surprised that this would be the quarter that you start seeing it perk up here. Is that more of a function of comps just getting easier, or are you seeing anything specific in that market that is kind of driving that here?

Yes, I wouldn't say there's any major change. We did note that the back-half comp started to get easier. So, hey, we are glad to see it. It's good to see, but is no major inflection different from what we've talked about so far.

Okay. And just related to the commentary you've heard from the major players in that space, do you get a sense that maybe like a slowdown in financing and just deal activity in that health care space is just putting a little bit of a crimp in just spending and capital spending there? Do you think it's deal-related in a way?

I'm not sure I understand the question, Joe. You're saying because…

A lot of the sequencing is still on more of the research side. And the lack of just general, like, funding in the markets is capital funding for small companies in that space. Do you think that's impacting just overall demand there a little bit, like more of a temporary thing in that sense? Because I know you have this view -- a long-term view is very positive there.

No, I don't think so. I think you've got -- when you are talking about sequencing, you have got major product cycles that are critically important. And you have got this movement from, I will call it, the lab space into more of a commercial application. And so that is a move that everyone has expected to happen. And with that, you see a movement from very, very high-priced equipment down to more readily available lower-priced equipment that is more deployable into the field. I think -- when you step back and think about the potential for this industry and you look at the number of sequences that are sold per year compared to the number of mass spec or analytical instruments in ultra-high-pressure liquid chromatography, it's tiny. I mean, it is absolutely tiny. And when you look at the applications and where those can go and land, and the number of potential units that can be sold into commercial applications -- and when I say commercial, I mean non-laboratory research, the number is huge. It is multiples of what is sold today. And so it's not going to be smooth; it's not going to be perfect. But if I think five years from now or 10 years from now compared to where we are today and the unit volume that you would expect, it's going to be much, much, much higher. That is the bet we're making.

Okay. That's fair. Then if I could just sneak in one last one on the divestments. You mentioned that the stuff that you have been buying, a little bit more asset-light then maybe the average. Is there any consistent -- in divestments, is this a move to further asset-light the portfolio? Are these kind of on the high-end in terms of average?

No, I wouldn't read into that at all. Across our business, we are pretty asset-light. You're talking about 1.5%, 2% CapEx intensity for the businesses. We're not necessarily buying things that are lower than that or selling things that are higher than that. It is really around market positioning. Market positioning and what I would call relative competitive scale. So, what -- if you look at what really works for us, it is when we are in a niche that is big enough to be attractive, but small enough to not get the gorillas of the world if you wanted to compete for it. And then we have the attractive relative market share position. So we are a classic number one or number two. And that -- the profit pools in that scenario and the attractiveness is very, very high. When you are a distant three, four, five and you don't have a pathway, or if the niche is too small, that's where it's just not very attractive for us.

Makes sense. Thanks, guys.

Thanks Joe.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I would like to turn the floor back to Mr. Silvernail for final remarks.

Well, thank you very much and thank you, everybody, for joining us on the call today. I think as I open this up, my hope is that people will really focus in on what we've done to drive operating results and what we have the ability to do given this continued weak macro environment. And, again, I think our overall execution has been extremely strong. The underlying operating earnings of this company and our potential to drive earnings growth over time, I think is substantial. We have done a nice job with disciplined capital deployment and we've got a great balance sheet to continue to do that. So, look, we're going to have to continue to work through this murky macro environment that's going to be with us for a while, but we are exceptionally well-positioned to drive total shareholder return as we go forward. So, again, thank you for your questions today and thank you for your support of IDEX. And we will talk to you here in about 90 days. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.