Greetings, and welcome to the IDEX Corporation Fourth Quarter 2017 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. It is now my pleasure to introduce your host, Michael Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you. Mr. Yates, you may begin.

Great. Thank you, Doug. Good morning, everyone. This is Mike Yates, Vice President and CAO for IDEX Corporation, and I want to thank you all for joining us for a discussion of the IDEX fourth quarter and full year financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the quarter and year ending December 31, 2017. 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 Bill Grogan, our CFO. The format for our call is as follows. We’ll begin with Andy providing an overview and an update on market conditions, geographies and our capital deployment strategies. He will then discuss our 2017 financial results and walk you through the operating performance within each of our segments. And finally, we will wrap up with an outlook for the first quarter and full year 2018. Following our prepared remarks, we will 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 conference ID 13675214. Or you may simply log on to our company home page for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in today’s press release and in IDEX’s filings with the Securities and Exchange Commission. With that, I’ll now turn this call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike. Hey, good morning, everybody. I appreciate you joining us to talk about the 2017 full year and, obviously, our fourth quarter results. I’m going to start with a brief overview of 2017 and what we expect to see here in 2018. Look, 2017 was a record for IDEX. Market conditions around the globe continued to improve throughout the year, and our team is positioned very, very well to capitalize on the strength. We delivered organic revenue and order growth in all four quarters as well as all-time quarter and annual highs in orders, sales, operating margin, EPS and free cash flow. I’m extremely pleased with the team’s ability to execute our targeted growth initiatives, which really contributed to this record results for the year. The strength is broad-based across almost the entire portfolio, which I’ll elaborate on here in a minute. And our balance sheet is extremely strong. Our gross debt leverage ratio is 1.4 times, and our net debt leverage ratio is 0.8 times. If you combine our strong balance sheet with the $700 million of availability on our revolver plus our free cash flow in 2018, we’ll have the ability to deploy over $1 billion in the next 12 months. Of course, we remain very disciplined and ensure that we get our best returns for our shareholders not only in the short-term but, most importantly, in the long term. Speaking of which, I’d like to take the opportunity to welcome our newest acquisition, thinXXS, to the IDEX family. We’ll talk more about the acquisition in a bit, but we’re very happy to have this innovative team as part of our organization. Given the sustained strength in the back half of the year, we remain optimistic about our ability to continue to grow. We’re projecting 5% organic…

Thank you. Ladies and gentlemen, we’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Hi guys, good morning.

Good morning, Allison.

Andy, could you touch on organic investment a little bit more? You’ve obviously invested very broadly here. But with the incremental cash that you’re now going to get from the Tax Reform, is there any specific area that you think you could accelerate some investment in just based on the traction you’re getting?

Allison, we figured we’d get this question. Across the board, it came down to the increase in earnings and cash from the tax rate. And the bottom line is not really. And what I mean by that is we have been very aggressive across the board for years now at fully funding organic, and I think we’ve been very consistent in saying that even when that’s done, there’s plenty of money left over. So I don’t think we’ve left much on the table. Last year, we had a pretty good number in terms of incremental organic investments. This year, it’s $0.08 a share. So I don’t think, when you net it all out, it changes much of anything from our strategy. And I think it’s – in terms of our ability to be competitive and to win globally, it’s obviously a positive thing. But I don’t think it changes what we spend our time on and where we’re going to invest.

That’s helpful. And then HST, with the operational inefficiencies in 2017, it sounds like they’re dragging into 2018.

Yes.

Could you help us quantify that impact in 2017, how you’re thinking about it for 2018? And should those kind of disappear as we go through the year?

Yes. So actually, it’s under one headline. But to be candid, there’s one piece that we’ve kind of put behind us and two pieces that we haven’t. So when I say that we had – we did a major consolidation up in Canada, which we had some bumps earlier in the year, and that was kind of some of the bigger dollars earlier in the year. And we fundamentally – those things are never done until you’re humming completely, but we feel really good about where that is, and the team there has done a great job of closing that off. But two things that we’re more wrestling with right now are really around very fast-growth rates and as we look at some of the more scientifically bent pieces of our portfolio. So what we’re experiencing is more around – think of it as expedites a little higher cost of internal quality than we would expect. In the quarter, it was about $1.5 million, Allison. And frankly, we’re – basically, we’re protecting our customers to make sure that they’re not feeling these inefficiencies or longer lead times, and we’re easing some of the costs ourselves. So it was $1.5 million in the fourth quarter. And if you normalize the HST margin, frankly, that’s the kind of margin we would expect to see in HST if you normalize that $1 million, $1.5 million. I don’t think we completely put it to bed just because we’re not going to – we’re not going to try to save $0.5 million to put our customers at risk. And so if it takes a little bit longer to make sure we get it right at all angles, we’ll do it. I think it’s going to go into the second quarter before we have it completely behind us.

Great. That’s helpful. Thank you.

Yes. No problem at all.

Our next question comes from the line of Mike Halloran from Robert W. Baird. Please proceed with your question.

Hey, good morning, guys.

Good morning.

So maybe when I think back to prepared comments, Andy, and I think about the prepared comments over the last five, six quarters, the level of caution continues to bleed out of the comments. And I did not hear a lot of concern points in the script.

Yes.

Any areas of the portfolio you’re worried about right now? Or are we just seeing broad-based growth through all of your business lines at this point?

It’s broad-based, Mike. You read this correctly. At this point, it’s pretty hard to find a piece of the portfolio that is soft. I mean, if I were going to pick a little bit, it would be the places that we’ve been picking on, but even those have gotten better since we last talked, meaning the Dispensing business in North America has flattened out. And the midstream energy, we thought, bottomed out in the fourth – excuse me, in the third quarter, and we believe that to be true, and has improved, and the cold winter will help that even some there. So when you do a Pareto of all of our businesses, if I showed you a Pareto chart of all of our businesses, a couple of things that you would see negative are by our choice. We actively made choices to shrink a couple of things. Otherwise than that, you’d see positives.

And then extending out Allison’s first question a little bit. Obviously, your investment hurdles haven’t really changed. You guys have been diligent on your side.

Yes.

How do you feel this is going to impact your customer base and what their investment decisions look like? And how does that layer through in your business?

That’s a great question. I think that is a big one. You mean – if I understand, Mike, you mean in terms of will they invest more, and therefore, will that cause a downstream effect. Is that what you mean?

Yes, that’s exactly it.

Yes. Well, I think – I mean, I think for everybody, the answer to that, to some degree, is going to be yes. And whether that happens directly or it happens with how money gets circulated in the economy via dividends or whatever, right, I think the answer to that is going to be yes. I will caution, however, that these things tend to have – because of where we play in the marketplace, there might be a little bit longer, I think, impact for that to turn into a structural change, meaning brand-new programs coming in, where we’ve won new products. I think that the short-term impact is going to be on book and turn business, right, stuff that you’ve already won, and you might get some incremental benefits. And I do think that we’re seeing that and we have seen that. And the bigger thing that we’re looking at is the confidence level in capital-related projects, right? And when you see – if you remember, I want to say two or three calls ago, Bill, must have been, or maybe assuming the beginning of last year, people were asking us, what would give you more confidence? And I believe my answer back then was you got to see what I’ll call the speculative confidence turn into the spending confidence, turn into the capital spending confidence. And I believe we’ve entered that phase. And so we’re definitely starting to see people more willing to spend bigger dollars, which is what makes it sustained for folks like us as long as it holds up.

Yes.

Yes, I would add. Our commercial funnels across the portfolio have picked up, especially over the last quarter. I think the upside case would be if a significant amount of those materialized here in 2018.

I agree with that, Bill.

Yes, yes. And then just for me tack under that one, Andy, on the CapEx side because I remember those comments a couple quarters back, and the hope was – CapEx have scaled back part of this year, right?

Yes.

It certainly feels like you’re more confident that CapEx of maybe not massive size but more meaningful size is starting to come forward. Is that fair? And how do you see that projecting out?

It is fair. Now let me give you three examples without being specific to any customers because we never do that, but three places where you’re seeing that common in size. One, we’re seeing it in the chemical markets. Whether – no matter if you look in Europe or you look in the value, so to speak, we’re definitely seeing improvement and bigger dollars being released in those areas. In China, actually, too. China, too. And then – so that’s number one. Number two, we received some pretty good-sized blanket orders, and it’s not atypical. But in our general industrial – touching some of our general industrial book and turn businesses. And if you went back two years ago, those didn’t exist. Then last year, it came back a little bit, and this year, we saw it come back stronger. That’s a good sign. And then finally, in some of our scientific-related businesses, you’re seeing people plan much further out related to their own capital. And the questions to us are around our ability to ramp if they ramp capital. So you’re not necessarily seeing the spend yet, but when that conversation is happening, they’re gauging – they’re starting to now gauge who am I going to partner with based on availability, not just based on price, not that we ever really play in that much.

Yes.

But you’re seeing some of those behavioral changes.

Great colors as always. Appreciate it.

Thanks, Mike.

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

Good morning, everyone.

Hi, Nathan.

I’d just like to follow on to the question there about larger capital spending dollars coming out. That would probably hit you in the second half of the year. But I would guess that, that’s probably not baked into the guidance that you have for 5-ish percent organic growth. I know you’re going to have tougher comps in the second half, and I assume that, that’s probably part of it. If you do see some of those positive spending drivers come through, is there upside to your organic revenue guidance, in your view?

I think, Nathan, you have to believe – for the answer to that to be yes, you have to believe that there’s going to be an overall pickup in industrial production in the back half of the year compared to what we’ve been experiencing now and the projections in the first half. And so far, we’re not seeing that yet. So we are baking in some of this improvement. You’re right. We do have tougher comps in the back half. Could it get better with an acceleration overall in organic spending through the pipeline, so to speak? It could, but the nature of the short cycle of our business and by nature of what we’re seeing people think about in the back half of the year and full year from industrial production, I think we picked reasonably well with the facts that we have today.

Okay, that’s fair. I’d like to go on to some of the businesses that have or continue to be in your fixed bucket.

Yes.

You disposed one that I assume didn’t pass your standards there. I know some of the acquisitions go into that. Can you give us an update on where you are with the businesses that are in the fixed bucket? Are they candidates for disposition? Are they candidates for moving out of that fixed bucket?

Sure, sure. Let me comment on, and I’m going to ask Bill to comment, too, because Bill plays a really big role here in looking at the overall portfolio of the company on a day-to-day, week-to-week, month-to-month basis. So first of all, the fixed bucket has shrunk from about 25% this time last year to about 15%, right? So whether it’s been disposition or folks moving from there to different parts of our growth profile, that’s shrunk now. So it’s a smaller piece of the overall profile. The first part, I don’t think that there are – there’s nothing major in line for disposition in there, right? We’ve always said we’ll constantly look at it. Things change, but I feel very good about where we are relative to what we own today. So that 15% that’s in there is really about those two types of changes that we’ve talked about for a long time. One is they got to improve their profit profile and/or they have something important in there that makes up their franchise that needs investment, I’d say as a technology or channel development. So they generally feel pretty good. And Bill?

Yes. I think the fixed businesses overall, the margin from them last year was about 200 basis points, so we did see a significant portion graduate out. Remember, all of our acquisitions go into the fixed business, so you saw Akron and AWG graduate into the integrated growth in SFC and then into integrated growth within our Dispensing – or excuse me, our Sealing platform. So the 15% that remains relative to productivity improvements we have in line this year, that will continue to shrink if we don’t do any additional deals this year.

Okay. As it relates to that, gross margins have been – they’ve been edging up over the last few years, but they’ve been in that kind of 44%, 45% range.

Yes.

Are there opportunities that you feel you still have to drive gross margins higher? Or does margin expansion really come from SG&A leverage here? Or just how should we think about that going forward?

Nathan, I think we can get both, and there’s no reason we can’t continue to do that. If you look at our ability to get price, our ability to drive productivity, so if you kind of look at those two major things, so let’s look at price versus – price and productivity versus inflation, meaning wage plus our raw material inflation, we think we can get – with that combination, we should be able to get expansion, right? And that all shows up at the gross margin line. And then from there, obviously, you’ve got volume leverage, and those two things combined should then compound at the op margin line. So I don’t think there’s any reason we can’t. Frankly, I’m not going to lie. I was a little disappointed on – at where we ended gross margin. I thought we could have expanded the gross margin more throughout this year, and we gave up a reasonable amount of it with some of these inefficiencies that we’ve had. And what I like about it is our teams are just as upset, right? It’s not like we’re having to tell them that this is an issue. At the same time, you got to make bets. You got to make bets on growth, and you got to make bets on Center of Excellence and things like that. And I think on balance, those are paying off for us. But I do expect to expand gross margins, and I think we can, Bill. I mean, I think we can.

Yes. I mean, you should see us this year consistently in the 45% range with improvement off of that. I think 46% would be a target longer term, but a solid 45%, mid-45% is a good number for this year.

Absolutely.

Great color as usual. Thanks guys.

Thank you.

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

Thanks and good morning all.

Good morning, Steve.

I just wanted to follow on that last question around gross margin and tie it to also the $0.05 of tailwind that you point to in 2018 for inflation net – or productivity net of inflation. Just maybe help us think about, and I know you separate pricing someplace else, but the dynamics there. A little more color would be helpful to break it apart.

You want to touch on it, Bill?

Yes. I think the $0.05 improvement is really us solving some of the execution issues that we had within 2017, and then it’s our continued OpEx programs exceeding our inbound inflation. That’s how you think about it.

Steven, anytime you can net that out to positive, that just puts you in a great position to expand margin.

Yes. It’s a little bit higher than what we historically have guided because of the inefficiency we can put our finger on in 2017.

Right. And that inflation is all material or you have wage elsewhere, correct?

No, that’s in the number as well.

That’s in there.

That’s both.

Yes.

Okay. And so on the material side, I know it’s not a huge part of your cost structure, but what are you thinking given what we’re seeing?

It’s 40 bps.

Yes, these are – 40 bps this year. That’s our expected.

Somewhere – $10 million, $12 million material inflation. It’s somewhere in there, yes.

Yes. So think of it, 40 bps. It’s not huge, but it’s definitely there. It’s present.

Okay. And then on the – maybe, Andy, if you could put a – I know you’ve talked a bit – a lot about capital deployment already today, but a little finer point on quantifying the current M&A envelope within which you’re working comfortably, particularly in light of, I guess, what, $200 million of overseas cash and all, et cetera.

Yes, I’m a frustrated groom.

[Indiscernible]

So we’ve looked at a lot of stuff. We see – we have looked at a lot of stuff, and our funnel has a ton of stuff in it. And we walked away from a couple of things right at the end of last year that we put a ton effort into and principally around some of the same things we’ve talked around, around price and around terms. And we have – with our board, we’ve laid out a very detailed strategy that combines organic and inorganic and what makes an IDEX-like business and then, frankly, our ability to drive differentiation long term. And so we know what that looks like. We feel very comfortable with what we know, and we feel very comfortable with what we don’t know. And so what I don’t want to do is find us stretching into places where we don’t bring something different and better to the business, and so I’d rather remain disciplined there. So what we’re seeing now is we’re seeing a lot of behavior, and it’s accelerating, right? And I expect tax relief to accelerate that to some degree. We’re seeing a lot of behavior where people are paying mid-teen multiples for very good assets. But when you just kind of back through the math, it’s tough to get there. And so I think – look, I’m betting on the fact that we will be rewarded for discipline over the long term. And we might – hey, heck, we might get punched around a little bit in the short term for it, but I’m okay with that.

Okay, that’s helpful. And any kind of color again around the characteristics of – I know Faure Herman, that went to Le Garrec. And as you’ve shrunk that fixed bucket down, I think it always helps us if you give us some insight into what makes that kind of business worth more to somebody else than to you guys.

Yes. So I think a few things, and I won’t speak specifically to Faure Herman. But I think what it comes down to is the ability to drive real differentiation in the marketplace. And so when we looked at a bunch of the businesses that we have sold in the last few years, most of them came down to either we didn’t have the scale to compete or we had lost the technology advantage that somebody else brought to the table that could advance that business much faster than we could organically. And so that’s typically been the decision-making. Rarely is it because financially, you can’t get there. We can solve those things pretty quickly. It really comes down to those two things: the ability to scale it and the ability to get over a technology hurdle. And for the most part, the buyers that we sold to are, I guess, for the most part, we think they could, and they think they could. And one of the things that we think about here, Steve, is it’s good for everybody in terms of performance of the business. It’s also good for the people in the business, right, because if – do you want to be part of a business where you are kind of forgotten? Or do you want to be part of a business where you are prime time? And so we think about that in the businesses we’ve sold. They’re going to partners. They’re going to be prime time, and that’s going to allow them to thrive and succeed.

Great. All right, very helpful. Thanks guys. Good luck.

Thanks, Steve.

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

Hey good morning, guys. Look, just another quarter well done. I thought I could tell you. The one – I jumped on a little bit late. I apologize. We’re spread really thin this morning. Could you – have you talked about the amount of fixed businesses that are still left in the portfolio, the percent of sales and approximately what their margins are running at right now?

Yes. So we did a little bit, so I won’t spend much time on it. You can go back on the transcript. But basically, about 15% of our businesses are now in the fixed bucket. We made about 200 basis point improvement in margins. We don’t talk about the specific margin profile that’s in there today, but that’s about what it is. But it was a longer conversation earlier.

Okay, got you. So now with – sort of piggybacking on the M&A question, and I know that your pipeline is looking good and all that, but can you give us an idea of what the pipeline is comprised of? You now have essentially 85%, which is a substantial portion of yourselves, of course, in businesses, which it sounds like you’re really ready to make an acquisition next to alongside. So does the composite of your pipeline equal the percent of sales of these businesses? Or how are you looking at that, Andy?

Yes. So I’m not – Scott, I’m not exactly sure if I understand what you meant by that. But let me take a whack, and if I’m wrong, come back at it. So I would actually look at the 75% because, really, most of the businesses that we’ve categorized has outperformed. We’re unlikely to acquire something in those businesses unless something popped out that was unexpected from a competitor that we could put together. So let’s just call it 75% of the business I’d categorize as ready and I’m excited about acquiring around. Across that 75%, the pipeline is pretty good. I couldn’t tell you that there’s one thing versus another where we’re seeing more or less of something. Now there’s price disparity. When I look at the HST-related properties, they’re more expensive. When I look at the FSD-related properties, they tend to be less expensive, and FMT is somewhere in the middle. And so we’ve been looking at things for all of 2017 and even today that touch on all those businesses or adjacent to those businesses. We continue to invest in strategy. We continue to invest in people to think about how IDEX runs a business. If you think about the style of competition of IDEX, right, what makes us really different? We kind of come down to three things time and time and time again, right? Number one, we’re really good at building teams who know how to run these businesses. The second part is those teams are obsessively customer-centric maybe in terms of how do you grow them, how do you care for them, how you innovate around them. And they do so through, really, this practice of 80-20, which has been the hallmark of our operating model. And so we keep investing in what other types of businesses that are adjacent to our world did that model work. And that’s where our sweet spot is. It’s got to have the dynamics of an IDEX business, but when we put those three things together, that’s where acquisitions work for us.

Very good. That’s all I had. Thank you.

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

Good morning, this is Jeff on for Deane. I just have one question around the dynamic of Tax Reform on the M&A landscape. Sellers have less tax leakage. I was wondering if you’re seeing any more targets become available. Do you maybe expect any more asset purchases? Just kind of wondering how you’re thinking about all this.

I guess the only way I can answer that with confidence is the number of things that have come across the transom since we walked through the door here on January 1 is it’s up substantially. So my answer to your question is – I think the answer is yes.

All right. That should be all for me. Thanks.

Thank you.

Our next question comes from the line of Joe Giordano with Cowen and Company. Please proceed with your question.

Hey, guys. Thanks for taking my questions here.

Hey, Joe.

When I think about like your organic guide for 2018 and just think about how orders – and maybe let’s focus on FMT and HST, just see if the lumpiness are diversified. But is it fair to think that maybe orders grow at a slower rate than revenues this year? I know the organic rate has been very solid on orders for you guys this year, but when I look sequentially, they don’t look dramatically different quarter-to-quarter. It’s a very stable, good, healthy run rate. Is that how we should be thinking about orders, kind of like stable around these areas, give or take a little bit on like a sequential pattern?

Yes. I think the – sequentially, they will uptick slightly for our 5% number next year, but not materially.

Yes. And I think following – we’ve always said that orders and sales quarter-to-quarter don’t necessarily match with, obviously – within a year, they typically would. That’s exactly what we saw this year. So you’ll see some puts and takes. We’ve built some backlog, which is a good sign, going into the first quarter. There’s no doubt we’ll have a quarter this year where we bleed some backlog, and no one should be surprised by that.

Okay. So fairly, like you’re getting a little bit of a tail from the order performance this year into revenue next year. That’s fair.

Yes.

Just quick housekeeping. On the corporate expense, it was bit higher than we had for the quarter here. Is that more of like a baseline that we should be modeling off of here, that kind of new $20-ish per quarter kind of level?

No. We guided $17 million to $18 million for the first quarter.

[Indiscernible]

Yes. I mean, the fourth quarter, again, we highlighted a little bit in our release, a lot of that was due to the increase in stock price impacting compensation and our overall management incentive. Based upon how we finished the year, there were some headwind from that.

Yes.

Thanks guys.

Thanks, Joe.

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Great. So just kind of three closing comments, one on the lighter side and two on the more serious side. On the lighter side, I grew up in Maine, so I’m a diehard in one of the Patriots stands, so I’m now going to turn on the opportunity to say go, Pats, even though everybody here in Illinois hates me. On the more serious side, there was an announcement this morning that a gentleman by the name of Dan Comas is retiring from Danaher as their longtime CFO. And I was an intern for Dan in the summer of 1998, and Dan is just one of the true gentlemen, has built an incredible legacy. And I just – he’s been around this community for an awful long time. He’s a very special person, and I want to congratulate Dan myself on just what a great run and a legacy that he’s built. And then finally, I just want to thank my teams. The teams here at IDEX have done a remarkable job. And we’re trying to build a special enterprise, an enterprise that believes in our mission of trusted solutions and improving lives, people who have bought into the values in this organization and then finally, really focused on how do we do the right thing for all of our stakeholders, our shareholders, the folks who work here at IDEX and obviously, most importantly, for our customers. So I just want to thank everybody for the great work, and I look forward to an outstanding 2018. Take care.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.