IDEX CORP (NYSE: IEX)Q1 2019 Earnings CallApril 26, 2019, 10:30 a.m. ET

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Operator

Greetings and welcome to the IDEX Corporation First Quarter 2019 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. Thank you, Mr. Yates, you may begin.

Michael J. Yates — Vice President and Chief Accounting Officer

Thank you, Doug. Good morning, everyone. This is Mike Yates, I'm Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for a discussion of the IDEX First Quarter Financial Highlights.

Last night, we issued a press release outlining our Company's financial and operating performance for the three months ending March 31, 2019 and later today we will file our 10-Q. 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 Chief Financial Officer. The format for our call today as follows: We will begin with Andy providing an overview and an update on market conditions, geographies, and our capital deployment strategies. Bill will then discuss our first quarter financial results and walk through the operating performance within each of our segments. And finally, Andy will wrap up the call with an outlook quarter and the full year 2019. Following these 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 number 136-841-62 or you may simply log on to our company's homepage 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 last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn our call over to our Chairman and CEO, Andy Silvernail.

Andrew Silvernail — Chief Executive Officer

Thanks, Mike. Good morning everybody and thank you for joining us for our first quarter call. I'd like to start with some key themes. Q1 results are strong and somewhat better than our expectations from 90 days ago. Bill will walk you through the details, but overall I'm pleased with our organic growth in both orders and sales, the team's execution was outstanding driving operating margin expansion and cash flow. And this helped us deliver another quarterly EPS record driven by both operational out performance and favorable tax rate. Momentum continued in our industrial, municipal, and life science markets, but was partially offset by softness in ag and semicon as well as some lumpiness in our project-oriented businesses specifically dispensing an MPT.

We're working on some concerns on slowing global economic, the global economy and those do remain, but we're confident in our ability to grow faster than the underlying markets, as a result of our market-leading positions, our ability to capture price and deliver our targeted growth initiatives. Pulling it all together, we're raising our full year EPS guidance, while maintaining our organic revenue growth expectations.

Now, I'd like to take a moment and talk about what we're seeing across the markets we serve and the regions we do business in. In the industrial market, the overall conditions remain favorable with continued strength in OEM and our targeted growth initiatives. We are, however, seeing some day rate volatility in pockets of our business due to customer caution about the macro outlook. In Scientific Fluidics and Optics, our life science markets continue to expand, our IVD bio business is leveraging new product launches and platform wins drive growth and the AI market demand remains solid.

In Energy, we're seeing some rebound, driven by higher oil prices, mobile truck builder demand is increasing and we're seeing positive signs in the aviation fueling space. In municipal, the North American market continues to modestly expand, our focus remains on new product development, notably the recent launch of our new hydraulic tool and our SAM system and fire and rescue as well as continued expansion in emerging markets.

In ag, we're experiencing some contraction due to macro uncertainty around the soybean tariffs and the OEM slowdowns. We are seeing some growth in Latin America and Europe, but North America is a challenge. In semicon, we continue to see broad-based pressure by lower investments in Asia and the downturn in memory chip demand after substantial growth in 2017 and 2018.

In auto, as you all know, there has been a slowdown in global light vehicle sales and that's driven some softness in this market. But as you know, that's a relatively small piece for us.

Now, let's move on to the geographic outlook. Sales across the majority of geographies performed well in the quarter with North America leading the way. Asia was positive, specifically, India and China was primarily driven by our initiatives versus the macro trends. The European economy loss traction in Q1 and we saw some supply chain disruptions ahead of Brexit. And finally, we are seeing some softness in the German economy. Nevertheless, our targeted growth initiatives and new products continue to drive positive results around the globe.

All right, let me turn now to capital deployment. M&A continues to be a priority for us. With that said, there remains a challenge in the current environment due to valuation. Our teams have evaluated several deals, but our approach has not changed and we will remain very disciplined with our return framework. We've only closed on a deal if it fits the IDEX's sale competition and delivers long-term value for our shareholders. This remains our number one priority. As I said, our balance sheet is very healthy, our gross leverage is 1.3 times and our net leverage is 0.6 times. When the right deal comes along for IDEX, we will capitalize on it.

In terms of other capital deployment, we did repurchase $52 million of stock in the quarter at an average price of $140 a share. We also returned $33 million to our shareholders via dividends.

Let me now turn it over to Bill, who is going to go over our financial results and our segment discussion.

William Grogan — Chief Financial Officer

Thanks, Andy. I'll start with our first quarter financial results on slide 4. Q1 orders of $655 million was an all-time record and was up 4% overall and 6% organically, all three segments were up with FMT leading the way. Q1 revenue was $622 million , up 2% overall and 4% organically. We expanded gross margins by 40 basis points to 45.6% primarily due to price, production efficiencies, and volume leverage, partially offset by investments in engineering related to new product development.

Our Q1 operating margin was 23.8%, up 120 basis points compared with the adjusted prior year period, mainly driven by our gross margin expansion, lower intangible amortization, and lower variable compensation costs.

Q1 net income was $110 million, resulting in record high EPS of $1.44, up $0.15 or 12% over prior period — prior year adjusted EPS. Our Q1 effective tax rate was 19.5%, which was lower than the 24% in the prior-year period, mainly due to an increase in foreign tax credits, discrete tax expense in the prior year period, and the mix of global pre-tax income. The first quarter ETR of 19.5% was also 300 basis points lower than our previously guided amount, mainly due to higher excess tax benefit from greater than expected stock option exercises in the quarter. This lower tax rate accounted for 5 out of 7 EPS favorability, compared to the midpoint of our previous guidance. The remaining $0.02 of EPS favorability was operationally driven.

Free cash flow was solid at $76 million, up 12% over last year and 69% of net income. This was our highest Q1 free cash flow of all time. In regards to the balance sheet, no change here, gross and net leverage remains very healthy. The combination of our strong balance sheet capacity on our revolver and free cash flow provides us with an ability to deploy $2 billion in the next 12 months for the right opportunities.

I'll now turn to the segment discussion. I'm on slide 5. Starting with Fluid and Metering. FMT continues to deliver strong numbers from both an order and revenue perspective. Q1 orders were up 8% overall and 10% organically, Q1 sales were up 4% overall and 6% organically. Our margin was strong at 29.6%, up 110 basis points over the adjusted prior-year quarter, mainly due to price, volume leverage, and productivity initiatives. As Andy mentioned earlier, we are seeing some day rate fluctuation in pockets of the business, but overall the fundamental strength within the industrial sector continues to drive solid results.

Our Viking and Richter businesses posted record order and sales in Q1 with continued project wins in the processing and chemical markets across the globe. The municipal water business remains steady and the oil and gas market conditions have improved due to oil price increases and stabilization. The only business in the segment that contracted year-over-year was Banjo. The concerns we highlight with the ag market in Q4 materialized in Q1 and we continue to be cautious on the balance of the year outlook for Banjo. Overall, the targeted growth efforts across our businesses in this segment continue to gain wins and market share.

Let's move on to Health Science turning to slide 6. Q1 orders were flat overall, but up 1% organically. We highlighted on our last call, we expected a tougher comp for HST orders due to an OEM blanket we received early in Q4 of last year. Along with the last time by we offered customers in Q1 of 2018, as we eliminated a product line as part of the Rochester COE project. Normalizing for the items, orders would have been up 5% organically for the segment.

From a sales perspective, Q1 sales were up 2% overall and 3% organically. I'll give you a bit of more color on this in a minute. Operating margin increased 10 basis points to 24%. This was primarily due to lower amortization. Core margin performance was negatively impacted by lower project volume and FX in MPT. Overall, HST's performance was primarily driven by continued success in Scientific Fluidics and Optics. Underlying AI and IVD bio markets remain positive and we continue to grow through targeted MPT efforts in collaboration with our key customers. Our strong underlying industrial OEM demand and solid execution on our growth initiatives in the food and beverage market. On the negative side, organic growth was impacted by contraction in our sealing business, which was affected by both the downturn in semicon and lower order — auto sales.

Finally, MPT backlog remained strong has grown sequentially versus last quarter, but timing of projects shipments is skewed toward later quarters in the year due to longer lead times.

I'm now moving on to our final segment diversified. I'm on Slide 7. Q1 orders were up 5% overall and 9% organically. Revenues were down 2% overall, but up 1% organically. Operating margin of 25.8% increased 90 basis points in the quarter. This was mainly attributable to price, productivity initiatives, more than offsetting our volume decreases. FSD's performance was driven by our fire and rescue business continuing to see growth across most of the product categories and geographies.

With several project wins, resulting from new product launches. Band-It saw growth in several of its verticals with Aerospace leading the way. They also had some nice project wins in cable management. Our dispensing business was down around 15% organically for the quarter as they had a tough comp against some larger projects last year. We expect them to recover some as we progress through the year, but will be down overall for the full year based upon timing of customer replenishment cycles.

I'll now pass it back to Andy to provide an update on our 2019 guidance.

Andrew Silvernail — Chief Executive Officer

Thanks, Bill. So let's wrap things up and I'm going summarize here with some additional details on 2019 for both the second quarter and the full year. I'm on our last slide and that's Slide 8. In Q2, we're estimating EPS of $1.47 to $1.50 with organic revenue growth in the range of 4% to 5% and operating margin of about 24%. We're projecting 2% top line headwind from FX based on the March 31st rates, which translates to about $0.02 headwind in EPS. Q2 effective tax rate is expected to be about 22.5% and corporate costs will be around $20 million.

Looking at the full year, we're raising our full year EPS guidance. We now expect earnings to be in the range of $5.70 to $5.85. Full-year organic revenue growth remains the same at 4% to 5% with operating margin of about 24%. Top line FX impact will be about 1% based on the March 31st rates. For the full year, we expect our tax rate to be about 22%, CapEx to be about $60 million and free cash flow in the range of 105% to 110%.

And finally, corporate costs in the range of $80 million to $82 million. As always, our earnings guidance excludes any costs associated with future acquisitions or restructuring. With that, Doug, let me pause here and we're going to turn it over for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will 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.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Hi guys, good morning.

William Grogan — Chief Financial Officer

Good morning.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Can we go back to the commentary around MPT. I just want to make sure I understand it. I think Bill you were saying sales were weak in the quarter, but you have a strong backlog. So, it's really timing of when those projects are getting delivered. Is that (inaudible)?

William Grogan — Chief Financial Officer

Yeah. MPT is going to be down for the first half, but they'll be up in the back half and overall positive for the full year.

Andrew Silvernail — Chief Executive Officer

Yes. So, Allison, we actually built backlog and we actually have a great backlog position MPT, but it's along with the dispensing those two tend to be is the most lumpy of our businesses. And so we're going to see that backlog flush itself through in the back half.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Got it. And then what are those one-time events that you referred to on the slide? Is just the order commentary you were talking about?

William Grogan — Chief Financial Officer

Correct.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Okay. Perfect. And then on acquisitions, obviously a lot of dislocation in the markets here. Are you sensing, I know it's been a long haul, but any sense of multiple kind of starting to pull in any sort of change there that you can (inaudible)?

William Grogan — Chief Financial Officer

Not really. It's been pretty consistent and I think for us Allison, it really continues to be working it very hard and being patient and disciplined. Eventually something will break here, but the last thing we want to do is do a really expensive deal that doesn't fit our framework. So we're going to keep our discipline.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Fair enough. And then last, equipment expense. It looks like it was just adjusted down a little bit, is that just your cost control or is there something else in there?

Andrew Silvernail — Chief Executive Officer

No, just the flow through of the favorable variable compensation that we incurred in the first quarter.

Allison Poliniak-Cusic — Wells Fargo — Analyst

Perfect. Thank you.

William Grogan — Chief Financial Officer

Thanks, Allison.

Operator

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

Michael Halloran — Robert W Baird — Analyst

Good morning, gentlemen.

William Grogan — Chief Financial Officer

Good morning, Mike.

Michael Halloran — Robert W Baird — Analyst

So, I'm hoping to triangulate a couple of things here Andy. If I think back you were essentially projecting from an end market perspective, kind of a low-single digit environment with choppiness quarter to quarter.

Andrew Silvernail — Chief Executive Officer

Yeah.

Michael Halloran — Robert W Baird — Analyst

Is that still the case? Any change there? And then secondarily, could you triangulate that with some of your leading indicator type companies? I know you didn't. I don't think you mentioned Warren Rupp, could've missed it, but gas and Band-It both were really strong in the quarter. So I'm hoping you can kind of put those pieces together for me.

Andrew Silvernail — Chief Executive Officer

It was actually mixed, Mike. So, if you go back and you look at how the quarter developed. It was pretty soft in the first half of the quarter and then strength picked up pretty broadly, as we've got into the second half of the quarter. That was a good sign. And obviously building backlog in the quarter and the 6% order rate is a good sign as we walk into Q2.

That being said, those businesses that we look at as being very short cycle that was mixed too, right. So we had some — if you strip out some really specific wins that we know we got and you look at the day rate business, pretty choppy in some places and then relatively strong as you get — as you lean more industrially pretty strong. So, I actually don't think that the point of view has changed much from when we talked 90 days ago.

Michael Halloran — Robert W Baird — Analyst

Any different on the regional side?

Andrew Silvernail — Chief Executive Officer

Yeah, a little bit. I think Asia is probably a little bit better than we had expected. North America is just about what we had expected and Europe is a little weaker.

Michael Halloran — Robert W Baird — Analyst

Great. Appreciate it. Thank you.

Andrew Silvernail — Chief Executive Officer

Thanks, Mike.

Operator

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

Deane Dray — RBC Capital — Analyst

Thank you. Good morning, everyone.

William Grogan — Chief Financial Officer

Hi Deane.

Deane Dray — RBC Capital — Analyst

Hey. Maybe we can start with a review of some of these sector puts and takes that a number of the multi-industries have been commenting on either they were or were not affected. So let's start with, there were some issues about pull forward of demand out of the first quarter into the fourth quarter. There was a company last night pointed out the close where it ended up being much bigger than they thought. Did you see any of that dynamic? Was that all related to the softer start to the year for you guys?

William Grogan — Chief Financial Officer

Not really. We had that — we had that one order in HST that we talked about that it went into the quarter — fourth quarter, but not a big deal.

Andrew Silvernail — Chief Executive Officer

And then that wasn't tariff related to so many I had, (inaudible) it was something that was pure timing.

William Grogan — Chief Financial Officer

That's pure timing with the customer. So, generally Deane, we're so short cycle and we don't tend to — we're so short cycle and we are not generally an off-the-shelf product, that we don't play a lot in some of these, for a lack of better term, games that you see out there. Last year, we did see — as the tariff stuff was kicking in, we did see some some crazy activity there between the second and third quarter. But, in terms of looking at 2019-2018, I don't think it's material for us.

Deane Dray — RBC Capital — Analyst

Good. And then, I didn't hear weather come up at all. But when I hear about ag softness, there was a company Pentera had issues there with weather, anything on your side?

William Grogan — Chief Financial Officer

Yeah. The only weather here was Mike's house being shutdown by the weather. But…

Deane Dray — RBC Capital — Analyst

That was last quarter.

William Grogan — Chief Financial Officer

Exactly right. There was a — a little bit here and there, but not enough to have mattered specific to ag — look that market is just soft and we saw it coming late last year, we had that bolus of activity that we cautioned everybody on that we didn't think it was going to hold and that has been reality and they're just going to have to work through their cycle. In terms of weather not that's bottomed yet, you got some people saying that I'm not sure. And so we're going to kind of hold off making that call at this stage. And, but it's an important business for us, but we think we have triangulated in terms of the rest of the year.

Deane Dray — RBC Capital — Analyst

Good. And then just last one from me, can you comment on price cost in the quarter and any changes in the outlook for the year?

William Grogan — Chief Financial Officer

Yes. So we're still above 1% in pricing. Inflation did settle in a little bit. So we had — we definitely had a little bit of incremental benefit relative to the expectation of that 30 to 40 bps. So a little bit better than expected. So we think we're in a good spot for the rest of the year.

Deane Dray — RBC Capital — Analyst

Great to hear. Thank you.

William Grogan — Chief Financial Officer

Thanks, Deane.

Operator

Our next question comes from the line of Matt Summerville from DA Davidson. Please proceed with your question.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Thanks. Two questions. First in the prepared remarks, you referenced supply chain disruptions you saw in Europe. Can you get into a little bit more granular detail on that and whether that's still with you here — we're in into the second quarter at this point?

Andrew Silvernail — Chief Executive Officer

Yes. So Matt, the bigger thing there was really specific to the UK and we have a number of businesses fire and sealing in particular that are there in the UK and what you saw was, you saw some hoarding of product as people were ramping up to that expected Brexit date and so we'll see how that plays itself out now that we've got that kicked down that can kicked down the road again, but you definitely saw some behavior around relationships between the UK and the continent in terms of supply chain. It's not that big a deal to us, but to that, those businesses, it is and so, we'll keep an eye on it, but I expect as this continues to unfold, we'll continue to see some of that wackiness.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Then, are you seeing any evidence? You mentioned sort of the short-cycle day rate business, but beyond that — in kind of thinking in some of your longer cycle businesses, are you seeing any evidence that customers are delaying capital decisions, awaiting some sort of outcome with all of this trade stuff?

Andrew Silvernail — Chief Executive Officer

Absolutely. I actually think that if you go back to last summer. What changed was people pulling in capital, being much more hesitant about releasing larger chunks of capital while this tariff stuff is working itself out and obviously with the government shutdown in the U.S. Those combined events, I think made people skittish and if you look across — I was in China last week. And if you look across kind of behaviors what's happening in Asia, it's a big time wait and see. And then, any U.S. businesses that have a lot of China exposure is a big time wait and see attitude on how things are going to play out. So, I do think that there is some constrained relationships between kind of natural supply and demand with this situation.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Thanks, Andy.

Andrew Silvernail — Chief Executive Officer

Thanks, Matt.

Operator

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

Nathan Jones — Stifel Nicolaus and Company — Analyst

Good Morning, everyone.

Andrew Silvernail — Chief Executive Officer

Hey, Nathan.

Nathan Jones — Stifel Nicolaus and Company — Analyst

Hey, Andy. Question here, just on FMT and the impact that Banjo had in the quarter. I mean you got pretty phenomenal order growth 110 basis points of margin expansion and I think Banjo is one of the higher margin businesses in there. So it probably was a bit of a drag on margin expansion, can you maybe talk about what that drag from Banjo was, you're getting pretty close to 30% operating margins now. Can we see that number breach this year?

Andrew Silvernail — Chief Executive Officer

Yeah. So it's less than you might have thought. There is definitely some impact, but it is less than we think for a couple of different reasons. Most importantly, the margin profile of the rest of FMT has closed some of the GAAP on the rest of relative to Banjo. So the mix impact isn't quite as big as you'd think. And when it's all said and done, you're talking about this is a company that is sub 5% of IDEX sales. And so if you look at it relative to FMT, you're still talking about what 12%-14% of FMT business is that about right. So, plus or minus. So it's not immaterial, but it's not that bigger deal — not as big as it would have been say 5 years ago.

Nathan Jones — Stifel Nicolaus and Company — Analyst

Okay. And then maybe, you did talk about pockets of weakness in FMT and you've danced a little bit around what those are. Maybe you could give us some more details on which of the businesses or which end markets that you're seeing that weakness in?

Andrew Silvernail — Chief Executive Officer

Yeah. More generally, the pockets of real weakness across the company are around ag or around semicon and auto. Now, the good part is we don't — all those things together are sub 10% of revenue for IDEX. So, when you're all said and done, yes, there's pockets of weakness there. The bigger thing that I was referencing in my prepared remarks was around the volatility of day rates. And so, we've seen this in a couple of different periods, kind of going into '15, '16 coming out of '15, '16 And then last summer, you start to — as you look at it, one kind of inflection positive or negative. You kind of tend to see some of this volatility and I think that goes back to the earlier question that was asked about capital being held up.

I think if capital gets held up, the book and turn business tends to have more volatility in it and also projects get kicked out.

So I think it's a combination of those things. The good news story here is, if you get some relief on that, I think that volatility goes away and you inflect upward.

Nathan Jones — Stifel Nicolaus and Company — Analyst

Okay. So going into '15, '16 and coming out of '15, '16 that volatility clearly resulted in a big downturn in a big upswing. I guess the volatility last summer didn't really move the needle in a big way, one way or the other.

Andrew Silvernail — Chief Executive Officer

I would argue that we in a 6-month period to power to go back kind of the third quarter to the first quarter. I'd say it's been 6 months of that. Right. We've had months that have been weak and months that have been very strong. And so, I think we're still in that question mark zone.

Nathan Jones — Stifel Nicolaus and Company — Analyst

Okay. So you're still in the period of volatile day rates, waiting to see whether that's going to sort itself out or jump off the cliff or inflict up or something like that any — any sense from you of what you think is going to happen around that?

Andrew Silvernail — Chief Executive Officer

The issue, I think, is this isn't tied to normal economic activity, it's tied to very big macro and political issues. And so, I don't have any idea.

Nathan Jones — Stifel Nicolaus and Company — Analyst

Fair enough. Fair enough. And I'm glad to see (inaudible) today. All right. Thanks, guys.

Andrew Silvernail — Chief Executive Officer

Thanks, Nathan.

Operator

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

Joe Giordano — Cowen and Company — Analyst

Hey guys, good morning.

Andrew Silvernail — Chief Executive Officer

Hi, Joe.

Joe Giordano — Cowen and Company — Analyst

Hey. So, someone like a higher profile OEMs and some of the HST areas like on mass spec and chromatography etc, talked about having — it sounded like there was some build up there in the channel perhaps, I'm just curious what you're seeing. I know it's a longer sales cycle for you guys there. So, what are you seeing relative to that, how temporary does that feel like for you guys?

Andrew Silvernail — Chief Executive Officer

Yes. So, we didn't see — if you actually look at the life science piece itself, that was actually pretty darn and healthy and so we have not seen that play through. With the major customers, we have electronic compounds that are in place with all of them and so we have a pretty good visibility. How that might play through their supply chain — their forward supply chain to their customers back to us? We have less visibility on, but I don't think you're looking at something that's going to be a really big deal.

Joe Giordano — Cowen and Company — Analyst

Great. FSD, I mean, I guess the pop in orders probably is a bit surprising to most people, how sustainable do you think that is? Is that a business as a segment that might be down organically this year, full year? How are you calling that right now?

William Grogan — Chief Financial Officer

No, I think. This is Bill. Overall, it's going to be up for the year. I think there will be again quarter-to-quarter volatility for dispensing. Sales were down 15%, but orders were up 10%. We called down in the fourth quarter, we had something that pushed in the first quarter, we landed that order. But fire and rescue are really strong mid-single digit, and it's kind of same expectations for Band-It.

Joe Giordano — Cowen and Company — Analyst

And then just last from me, I mean, we've talked about day rate volatility of bunch here. Andy. I know that's something that really gets you kind of laser focused. So, how are you kind of — when you're not sure which way it's going to break, how do you kind of act — do you kind of — do you kind of get ready for one side or the other, or get actions in place that if it goes one way we're ready to — I know you hate getting behind that either, so just.

Andrew Silvernail — Chief Executive Officer

Yeah. I think…

Joe Giordano — Cowen and Company — Analyst

How are you kind of…

Andrew Silvernail — Chief Executive Officer

We are — as I've said many, many times in the past, we react much better to the upside, than we do to the downside. And so, we can move pretty quickly as demand and flex upwards and I'm happy to have to chase that a little bit. That's all right with me. The contribution margins are going to be high. And you're really chasing it with supply chain and labor and so, I think I can deal with that.

Getting way out in front and having the markets turned over on you is very painful, right because now you're firing people and you've got a really difficult contribution margin on the back side where the decrementals become painful.

So, I'd rather be conservative going into that have to chase the upside a little bit than I would getting out in front and having to dramatically react to the downside.

Joe Giordano — Cowen and Company — Analyst

That's fair. Thanks.

Andrew Silvernail — Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Bryan Blair with Oppenheimer.Please proceed with your question.

Bryan Blair — Oppenheimer & Co — Analyst

Good morning, guys.

Andrew Silvernail — Chief Executive Officer

Good morning, Bryan. Thank you.

Bryan Blair — Oppenheimer & Co — Analyst

I was hoping you could offer a little color on the SAM launch in fire and safety, and I know literally just introduced to the market, but it seems like that, that's going to be a game changing technology and I'm curious about initial reception whether it's already contributing to FSG order ratio?

Andrew Silvernail — Chief Executive Officer

I appreciate the question, Bryan. So we have the North American fire showing in the Indianapolis here few weeks ago and we introduce both the SAM and the new hydraulic tool and I think it's fair to say that the SAM System had incredible reaction. The number of people at that booth, the reaction from customers has been terrific. We have already secured our first major customer around that. I don't want to talk about who at this time and it's a big deal. Right. We made that small acquisition, technology acquisition last year. It was all about bringing that the user interface and our ability to link all of our components into a singular system and it's really in terms of — everyone's talking about IoT and digital, and this is a great example of where we're really on the forefront of that. And what's going to happen is over the course of years, we're going to change the productivity and the safety profile of a fire truck, and that's a really big deal.

Now that being said, this is stuff that happens really slowly. It happens slowly for 2 reasons; one, there is already a year of backlog in the fire truck OEMs, right. So, these things have already been ordered. So, unless somebody wants to fundamentally change the nature of their order, it's going to take some time for that to go through the system. And then, second, there is going to be conversion, right. You've got a huge installed base over time. But I think what happens is — you're going to see this over the course of 3 to 5 years, I believe we're going to start taking significant chunks of market share.

We've got great intellectual property around this. And I do think it's a game changer for us. As you think about over a decade, our positioning in the fire market relative to this capability and how it pulls through component tree. It's a big deal.

Bryan Blair — Oppenheimer & Co — Analyst

That's extremely helpful color. Thank you.

Andrew Silvernail — Chief Executive Officer

Thanks, Bryan.

Bryan Blair — Oppenheimer & Co — Analyst

And If we could follow-up a little on M&A. Obviously have a lot of dry powder right now and good scale and diversification across platforms. With the resources you have in place, is larger scale or more transformational M&A perspective going forward?

Andrew Silvernail — Chief Executive Officer

You know Bryan, we're pretty cautious about that. If you look at the universe of businesses that would be transformational. So let's say our size to half our size. Right. If you look at businesses of that scope and scale, there are very few that fit naturally with IDEX, there are a handful and those are things that we keep up on and we work on all the time. And there are a few that we could do that would be wonderful combinations with IDEX, but it's not very many. It has to be at the right price and you've got to be able to drive real synergies. That being said, as you look from say that size down to $300 million — $500 million. So, we call it $300 million to $1 billion in revenue. There is quite a bit of stuff out there and it's really a matter of timing and being able to do a deal at the right kind of economics that fits our style of competition and if that happens, we will move really quickly. We've looked at a bunch this year, we put a ton of effort into them and we just need to keep to our style of competition and the discipline around our return frameworks and not get seduced into doing mid-single digit ROIC deals that are "accretive" but are really disastrous to the capital structure and the returns structure of a business over the long term and we're just not going to do that.

Bryan Blair — Oppenheimer & Co — Analyst

Makes perfect sense. Thank you again.

Andrew Silvernail — Chief Executive Officer

Thanks, Bryan.

Operator

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

Andrew Silvernail — Chief Executive Officer

Thank you very much and thank you everyone for joining us here on the first quarter call. More than anything else, I want to thank the teams here at IDEX, who do just a tremendous job being laser sharp focused on our customers, understanding that in a market like this, we really do need to execute and execute well and they've done that. And then discipline around how we spend this free cash flow. And so the teams — I'm very proud of the team that we have and the culture that we've built. And I look forward to catching up with everybody in the next 90 days. Take care.

Operator

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.

Duration: 37 minutes

Call participants:

Michael J. Yates — Vice President and Chief Accounting Officer

Andrew Silvernail — Chief Executive Officer

William Grogan — Chief Financial Officer

Allison Poliniak-Cusic — Wells Fargo — Analyst

Michael Halloran — Robert W Baird — Analyst

Deane Dray — RBC Capital — Analyst

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Nathan Jones — Stifel Nicolaus and Company — Analyst

Joe Giordano — Cowen and Company — Analyst

Bryan Blair — Oppenheimer & Co — Analyst

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