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IDEX Corp (NYSE:IEX)
Q3 2019 Earnings Call
Oct 30, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the IDEX Corporation Third Quarter 2019 Earnings Conference Call.

[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.

Mike Yates -- Vice President and Chief Accounting Officer

Thank you, Doug. Good morning everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying 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 months ending September 30th, 2019. And later today, we will file our 10-Q. The press release, along with 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 is as follows; we'll begin with Andy providing an overview of our operating performance in the quarter, Bill will then discuss our third quarter financial results and walk you through the operating performance within each of our segments. And finally, Andy will wrap-up with an outlook for the fourth quarter and full-year 2019. 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 13684164, 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 the last night's press release and in IDEX' filings with the Securities and Exchange Commission.

With that, I will now turn this call over to our Chairman and CEO, Andy Silvernail.

Andrew Silvernail -- Chairman and Chief Executive Officer

Thanks, Mike. Good morning, everybody. I appreciate you joining us to discuss our 2019 third quarter operating results. In the challenging macro-environment, I'm extremely proud of my team. As you know, I have had concerns about the overall demand volatility and the potential for further erosion. We have a short-cycle business. We go into any given quarter with only about 50% of the quarter booked. We were prepared, we got ahead of the challenges, and we are executing.

In the quarter, our team delivered outstanding margin expansion, hitting all-time highs for gross margin and operating margin. The healthy margin expansion helped us deliver another record quarter of adjusted EPS and we reduced working capital to drive another record quarter of free cash flow. The results were achieved in a decelerating commercial environment.

Organic sales were flat in the quarter. The global demand for industrial products definitely weakened in the third quarter, with manufacturing activity decontracting for the first time since 2016, and we are certainly feeling it. Lingering trade tensions and uncertain trade policy, have weighed on global growth with customers and business leaders hesitant to spend. This has led to a slowdown in most geographies.

With that said, we remain confident in our ability to thrive in this environment. We're executing the playbook we've spoken about to you all year. We are being prudent about costs, and we are focusing on productivity, while continuing to invest aggressively in our exceptional long-term growth prospects.

We have built IDEX to perform throughout a cycle, and we are doing the things that make IDEX different. We are investing in great teams, who focus on the critical few priorities within our outstanding businesses, all of which is in service to our customers. This is what separates IDEX from our competition and allows us to deliver for our customers, employees and shareholders regardless of the macro-environment. We are fortunate that our durable, diversified business model, produces exceptional free cash flow, and we have an outstanding balance sheet. These facts allow us to have abundant capital to both invest aggressively in organic growth and drive returns through capital deployment.

Let me take a moment to talk about capital deployment before turning it over to Bill for some color on the financial results.

The integration of Velcora is going extremely well and the teams are delivering on the key value drivers. And as we get inside the business, I am even more excited about the possibilities that Velcora brings to our Sealing platform. M&A continues to be a top focus for us, but remains a challenge in the current environment due to valuation. Our teams are hard at work on both the cultivation and evaluation of several deals. With nearly $2 billion of capacity based on existing cash, availability under our revolver and a very healthy balance sheet, we have the capacity to support the right opportunities, while remaining disciplined within our return framework. We'll only move forward on a deal when the target fits the IDEX criteria.

Along with the acquisition of Velcora, we returned $38 million to shareholders via dividends in the quarter.

With that, let me pause here, and Bill, I will turn it to you for a discussion on financial results and the segment details.

William Grogan -- Senior Vice President and Chief Financial Officer

Great. Thanks, Andy. I will start with our third quarter financial results on slide four. Q3 orders of $586 million were down 5%, both overall and organically, driven by softness across all segments and tough comps versus last year. Q3 sales of $624 million were flat overall and organically. We did see growth in FMT and HST, but it was offset by a decline in FSD that was primarily driven by project timing.

We expanded gross margins in the quarter by 20 basis points to 45.2%. However, excluding the $3 million fair value inventory step-up charge related to the Velcora acquisition, adjusted gross margin was at an all-time high of 45.7%, up 70 basis points. This was primarily due to strong price capture and productivity initiatives, partially offset by continued investments in engineering related to new product development.

Q3 operating margin was 22.7%, but adjusting for both the fair value inventory step-up and restructuring expenses, adjusted operating margin was 25.2%, an all-time quarterly high for IDEX and up 120 basis points compared with the adjusted prior year period, mainly driven by our gross margin expansion and lower SG&A costs, which were driven by decreased variable compensation expenses and tighter cost controls across the business.

Included in the restructuring charges, was an approximate $10 million impairment charge related to the wind down of a small business line within HST.

Our Q3 adjusted effective tax rate was 19.1%, which was lower than the 20.3% in the prior year period, mainly due to changes in US Treasury regulations, as well as the mix of global pre-tax income among our jurisdictions. The adjusted ETR of 19.1% was also 340 basis points lower than our previously guided ETR, due to a higher excess tax benefit from greater than expected stock option exercises, as well as a favorable impact from the 2018 income tax return to provision adjustment. This lower ETR provided $0.06 of EPS favorability in our quarterly results compared to our previous guide back in July.

Q3 adjusted net income was $117 million, resulting in a record adjusted EPS of $1.52, up $0.11 or 8% over prior year adjusted EPS. Finally, free cash flow was very strong at $146 million. It was up 28% over last year and 125% of adjusted net income. This was our highest free cash flow of all-time.

I will now turn to the segment discussion. I'm on Slide five, starting with Fluid & Metering. Q3 orders were down 1% overall and flat organically, mainly driven by softening demand in the industrial market and continued declines in agriculture. Q3 sales were up 1% overall and up 2% organically, attributable to the growth in our pumps, valves and energy businesses, due to strong performance around our targeted growth initiatives but partially offset by the slowdown in the industrial short-cycle book-and-turn activity during the quarter.

The municipal water business remains solid with stable spending projected for the remainder of '19. In regards to the agriculture market, the market dynamics remain unchanged due to continued tariff pressures and depressed commodity prices, which has put pressure on the Banjo business all year. Preseason orders are flat compared to prior-year period, and we are not forecasting any near-term change to the US agriculture market performance.

Finally, operating margin was outstanding at 32.2%, up 270 basis points over the adjusted prior year quarter, mainly due to a widening price cost spread, driven by the team's ability to continually capture value for their products and deliver on their productivity initiatives. FMT really executed during the quarter.

Let us move on to Health & Science, turning to Slide six. Q3 orders were down 4% overall and 6% organically mainly driven by continued market pressure in semicon and automotive, as well as the industrial slowdown impacting about one-third of the sales in HST that are industrially exposed. Orders were also impacted by timing as a few large life science blankets got pushed into the fourth quarter. From a sales perspective, Q3 sales were up 3% overall and 1% organically, driven by strength in the life science business, as they continue to experience growth tied to new product development and collaboration with our key customers.

At Gast, we continue to see MPT project wins, but as discussed earlier, we started to see challenging market conditions in the third quarter due to weakened North American industrial distribution demand. For MPT, strong results in Q3 were driven by shipments of some long lead time projects, reversing the negative trend we experienced in the first half of the year. We are seeing positive momentum within key pharma markets, and our commercial funnel continues to grow. Expectations are to deliver positive growth for the year.

Finally, within Sealing. Pressure across the semiconductor, industrial and auto markets continue. Although we are beginning to see signals of reaching the bottom of the semi decline, their orders and sales are still challenged. From a margin perspective, excluding the fair value inventory step-up charge and restructuring expenses, operating margin increased 30 basis points to 23.8%. This was primarily due to the higher volume and price capture, partially offset by higher growth investments and amortization related to the Velcora acquisition.

I am now moving to our final segment, Diversified. I'm on Slide seven. Q3 orders were down 10% overall and 9% organically, mainly driven by pressure on the projects side of the business, as customers remain cautious around making large investments, as well as tough comps in dispensing and rescue to large project orders in the prior-year period. Both dispensing and rescue orders were down over 20% organically in the quarter. Q3 revenues were down 5% overall and 3% organically, and I will provide a little bit more color on that in a minute.

Adjusted operating margin of 27.2% decreased 50 basis points in the quarter. This was mainly due to the reduced project volume. Sequentially, the segment was up 10 basis points versus the second quarter. FSD's performance was mainly driven by the following; on the fire side, core OEM and municipal markets continue to perform well. We are experiencing steady growth across our product offerings, as well as continued momentum around our new SAM product launch.

Turning to rescue. Sales declined mainly due to project delays associated with political uncertainty, coupled with a tough comp from the prior year period. US performance was slow due to a delay in FEMA spending, but expectations are that we will see a rebound in the fourth quarter. BAND-IT performance remained strong based on wins with our targeted growth initiatives. Even as we see general softness in the auto and energy markets and pressure within the industrial space, BAND-IT continues to take share and grow in these areas. Finally, dispensing story remains similar to the first half of the year, due to a tough-comp against some large project wins in 2018 with no new projects occurring this year. As such, the business was down double-digits compared to prior year, but we do expect to cycle back to growth in 2020.

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

Andrew Silvernail -- Chairman and Chief Executive Officer

Thanks, Bill. So let me wrap things up, and I will provide some details here regarding 2019 for both the fourth quarter and the full-year. I'm on the last slide, that's Slide eight.

In Q4, we're projecting EPS to be in the range of $1.33 to $1.35, with flat organic revenue. Operating margin should be about 23.5%. We are estimating about a $0.01 top-line headwind from FX based on the September 30 rates. This translates to about $0.01 on the bottom line EPS headwind. The Q4 effective tax rate should be about 22%, and corporate costs in the fourth quarter will be around $18 million.

If we look at the full-year 2019, we are projecting full-year EPS of $5.80 to $5.82. Full year organic revenue is projected to be about 2%, with operating margins at approximately 24%. We should have about a 2% headwind from FX based on the September 30 rates. The effective tax rate for the year to be about 20.5%. CapEx is anticipated to be about $55 million, and free cash flow should be about 105% of net income. And finally, corporate costs will be about $73 million for the year.

As always, these earnings guidance expectations, excludes anything from acquisitions or restructuring.

With that, Doug, let me turn it over to you, and we'll open it up for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session.

[Operating Instructions] Our first question comes from the line of Mike Halloran with Robert W Baird. Please proceed with your question.

Mike Halloran -- Robert W Baird -- Analyst

Hey, good morning, everyone.

Andrew Silvernail -- Chairman and Chief Executive Officer

Good morning Mike.

Mike Halloran -- Robert W Baird -- Analyst

So let's start with the underlying trajectory, what you are seeing right now. Lots of puts and takes in the order numbers. SMT is flattish, which is typically a more cyclically sensitive business. The other pieces had some project timing related things. So maybe you could just talk about what you are seeing as like the core underlying demand characteristics today. What that trajectory looks like through the fourth quarter? And then maybe some puts and takes on how you are looking at growth for 2020.

Andrew Silvernail -- Chairman and Chief Executive Officer

Sure. So, Mike, first of all, good question. That's the biggest one that's on our minds. If you -- do have to kind of separate out the puts and takes and this is the way I do it. You've got some project timing issues meaning last year, we had an exceptionally strong third quarter, if you look at rescue and dispensing. And those are some pretty good-sized numbers. And then in -- last year, we got some larger orders in our life science blanket orders that we typically get that we're going to get in the fourth quarter. If you take those three things and you neutralize those three things and you look at the underlying run rate of the business, it's basically flat to down 1%. It is about 0.5% if you just kind of look at the underlying day rate businesses. And I think that's pretty consistent with what we've seen.

And so as we get into the fourth quarter, I think you will see some other puts and takes around there with that day rate business. What we've seen in early October or in October so far is basically kind of meeting our expectations of where we went into the quarter. And so I think, we're kind of holding at this flattish to down 1% right now in -- on the core order rate of the businesses. So I don't see a reason for that trajectory right now to change meaningfully as we go out.

Now that being said, we've an easier comp in the fourth quarter versus what you saw last year, and then you got two pretty tough comps in the first and the second quarter of next year. So if you assume that you don't get a change in trajectory, I think, that kind of flattish revenue growth in the fourth quarter feels about right. And then you will face some tougher comps in the second -- first and second quarter with that getting easier in the third and the fourth quarter of next year. That is kind of how we are looking at it.

Look, it's early to call 2020 based on our short-cycle nature of our business. What I would say, the first pass of that looks like a tougher first half, easier second half, balanced out with somewhere in a range of, I want to say, plus 2% to negative 2%. That's what that feels like right now. But again, really early on. We are in the process of tightening up our 2020 annual plans, but that is what the first pass kind of looks like, Mike.

Mike Halloran -- Robert W Baird -- Analyst

Now, that makes lot of sense. And then on the margin side, very strong execution this quarter. Walk through any puts and takes you think, that might help us on a forward basis to figure-out sustainability of this level. Where there anything -- any incentive comp that's different? Any other kind of one-off things that would move this around one way or another?

William Grogan -- Senior Vice President and Chief Financial Officer

No. Yeah, I think overall, obviously, with the revised results for the full year, there is a decrease in some of the variable compensation stuff. I think fundamentally, obviously, FMT's margins were really strong. That's where we are going to see probably the most decline is -- if we are in this industrial softness here recently, and they'll delever probably more than the other businesses. So that will put more pressure. I think, for the third quarter, we guided around 23.5%, which is probably what you would see going forward at a consistent revenue run rate.

Mike Halloran -- Robert W Baird -- Analyst

Thanks guys. Appreciate it.

Andrew Silvernail -- Chairman and Chief Executive Officer

You bet Mike. Thank you.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thanks, good morning everyone.

Andrew Silvernail -- Chairman and Chief Executive Officer

Hey Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, Andy, I appreciate that you made the comment that you were signaling that there was slowing going on. In fact, you were among the first senior guys back at the EPG Conference in May to say, a slowing was happening. So as -- so no one should be blindsided by this. But as you -- orders inflect negatively here, what -- and I know, you are short cycle, but you talked about customers hesitating to spend.

What is the discussion at the margin right now in terms of committing -- willingness to commit capital? The order rates as they look in the fourth quarter? Are we going to stay negative? Or is it worsening versus the way we started the third quarter?

Andrew Silvernail -- Chairman and Chief Executive Officer

I don't see right now, Deane, that it is worsening. But let me kind of back up and talk a little bit about the hesitancy. And like you said, we talked about it publicly at EPG. The -- as you look at this, the issue at hand is that there's just a real hesitancy based on the uncertainty in the marketplace, right? There's no -- there aren't kind of big demand bubbles, meaning negative issues that things are kind of imploding outside of what I've talked about in the past, these kind of human-made issues, that are around the world.

But what that is doing, is -- it's reverberating back and people are just hesitant to spend, they're hesitant to hire. We are seeing more lay-offs in the manufacturing sector than we have seen here in quite some time. And so I think, this world of uncertainty, unfortunately, doesn't -- isn't likely to revolve -- resolve itself anytime soon, right? So you have got the constant back and forth regarding trade tensions that are out there.

The folks who seem to -- with anybody who knows what is going on, the folks who spend a lot of time on this are very doubtful that any meaningful positive improvement happens, except for maybe a standoff, right. So it just doesn't get worse. So you've got that and then really, as you get into the election cycle next year, these are not areas of our expertise, but in terms of talking to people out in the field, people are holding-off as long as they can to commit large chunks of money into either hiring or into capital in really uncertain times. So my view is that it is going to be bumpy here for quite some time.

Deane Dray -- RBC Capital Markets -- Analyst

All right. So the macro commentary is really helpful, but let's pivot now into your end-markets. And if we just go back to the second quarter when we talked about where the softening was showing up, it was auto, it was semicon, it was ag for you guys. And that was like 10% of the portfolio. It really does sound like that is still the kind of ground zero of where you're seeing the slowing. Has that spread to these any other verticals?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah. I think that's the change in the third quarter. And if you remember, that was what I said -- I was concerned about was you've seen those three continue to struggle. And then you've seen the industrial start to come down, right? FMT, which is two-third's of our industrial exposure or one-two our industrial exposure -- you can see, although it's still good relative to what I think the rest of the world is experiencing, you are definitely seeing that. And I expect that to continue here for a little while.

I think that the -- let me -- the puts and the takes, right? So I think that -- the negatives are general industrial slowing, and I think we are going to face those headwinds here, at least through the second quarter of next year. It is hard to imagine that, that is not the case. And then you've got the question of whether ag, semi are bottoming.

If you look at kind of the auto side, you are probably bottoming in China auto, and then you probably -- if you look at the expectations of auto builds, those are down for next year, so maybe a little more pressure there. But I do think, that net-net, those are still going to struggle for a little while until we see some uptick in semi, which by the way, we've seen some things that look like a bottom in semi. Ag, I think, is still a question mark here to tell, with the trade tensions. And then municipal and health of science, those are going to hold in.

Deane Dray -- RBC Capital Markets -- Analyst

Yes. That is exactly what we would expect. And look, you cannot control the slowing on the end-markets, but you are obviously doing a great job on margins and cash flow, so congrats on that. Thank you.

Andrew Silvernail -- Chairman and Chief Executive Officer

Well, thanks, Deane. I think the important thing there is controlling our own destiny. We have talked to all of you guys about the playbook, we've looked at it in a slowing environment. We are certainly working that. We know how to deal in those environments and make sure that we deliver for our customers, our people and certainly our shareholders. Next question.

Operator

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

Nathan Jones -- Stifel -- Analyst

Come on, Andy, control the end-markets. Question on working capital. I mean, it looks like you guys managed inventory really well in the quarter in the face of probably some slower revenue that you were anticipating. Maybe you can talk about whether you need to reduce your inventory levels here in the face of this lower demand environment, whether you can generate some cash over and above what your excellent free cash flow conversion normally is here in this environment?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yes. I think, Nathan, so first of all, this is something from a business model standpoint we have talked about a lot that even in times where you are getting pressure on the top-line of the business and pressure on margins that the balance sheet delevers really nicely. And so from a cash EPS perspective, that will hold up well. I expect we will see more delevering in the fourth quarter. And then we will kind of see where we are in terms of what we are planning for next year. But certainly, in the fourth quarter, I expect more delevering.

Nathan Jones -- Stifel -- Analyst

So you're not in any kind of heavy downturn here. You are talking about flat 4Q, kind of plus 2% to minus to 2% 2020 outlook. Are there any meaningful cost action plans that you take here? Are there particular businesses where you are seeing worse demand where you think you need to take some cost actions, and maybe what those would be?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah, you absolutely do. And to be clear, in this kind of environment and really for IDEX in total, these kinds of things are never broad-based, right? We are never -- we are not a Company that does these kind of wacky 5% reductions across the Board. The key to any kind of -- facing an environment like this is, number one; you want to invest in the things that drive long-term, sustainable competitive advantage and value.

And for us, that really comes down to two big things. The first; our people, and we view people as being central to the business model. It is what scales in this company. And so we are going to continue to invest in the leadership development around the Company and making sure that we are very focused on that.

Second, it is really kind of innovation in our core markets. If you think about the 80-20 and the segmentation work that we do, around where are the profit pools? How do you continue to make those growth bets going forward? And then what you do is you look kind of around that outside of those core strategic areas, and you just have to be prudent, right? There are places that we are already making targeted cost reductions.

We are going to have to do some more of that if we see some weakening there. And that is just the right thing to do for the long-term competitiveness of the Company. And so we are executing that playbook, we are looking out into the future. As I said, my expectation in this current environment is what you really have in 2020 is a pretty tough comp in Q1, Q2 and then an easier comp in the back-half, weighing out to that kind of plus 2% to minus 2%.

Nathan Jones -- Stifel -- Analyst

Thanks for the color. I'll pass it on.

Andrew Silvernail -- Chairman and Chief Executive Officer

Thanks, Nathan.

Operator

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

Matt Summerville -- DA Davidson -- Analyst

Thanks. A couple of questions. First, can you maybe give a little bit more geographic granularity in terms of incoming orders and organic performance in the quarter?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yes, Matt. Bill, you want to tackle it?

William Grogan -- Senior Vice President and Chief Financial Officer

Yes, sure. No, I think, it was -- Europe is basically maintain its lower level that we've seen over the last couple of quarters. It was really more declines in North America that we started to see that broader orders -- order number down. We actually did outperform a bit in some of the emerging markets, but again relative to the fundamental macro situations within -- in India and in China, our teams really delivered on their targeted growth initiatives and grew in the upper single digits in those areas.

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah. So the incremental softening, Matt, has really been around North America.

William Grogan -- Senior Vice President and Chief Financial Officer

Exactly.

Matt Summerville -- DA Davidson -- Analyst

Got it. And then just back maybe to FMT margins, up $270 million sequentially. Up, I think, -- or $270 million year-over-year, up $170 million sequentially. On a sequential basis, that is on lower revenue. So can you talk about, are you pushing more price through that business? Are your input costs coming down meaningfully? Maybe just kind of parse-out how you're getting that margin and what the right way to think about FMT margins are kind of going forward at what you are calling kind of a more subdued general industrial environment for that business?

William Grogan -- Senior Vice President and Chief Financial Officer

Yeah. I would say 30% is probably closer to what its normal run rate is. Those businesses, even on lower volume, are running little lights-out with the remaining projects that they had. And then the input costs have decreased. I think, the teams, as they looked at where they are getting some pressure from tariffs, they have been able to come up with some supply chain solutions to reduce the impact of those. And the pricing that we put out last year in Q3 to offset some of those just levered better within the quarter.

Matt Summerville -- DA Davidson -- Analyst

Got, it. That's all from me. Thank you guys.

William Grogan -- Senior Vice President and Chief Financial Officer

Thanks, Matt.

Operator

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

Brett Linzey -- Vertical Research Partners -- Analyst

Hi, good morning guys.

Andrew Silvernail -- Chairman and Chief Executive Officer

Good morning, Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

Hey just wanted to come back to price cost. It sounds like you got a very good price traction in the quarter. You do start to lap a tough like-unlike price in Q4 next year. But given the moderating commodities, does price start to flatten out, as we get into 2020? Or do you still think, you can achieve positive price in some of those businesses?

Andrew Silvernail -- Chairman and Chief Executive Officer

Brett, we will get positive price in 2020, I feel very confident in that. The nature of the business model, the nature of our competitive positioning, it will be lighter than certainly in 2019, there is no doubt about it. But I don't see any reason why we won't sustain that kind of 30 to 40 bp price cost leverage that we have gotten in the past. Bill, anything else you would add to that?

William Grogan -- Senior Vice President and Chief Financial Officer

Yeah, I think, the spread as we come into the back half was -- is higher than that. But next year, as we calibrate around our 2020 pricing actions, it will come down a bit. But to Andy's point, I think, we'll still be significantly positive on the price cost differential.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay. Great. And then just shifting to the funding delays in rescue. It sounds like that gets resolved in Q4. What informs that I guess? And then have you seen any type of funding delays broaden to other agencies, as we enter this election cycle?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yes. So with rescue in particular, there are kind of two things that you saw. One is just around the world, we have seen this in the past, it is happened many, many times, you get -- the sovereign governments who are buying product from us, as things get tight, they can pull-back. And so we are seeing that relieve. Why? Because we are very close to our customers, and we know when money is going to be relieved just generally.

So we feel pretty good about that. And then you have got the FEMA issue that Bill referenced. For some reason, and we don't quite understand why, FEMA money got tied-up here in the third quarter, and it feels like, it is been released already. There is no reason to believe that is not going to happen or hasn't happened already.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, got it. I'll pass it along. Thanks guys.

Andrew Silvernail -- Chairman and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Andrew Buscaglia with Berenberg Capital Markets. Please proceed with your question.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Hey guys. Can you make -- can you comment more, you said that -- you think semis was showing signs of bottoming, and that is -- can you just remind us, first-off, what -- how big is that as a percentage of your sales at this point? And then what -- why do you say that? Or what are you seeing specifically?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yes. So it's not a big chunk in total.

William Grogan -- Senior Vice President and Chief Financial Officer

About 3%.

Andrew Silvernail -- Chairman and Chief Executive Officer

It's about 3% [Phonetic] in total for the business. The biggest impact there is in our Sealing business, and then we have a small pump business that faces that also. And when I say, bottoming or inflecting, there is no reason to believe that this thing is picking-up dramatically. But we have gotten significant signals from a handful of the big players that they are projecting stronger demand.

Now that is mixed with a couple of other things that they see some softening in there. But we are converting a lot of customers over time. And so it is -- a lot of that has been a share game on top of kind of what's happening to the market. So in other words, Andrew, we are getting direct signals from people on higher demand to get our supply chains ready. But to be clear, I'd not use us as a bellwether for the semiconductor market. We are not the right people to talk to about that.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Got it. Okay. And then I know people are kind of taking up this question a bit, but it's -- you hurt your sales only about 2% -- or you'll do about 2% this year.

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

And you really -- you drove a really impressive incremental margin-off of that. That is on the heels of strong incrementals in the prior year. So the question is how long can you keep this up at -- if you are only -- it sounds like, correct me if I'm wrong, you are implying about 2% plus or minus in 2020 for the top-line. So it just seems unrealistic that expansion is likely.

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah. I think -- so there are a couple of things that really matter there. The first one is the overall top-line, when we are -- I want to call it 2%, is kind of the tipping point, right? And 2%, you're covering your inflation, you can still get incremental margins. You get north of 2%, 3%, 4%, you start to really drive those incremental margins in that 30% to 35% range.

But 2% is about where you hit parity with just offsetting normal inflation that happens in the business. So overall, kind of that volume number matters. Second, that price cost -- what you get between price and cost, if we can keep that 30% to 40%, that will play into that first part and certainly adds to any kind of expansion that you drive for here going out. So look, if we are sub 2% growth rates, it is going to be harder to get any kind of expansion, and we work to really hold the line, is what we work to do. And if you get north of 2%, we will absolutely get expansion just with the normal contribution and the price leverage that we get.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Yeah, OK. And I guess, the flip side is you're -- you sound like it's unlikely margins will degrade much, if anything.

Andrew Silvernail -- Chairman and Chief Executive Officer

So let's take the other scenario. So let us say we are down next year. And we've talked about kind of how we thought about that, and I'm going to bore you guys for a second, but our overall playbook is looking at what I call a vanilla recession, looks at kind of 5% down. That is $125 million of top-line coming down, that would be about $75 million, unabated that would hit the bottom-line.

Our goal would be to offset that by about $25 million of cost reductions and so you can do the math on how that works out. We are -- in that kind of environment, we're going to be super thoughtful. I mean could you go further, could you go deeper? Have we done that in the past? We have, but we won't do that. And as I've said to you all in the past, if that scenario plays-out that I'm talking about, we are going to make sure that we keep reinvesting aggressively in the business. And so that $25 million range is about what you can do and not have to make other very, very hard trade-offs. And so we would make sure that we are super thoughtful. Again, we are investing in those critical priorities around our people and the really attractive businesses we have in terms of innovating in those profit pools. But that is how we are thinking about it general.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Okay. Yeah, that's really helpful. Thank you.

Andrew Silvernail -- Chairman and Chief Executive Officer

You bet.

Operator

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

Joe Giordano -- Cowen -- Analyst

Hey guys, good morning.

Andrew Silvernail -- Chairman and Chief Executive Officer

Good morning Joe.

Joe Giordano -- Cowen -- Analyst

Hey, I apologies in advance, you might have covered this. I got disconnected for a little bit in the beginning of the Q&A here. But when I look at your capex, generally, it scales up in the second half of the year. Clearly, you have some markets moving other ways and you are being cautious, but how should we think, about that level for the rest of the year and into next year?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah. So we're going to be at about $55 million, which is about $5 million less and that was not our intention. It is a matter of timing and the ability to actually get some stuff in within the fourth quarter. So that $55 million, $60 million range, that is a healthy range with our business right now and I would expect that to be similar going into next year, plus or minus.

Joe Giordano -- Cowen -- Analyst

Okay. And then is your fourth quarter in HST -- I know, some of it seems timing related with the order decline there, but is that like a direct impact into the revenue number that you anticipate for Q4 there?

Andrew Silvernail -- Chairman and Chief Executive Officer

I don't think it's a big impact. It is just that timing of that order, those things are blankets that are going to be in the future. So I'm not -- I don't think that is a real impact to the fourth quarter.

William Grogan -- Senior Vice President and Chief Financial Officer

Yeah. I mean OEMs, when they place it, we've had some volatility between Q3, Q4 and Q1 that have created some noise in the comps there.

Joe Giordano -- Cowen -- Analyst

Okay. And then if I could just clarify something, Andy, I think you -- in your downside analysis, that you just ran through on a 5% decline, did you say $75 million would come off, like, unabated to the bottom-line on $125 million decline. Did I just hear that?

Andrew Silvernail -- Chairman and Chief Executive Officer

Yeah. I'm just using the -- if you do nothing, right, and effectively, it flows through at what we call material margin, right. So material contribution or value added, that's what it would be if we did nothing, right? So that's 50% of the contribution margins of the Company.

Joe Giordano -- Cowen -- Analyst

Okay. Thanks.

Andrew Silvernail -- Chairman and Chief Executive Officer

You bet.

Operator

[Operator Instructions] There are no other questions in the queue, I would like to hand the call back to management for closing remarks.

Andrew Silvernail -- Chairman and Chief Executive Officer

Well, thank you very much, Doug. I appreciate it. And thank you all for your time and attention here on our call. Again, in this kind of volatile environment that we have all been living in, I could not be more proud of the team, in terms of how they have executed and delivered for -- really, for our customers first and then for our people and also for you, our shareholders. So we are thrilled about that. We appreciate the support that we get from the investment community. And with that, we will say goodbye and talk to you here again in 90 days. Take care.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Mike Yates -- Vice President and Chief Accounting Officer

Andrew Silvernail -- Chairman and Chief Executive Officer

William Grogan -- Senior Vice President and Chief Financial Officer

Mike Halloran -- Robert W Baird -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Nathan Jones -- Stifel -- Analyst

Matt Summerville -- DA Davidson -- Analyst

Brett Linzey -- Vertical Research Partners -- Analyst

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Joe Giordano -- Cowen -- Analyst

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