藝達思 (IEX) 2001 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the IDEX (Company: IDEX Corporation; Ticker: IEX; URL: http://www.idexcorp.com/) fourth quarter and year-end conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press the star, then zero keys on your touch-tone telephone. If anyone should disconnect and need to rejoin, please dial 888-413-4411.

And as a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Martin of FRB Weber Shandwick. Please go ahead, sir.

Thank you, and thank you for joining us this afternoon.

Earlier in the day, we distributed a press release outlining the results for the fourth quarter and year ended December 31, 2001. If anyone has not received a copy of this release, please call FRB Weber Shandwick at 312-266-7800 and my associate, Samir Patel, will provide you with an additional copy.

Joining us today from the management of IDEX Corporation, we have Dennis Williams, Chairman, President, and Chief Executive Officer; Wayne Sayatovic, Senior Vice President of Finance and Chief Financial Officer; and Doug Lennox, Treasurer. Management will provide an overview of the fourth quarter year, and then we will open the call to your questions and answers.

Before we begin, however, I would like to remind all participants that this conference call may contain certain forward-looking statements that are subject to the Safe Harbor found in today's press release.

At this point, I'd now like to turn the call over to Dennis.

Thanks, . I'd like to welcome everyone to the call.

The agenda that I'll follow today - I will start with the fourth quarter results, then comment on the full year results, I'll give you some comments on each of the groups, talk about our restructuring, give you a progress report on the initiatives we have underway - Six Sigma, global sourcing and e-business, and then talk briefly about our outlook.

So starting with the fourth quarter, if you recall, the assumption that we made for our fourth quarter restructuring was that fourth quarter sales would equal third quarter orders. That was $171 million assumption for sales. Sales actually came in at 168.8, so fairly close to the assumption that we made. That's up two percent from a year ago. Acquisitions accounted for a 14 percent increase. We saw a decline in our base businesses of 12 percent and a negligible currency impact in the fourth quarter.

International sales grew five percent. Domestic declined one percent, giving us 43 percent of our total sales are international in the fourth quarter versus 41 percent from a year ago. Including acquisitions, we saw Europe down one percent, Asia up 25 percent, the Americas exclusive of the U.S. up eight percent, and the other territories up one percent. If you exclude acquisitions, which maybe is a more consistent way to look at it, Europe was down 12 percent, so very much like our base business in total; Asia up eight percent; Americas down four, so not quite as significant as the U.S. market; and the all others, which are fairly insignificant - down 30 percent.

Operating margin - year-over-year down in all three groups. And the causes, as we've pointed out in the press release - significant reduction in our base businesses as you can see, under-absorption due to the lower volumes and the planned inventory reductions that were fairly significant this year, the acquisitions have - currently have lower margins than our base businesses, and we also had a small incremental cost for the initiatives.

The Dispensing Equipment business experienced the largest operating margin decline, but there we saw really significant drop-off in sales - year-over-year, 27 percent, sequentially, 16 percent - some fairly substantial drop-offs, and I'll talk more about that when I discuss the groups.

Earnings per share - 25 cents versus a consensus of 23. Orders at 161.3 million, which is unchanged from the fourth quarter 2000, but a sequential decline, as we've pointed out in the press release. And to go back over that - first quarter was 190 million in orders; second quarter, 191; third quarter, 171; and fourth quarter, 161.

Now due to the unusual economic environment that we're in, I thought it might be worthwhile to talk a little bit about the monthly orders in the fourth quarter, which is something we normally don't do. In October, the orders were 60 million, which was a reasonable rebound from September. November, which is a shorter month and we saw some of our customers take extended holidays in November, the orders declined to 54 million. And in December, ourselves and many of our customers and partners, in fact, had shutdowns of two weeks or so, and budgets were curtailed in the month of December. We saw orders at 47.3 million.

So we expected lower orders, but clearly the economic conditions in the last two months of the year gave us a fairly low order level. We'll have to see how things rebound here in the first quarter. We do expect they will rebound, but we're not sure to what level.

Cash was another strong performance in the fourth quarter. Free cash flow was 19 million versus 22.8 in the fourth quarter of 2000. Backlog remains at about one month. But all in all, it was another challenging quarter for the industrial world.

For the year, sales of nearly 727 million - up three percent; acquisitions accounting for a 13 percent increase; a base business decline of nine percent; and a currency adjustment of negative one percent. International grew six percent, domestic one percent, making the international sales 42 percent of the total versus 41 in 2000. Again, including acquisitions, Europe was unchanged; Asia, plus 21 percent; the Americas, plus seven; and the rest of the world - Middle East and Africa, plus 30 percent. Looking at it excluding acquisitions, Europe was down 10 percent very much like the base business; Asia, plus five; Americas, a negative five, so not quite as significant as the rest of the Americas - the core business; and Middle East Africa 22 percent.

The operating margin - 11.6 percent versus sixteen-and-a-half - the decline there due to the same reasons we cited for the quarter. Earnings per share before restructuring at $1.28 versus . And orders at 713 million, up two percent, and if you exclude acquisitions and foreign exchange, a negative nine percent, which is pretty much in line with the sales decline.

Cash was a record year, and we're very proud of that - 86 million versus 72 million from a year ago. We reduced receivables and inventory by 45 million through the year, so we're seeing some benefit from our working capital initiatives - we're seeing some payoff there. Cap ex came in at 21.6, which is slightly less than the 23 we forecast during the third quarter call. Debt paydown was 82 million. As you recall, in 2001 we made acquisitions worth 132 million and we paid off 82, so over 60 percent of the acquisitions were paid off in the first year.

Now let's take a look at the groups. Pump Group in the fourth quarter - these are fourth quarter comparisons - the base business - orders down 12.1 percent, sales down 10.6. If you include acquisitions, the fourth quarter comparison up two percent in orders and up 7.4 percent in sales. For the year, base business down 9.6 percent in orders, 8.5 percent in sales.

If you include acquisitions, up 6.1 percent and 8.1 percent for orders and sales respectively. Sequentially, the base business down six - this is a third quarter to fourth quarter comparison, so a sequential comparison - base business down six percent in orders, seven-and-a-half percent in sales. If you include acquisitions, down 6.7 percent in orders, four-and-a-half percent in sales. What I think is significant here is the operating margin improvement sequentially from 12.8 percent in the third quarter to 15.2 percent in the fourth quarter. Now there are obviously - in the fourth quarter, you have some adjustments, but clearly the operating margin is up sequentially on lower sales, which we feel good about.

In Dispensing Equipment, fourth quarter comparison year-over-year - orders down 12.9 percent, sales down 26.6 percent. For the year, orders down 17.8 percent, sales down 17.4. And sequentially, orders down 2.6 percent and sales down 15.1. So a substantial decline here. Operating margins dropped off dramatically. If you look at the fourth quarter year-over-year comparison, the main causes are Fluid Management , followed by , and a small portion caused by Fluid Management . Sequentially, Fluid Management is still the main cause of the fairly dramatic slowdown, and I'll talk a little bit more about that. we saw some decline, and the same with Fluid .

Fluid sales were down 27 percent sequentially and 46 percent year-over-year, looking at the fourth quarter. Now in Europe, we're unable to get cost out as fast as we can in the U.S. We've made some progress there, but the decline in operating margin is principally due to our inability to get cost out quickly in that business with that kind of a precipitous decline. More will be accomplished in this next year. In 2002 we will be integrating more fully the European operations, as I had mentioned in a prior phone call. That's going well so far, but there's a lot of work to be done there. We've got new products for the Show in April, which is a big show in the - in the paints and coatings industry. So a lot of good things going on there. We've built a little backlog in the last quarter, so I'm cautiously optimistic we'll see a return to a better business level in Europe. Europe dropped off rather dramatically with - in the post-September 11 time period, but as I talk with our people over there now, there is some cautious optimism across the board. So hopefully, Europe will begin to improve because we saw things slow down rather dramatically there. deals in some very tough end markets. We've got some new products in the pipeline there to reposition the business. I'm confident we will be able to do that, but it's going to take a little bit of time. So it's still a pretty tough story at .

Fluid Management - we saw some decline, but Home Depot and Lowe's seem to be on track for 2002, opening a fair number of stores pretty much like they did a year ago. So we expect reasonable performance returning there in Fluid .

So, some work to do in this segment, but I think we see some opportunities coming.

In the Engineered Products area fourth quarter base business - orders down 7.9 percent, sales down 1.1. With acquisitions, orders up 5.4 percent, sales up 15.2. For the year, base business down 5.7 percent in orders, 5.1 in sales. With acquisition, up 12.7 percent in orders and 13 percent in sales. Sequentially third quarter to fourth quarter, our base business in this segment down 4.1 percent in orders, up two-and-a-half percent in sales. And with the acquisitions, down 6.1 percent in orders and flat sales sequentially quarter-to-quarter. Again, as with the Pump Group, we saw operating margin improvement from 14.1 percent to 16.4 on flat sales. So we see some improvements coming into that business, as well.

Turning now to the restructuring, as I think you all know, we took two charges - one in the first quarter and another in the fourth quarter. Both turned out to be 5.6 million, making it a total of 11.2. We closed the Gas facility. That was completed on schedule in September, and we saw the benefits kicking in the fourth quarter. We're closing the St. Joseph's facility of , and that work will go to and also to Ocala. So we will close that facility as part of our fourth quarter restructuring.

For the total company, the total reduction in workforce was 15 percent - about 600 people. We - it's a significant cut, but we felt it was necessary to lower our costs, improve our structure, improve efficiencies. And as we've said several times and I'll repeat it again here, the annualized savings from these actions will certainly exceed the charges that we've taken.

I'd now like to give you a progress report on our initiatives. Let me start with Six Sigma. The belt count, if you will - we now have 586 total belts. We added 27 in the last quarter. I'd mentioned I think in our last call that we had 20 distributors in green belt training, and all 20 of those green belts are about to be certified. The cost of poor quality of the - of the projects that they have worked on, which we don't bookkeep on our numbers - this is strictly for their account. These are customer-focus projects, so we see some real benefit coming from our channel here for the channel in total. But the cost of poor quality is $433,000 for those 20 projects. We will start another class in March for 20 more distributors, so we're very pleased that the distributors are in the game here and are committed to it. I've gotten phone calls from a couple of the distributors commenting about how happy they are that they're doing this and they see real benefit, so it's really good news.

The total completed projects internally - 108 for the year. In the fourth quarter, it was 49. The total hard savings in 2001 is just over $2 million. If you annualize the savings, it's just about $4 million, or roughly twice the hard savings for the year that we accounted for in the year. The average savings per black belt project is $62,000, for green belt it's about 15,000. We've got 244 open projects - 93 black belt, 151 green belts.

From a customer standpoint, on-time delivery has improved nearly across the board in the company. We report on 33 different units, so it's main units and sub-units. Twenty-seven of those 33 units had improvement. Fourteen of the 27 were very substantial improvement in on-time delivery. One of the 33 was unchanged, but they're at 99.8, so we'll let them - we'll let them - we'll give them a bye on that one. And five of 33 had a slight decline in on-time performance. Four of the five were smaller sub-units, but we'll focus a little more activity there.

So customers are feeling a difference. We hear back from them. The fact that distributors are in the game helps us. I think we're gaining a lot of momentum here. In 2001, we added and demand-flow to the toolkit. There are three-to-five day events with pretty immediate payback - reduces floor space, inventory, improves the efficiency. All of our businesses have been trained in these techniques, also. It's now part of our operational excellence toolkit. We've seen some benefits, and we'll continue to see benefits in '02 from the use of all of these tools. So we have pretty much a complete range of short-term to longer-term - simple problem, complex problem sets of tools we use that impact margins and efficiencies, but also working capital. So we're very pleased with our progress here.

Global sourcing - momentum is building here in global sourcing, as well. Savings for the year were 3.6 million. That's a 41 percent savings versus a prior source.

And just to kind of give you the scorecard here, we have placed 14.2 million of purchase orders - 5.2 million have been received, so it leaves an open purchase orders of nine million, which will yield about six million of incremental savings in 2002.

We have 22.7 million of components in the trial stage, and not all of those will be successful. But the annualized savings from all of those, were they successful, would be about 15 million, so a substantial savings in the trial stage right now. RFQs - requests for quotations stand at eighty-four-and-a-half million, and the total potential for outsourcing remains in the 170 - 180 million range, as it has for the last few quarters.

We continue to identify new suppliers and new opportunities. As you will probably recall, we set at the beginning of the year a stretch goal of $5 million of savings. We knew that no one knew how to do that, but we picked that kind of a number to get people to think differently - not to think incrementally. I'm very happy we've saved 3.6 million from basically a standing start - most of our businesses. I think that's great progress. We carry a lot of momentum into 2002, but we're just really getting started. So I'm very pleased with our progress here, as well.

In e-business, we launched IDEXconnect.com in September. As you will recall, our initial focus was distributors in the pump business. As of today, we have six distributors online - 121 users from those distributors. We have 155 IDEX internal users of the system. Eight Pump Group units have content on IDEXconnect. Over 1,100 models in the catalogue. Nine hundred plus publications that can be accessed. We have 13 live applications including order entry, order status and tracking and a number of other features. I mentioned in the last conference call that we were stretching like crazy to try to get the product configurator up and running in December. We stretched - didn't quite get there. It went into testing last week along with our virtual inventory model.

So things are progressing along there. The direction remains the same - continue to add functionality that the users want, add more pump distributors in this year, and to roll this out to our other two groups. I've talked with the distributors that are on the system right now. They love it. We're working to get seamless order entry going on all of them. It takes a little bit of work at coordination on their end and integration, but we're clearly gaining momentum here, as well.

To finish the comments on the initiatives, I guess I would say that we continued with all of these because we believe that they have substantial impact on the company in the longer term. These initiatives will help us drive the top line, the bottom line, cash flow, and will continue to improve customer satisfaction and loyalty. Even in this tough economic environment, we have stayed the course and we remain absolutely 100 percent committed to these improvements because we think they're important for the long term.

Let's turn now to the outlook. As we said in the - in the press release, we really don't know how long the weak business conditions will last. As all of you know, we're a very short-cycle business and our performance in any month or any quarter is dependent upon the incoming order rate. We're not anticipating any short-term economic rebound that's not in our thinking or in our plan. As you can see, we've taken very significant actions to resize the company. We're driving hard on all the initiatives and believe that in a - in a stable, flat sales environment, we'll see some operating margin improvement as we have seen in a couple of our Groups in the last quarter. We're clearly well positioned to capitalize on any recovery when it occurs, and as a management team, we are committed and will continue to drive for top-line growth, continue to tightly control costs, and increase the momentum of all the initiatives so that we can maximize the profit and the cash flow from the company.

So with that, I'll open it for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from Scott Graham of Bear Stearns. Please proceed.

Good afternoon, Dennis. Hi, Wayne.

Hi, Scott.

I have three questions - really just understanding, of course, that, you know, pretty much across the board, you guys are seeing, you know, end market weakness and obviously the first and foremost would be Fluid Management it appears. But would - could you give us a little bit more color on, you know, some of these - a couple of the businesses had sequential improvement, but still, on a year-over-year basis, we're still down pretty noticeably in pumps, less so in engineered products, and down in lubricant and what have you. And while I think I know the end markets of a lot of these, but would you kind of maybe give us the pecking order of, you know, which is weakest to which is best by end market in your top four - five end markets?

Well, I'm not sure we can give it to you that precisely because there isn't a lot of solid end market data that's on a consistent basis. We see weakness across the board. We saw Europe slow down pretty dramatically, and you can see that in the - in the Fluid Management numbers. has held up quite well, so that's really not the issue there.

If you look at the utilization information that comes out of the U.S. government, you see all industry sector utilization are down or flat at a - at a much lower level, so you don't see any rebound in those kind of trailing indicators. So, I mean I'd love to be able to tell you, Scott, you know, chapter and verse, market by market, but we just don't have that fine of data.

I was really talking about your order rates specifically - like, are you particularly weak in chemical, or are you particularly weak in auto. You know, historically you have kind of told us that the couple of end markets that you saw significant weakness in. That's what I was referring to - not a general economic statement - more of an IDEX order rate statement.

Well, auto is clearly down. is down. Those are very weak end markets - both auto and heavy vehicles. So those are weak and remain weak.

The Fluid business in Europe - that quite weak, and we saw a push-out and slowdown of orders there. We do expect that that will - that will turn and there will be new products introduced in April which we think will help that recovery, as well as what appears to be an uptick in attitude in Europe. Europe was pretty pessimistic in the last quarter.

The general chemical kinds of industries, because we sell through distribution, we can't tell you with a lot of precision what the exact end users are, but we know those segments have been flat for quite some time.

OK. Would you be able to tell us a little bit more about the dispensing equipment, particularly as it relates to the cost side of the equation? It looks as if there might be a fixed cost issue there. Could you maybe tell us how that could have turned into a loss position in the quarter?

Well, if you - if you look at the year-over-year declines and the sequential decline that I mentioned in Fluid Management , in Europe you don't have the freedom to act in exactly the same way you act in the United States from a - from a workforce reduction standpoint. So we have in some cases temporary employees that have fixed period contracts to help us get around some of these things. And you really need to have to let them expire; otherwise, there's not much you can do about it. So it takes longer to restructure a business in Europe than it does in the United States.

Also, the decline was so precipitous that you would have had to have been a clairvoyant to know that you needed to start six months before you actually saw the decline. So it does take longer there. We are attacking the Fluid Management issue, but we're also looking at a broader integration of and Fluid which we had embarked on, and it, I think, is going quite well and will serve us well in that marketplace.

OK. Last question relates to the engineered products sector, which - where the base sales were down one, but I was surprised to hear you say that the orders were down eight in a market that, you know, our has suggested is on the upturn not necessarily from, you know, grandiose municipal spending, because certainly lower tax receipts are hurting all municipalities, but just more awareness and, you know, I guess I would have not been surprised to have seen a flat to a minus two, but to have seen a minus eight on the order front surprised me. Could you help me out on that a little?

We - I think we've got a timing issue of the lead time between when a vehicle order is placed and when they order the components because our lead time is much less than the vehicle lead time. And we - anecdotally the comments out of are there will be a ramp up of production of vehicles in the second quarter, so I would expect we will see some movement in that order level based on the anecdotal comments. But, you know, we wait to see them.

OK. Thank you.

Our next question comes from Michael Schneider of Robert W. Baird.

Good afternoon, guys.

Hi, Mike.

I guess we'll start with orders because they are most important. Dennis, I'm surprised you're not more optimistic. Yes, the monthly numbers are sequentially down, but if you adjust for what we certainly witnessed were widespread shutdowns both in November and December and if I make some assumptions - let's say three days taken out of November, five days taken out of December - and I use the numbers you just gave, you actually went from 2.7 million a day in October to 2.85 million a day in November to 2.95 million a day in December, which to me says and my gut tells me that things sequentially improved throughout the fourth quarter despite the absolute numbers. Can you comment on that thought process? And any commentary you can give would be helpful.

Well, I understand the math, and that's one way to do the numbers, and it may be the right way. We simply don't know. And to be able to look at the orders that we've seen in January to date and draw any conclusions would be - it would be a bit of a stretch, I think. So I guess if I were to say personally do I think the orders level in the first quarter will be higher than the fourth quarter, I think they will. But we've got to wait and see what they are.

We don't see any indication of a - of a - any kind of V-shaped recovery. I suspect we will be looking at a gradual recovery out of this kind of an economic environment. And there is a fair number of indicators that we've reached the inflection point, but I can't prove that to you with the data we have in hand right now. So, ...

Well, ...

... I'm being - I'm being conservative in the end.

Right. Well, must come and obviously bounce nicely off of the bottom and trending positively, and certainly your order patterns track very closely. At least, my shows that. What are you hearing from the field? Are people more optimistic as we move through the fourth quarter in light of the numbers, or is it a self-fulfilling prophecy?

I couldn't correlate the purchasing managers comments with the anecdotal stuff I was hearing in the fourth quarter, but the fourth quarter was a very unique one, as you've pointed out. There were a lot of shutdowns, budgets were curtailed - you know, the edict, "Just stop spending. You don't need it. Shut it down. Don't worry about it." So we're going to have to see how things sort out here in the first quarter and see if we can string a couple of data points together in the right direction.

Right. OK. And just drilling down to dispensing equipment, Fluid Management is obviously taking it on the chin, but you mentioned held up well. Is holding up well only, though, because of the incremental orders from Axo ?

That's a piece of it, but they've had very good success with their stirring lids in the refinish market. They've made - they have a new product there that is really innovative, and it's gaining a lot of acceptance. So they're seeing a benefit there.

The business is just starting to increase. I think we shipped - don't hold me to this now, I'm doing it off the top of my head - I think around 180 or 200 units, maybe, in the last year. That will ramp up to probably or 800 or maybe even more this year. We think the Fluid Management business will increase, too, with some of their customers coming back and the introduction of new products at .

So, I think we'll see a recovery there. I'm cautiously optimistic, but a lot just depends on the European psyche.

Well, the two businesses serve pretty much northern and southern Europe. Is it as easy as saying because Germany is weakest at showing up in the Fluid Management numbers versus ?

No, I don't so, because they serve markets outside of there, as well.

OK. And then I guess looking at it a different way, is the Fluid Management - Fluid Management holding up better because of the retail exposure that you don't have as great a percentage of over in Europe?

Well, I mean you have the retail exposure, but you have it through a different mechanism, which is through the paint companies. And we have some of that here in the U.S., as well. They don't have the same kind of big box approach in Europe yet that exists in the U.S. Home Depot, I think, has said they're going to open 190 stores, as I recall, versus, I think, 200 in 2001 - so nearly the same number. They're continuing with their resets or upgrades. Lowe's, I think, is opening about the same number of stores in '01 - or, in '02 as they did in '01.

So, you know, the big boxes are clearly big customers of ours. It's just a different channel mechanism in Europe. It's a - you know, it's just a difference in approach.

OK. And the charge this quarter - now, does that cover what you intend to do with the European operations in the dispensing equipment in '02?

At the moment, I would say we don't intend to take any first quarter charge of anything in Fluid in Europe ...

OK.

... because we're not - I mean we're not going to be closing facilities. It's a matter of adjusting headcounts and dealing with the ongoing expense of running the business there. So we're not going to move the Italian operation to the Netherlands or vice versa.

Right.

That's not the right answer.

And then I guess final question on dispensing equipment - you're in a money-losing position there, and historically you had fairly stable margins in the 18 to 20 percent range. Is there anything fundamentally different now as you look at that, especially the European market, that would prevent you from getting back to those type of numbers?

No, absolutely not. Absolutely not.

This is - this is a volume issue?

Absolutely.

OK.

Yes.

And then first quarter versus fourth quarter, if we assume orders have troughed here, is there any reason to expect, especially adjusting for whatever year-end adjustments went on in the fourth quarter, that earnings would be down in the first quarter?

With an increasing - flat or increasing volume?

Yes.

With - I guess I'd have to go and look specifically at all of the adjustments, but on a - on a - let me answer it this way - on a true operations basis in a flat to an increasing volume environment, we should expand margins.

OK. And is there any - and maybe, Wayne, you can answer this - is there any material reversals that went on during the quarter that might have artificially inflated, for example, the pump margin?

Not really out of the ordinary from typical fourth quarter adjustments. Nothing unusual.

OK. Thank you.

Yes.

Our next question comes from Donna Takeda of Merrill Lynch.

Good afternoon, gentlemen.

Hi, Donna.

How are you?

Good. How are you?

Fine. Happy New Year.

Same to you.

Just a couple of - just a couple of short questions here - Dennis, you mentioned that you were - you had about $23 million, I think, of components in the trial stage on the - on the global sourcing. And then you said something about that could be $15 million in savings. That includes what you were looking at for - that came in 2001, right? This is a cumulative number?

No.

No? The 15 is just off the 23?

Right.

Wow.

The 20 - the 23, Donna, is at the reduced sourcing number. So to get to what that would be at the current price, you'd have to factor it up to account for the 40 percent lower purchase price. So the annualized savings that that would represent were we to do 100 percent of what we have in trial would be an incremental 15 million of savings. Now, it is - we have not batted a thousand on all of this - all the things we've had in the trial stage in the past, but we don't have enough hard data yet to say history would indicate we're going to get "X" percent of that $22.7 million.

So we'll have to wait and see, but I think - I think the relevant point is that what's in the trial stage continues to grow quarter-over-quarter and the savings potential is there. And even if you got half of it, you're talking about $7 to $8 million of savings on an annualized basis. So it depends how long does it take to get it approved and get the first production units in and what's the volume assumption for the year.

So it's a measure of the momentum of the - of the activity that we're building, so that we're confident we're going to see substantial increase in savings versus this year where it was 3.6 million.

And those numbers are assuming sort of flattish volumes for 2002 versus 2001?

Yes.

OK. The net savings from the black belt and green belt projects in 2002 net of - net of the incremental expenses for the new projects would be about what?

I'm sorry. The net for ...

The net - the net savings on the - on the black and green belt projects scheduled for 2002 - net of the - net of the incremental expenses for the projects.

We haven't done that math yet. We're still sorting out the total number of projects that we expect to have. And while the numbers I gave you of black belt savings around 60,000 and green belt around 15,000, that's the math that we do. You know, the trick is always to trace it to the income statement. We know we're getting some of through.

So we'll see clear savings from Six Sigma in 2002. I cannot tell you the exact number yet because we're still in the process of trying to get the business plan finalized and what those numbers are. So I'll be able to answer that question in another two or three weeks probably.

Great. We'll look forward to the answer.

OK.

Thanks.

Our next question comes from Walt Liptak of McDonald Investments.

Hi. Good afternoon.

Hi, Walt.

I guess, you know, going to the margin issue for the year or the margin outlook for the year, it's impressive the way the margins came up in a couple of your segments. Have you done any kind of sensitivity analysis based on flat revenue for the year or, you know, an increasing revenue environment - where you think you can get peak margins now?

No, we haven't. We're still trying to get the business plan finalized for this year - get everything closed and get the plan in place for this year.

It's - I would make, I guess, the following observations, Walt, that a lot of the structure that we have taken out does not need to be added back for the same level of volume that we had when we took it out - I mean that generated it, so that we've become more efficient. So I think we've got more upside leverage than perhaps we've ever had in the past.

OK. So the costs that were taken out were variable at this point.

Some were fixed and some were variable.

OK.

And we - you know, when you close, like, a facility, there's a ton of fixed cost that goes away. And that is a significant piece of what you see happening in the pump numbers in the fourth quarter because that was completed on schedule back in September, so that full benefit then begins to accrue in the fourth quarter. So what you're seeing in those numbers is the effect of restructuring, it's the effect of 15 percent reduction in workforce across the company, it's a piece of global sourcing, a, you know, piece of Six Sigma. There's a lot of - a lot of elements in there, but I would say there's tremendous upside leverage here. And all other things being equal, when we were at higher margins, if we get back to comparable volumes, I believe we'll be at higher margins because we have - we've structurally and efficiency-wise dealt with issues in the company.

OK. And for 2002, I mean you're looking for an up year in EPS, right?

Yes.

OK. And over an expansion, is IDEX now a 15 percent grower?

Well, I - what's the volume assumption - I'll answer your question. We will - we will expand margins faster than the top line, but I don't know where the top line's going to be. I wish I did. If I did, I'd be the first one to tell you.

OK. And then a couple of minor things - accounts payable in the fourth quarter?

We'll dig that out for you here. Why don't you go to your next question and I'll ...

OK. The other question is just the cap ex outlook and depreciation for '02.

Yes, cap ex should come in around $24 million for the new year, and depreciation about $28 million.

OK. And the tax rate - what rate should we assume?

I'd assume about a thirty-five-and-a-half percent. Again, the effective tax rate goes down because we no longer have the non-tax deductibility issue of a portion of the goodwill.

OK. OK, I'll just wait for that . That's it for me. Thanks.

OK.

Our next question comes from Wendy Caplan of ABN AMRO.

Hi. A couple things just to kind of go about this in a different fashion - usually, Dennis, at this time of year, we - we've come to expect the word "record" being used at IDEX as in sales and earnings. And clearly it's been a tough year economically, but is there anything - just to be sure, there's nothing inherently different about IDEX today in terms of the mix of businesses or the geographies or the end markets that would lead us to believe that that expectation for future record sales and earnings is unreasonable once the economy improves?

No, it's not unreasonable at all. And the only place we used "record" this year, Wendy, was with cash generation.

Which is a good place to use it, Dennis. Another question just to be sure that I understood your comment about if the - if sales in the - in the first quarter were flat to up, we should see some margin expansion and, therefore, the comparisons would be favorable. I want to be sure - are we talking about sequentially or year-over-year?

Sequential.

OK.

It was really a sequential question the way I - the way I thought it was asked. And on a sequential basis, because of all the other things we're doing, pure operations flat to up we should see a margin expansion.

OK. First quarter over fourth, then - yes.

Yes.

Any benefits from raw material pricing in the quarter?

Raw material - I mean other than global sourcing, we saw just the threat of global sourcing gave us the occasional price reduction in raw materials. I mean we don't buy much, you know, raw aluminum or raw steel or raw this or raw that. It's mostly castings and bar stock that we machine things from or machine components.

So the only place where we are a big material user is at on stainless steel, and there I guess - and I don't have a solid on it, but I think - I think it's been pretty flat. There was a nickel-base decline that then, I think, pretty well flattened out, it's my recollection. Wayne, do you ...

I agree.

OK. And Wayne, last question - receivables and inventories were down nicely this year. What kind of expectation do we have for working capital reductions in '02 - specifically receivables and inventories?

Well, we're committed to really bring our inventory turn level up to the - to the shooting for the ten-turn objective by the end of next year. Now, clearly we're not there yet. We made some progress in the year 2001, and then, clearly over the next two years we expect to, you know, get closer to the - to the ten-turn level.

In terms of the receivables, we're charging our business units and the leadership of the company to really move towards coming up with a receivable past-due position or past-due essentially the entitlement period of payment by customers that would approach five percent. Today we're around 25 percent. So clearly both of these objectives are very important to us, and we expect to hit those numbers in the next couple of years here.

Thanks very much.

OK.

Our next question comes from Karl Mergenthaler of Bank of America.

Hi.

Clearly a lot of the focus has been on the cost line, but there was one initiative you all used to talk about a lot last year which was asking the managers to redefine their markets. I'm wondering, you know, has that initiative fallen by the wayside? And I mean what can give us confidence that organic growth is going to reaccelerate at some point late in '02 or further out?

It's a good question, Karl.

The - it clearly is not fallen off the screen at all. In fact, it becomes even greater focus as we move into this year with a little bit different review cycle that we're going to have with each of our businesses where we are focusing on new product introduction. There are some methodologies that we're using to bring focus to where we generate our sales and income, and the market redefinition question is very much alive and well.

We've got some very exciting things going on that I'm not prepared to talk about yet because they may or may not come to fruition, but we've got a lot of people thinking growth in addition to the other initiatives we have underway.

OK, then also with regard to revenue growth, can you just comment on the acquisition pipeline if you're seeing anything now and if you expect to be more aggressive at some point in '02?

Well, we are constantly looking for acquisitions that fit the business that we have right now - things that are adjacent that add to our products. We constantly have things in the pipeline. We are hopeful that we'll have things to talk about again as we did in '01 - that we'll have things to talk about in '02 because we're out there in the market looking.

OK, great. Thanks.

Yes.

Our next question comes from Greg Macosko of Lord Abbett.

Yes, hi.

Hi.

We've had a period of cost cutting and, you know, sales have down in the base business nine percent or so. And clear there's not a lot of clarity, as you've said. Let's just suppose we see some clarity and we see another eight to nine percent. Do we need to - are we going to stay at the place we're at with regard to employees and our cost structure, et cetera, or if such a picture looked to be the case, would you cut some more?

If we saw another eight or nine percent reduction, we would - we would make further adjustments without a doubt.

And the - and obviously continuing additionally with the outsourcing, as well?

Well, of course. That's a key part of the strategy.

OK. Thank you.

Once again, if you have a question, please press the one key on your touch-tone telephone.

Our next question is a follow-up from Michael Schneider of Robert W. Baird.

Hi. Dennis could you address just the management and executive comp system? There hasn't really been any major changes since you arrived. Did you address it at the year-end with the board?

Are you talking about incentive compensation?

Yes, and just the drivers of it.

Yes, we changed it last year, Mike, to focus on top line growth, bottom line growth, margin expansion, Six Sigma-specific performance, and working capital improvements.

OK, but no tweaks to that system?

No, I mean we're going to stick with that same basic system because I think it incentivizes people to do what we want them to do. We will pick - we're in the process of getting the finalized numbers put together so that we can take to the board "Here's our approach," which will be more or less the same as it was this year - or last year, I mean. "And here are the targets by business."

OK. And can you share with us what the average targets are either by revenue growth or margin growth?

We haven't set them yet. We're in the process of trying to take the final business plan rollups. We've - in the last week, we've had another round with each of the businesses to finalize what they think they can do this year, and we will be setting those targets in the next couple weeks.

OK. Just in terms of the balance sheet and cash flow, are you comfortable with the progress you've made in paying down debt and I guess is it limiting factor at all as you head into '02 and look at acquisitions?

Well, am I happy with what we've done? I think our cash performance this year has been very good. If you look at receivables, DSO has gone from 57 days at the beginning of the year to 50 days at the end of the year.

Right.

And in this kind of an economic environment, I think that's a - that's a terrific accomplishment on the part of the businesses.

We tend to look at it in a couple of different ways. We look at it on a DSO basis. We also look at it on a what's past due because generally there are things in there when you've got past dues that, you know, maybe you've done to yourself and that's the reason the customers aren't paying you. So we look at it a couple of different ways, but I'm very pleased with the progress we've made there.

On inventory turns, we got a slight turns improvement, I think, in the end, but, again, in a down environment that's a pretty tough challenge just to maintain turns. And as Wayne pointed out, we set stretch targets for both inventory and receivables that to be honest, I'm not sure we'll ever get to ten, but it forces you to think in a way that isn't incremental. You have to think broader of how can we possibly break this paradigm that we're in and get to a whole different level. So we will make progress there that will help us pay down debt - generate cash and pay down debt even further, which does enable acquisitions.

Now in the end, there's always a limit based on the availability of cash to go with new deals. But that's not the restricting factor right now. It's finding the businesses that have the right characteristics that fit so that we're happy with the acquisitions we make.

So as a general statement, I'm pleased with what we're doing on the working capital side paying down debt, and we've just got to find the right candidates.

OK, and Wayne, just a couple housekeeping questions. Cash flow from operations as reported during the year would have been what?

One hundred seven million dollars.

OK, and that includes the effect of the restructuring?

Yes, it does.

OK. And the restructuring programs - of the 11.2, how much was cash?

I don't have that right here, but probably half of that is out as cash at this point because some of it's tied to the sales of some facilities.

OK. And the accounts payable number - did you happen to get that?

Yes, I did. Walter's question of earlier - accounts payable at the close of the year were $41 million and accrued expenses were $46 million for the total of the 87 million that appeared on the - in the press release.

OK, great. Thank you.

Our next question comes from Richard Henderson of Pershing.

Yes, good afternoon. I have several small questions. Dennis, you mentioned with this past restructuring program that the one area that was harder to drive down costs was in Europe. Does that mean that, you know, obviously there you're looking at them. Is that this year and into 2003 you would achieve the objectives that you set forth for them? Is that reasonable?

I think it is.

OK. Second question - I guess this one goes to Wayne. Wayne, what's or how should analysts view goodwill and impairment, et cetera? What's included in estimates and what isn't?

Well, if you look at, again, the press release, in the - over the last couple years, we've been separating ...

Right.

... the calculation. On an annual basis, you should assume that going from old accounting to new accounting should improve our numbers by 38 to 40 cents ...

Right.

... for the year.

OK.

And we don't anticipate any issues that would arise due to the impairment under the new guidance from FASB.

OK, so first doesn't include ...

Right.

Yes. Dennis, back to you - on cap ex, how much is technology oriented? You know just roughly out of the 23 or so million or a normalized year, how much do you spend roughly on technology? I understand - I understand it's kind of difficult to measure, but just kind of like the thrust - the change you're trying to instill into the company to add more value and stuff. Is technology a very important part of that?

Well, I guess there's a lot of different of technology. We are investing - we have in '01, we will in '02 and beyond - in our IDEXconnect vehicle technology.

Right.

It's clearly a way to help us and our channel partners go at the real enemies here, which is cost and cycle time and inventory and complexity and those kinds of things. So that's a technology investment which we intend to continue to make.

From an ERP standpoint, we are - we are migrating towards a common ERP - a technology investment, again - that we're not doing a forced march across the company, but when a business has the need to convert ERPs, we're converting to a common one, which is the right world to be in in the future, so that's another technology investment.

The way we've sized our cap ex budgets for this year, we took 80 percent of depreciation and we focused 65 percent of depreciation on areas where we get competitive advantage. We went through a sorting process that is part of our outsourcing approach that helps each business put in the nine figure where you get competitive advantage, and that's where you invest. And if it's in doing the design, the R&D, and assembly and test, then that's where we would expect them to be making their investments and they should be outsourcing other things that they perhaps do today. So one would argue that we're trying to funnel more of our resources towards areas where we get competitive advantage, and we support the outsourcing through whatever tooling we may have to develop for that outsourcing.

Lastly, we kept 15 percent of depreciation held back as undefined to support the technology, single-piece concepts, and Six Sigma requirements so that we had some cap ex budget that was uncommitted at the beginning of the year so that when a Six Sigma project said, "You need to do A, B, or C," that you've got some cap ex budget to be able to allocate to it.

So I guess, I mean it's kind of a long answer to your question perhaps, but I think we're funneling more and more of our cap ex to various forms of technology that are important to the company.

I think that's very important because historically your kind of unit growth was very minimal and, you know, acquisitions. So basically what you have to do is to use technology gain market share.

A question on global sourcing, Dennis, you mentioned and you sounded very optimistic about it, but a question I would have is the world economies are soft, operating rates are down, and there's a lot of companies in the red. Now, I don't think you'll have a problem this year, but as you go into 2003 and so forth and you mention you really don't touch so much the base raw materials per se, but the castings and things like this are sensitive. Is there - is that kind of in your equation that, yes, they're going to get their fair share, but there are - there are so many other different products going on in so many different areas of the world where we can source that we can attain our objectives?

Well, we are constantly identifying new sources for the commodities that we buy - the castings and machine parts. And we do - we go through a fairly extensive due diligence with our commodity leaders and the engineers that we have on the ground in a couple of the countries where we're doing a lot of outsourcing or moving in that direction. So we try to make sensible choices of where we source to make sure that it's not - it's not just an that is going to change in the next six months.

And we're also getting things consigned at our locations so that it's - we're not taking a bunch of inventory into the pipeline to support a global supply chain. So I think we're doing it right.

I can tell you I've personally gone to foundries in China and other parts around the world - Eastern Europe. And when you walk in, you pretty well know whether you want to do business with that group or not. It's - you either are greeted by something that looks pretty ancient or something that looks pretty new. And we tend to be dealing with the ones that have things that look pretty new.

OK. Very good. One last one for Wayne - could you remind me what's the average interest rate on your debt?

It really varies. We have the $150 million of senior notes that are out at six-and-seven-eighths. And in terms of ...

What would be a good number though, Wayne, to reduce interest expenses your cash flow, you know, your continued debt? I mean just a rough number.

What would be a good number in terms of reduction ...

Yes, that you could just use incrementally on your cash flow to reduce debt on a quarterly basis.

Well, again, we paid down $80 million this last year, ...

Right.

... and not a bad - a bad number to be working on a go-ahead basis, plus the fact ...

Right.

... we're going to continue with the emphasis on working capital. And in addition, we should have higher earnings that'll help reduce debt, as well.

The other thing I was going to say is on an overall basis, we have a one percent rate above LIBOR on the basic bank agreement.

OK. OK, thanks very much.

Our final question comes from Paul Hogan of Fenimore Asset Management.

Hi, Dennis. Hi, Wayne.

Hi, Paul.

Hi.

Just wanted to delve a little bit deeper into some of the things that you were talking about with the acquisition pipeline and really get a sense of what's going on in there. Are you seeing pricing coming to you a little bit more? Are you seeing a number of opportunities popping up more so than you did a year or two ago? And also, are you seeing that maybe there's more competition or less competitions for the deals that you're interested in?

I would say we're probably seeing more or less the same number of ideas coming along. One thing that is different is that the traditional hockey that you see for everyone that comes through the door aren't quite as as they used to be, so therefore pricing is probably a little more realistic. The ones that we do see, in most cases the seller's price expectation has been somewhat modified from maybe what it might have been a year-and-a-half or two years ago.

So there're still a lot of things coming through the door. We haven't - we haven't found the one that fits that we're ready to announce right now, but we're constantly chasing things to try to find good fits of things that will add to our business.

OK. And in terms of your cash flow, where are the priority of uses for that in the - in the current year?

Well, it's - I mean obviously to pay down debt, but to in total to invest in acquisitions and in our core business, to grow it.

OK. All right. Thank you.

Thank you.

Gentlemen, there are no further questions at this time. Would you like to proceed with any closing remarks?

Just briefly, first I'd like to thank everyone for listening in on the call.

As I think is apparent, we've taken some pretty aggressive cost actions. The initiatives that we've got underway are progressing well, and I think we're building some terrific momentum in them. Our cash generation's strong - positions us for acquisitions that we continue to look for. And the company is very sound and well positioned for a rebound.

So we are hopeful that we'll see an increase in orders and the operating leverage that we have is pretty strong. So we hope we see a rebound. Thanks very much.

Ladies and gentlemen, that does conclude the conference call for today. Again, thank you for participating, and you may all disconnect. Have a great day.