藝達思 (IEX) 2002 Q2 法說會逐字稿

I would like to introduce today's today is Mr. Schmeddle.

Earlier in the day we sent a press release outlining the results for the second quarter ending June 30th, 2002. If anyone has not received it, you can call 312-266-7800 and my assistant, Samere Patell will sell you another copy. Joining us is 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 quarter and then we'll open our call to questions. We would like to say that this may contain certain forward-looking statements into the safe harbor language in today's release. At this point I would like to turn the call over to Dennis.

Thanks, Bill. Agenda I'm going to follow today, I will comment briefly on the first half results, pill provide comments on the groups, progress reports on our initiatives, operating excellence, global sourcing and E business, then some comments on our two new acquisitions, Rheodyne and Halox. Some comments on equity offering and some brief comments on outlook. Starting with the second quarter results, orders were up slightly on a sequential basis from 184 to 189 million year over year down about one% for 191 to 189. The base basis on a year over year basis was down around 5% and that was mostly offset with Versa-Matic acquisition and foreign exchange, so clearly substantially better than the second half of last year and slightly up sequentially. On a sales basis we had a very nice sequential improvement. Sales were up 90 percent from 175 million to 190 million. And down about 1% on a year over year basis from 193 to 190. Again, base business down about 4%, largely off yet by acquisitions and foreign exchange. We reduced backlog by about a million in the quarter but since the first of the year we've built about seven and-a-half million in backlog. Looking at sales, the foreign sales component was 42% in the second quarter versus 40% in the first quarter. To get behind those numbers to some of the details. The U.S. business was up 6%, Europe up 15%, Asia up 24% and the Americas, exclusive of the U.S. down 5% so in total the foreign sales element up 13 up% and U.S. up 6% on a sequential lists. Year over year 42 percent in the second quarter versus 43% a year ago. Behind those numbers U.S. was essentially flat up university four-tenths of a percent. In total the foreign element down 3% and the pieces of that, Europe was up five, Asia down 20 and Americas exclusive of U.S. down 16. So if you look at this sequentially, we saw rebound in Europe and Asia and the Americas exclusive of U.S. are still fairly weak from what we can see from the sales activity. Turning to operating margins. The operating margin in the quarter was 14.8 percent, up nicely 190 basis points sequentially and that was mainly due to volume. On a year over year basis margins were down about 70 basis points due to a number of offsetting factors. Included in this would be a favorable impact from the operational excellence activities and efforts we have underway, acquisitions and also reinvestment in the business as we attempt to drive a higher rate of growth.

Net income. Net income was up 15.6 million which was a 36% improvement sequentially. It shows a very nice leverage on a 9% sales increase. Year over year net income was down slightly, university one% on one% lower sales. Earnings per share were 48 cents, up 11 cents sequentially and down just three cents on a year over year basis. Cash was another great story. Second quarter precash flow was 26 million dollars, 1.7 times net income, another great quarter for cash generation, year-to-date we've paid down debt by just under 81 million, 8.9 million, 51 million of that came from the equity offering, I will talk a little bit more about that later. But at the end of June the debt to total capital in the company was 30.2, down to 42.1 at year end and that's the lowest it's been in company history.

So in total I'm pretty pleased with the execution of the second quarter. We had very nice sequential improvements, nearly the same performance as the second quarter a year ago which was the strongest quarter in 2001. And well above those in the second half of the inaudible.

Turning to the summary of the first half orders were for foreign sales were 41% in the first half of 2002 versus 42% a year ago and the components of that are a decline of 3% in the U.S. and 5% on the foreign element of that. Operating margin 13.9% versus 14.7, primarily due to lower sales. Net income of 27.2 versus 29.3 a year ago. That's on a consistent accounting basis excluding restructuring and goodwill. Earnings per share 85 cents versus 95 cents a year ago. Again on a consistent accounting basis. And on a as reported basis 85 cents versus 65 cents. We now turn to the groups. I will go through each of the groups and give you some sequential and Euro year over year performance and then a few comments about what's going to the groups. In comps year-to-date 58% of sale, 59% of operating income, sequentially orders up 2%, sales up 8%, operating income up 13%. And the operating margin is 16.8% versus 16.1% in the first quarter. Nice improvement sequentially there. Year over year two and-a-half percent increase in orders. Four-tenths of a percent decline in sales, nearly flat sales, eight-tenths of a percent decline in operating income. Operating margin 16.8 versus 16.9 a year ago. So essentially flat performance on a year over year basis. We're still not seeing a lot of project business. Some has been quoted but we don't see a lot of the project business closing yet so the capital spending has yet to pick up as we would hope that it would. We continue to improve the sales efforts in the U.S., in Asia and in Europe. We're seeing some benefits from the creation of what we call the Asian pump group which is a consolidated sales force across Asia are selling the entire pump group portfolio, so we're seeing some activity there and I see some of the benefit of the Asian growth we're seeing is coming directly because of the Asian pump group. We continue to look at distribution opportunities, better regional distribution, better niche distribution, we have made some changes and there are more on the way as we improve the very important resource that we have in distribution.

Moving to dispensing equipment. Year-to-date 20% sales and 20% operating net income so we've seen a nice rebound towards historic profitability in this business. Sequentially second quarter to first orders up 9%, sales up 20%, operating income up 84%. Our operating margin 18.9% versus 12.3. So great leverage here sequentially. On a year over year basis sales, orders down 6%, sales down 3%, operating income up three-tenths of a percent and the operating margin 18.9 versus 18.3. So better profitability on a slightly lower sales. As I mentioned in the last conference call we introduced a lot of new products at the Farba show in Europe. These are now in production and they have been designed in a different way so there are standard modules and late point of identification for the end product and that makes it easier to improve the production flow, it eases inventory needs. If you look at the production line item it is very clear this is a Lean design production line and product. Our BP of manufacturing there is a black belt, also Kaizen trained and so he has done a great job of setting up a great production line for us and working with engineering to have the right product, the old designs and enjoy the benefits from the new designs.

In the U.S. Fluid Management Americas a couple of great six sigma stories that I will share with you. It starts with a process focus in new product development. A much shorter cycle time. We've now been able to completely design and go through prototype phase and into production in six months for a new product. It comes from a real process focus focusing on CTCs which is critical to the customers and doing it right the first time. Toll gates and the like so great story in cycle time reduction which is an outgrowth of a six sigma methodology. But the important thing here is we've been able to convert sustaining engineering to R and D. We did that by eliminating some of the technical issues that we've experienced in the product before using sick sigma techniques so we've basically cut sustaining engineering in half, doubled R and D, no impact to the bottom line and that allows us to completely overhaul the entire production line there when coupled with the shorter cycle time we can probably complete a complete redesign of all the products in a 12-month period. So it's a great combination of six sigma methodology in some different disciplines and a process focus. The other interesting six sigma tale relates to one of our customers. We were able to tell one of our large customers that they had a colorant problem based on the data we had on failure rates of valves. That allowed them to go work with that colorant supplier quickly to avoid what could have been a really difficult problem for them. So it is a place we were able to take data and analysis to the customer and help them in their end producting.

We also had a significant that on service growth and have terrific opportunities to grow that. On the European front we combined from a management standpoint FAST and Fluid Management Europe. That integration is going quite well and we're seeing some of the benefits of things like common software platforms and the like. Moving on to other engineered products. Year-to-date 22% of the sales, 21% of the operating income, sequentially orders did not change. Second quarter versus first. Sales were up four and-a-half percent, operating income up 17%. Operating margin 15.6 versus 14 in the first quarter. A very nice sequential improvement there as well. Year over year orders down four, sales up two, operating income down 10%, operating margin 15.6 versus 17.8. The decline in operating margin here is driven principally by three things. Investment in growth, sales, people, representatives, products and some facilities. J. D. Edwards conversion, ERP conversion at Lucas and at Hurst where they were the first - Lucas was the first conversion that we did in J. D. Edwards so we've incurred some costs there to get them converted and that is on track. Hurst should go live in probably September of this year. And also the cost of the initiatives which from a Lucas and Class One standpoint were not in the numbers a year ago, they are this year and there's a time lag as we saw across the company between incurring the expense of training and the benefit that comes from that. Some news from each of the business areas. Bandit we were recently there. A constant flow of new applications coming into that business. Two of the more interesting ones, there's an opportunity that we're now leveraging in autos and also in recreational vehicles on heat shields, holding heat shields on to things like exhaust systems.

Also in the automotive side air bags. We have a much better solution in clamping on the air bag side and we're seeing that really take off for us. So some interesting new applications there that we can leverage around the world. In the rescue tool business, a great niche product story. Historically they had been in the - Lucas had been in the rerailing business or equipment that is used to set locomotives and rail cars back on the track if they have derailed. The German railroad wanted to update the product. They worked very closely with them in a very short time frame, focused on the CTCs, what was critical to them. They developed a new product, got a $6 million order that will be phased over a three to four-year period. But more importantly, they see their market now as the global market. They have a new global product. They recently won an order in Turkey and they are leading in several opportunities around the world for this rerailing product so a demoistick focused product historically, new product development, win the local business and then leverage it globally. So great story on niche product redesign and development there.

There's lots of other things in U.S. and Asia and we think we'll see some opportunities develop in the third and fourth quarter of this year. On the fire suppression side, pump module that many of you have heard me talk about in the past, we have small OEM that is now committed, two pump modules. They are going through the final test on three units. They are about a 50 or 60 unit a year kind of OEM. Working with other OEMs but it's a pretty compelling value proposition for them. For us, it is about a 30% revenue increase. If you compare the revenue with a pump and components versus module, it is about a 30% revenue increase for us. So something that we think has great value for our customers. It is a great opportunity for us. One is converted and more on the way. So we're pleased with that activity.

ASCII, our vehicle multi plex system. Thomas Demison-Butts has standardized on this design. The demo unit is completed. They are very happy with it. We'll see value this year and combined it is about $5,000 for us. So a new market area that we've never been in before that's really beginning to bear fruit. In general in this market area, the fire act funds that I think most of you are familiar with, nothing has been released yet but we have an obligation to release half of it by September. Half this year's 175 million so we expect in the third and fourth quarter we'll see some impact from that as well.

So I think some opportunities in that area. We move now to the initiatives. We've had significant progress across the businesses merging Kaizen/Lean, demand flow technology and six sigma into what I call a true operational excellence. Seeing real progress as we roll this out and they begin to use it more and more. Starting with six sigma, the number of belts that we have 659 which is up 20 from the fourth quarter. We've got about 70 more in training that will be through training in the second half of this year. In the second quarter we've completed 77 projects versus 64 in the first quarter. Savings are a million and-a-half versus 1.37 in the first quarter. Year-to-date we've saved 2.9 million versus just over 2 million, slightly over 2 million in all of 2001. So a nice acceleration of that activity. Average savings annualized savings for the project around 46 thousand, for green belt project around 19,000 so we still see significant benefit in each of the project types. At the end of the quarter we had 298 open projects versus 280 at the beginning of the first quarter so a lot of good progress and activity there. Project focus remains on time delivery. Product reliability, technical response and other CTCs that each of the individual businesses determine with their customer base. But more importantly, the culture is starting to take hold here. The change is beginning. We're getting more of a process focus. We're gathering data off the processes or process owners, better focus on what's critical to customers, CTCs and we're moving from the tool methodology to determining a different way to run the business. The stories I told you about Fluid Management Americas is a good example of how the company is changing so I'm very pleased with that.

The activity in Kaizen and Lean is accelerating too. We had year-to-date 75 total events across the company with an average savings of about $8,000 per event. And her we're also seeing an interesting cultural change and it's changing very quickly and it's evolving from skeptics participating in a week-long event to daily brainstorming by individuals and teams on how they can improve their work area and their manufacturing selves. So it is a real change that we're see going on in the business. Go into any of the factories today compared to a year ago, the visual change is very significant. So we're very, very pleased with the impact that the tools are having and the cultural change that it's driving. Kaizen/Lean and six sigma are really a very, very powerful tool kit and the desired cultural change that we're really after is beginning to happen.

From a global sourcing standpoint, second quarter savings of 2.8 million versus 1.9 in the first quarter. We're seeing a very nice increase sequentially. Savings are running at about 30% versus prior source. If you eliminate the purchase of motors where our savings are about ten - long pause in webcast - versus prior case, we're seeing less than in casting and machine components, if you take those out the average savings increases to about 35% so still significant savings. Year-to-date things to global source and also more importantly I think we continue to find a lot of high quality suppliers including suppliers that will concentrate and focus on small lot sizes which is very important to us. So I'm pleased with the progress here. We're also using six sigma line set to improve the process to help accelerate the effort.

Turning to E business. We continue to add functionality and users to IDEX connect. We currently have 16 modules including a mod configurator. We started the rollout with pump distributors. We have 39 on the system now and 18 more will be added this quarter. We also have six in the dispensing side of the business that is acting as a pilot distributor group to help them work on functionality and content. The strategy remains unchanged. Attack cycle time, costs, complexity, defects and inventory levels. Add functionality desired by our customers and channel partners and have the launch in mind set. So 60 to 90-day project focus, identify the short-term projects, get them done and move on. So good progress here. A lot more to do but distributors are responding well to the tools that we put in their hand.

Turning now to acquisitions. We have two new acquisitions to talk B the first is Rheodyne which is located in Roanoke Park in California. This deal actually closed just about an hour ago. So it is done. It has been a very exciting acquisition for us. Rheodyne is the world's leader in precision injectors, valves and fittings for the analytical instrument market. The company has an OEM focus and designs components or fluid handling assembly for the instrument manufacturers. The company is the global expert in automated sample injection and fluid switching platforms. High performance, liquid chromatography, a couple of key OEM products, they serve high growth end markets like biotech pharmaceuticals, life science, food and beverage, chemicals a lot of different end markets but a lot of higher growth. They have someone customers with micro pump and Ismatech. It will be the 12th stand alone business in the company but we will have it working very closely with Ismatech and micro pump and Trebor because we believe these opportunities create a larger system selling opportunity here and to leverage customer relationships.

Rheodyne is really on the leading edge and has products down in the nanoliter sampling range moving to the picoliter range and a lot more exciting products in the pipeline so just a clear example of how IDEX is moving towards higher tech, higher growth. Sales at Rheodyne about 23 million and it will be created in year one.

Halox is another exciting opportunity. This one is considerably different. It is a very small business in Bridgeport, Connecticut that manufactures patent, self-contained chlorine dioxide generator. It is a safe point of use generator of chlorine dioxide. Chlorine dioxide has been around for probably 150 years. It is well characterized. It is a highly effective biocide that does not produce suspected carcinogens. It can result from either chlorine or bromine use. It doesn't have any odor. It is very effective against legionellae and other pathogens. The technology here at Halox utilizes an electrolytic cell which oxides sodium chloride to produce CO 2. It produces relatively low levels of chlorine dioxide in aqueous solution. The practice additional techniques uses a couple of precursors that are a little tougher to handle, hydrochloric acid and sodium hydrochloride. If not controlled properly it can be explosive and that has limited the use of chlorine dioxide because it is somewhat dangerous to handle and handling the precursors is not too attractive. What's different here it is a single precursor of benign materials in water and electricity. It is a point of use it produces when needed and it's shut off when it's not needed. It serves a lot of interesting end markets, food and beverage, health care, potable water, wastewater, cooling towers. It had great synergy. We've already introduced the Pulsafeeder system for Halox so we have a combined product offering. There is a significant consumables business that goes along with the product. There are cassettes that enable the process to take place and they are consumable. Some interesting examples because there are a number of pieces of equipment out in service today. Johns Hopkins will present a paper this month talking about how they eliminated all of the pathogens in their kidney dialysis unit by using this type of equipment. Another interesting one at the other end of the spectrum, maybe creating the problem for Johns Hopkins which they used mist water as the lubricant in their bottling area and everyday or two they had to shut down to go in and decontaminate the place to get rid of the bio slime. Today they have a misting system with chlorine dioxide and they don't shut down. They have no need to shut down so a tremendous opportunity, productivity opportunity for them for output and big cost savings.

Chicken processing. There's a technique that's being pioneered in Canada right now which is an interesting approach again, lowers the cost of processing chickens but also adds 50% to the shelf life. So some very, very diverse and interesting applications for this technology. We see a lot of opportunities there and we're pretty excited about growing that business and turning it into a real growth machine. If you want more information on either one of these companies, you can go to their web sites, there's a lot of information there. It is Rheodyne.com and Haloxtech, TECH one word, dot com and a lot more information that we'll give you background on the product. Finally there's a lot of opportunities that we see now across all the business segments that we're evaluating. We've actually seen a pick up in opportunities coming across our desk that we're pretty excited about what we see for opportunities in the acquisition area.

The equity offering. I think as everyone knows, it was priced on the 29th of April. It was 5 million shares plus the overallotment of 750,000 so a total of 5.75 million shares. 4.25 were secondary from IDEX associates and KKR associates. One and-a-half million primary shares yielded 51 million that we used in debt reductions. As I mentioned we're at the lowest debt to total cap in the history of the company. Finally on the outlook. We saw a small increase in orders as I mentioned sequentially. But we've yet to see a really strong rebound. For us the second quarter tends to be somewhat stronger. There is more work days. There's some seasonality in our paints and coatings business, for example. So consequently, we're cautious right now about what the third and fourth quarters might bring. We have the summer holidays to deal with in Europe and to some extent the U.S. Year end holidays, plus being a short cycle business, as I think you all know we are, with about one month of backlog we're totally dependent on whatever the incoming order rate is. So we feel we're very well positioned due to the operational excellent activities we have underway, growth activities we have under way and a pick up in some of the segments of the markets that we deal with but we really have to wait and see how the second half unfolds to see what our performance will be.

So with that, I would like to open it to questions.

Thank you. At this time we're ready to begin formal question and answer session. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. If you withdraw your question, press star 2. Once again, to ask a question, press star 1. First question comes from Alexander Paris of Barrington Research.

Just a question of Rheodyne just to look at the implications of it in terms of your wanting to redefine your markets, in this case all of it goes into the pump sector to get down to average 40% down to 10% market share. Now, this 23 million, I presume that it looks like it is all new products for you. So this would be increasing the markets that you address. So what kind of effect would that have on your addressed market for the pumps or in terms of reducing your market share?

Well, it is an adjacent market that deals with fluids. It is clearly a fluid handling system and it expands the opportunity that we now have in micro pump, for example, to develop additional pumps that can be sold as a combined offering to the analytical instrument companies. Today the instrument companies by and large make their own pumps. So we see this as an opportunity to not only enter an exciting segment, new segment that we have not been in and the new product development activity that's going on in that marketplace, but also to leverage it and the relationship with customers to take a bigger piece of the analytical instrument. So it expands what I would consider the addressable market, the pumps in question here are higher pressure and lower flow than what we do today. And we do have some technology that will enable us to move in that direction. So it is all part of expanding to adjacent market areas, moving into higher growth segments, Rheodyne has done a very, very nice job over the years growing. They are the clear world leader in this market segment. Their designs are customized for the instrument manufacturers so they are embedded in the designs and it's really a terrific business. It is great people and an exciting business opportunity for us.

Do you have an idea of what their market share is?

They are far and away the world leader. I don't give you an exact percent. I haven't seen any numbers but it is in excess of 50 percent.

Next question comes from Michael Schneider of Robert W. Baird.

Good afternoon. I would like you to dispense the orders, the numbers of two quarters in a row of what was admittedly a bad fourth quarter in the wake of September 11. What I'm trying to determine what is the extent of some of the new products coming out of Fluid Management and/or to what extent this is actually a market recovery and why you haven't been optimistic and I want you to extrapolate from that into the second half.

I think there's a number of things that work here, Mike. First of all, in the second quarter is, I guess, what you would call the paint season. So we would expect it to be seasonally stronger. But we have seen a rebound in Europe where the biggest decline was the end of last year. Europe, the reaction to September 11th tragedy was in some ways even greater in Europe than it was in the U.S. So we've seen a rebound in the underline market and we've also seen because of the new product introductions some pick up in orders there where we think we're taking some additional share. Coupled to that is the Axon Noble product called FUMM, F-U-M-M, which is coming from FAST. We've seen in the beginning of the rollout of that product but it is not really up at what I would call full speed right now. It is still in the introductory phase so we've got that to look forward to over the next two, three, four years.

Have they solved the software problems?

I think so. There are a couple of silly little things like if you don't use your computer it goes to sleep. Well, not all computers go to sleep the same way, not all computers are in in the same company go to sleep the same way. Sometimes they had to reboot it which was an unacceptable time delay so it's working through those kinds of crazy little things that are not fundamental but they do sure kill you from a productivity standpoint. They have gotten through those issues. They have some things on the colorant side they had to work out as well but it is just a matter of time before it moves.

On the domestic front, we've seen a lot of nice business here. Some upgrades of existing equipment. We also have been driving the service initiative as I mentioned and great performance in reducing the sustaining engineering spend and converting that to true R and D on the Fluid Management America side and they will completely revamp their whole product in a period of about 12 months so we'll see some benefit from that of new product opportunities and we think that will - large pause in web connection - inaudible as well.

In the second half I know Fluid Management at least U.S. is targeting some lower price points to go after a competitor you generally haven't gone after. Is that incorporated into your guidance?

> DENNIS WILLIAMS:[Operator spoke over him so I did not hear an answer.]

Next question comes from Scott Chemm of Bear Stearn.

I will save the toughest one for last. First question relates to the initiatives within dispensing where you talked about you were able to reduce engineering costs by a certain amount and then turn around and use that to fund higher R and D in conversion. My question really is what percentage of production does that apply to? Is that like one project or a couple of projects? What percentage of dispensing production does that apply to? Can it be taken over more production?

Well, I'm not sure I understand your question. Let me take a shot at it. The sustaining engineering, what I would call sustaining engineering is it is fix-it engineering and it's support of products that are out there and support to the production line. So if you eliminate the root causes for those, if you go through the discipline of understanding why a product is a component is returned or what the issue is, if you can eliminate the root cause then you eliminate the need to repetitively do that. As crazy as it sounds, we historically like probably every company have not focused enough on what's the real root cause of the problem, eliminate it so I don't have to continue to spend that kind of money supporting existing products. So it starts with a focus of what drives sustaining engineering, eliminates the need for it and with no impact on total engineering as a percent of sales, you can convert more of that sustaining engineering to true research and development and spend more money on more new products and new product ideas. So we were able to cut the sustaining engineering about in half. It will probably take it down further and able to more or less double R and D spending which allows you to generate more products in a given period of time. Coupled with that, what Fluid Management did reduce their cycle time for product development by about two-thirds, by taking a different approach. And a much more disciplined process of talking with customers upfront to understand truly what they want and to understand critical paths in the development of the like and rapid prototyping and they were able to one of their new products go from idea to prototype through into initial production in about six months. So there's a number of elements at work here that allow you to get more bang for the buck, satisfy customers better and have more new products.

So with limited to what you are coming out with, new product wise at this point?

I wouldn't say it is limited. I would say that is the game. Do you want to get more new products out.

Okay.

In fact, we're trying to leverage this across other businesses so that we're focused now on other businesses about how much do you spend on sustaining engineering? What do you spend it on? Can you eliminate the problem and have more money to spend on new products without any impact on the margin of the business.

Understood. Second question I have relates to the market expansion initiative that we've been talking about for some time. I guess maybe one of the areas that I was most interested in was going after some of the after market with some of the distributors and maybe you can comment on that and some other initiatives which you think maybe near term.

On the pump side of the business we created positive pump care group. These are trained distributors aimed at servicing not only our pumps but other pumps. We also have pumper parts which is a third-party provider of spare parts, which has been key to conversion of distributors where we wanted a distributor to convert and perhaps he had a competitive line and we were able to provide spare parts for that competitor's product. It takes one of the risks out of conversion of distributors. So we've converted some distributors because of the presence of pumper parts and the products that they have.

There are service initiatives in other parts of the business. In Fluid Management Americas where we do service today and we're enhancing that and going after more service business. It is growing at a very rapid pace, albeit starting from a relative small number, but I think it is a great opportunity to expand our service presence. If you look at the two acquisitions those are both adjacent acquisitions that take us into some different market areas. The activity in Fluid Management of some new product development into segments that they had not been in before, to take competitors head-on where we hadn't done that in the past. I mean there are stories everywhere about market expansion and different product thinking. The rerailing product that I mentioned in Lucas, German, they viewed their mark as the German rail system. They have quickly redefined that product with the German customer, rapidly prototype, tested and product advertised a new offering, got a $6 million order that will be shipped over a three to four-year period but they now see their opportunity as global. Including in the U.S. where they had never come before, including in places like India, Turkey, places around the world that need rerailing equipment. Another has never been focused on to the extent it is now focused on.

Last but not least is your guidance. I know you don't get into the estimate detail because of the nature of your business. But clearly you indicated some costs for the second half of the year and my question is sort extends from that. If we were to exclude the acquisitions made to and assume that your sales kind of revert to their seasonal, sequentially seasonal manner in the second half, one would surmise that third quarter sales would be a little bit lower than second quarter and fourth quarter would be a little bit lower than third quarter. Would you expect earnings per share to follow suit or stay at the current level?

First of all, I don't necessarily agree with your premise to start with, that I think if you look back at the data and I don't have it here in front of me. But it might be interesting to look at. I don't think we always see third quarter down and always see fourth quarter down below that. It so happens that we did last year but I think for a very unique set of circumstances. So in this kind of a market environment, frankly all bets are off relative to what the history has been, in my opinion. I can tell you that there is a seasonality to the Fluid Management business typically. It may not be the same this year. We simply don't know. If Axle Nobel certainly turns up the wick and wants to move quickly on the foam machine in Europe, that's a unique set of circumstances that will drive the business. So we simply don't know. I mean we sat here a year ago looking at 190, 191 million of first and second quarter orders, we said that looks pretty stable. That's what we said. Boy, were we wrong. So the simple answer is, and I'd be not doing justice to anyone if I said I knew. We don't know. But we do believe that we're very, very well positioned to deal with whatever the reality is. Will our margins expand on flat sales? I think the answer is yes. Because of all the good things that are going on in the company where we think we can save variable costs and some base costs in the business. So on a fixed portfolio, flat sales environment, will we see margin expense? Yes, I believe we will.

Thanks a lot.

Our next question comes from Donna Sakada of Merrill Lynch. You may ask your question.

Thank you. Good afternoon, everybody. The experience that you had in your international sales in second quarter seems a little different from some of the other companies we've been hearing from in this earnings cycle. Your sales in Europe, as I recall you said were up, right?

Right, sequentially.

Asia was down. Sequentially. I thought you said year to year as well.

Let me go back to that page.

It was up like 15% sequentially and I thought you said 5% compared to a year ago.

Sequentially Europe up 15, year over year Europe up five. Asia up 24 sequentially, down 20 year over year.

Most companies are actually seeing Europe down this quarter year to year. I was just curious to hear what your experience has been in some of the major markets like Germany and France?

Well, I think it depends on the end markets that businesses are selling into. We did see a rebound in the dispensing business, as you know and that has helped drive the business there, I believe perhaps in a unique way that other companies may not have experienced. We did see, you know, some pockets of activity on the pump side that was encouraging in Europe. In Asia I think a lot of what is going on in Asia is directly attributable to the creation of what we call the Asia pump group, which really takes all of the sales guys from all the different businesses, cross trains them and organizations them into a pump sales force as opposed to a viking sales type. So we're getting some more penetration there that we didn't have before and I think that's helping to drive our Asian activity. In the Americas, the Americas are pretty sick. If you take the U.S. out, so you think America is a tough market right now. Canada is not robust. So the numbers, I guess, as I look at them don't surprise me. I haven't studied. You are in a different position. You can get the perspective of a lot of different companies which we don't see here. But I think our results are fairly explainable.

On IDEXconnect.com, I think you mentioned that you were bringing up another 18 distributors on that in the next quarter or so. 57 distributors that will be up and running on that, what percentage of the total is that?

Domestic distributors, literally hundreds of domestic distributors across all of the pump businesses. What we've gone to first, Donna, are really our major distributors. So they would have a disproportional share, if you will, of the sales but quite frankly, we don't have that number calculated to indicate what percent of total pump sales they would represent.

But it probably is still less than half, right?

I think that's a fair statement. We've tried to prioritize based on size and impact and enthusiasm. So it is moving. We'll get over the next year we'll get the majority of them up and on now in a couple of our businesses and with a couple of our distributors headed towards single key entry so that they enter the order once, they don't have to enter it on two systems so their local system is integrated into the front end of ours, it goes straight through to legacy system, ERP untouched. And that's where we want to go. We've got a couple that are there and more that will occur over the next half and more over the rest of the next year.

Great. Acquisitions. Were these private transactions or were they options?

More or less private transactions.

More or less.

You know, you are never alone. There's always somebody hanging around there.

Were both of these things sold by the founder or the entrepreneur I guess that was actively involved?

In the case of Rheodyne, yes. Jim Noonan and Sue Trachsel are the two principal always and they have been involved for what, seven, eight, ten years and had built the business. They had purchased it seven or eight or ten years ago and had built it up to what it is today. So they weren't really the found percent but they are the ones that turned if into what it is today. So they have done a terrific job. And there will be a transition phase of them in the next three months or so as we move in. - long pause in the webcast -

On the Halox side it was a little different situation where there were actually some venture capitalists involved in this. And we moved in and growing body of data says that chlorine produces something called THMs I think they are called. I can't tell you what that stands for. I knew at one point. But they are carcinogens. So there's more and more move away from chlorine and bromine and I think that's the way the world is going to go. And this is a great replacement. It has - it doesn't have odor, it doesn't have the kind of side effects that come from chlorine and bromine and it stays in solution. So it has a lasting presence. In the U. K. where they have legionellae legislation, this is the preferred solution to eliminating legionellae and there are recorded examples where legionellae was present. In fact, as you get further into this you almost get afraid to turn your shower on in the morning because legionellae is ubiquitous, it is everywhere. And this and Johns Hopkins paper this month will come out pretty clearly and state how effective it is against some pretty ugly things. And there are - there's more legionellae that occurs than ever gets reported. Because it looks and acts a lot like pneumonia.

Maybe that's why I'm coughing. I'm such a hypochondriac.

Then you don't want to learn about this product.

You said that Halox process is actually a lot safer because of the lack of intermediate. Is this something that they have patented?

Yes, it is a patented process. Very well protected. It is completely safe because you don't get to the concentrations that are explosive and the chemical process that is used traditionally when you mix hydro color recollection acid and sodium hypochlorite together the process goes to completion, the reaction goes to completion, you cannot stop it. So when you get chlorine dioxide produced sort of without your control. The only control you have is by controlling the two precursors. In the case of the Halox machine, it is an electrical process and on when you want it you turn it on, when you don't you turn it off and it stops the process. It is very safe and the concentrations are very low. It is an aqueous solution and it's suitable for dosing systems to dose into water streams or whatever you want to does it into. So it's a fascinating technology with some extraordinary results from beta tests that have gone on. And it's in a way it is a technology cell. It is not a cell of chlorine dioxide. Chlorine dioxide is very well known and very well accepted in many disinfecting kinds of applications. Cooling towers and it is just in a very long list of places where this is effective. If you will excuse, this chicken example in Canada, traditionally what happens is they run all the chickens through a chilled water bath that is filled with a lot of pretty tough chemicals to kill everything that may be on even just one chicken but it could infect the entire group going through a water bath. This is a new application is misting in a chilled room that doesn't put bath chemicals on to the chicken and it is cheaper and it improves the shelf life from 10 days to 15 days which is a huge deal. I mean a huge deal. So it is exciting. I mean every time I go there in an integration meeting you get all excited because you can see the potential to these things and we're adding people and resources to try to grow this business faster.

It sounds like the applications you are talking about sound like they are relatively low slow rates. Would this be something you could use on a municipal water system?

It is possible to scale it up. We've asked the question. It really depends on how the power supply scales for the needs of the process. We don't know the answer yet. But I would like to get it large enough with time so that you can go to places like paper mills where you are being mandated away from chlorine and have to use chlorine dioxide and today they have some pretty sophisticated people controlling the old process to make sure that it doesn't get out of control and cause some serious problems. So I think that to the extent this is scalable, it opens up other industrial applications as well as some interesting water purification applications on a larger scale. Today we've got a system, a couple of systems on cruise ships that have both potable water and a wastewater issue of growing proportion. And we see some opportunities there for a meronized unit so we've got some tests that are going on with one of the cruise lines.

It sounds very interesting.

It is a fascinating area, it is really fascinating.

One quick question on Rheodyne. I think about all of that hanging around that I saw you at.

It all ties together. Water agilant, bionics, biorad, anyone that makes HBLCs or IC machines, those are customers.

This is all local chromatography, not gas chromatography?

Right.

Next question comes from Jerry Blockman of Credit Suisse First Boston.

I will try to make this quick. On the Halox, do we have an estimate as to what the size is as far as sales?

It is small. Single digit in the millions.

What about the end market?

End market, I mean they are so diverse.

How about just the size at this point in time?

I wish I could put a number on it. It is huge, Jerry.

It is brand new technology but the potential here it's got to be more than single digits, if we had to take a guess at it?

Over a five-year period?

Sure.

Between 50 and 100 million of sales potential.

So the patent here is really the distribution technology?

The patent is the technology in the electrical process to convert sodium chloride to chlorine dioxide. It is a process in chemistry patents.

That really gets you at the advantage then is the onsite application?

Right. You've create it on site in a safe way, used whenever you need it. So there's no storage. You don't have to worry about exposure to chlorine dioxide or anything else or the ugly precursors that are needed for other techniques. So the patents are very good, very dependable and are the heart of process and the components inside the piece of equipment.

On the Rheodyne acquisition, there's a relationship with an Inovadine division at one point that was spun off, what's the current status of that relationship?

Novadyne remains separate. They are not a competing business so it was a spinoff that made sense for them to do. It exists today and there really is no relationship between the two.

That's not competing right now?

Right.

No risk with Jim Noonan only being around for a three months?

No, Jim was not there 100 percent of the time. He is a terrific leader. He and Sue have built a great business with the team that's out there. I spoke with Jim yesterday. The deal was closed literally an hour ago. He's happy and will stay with the business and help us with help us transition and help us things about ways to grow further and faster, so I think it is a great relationship.

What's the number of employees there right now? So I can get a flavor or so.

90ish.

With the genome product I know enough to be dangerous, with the genome product growing to a close how did it drive the sales? The next way to drive Rheodyne sales?

Certainly the continuing analytical instrument business, the underlying HPLC market, ICL market is a high single digit kind of growth market I think in and of itself but there are some clear product opportunities in the protylomix area that are ways to grow the business in the future.

And then you probably can't disclose purchase prices here, but can you give a flavor as to how the transactions transpired along those lines?

It is creative.

Last question on the restructuring charge that we saw this quarter. Prenet I got a gross number of a million three; is that right?

That's right.

Can we describe what that went to?

We set up a reserve last year and part of the original reserve that was set up was with the sale of the gas facility in southwest Michigan. What happened is we wound up selling the business for a higher amount than we had anticipated so the proceeds exceeded what we had anticipated. And in conjunction with that, we had other moves in the company that we made that we completed in the second quarter to further downsize operations at Gast, Bandit and Hale. Really follow-on actions really nowhere the significance we had in the prior year but actions we wanted to take and completed during the second quarter.

These were people moves, facility moves?

Both. Both, Jerry.

That will do for me. Thanks a lot.

Next question comes from Carl Mergenthaler of Banc of America Securities. You may ask your question.

I will try to make this question. The conference call has gotten kind of long. I wonder if you could comment generally on where you want to take the business from here. Just to put that in context a little bit with the recent equity offering you need to do a deal of the couple hundred million dollar variety. Six of seven deals done since 2000 have all been in the pump products segment. I'm be wondering do you want to go further down the pump products path? Are you eventually going to break off a piece into a fourth leg perhaps? Secondly, with the balancing capacity that you now have, do you want to build out your corporate development capacity and/or kind of expand the size and type of deals you are willing to look at at this point? So generally speaking, where do you want to drive the business over the next few years?

Well, probably about five questions in there. So let me see if I can answer for you. If I miss any, come back at us. While the two deals we talk about are, quote, in the pump business, they are in an entirely different market segments than what we're in right now. So they are adjacent. They have leverage with some of our products in the pump area and it makes sense to put them there. But to consider them, you know, industrial pump kinds of applications is not really what they are. I think it is probably abundantly clear. We're looking at opportunities in all of the business areas. Now, were you able to time and pick and choose, you know, you might choose to build one segment for awhile and then another segment. You kind of have to deal with these as the opportunity presents itself. So we're looking, constantly looking across-the-board at things that range from very small to some pretty significant size potentials of things to do. So we're constantly looking across-the-board. We have more business unit involvement than what we've ever had before and we've added a little bit of resource to our corporate development side here so that we can deal with what appear this quarter to be a significantly increasing list of opportunities. So I think it is more robust today than perhaps it's been since I've been in this job. There are just a lot of things that come across our desk daily it seems right now and a lot of good fits and some very interesting businesses. So we see opportunities everywhere. We're trying to build into higher growth segments, higher tech segments and we will add to all of our businesses. We see some interesting opportunities on the fire and rescue side. We see some interesting on the dispensing side. It is pretty much across-the-board. My preference higher growth, higher tech - long pause in the webcast - systems level, systems level approach as opposed to components gives you more upgrade potential, greater service potential in the future and the fact because we wanted it that way. We're very closely aligning micro pump,tis ma deck, Rheodyne and Trebor together and to the extent we can add to that portfolio of businesses it begins to look distinctly different than, quote, the pump group. So at some point would we create a fourth leg? At the right time I would do it in a heartbeat. You have got to have the right portfolio products and it's got to make sense to do it that way. But certainly I would consider that without a doubt.

It sounds good. So where you are in the balance sheet is now under levered, how far up would you be willing to take the leverage on the balance sheet in order to get a deal done?

We've conditioned rating agencies that we could bounce up into the low 50s because we don't stay there very long. From our cash generating capability. If you look at the history of the company it is, it peaks up, comes down, peaks up, comes down. This is a game where it's comfortable playing and I think the rating agencies are pretty comfortable with us in that regard. So we generate real cash.

Thank you very much.

Once again to ask a question you may press star 1. One moment, please. At this time I have no further questions.

Great. I would just like to thank everybody for participating. This one went a little longer but a lot of things to talk about. Generally I was pretty pleased with the second quarter. More to do across-the-board but I think we're gaining some transaction in a lot of areas and I look forward to our next conversation three months from now and I think we all hope the economy stays strong and capital spending starts to ping. If so we'll have an even better story to tell. So we'll keep our fingers crossed. In the meantim we're going to execute like crazy. Thanks very much for tuning in. I appreciate it.