藝達思 (IEX) 2002 Q3 法說會逐字稿

Good afternoon. Thank you for standing by. All participants will be able to listen-only until the question-and-answer session of the conference.

This conference is being recorded at the request of IDEX. If you have any objection, you may disconnect at this time.

I would like to introduce your speaker, Ms. Hortina (ph). Ma'am, you may begin.

Lisa Hortina (ph): Good afternoon, and thank you for joining us for the IDEX third quarter conference call. Earlier in the day we sent a press release out outlining the results for the third quarter ended September 30th, 2002. If you have not received the release, call FRB at 312-266-7800 and we will resend the information.

Joining us today is Dennis Williams, Chairman, President and Chief Executive Officer; Wayne Sayatovic, Senior Vice President and Chief Financial Officer; and Doug Lennox (ph), Treasurer. Management will provide an overview of the quarter and will open your call for Q&A.

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

At this point, I'll turn the call over to Dennis.

Thanks. Welcome to everyone on the call. The agenda we'll follow today, we will talk about third quarter results of the nine-month results. I will give some comments on the groups, a progress report on our initiatives, a few comments on a couple of acquisitions, and brief comments on the outlook.

But before talking about the third quarter results, you may have noticed a change in the presentation of our financial data in the press release today. NIRI, which is the National Investor Relations Institute, has issued guidelines that are in line with the SEC desires to give prominence to GAAP results. We have done so, but we've also included non-GAAP results specifically excluding goodwill and restructuring, in this case, to help clarify our performance. I hope you find that the non-GAAP presentation is helpful in understanding how the company is performing.

Moving to the third quarter, as background, as I mentioned in the last conference call, third quarter has historically been weaker than the second quarter due to fewer production days, seasonality of some businesses, European summer holidays. We were pleased with the third quarter results, as our financial performance was nearly flat with second quarter and was up nicely on a year-over-year period basis.

Starting with orders. Orders were flat sequentially and up 10% year-over-year, excluding acquisitions and currency. Orders were down 3% sequentially and up 4% year-over-year.

Turning to sales. Sales were flat sequentially and up 6% year-over-year. Again, excluding acquisitions and foreign exchange, sales were down about 3% sequentially and flat year-over-year. Foreign sales in the third quarter were 43%, compared with 41% a year ago. In that mix, the U.S. was up about 3%. Europe was up slightly over 20%. Asia down 9. And the Americas, exclusive of the U.S., up 1%.

Of the foreign piece of this, the numbers I just gave do include the exchange benefits of the foreign exchange effect. If you net all of it out, foreign sales were up 5% on a year-over-year basis net of the foreign exchange conversion effect.

Operating margins were down 60 basis points sequentially due to sales decline and dispensing equipment. That is mainly due to the European holidays and the seasonality of the business. Operating margins were up 160 basis points on a year-over-year basis with the same accounting, due to the operational improvements, restructuring, and sales volume. Net income declined 5% sequentially and increased 35% on a year-over-year basis with the same accounting treatment.

Earnings per share, up 10% year-over-year, down slightly sequentially. Cash flow was once again a great story. In the third quarter, free cash flow was 27.7 million, nearly 1.9 times net income. So we had another good quarter for cash flow.

Debt to total capital at the end of September was 33%, down from 42 at year-end last year. As you may recall, the lowest in the history of the company was around 30% at the end of the second quarter. So, in general, we are pleased with our performance in the quarter given the economic conditions.

Looking at the first nine months -- orders up 2%. That is comprised of a base decline of 1% offset by acquisitions. Sales essentially flat. The base business was down 4% and that was offset by acquisitions and there was no foreign exchange impact through the first nine months.

Operating margins increased 290 basis points on an as-reported basis. They were flat at 14% on a comparable accounting basis, excluding restructuring. So, on a non-GAAP basis, flat at 14%. Net income of 48% on as-reported GAAP basis, up 4%, excluding goodwill and restructuring. Earnings per share up 41% on an as-reported basis, flat on a comparable basis, excluding goodwill and restructuring.

Cash 73 million, up from 67, a nice 10% increase. So, probably the best way to look at the year-to-date performance would be flat year-over-year sales, net income up 4%, EPS equal on a year-over-year basis due to the share dilution, and free cash flow up 10%. So, I think pretty good performance through the first nine months.

Now, let's look at the groups. Start with pumps. Pumps, on year-to-date basis, 58% of sales, 61% of operating income. I will give you three comparisons. The first will be sequential, third quarter versus second. The second comparison is a quarter year-over-year basis of third quarter year-over-year, and the last is a nine-month year-to-date comparison. So, starting with a sequential comparison, orders up 1%. Sales up 3%. Operating income up 9%. The operating margin at 17.7%, versus 16.8.

On a quarterly basis, year-over-year -- orders up 7%. Sales up 7.5. Operating income up 30%. The operating margin 17.7 versus 14.6. The nine-month comparison -- orders up 2.2%. Sales were flat. Operating income of 5.5 percent. Operating margin 16.9 versus 16%.

So, nice improvement in all comparisons. Nice leverage margin improvement on the sales increase. That's due to the restructuring and operational excellence activities that we have underway. A few highlights from the pump part of the business. I will talk about it more later, but we did make an acquisition of Retech (ph), which adds to our bundle of products for the sanitary processing market. It is small, less than 2 million in sales, but a great door-opener some of the rest of the products we have - Warren Rupp, Versamatic (ph), Pulsafeeder, Johnson Pump (ph) as we move into the sanitary channel. I will talk more about this later.

We've continued our focus on R&D with a lot of new products being introduced at night (ph), Pulsafeeder, Johnson (ph), and Viking. We continue to focus on distributor upgrades and additions throughout the world as we do a region by region look at distribution.

We've also increased our focus on OEMs and we're seeing nice opportunities there. We continue to focus on new applications. Viking is a good example. Historically they have served a hot oil market in the OEMs for commercial cooking. We are now moving downstream to recycling, on the recycling side of the business for cooking oil, where there are new opportunities. We are trying to leverage our current position, look for new applications, and grow our business.

We still don't see a lot of new project business. But the capacity utilization figures that we look at have been flat for the last three months and are clearly (ph) off the bottom.

On the personnel side, Rod Usher (ph) will retire from the company at the end of the year. Jim Dahlke (ph) is replacing Rod (ph). Jim (ph) is the former president of Waukesha Fluid Handling. He was also president and CEO of Harrow Industries (ph) and Metalist Industries (ph), small public companies. Jim (ph) has extensive pump experience and proven leadership characteristics in global businesses. We are very, very pleased to have Jim (ph) join the company.

Mark McDonald has been named president of Rheodyne. He replaces Jim Noonan, who will phase out by the end of the year, which was according to our agreement in the acquisition. Mark was previously president of Hitachi Instruments here in the U.S. and brings great leadership experience, plus the industrial and technical knowledge necessary to lead this important new acquisition for us. We are pleased to have Mark onboard as well.

Turning to dispensing equipment. On a year-to-date basis, 19% of sales, 18% of operating income. First a sequential comparison. Orders down 15%. Sales down 19. Operating income down 47. The operating margin declined from 18.9 to 12.2%. On a year-over-year basis, orders up 14%. Sales up 1%. Operating income down 8. The operating margin declined from 13.4 to 12.2.

Year-to-date, orders down 1%, sales down 5, operating income down 10. The operating margin declined from 16% to 15%. The seasonal third quarter weakness is very clearly visible here in these numbers. The end markets, summer holidays, shutdowns all impacted this business because of its exposure and the location of two of the facilities in this group. There is a secondary effect that we also see here which is a startup of new product production in the Netherlands. There is some inefficiency in the transition because we have both the old lines and new lines in production. We will be phasing out the old as customers transition to new products.

Other highlights in the business -- in Italy, shipments are ramping up for XO product. We will ship 400 this year and twice that, probably, next year. We are taking market share from our largest competitor. Good example of this is in South America, where the largest paint supplier is switching to our products, which is a nice win here in the Americas. One of our major domestic U.S. customers has decided to replace all of the installed competitors' equipment, over 250 units. They will be shipped over the next 2 quarters.

Also here in the Americas, shipping this week, the first Akutiner 8000s (ph) will go to U.S. customers and foreign customers. As you may recall, this is the top of the line of the new product family. So, we are beginning to ship these new products and the rest of the line is being worked on and will be rolled out in next year. We are working with several customers on applications for the Tentium (ph) machine. So additional companies working on hair colorants, cosmetics, and shampoos. We remain convinced that this is a great longer-term potential for the company.

Moving to other engineered products. Year-to-date, 23% of sales, 21% of operating income. First, the sequential comparison. Up 7% in orders. 3% in sales, 9% in operating income, and the operating margin moving from 15.6% to 16.3. Third quarter year-over-year comparison, orders up 13%, sales up 7%, operating income up 9%, and the operating margin up from 15.9 to 16.3%.

Year-to-date basis -- orders up 3%. Sales up 1. Operating income down 6. And the operating margin declining from 16.6 to 15.3. What we see here are very nice sequential and quarter-over-quarter improvements. We are very pleased with that.

Some of the highlights, starting with Bandit (ph) . Bandit is having great success in automotive and recreational vehicle market, so ATVs and snowmobiles and those products. The applications are heat shields, sound shielding, and airbags. The quantities of airbags are going up in vehicles, so quantities are growing. Bandit (ph) has a clamping technique of the bag to the inflator and the inflator to frames. So we have several clamping opportunities. And sound shielding is also growing in importance in all vehicles.

So, this is a nice area of development that the team out in Denver have been working on. They are really driving a much more global approach on this type of application work. Some great success in the automotive and recreational vehicle side of the market for Bandit (ph).

Hale, nice progress on pump modules. Three smaller OEMs have converted over. We are working closely with others to gain acceptance and convert them to modules versus components. The new line of stainless steel valves we introduced a few months ago are starting to gain acceptance. We expect orders to ramp up in the fourth quarter and into the next year as they get broader acceptance in the industry.

The vehicle multiplex system, Eski (ph), acceptance is increasing there. A new rescue vehicle OEM has standardized on it. And the bus business was very much a nontraditional business for us, is increasing in the fourth quarter. Thomas Dennis (ph) will ship 50 buses with the system on board. To us, it means $5,000 per bus. A very nice increase in business there and taking us into some nontraditional markets.

We've had an important new innovation in CAFS, or compressed air foam systems, which are becoming more and more interesting for the firefighting world. Class 1 (ph) has developed an innovative one-button operation system. It was demoed last week for the first time for a big customer. We think it is going to get great acceptance because it is simpler to use than prior systems.

Finally, on the Fire Act (ph). Funds are being released -- '02 funds are being released for '03. The number will be somewhere between 450,000 and 900,000. The House is at 450,000, the Senate is at 900,000. For us, it is not a huge driver of the business, but it's clearly beneficial and in the right direction. We are hopeful it moves closer to 900 level.

In general, I am pleased with the progress we are making in this business segment; nice improvements.

Now, let's turn to the initiatives. As the tools (inaudible) become part of our culture here, we are in the process of merging Kaizen/Lean and Six Sigma, all of the tools into what I would call a rapid continuous improvement tool kit. The words of rapid continuous improvement capture the key themes of what we are trying to do, of speed and constant, never-ending improvement in everything we do.

I will give you specific comments on Six Sigma. We are up to 693 trained belts at this point. We completed 100 projects in the third quarter versus 77 in the second. 2.4 million of savings in the third quarter versus 1.5 in the second. 5.3 million year-to-date versus 800,000 last year. The average savings is remaining constant at about 47,000 for black belt (ph) projects and around 19 for green belt.

Kaizen/Lean events continue across the company. Great success stories everywhere of how this simple approach is paying big benefits for us.

In total, we have a powerful set of tools to rapidly improve operations and drive improvements for our customers. It is starting to become part of the culture.

Global sourcing. Third quarter savings of 3.3 million versus 2.6 in the second quarter. Savings remain constant at 30% versus the prior source. This is exactly as it was in the second quarter. Year-to-date savings of 8 million versus 2.6 in the same period last year. And I think it is important to note here, I mentioned it before and in prior conference calls. Let me just emphasize how we keep score on this.

In our bookkeeping, we only track the savings for 12 months and then force the businesses to look for year-over-year improvement. So it is an internal management technique that we use to drive continuous improvement and focus on global sourcing.

In fact, the real benefits are cumulative, as I am sure you understand. So, the numbers here of $8 million this year versus 2.6, those are just 12-month savings kinds of figures and they certainly continue to accrue benefit into the future.

So far this year, we have placed nearly $27 million of purchase orders. We have over 15 million of components in trial stage right now and we continue to gain momentum in this important initiative.

We continue to see opportunities. We are finding new suppliers and leveraging existing ones. We are getting better internally. Our processes, we continue to shorten the total cycle time for placing orders and getting production components. We moved in a couple of areas to company-wide teams on key commodities, which is the logical next step from having commodity leaders. This is progressing and maturing in the company. I am pleased with progress. We continue to see lots of opportunities.

In e-business, we continue to follow the previously discussed strategy, a tax cycle time, cost, complexity, defects, and inventory levels. End (ph) users and the functionality that those users want and have a short-term focus, 60 to 90 days, launch and learn, and move forward aggressively. Today we have 54 distributors on the system; 25 more will be added this quarter. Very good acceptance by the users.

We are seeing utilization rates go up. We are very happy with the progress, but have a lot more we can do with this initiative.

Turning to acquisitions. Two acquisition to talk about, Rheodyne and Retech (ph). As you may recall, in the last quarter conference call I did talk about Rheodyne very briefly because it was on the scope. It did close in this quarter. I spent two days with the company last month and I can tell you I am more impressed than ever with this company. They're absolutely the clear leader in their market. The underlying market, the HPLC (ph) market, is growing at mid-single digits today. They have several new products under development, including a couple that will take us into totally different market areas.

So, it's very exciting business. We're very, very happy that it's part of the IDEX family. I am confident Mark will provide great leadership there for the business. We look forward to the growth that I am sure that business will provide.

Retech (ph) is a very small positive displacement pump manufacturer that serves the sanitary processing market. It's a great addition to the bundle of products we have for this segment. They have some unique knowledge of stainless steel alloys that are needed for the market. It allows the company to provide spare parts for competitor products and complete interchangeable pumps. The installed base they look at of competitor products right now is about 80,000 units around the world.

We think this gives us a very interesting window into that market. We are pleased with this acquisition.

Finally, turning to the outlook, the orders for the first three quarters have been essentially flat, but clearly at a higher level in the second half of 2001. With no measurable sequential increase and no -- what I would call near-term catalyst in sight, we don't see a basis for any kind of rapid improvement in the business conditions in the near term. As all of you know, IDEX is a very short cycle business. That's the way we drive it. We're trying to make it even shorter cycles to serve our customers better. Consequently, our performance is dependent upon the incoming order rate for every month in the quarter. Consequently, we have limited visibility on what our financial performance will be in the fourth quarter.

We are confident, we are focused on the right things through our initiatives in an effort to be able to deliver improved performance when the economy picks up.

So, with that, I would open for questions.

Thank you. At this time, we are ready to begin the question and answer session. Please limit yourself to one question and two follow-up questions. If you would like to ask a question, please press * 1. You will be announced prior to asking your question. To withdraw your question, press * 2. Once again, to ask a question, please press * 1.

One moment, please.

Our first question comes from Scott Graham (ph) of Bear Stearns. Sir, you may ask your question.

Scott Graham (ph): Yes, good morning. Good afternoon, I should say. I have two questions. I have two questions -- one about the margins and one about the working capital. If we look at the dispensing equipment, understanding of course, that there is third quarter seasonality, we look back to 2000, which is, you know, probably a better comparison than last year's second half, which was obviously significantly disrupted by the events of September 11th. You know, your margin in this business, even off of last year's very weak comparison, slid further down. Moreover, your sales seemed to deteriorate again. I would sort of have the same type of margin question relative to other engineered products, which while up year-over-year, was running at a 20% clip like the dispensing equipment business was back in 2000.

Yet the margins of these two businesses, particularly dispensing, remains much closer to last year's than two years ago. Can you talk about what has changed in those businesses?

In the dispensing side of the business, probably the largest impact is on Lubriquip side of the business where we begin to see decline. As you know, we had a very -- really a significant decline in that business, which took its profitability down and also the profitability of the group. Wayne, jump in here if you have any other view on this. I think that is the main driver on that side of the business.

Lubriquip started to have more difficulties starting in the fourth quarter of 2000, as you may recall from our prior conversations. They felt the problems first. They were out there making restructuring moves in the fourth quarter of the year ahead of our moves that we made first quarter 2001. I think that has a key part of the reason, Scott.

Scott Graham (ph): So, are you implying, Wayne, that excluding Lubriquip, the other businesses within dispensing equipment had up margins on year-over-year basis?

No, because clearly the impact of the volume declines that Dennis spoke of in the third quarter have an impact on what is happening. We also had the introduction of some new products and new production capabilities for our business in the Netherlands. Again, we are ramping up the learning curve on that, as well.

Scott Graham (ph): Could you address the same margin question relative to other engineered, which is still 600 basis points below where it was two years ago?

In the case of that business, what has changed with it, we added Class 1 (ph) at the beginning of last year. Typically, as we have said in the past, most of our acquisitions when we bring them on board have margins that would be slightly less than the margins of the base company. This would have an impact.

Plus, even if you look within the Hale business itself, it's a very complex business, and there is mix considerations that enter into that equation, too, with rescue tools having a certain profile for operating margins that is different from fire truck modes (ph).

Scott Graham (ph): Last question and I will get back in the queue -- operating working capital. You guys continue to be very good at managing down operating working capital. You guys are, on my calculation, TTM (ph), doing 100 to 150 basis point declines as a percent of sales every quarter. Is that a rate that can continue or should that maybe taper off a little bit?

I would love to have it continue. We are trying. As a practical matter, the higher you get in turns, the tougher it gets to drive it further. As I think you have heard us say a few times before, we have set big internal stretch goals on the working capital side, both on inventory and receivables, to try to continue to drive this great reduction of working capital.

Scott Graham (ph): Forgetting the magnitude, we should see this number continue to drop down.

That's our intent.

Scott Graham (ph): Thank you.

Next question comes from Eric Daniels (ph) from JP Morgan. Sir, you may ask your question.

Eric Daniels (ph): Good afternoon. Question about the marketing redefinition effort. Just want to, I guess, get a sense of where that stands in this rollout, if that is getting any traction?

Yeah, we continue to press that. We started a year and a half or so ago, driving hard on this. The kinds of things that you see Fluid Management doing, where they used to think about their business as the world leader in custom tinting of paints, custom blending of paint, and now beginning to think of the world as custom blending of anything. And this whole (inaudible) project -- and they are working with a number of customers that we are not at liberty to talk about -- but on products ranging from hair colorant. We currently have equipment in production today doing that. Other companies interested in it as they see the potential it may drive in the industry.

Shampoos, cosmetics of various types with different companies. So that's a natural outgrowth of thinking about markets and creating markets as opposed to continuing to concentrate only on the niche that they may dominate.

We see it also in Hale, for example. Lucas developed re-railing (ph) equipment, it is a hydraulic piece of re-railing equipment that is used to put rail vehicles back on the track when they are derailed. They developed a new generation of product there with the German rail system, provided the German equipment, but are also finding that is the world-leading product for re-railing. So, that is an outgrowth of rescue tools thinking about what they can do hydraulically.

You see the same thing on the pump module side that I mentioned in the comments of three small OEMs that have converted to pump modules. That takes our content up substantially, provides better service for the customer, and that business, thinking beyond the supply of components, but (ph) the supply a system that can be custom configured within the cycle time of the vehicle, just in time slide in and improve the productivity of the customer assembly line.

So, those are a few examples. There are more across the company.

Eric Daniels (ph): The success in Bandit (ph), is that a direct result of market redefinition?

Absolutely. It is a refocus on applications and doing it globally so that, if we find an application in motorcycles in Japan that we ought to be taking that to every motorcycle manufacturer in the world. So, it's a global -- in that case, it's both application, looking for new applications, but also thinking globally where it wasn't thought about it quite in those same terms in the past.

Eric Daniels (ph): Okay. And as a follow-up, you mentioned that you started this effort about a year and a half ago. About how long before we can certainly expect to see -- sort of outline the way you do with the continuous improvement initiative, sort of the benefit that this is having to the organic growth?

We haven't -- I guess the first answer to your question is, we are seeing some of it today.

Eric Daniels (ph): Okay.

Other parts of this, like conversion of a cosmetic market to a wholly different mixing and distribution approach will take longer. We have not made a conscious effort to seriously break out every new thing that we're doing, and in trying to put a label on it, is this new think or old think, because it is probably not worth the internal bookkeeping that it would drive.

I am not sure we will report (ph) it as such. I am not sure the energy and the work to generate the numbers is the right way to spend our time, to be honest.

Eric Daniels (ph): All right. Fair enough. I will hop back in queue. Thanks.

Our next question comes from Donna Takeda (ph) of Merrill Lynch. Ma'am, you may ask your question.

Donna Takeda (ph): Thank you. Good afternoon, everybody. Couple of quick things. Dennis, could you talk about what the sales or order trends look like across the three months of the quarter, and maybe what you have seen in early October to date?

Well, we don't comment on what the flow of orders was through the three months in the quarter and we certainly don't comment halfway through any month just because it's not a nice, smooth, orderly pattern, as you know. So, I guess I would respectfully decline to answer the question. But, you know, we do see, in all of the quarters, some up and down. It is not a nice linear progression in any quarter.

Donna Takeda (ph): Other than -- so, other than the summer holidays in Europe, there wasn't any particularly discernable pattern, or it wasn't like July started out great and degraded (inaudible) period or anything?

No, I don't think there is any trend that you could point out and draw any conclusions at this point.

Donna Takeda (ph): Okay. It was worth a try.

On to something that maybe you will be less reluctant to answer. Can you talk about who the competitors are at Retech (ph)? It sounds like it might be Waukesha Cherry Burrow (ph), guys like that.

That's a pretty good guess.

Donna Takeda (ph): I guess Waukesha is a hotbed for sanitary pumps?

They probably have the largest market share of these kind of low (ph) pumps, if I want to call them that, or as my pump friends tell me, external rotary piston pumps is the proper hydraulic definition. But Retech (ph) makes spare parts that fit into Waukesha (ph) pumps. They have drop-in equivalent pumps that will fit in the same footprint and flange to flange connection of Waukesha pumps. And we have a number of products in one product family and we are in the process of engineering some additional products to address an even larger installed base.

Donna Takeda (ph): Along those lines, how about a service business? Do they also do the service doing those repairs?

Service in this case, I think, and I don't know for sure, Donna (ph). I think it is done as it is with us, with a lot of third parties. So we would be, in this case, a component provider to the folks actually doing the repair, whether it's the user or distributor or a third party service provider. Also, another feature of the spare parts on these kinds of pumps is that sometimes they are customized, because you need to bore out one part and provide a larger rotor, for example, and we have the ability to do that as well.

Donna Takeda (ph): How much of their sales are in spares and replacements versus the original equipment under their own name?

I'm sorry?

Donna Takeda (ph): How much of the business is the spares and the competitive replacement?

I can't give you a total breakdown, but the kind of estimates that I have seen is that, if a pump - if an installed pump were to cost X, then over its 10 or 12 year lifetime, the spare parts usage would be about 2X. And so there's a significant spares component to this, which we're in a position to provide. And there are replacement pumps.

So the way to think about it, there's 80,000 sockets out there that take this size pump. So there are a lot of sockets that can be dealt with both from a spare and replacement standpoint. And it adds to the overall package of products that we have for this sanitary channel. We don't have a huge position right now, but it is an attractive one and it is something we think we can make an impact in.

Donna Takeda (ph): Okay. Great. One other quick thing. You mentioned that you thought the HPLC (ph) market was growing in mid-single digits? The numbers I have seen are more like 8% to 10%. Some of that will be higher because of the (inaudible) units that are out there. But even for the LC (ph), I am seeing numbers more like 7%, 8%.

I talked with Jim Noonan on this very subject yesterday afternoon to get his latest feeling. And he felt that kind of the instantanous rate is in the mid single digits, whether it's 5 or 6. That was his view. On a longer-term basis, it certainly has been growing, as you described, but high single digits for some period of time. And we were encouraged and certainly the Rheodyne folks were encouraged by what they have seen recently in orders out of the HPLC world.

Donna Takeda (ph): Right, because some of the companies have been growing faster than that.

Absolutely. But there's also a question in my mind -- you would know better than I. Waters (ph) may be gaining share relative to smaller players.

Donna Takeda (ph): Both Waters (ph) and Agilent.

But, those are two big players.

Donna Takeda (ph): They are both customers, right?

They are indeed, number one and number two.

Donna Takeda (ph): Thanks a lot.

Wendy Kaplan (ph), Wachovia Securities, you may ask your question.

Wendy Kaplan (ph): I am stuck on the dispensing equipment margins. First of all, if we can just clarify, in your press release, you said the margins were 13.1, yet in the call you said 12.2. Which one are we using?

Let me hop in on that one. In the third quarter, we discovered that our intercompany sales illuminations for the first half of the year had been overstated by approximately $2 million. While this had no impact on any of our reported consolidated sales or margins or earnings, it did cause a slight understatement of the first half dispensing equipment margins of about 40 basis points. We corrected the situation on a year-to-date basis through the third quarter segment (ph) table.

So, as you add quarters one, two and three, it indeed reflects appropriate information on the year-to-date basis for each of the segments. The number that Dennis spoke of, the 12% margins, essentially reflect the true margins for that business during the third quarter. But because of the adjustment in the intercompany sales, it shows up in the third quarter column as a 13% margin.

Wendy Kaplan (ph): Thank you. That is very helpful.

And also, that will explain why when you add up segments and come up with an additive number for the intercompany illumination of $1.2 million. So it doesn't affect the consolidated information, and the year-to-date information is accurate.

Wendy Kaplan (ph): Okay. Now that we know the number, can you help us to understand -- I know you mentioned seasonal issues, summer holidays. But year-over-year, the decline -- you did mention -- can you give us some sense of what portion of the decline was the new product introduction, the Netherlands, and what portion was Lubriquip and whether there was anything else meaningful that caused the margin decline year-over-year?

The startup cost, I can't quantify those for you right here. But all of the products that we introduced in the Netherlands at the FARBA (ph) show back in April, those are going into production. And there are inefficiencies with starting up any new product. There is a learning curve effect. We have seen some effect of that and we're tracking it and it is coming down nicely to the targeted hourly content in each of the units. I was over there a week ago. And at the same time we have the old units in production, so it's driving some inefficiencies. But we haven't really attempted to quantify that per se.

Lubriquip, I would say, as far as the year-over-year numbers, probably is not a big contributor one way or the other.

Wendy Kaplan (ph): Should we conclude most is this new product issue? Or are there other issues going on that caused the margin to decline by 120 basis points?

This is the third quarter year-over-year comparison where we've got essentially flat sales and margins are down. I would say, in my opinion -- and I don't have hard data in front of me -- the bulk of that is really caused by startup of the new products while still having the old ones in production.

Wendy Kaplan (ph): Okay, and that will still affect the fourth quarter, correct, in some fashion?

In some fashion. The -- we are coming down the learning curve steeply now. The inefficiency due to having old and new in production will be around to some greater or lesser extent for probably -- maybe 9 months, as we convert customers over to the new line. We can't shut it off immediately. We are working with all customer to convert them to the new product.

Wendy Kaplan (ph): Okay. And one last margin question as a follow-up. In the pump segment, in fact, the margins were better than we had expected. Can you talk about that relative to the fact that that was the segment that had the acquisition in it, and typically those tend to be lower margins?

There's a number of things that are moving there. First, you've got the restructuring of GAAP (ph). The team there did an incredibly wonderful job on and have realized the benefits that we expected to see. In fact, using Kaizen/Lean and some other new techniques, they've made further improvement in that business. There is a piece of it due to gas restructuring.

Rheodyne is a help. It's a very, very good business and is posting very good results and having a very strong period. We're very pleased with that. Then you have overall operational improvement things we are doing across the board. We're seeing a nice benefit in the pump business.

Wendy Kaplan (ph): And finally, that margin improvement in pumps, we should be able to -- is it sustainable in some fashion?

I believe it is.

Wendy Kaplan (ph): Thank you very much.

Mike Schneider (ph) of Robert W. Baird, you may ask your question.

Mike Schneider (ph): Good afternoon, guys. On dispensing equipment, again -- I know you are getting sick of talking about it. I am trying to figure out, given the trends we've seen in book margins and the revenue line in the third quarter, what this implies for the fourth quarter? Because if we look back to the fourth quarter of last year, the story then was Europe was hit hardest in the wake of September 11th. And the number may have been extraordinarily understated given those events.

In light of the 30 million revenue run rate this quarter, the third quarter doesn't seem like that number is all that extraordinary. I am wondering, when we look into the fourth quarter now, if you have expectations given some of these new orders and new programs you discussed that that business is going to be up, down, or flat in the fourth quarter? I think given the tone of the questions that preceded me and mine, sounds like a lot of us are concerned about that segment.

I understand the question. We have not -- obviously we haven't given guidance for the company for the fourth quarter. So I really can't give you specific guidance for dispensing equipment for the fourth quarter. I think there are some indications that would tend to give us some comfort. The orders levels that we talked about on a year-over-year basis where, if you look at a year ago, we were up 14% in orders in the same period. That's obviously a good sign. But this business, like all the rest, depends upon turnaround business every week of every month of the quarter. So we are just going to see how it develops.

We do have a larger order in hand from the domestic customer that I mentioned. That will get shipped over the fourth quarter and first quarter of next year. So that's a good sign. But it's totally dependent on the rest of the orders coming in.

And fourth quarter of last year (inaudible).

Yeah, fourth quarter, in the scheme of things, relative to what we have seen before, it was a tough quarter, obviously in the fourth quarter.

Mike Schneider (ph): Of last year. I guess that's why I raised the question. I am looking at third quarter at 30 million, fourth quarter of last year, 27.5. Are we going to see another sequential decline in dispensing equipment, or was the fourth quarter of last year an extraordinary quarter?

I think fourth quarter last year was an extraordinary quarter.

Mike Schneider (ph): Okay. Dennis, when you look at this business from a macro level, two short years ago you were doing 40 million to 45 million a quarter in revenue and dispensing equipment. Granted the troubles of Lubriquip have been well discussed in past calls, but this business seems to be now operating at a $30 million run rate, a good 25% or more haircut. Is there something structurally different in this market that I just don't appreciate that this market is a different size than it was just two short years ago?

Well, Lubriquip is clearly a piece of that, as we talked about before. If you look at all our businesses, that one was hit harder than any other one that we had. So that decline was pretty steep, pretty fast, and we have not seen significant recovery there, just the overall - the underlying market segments there are pretty tough.

The other aspect, anecdotal, but the big boxes - if you look at the U.S. market, big boxes and big companies are buying equipment. Some of the smaller companies are not. And I think that's pretty typical around the world, where smaller companies are a lot more conservative on their investments. So I think we're seeing a lack of investment on the part of some smaller companies and their reluctance to buy new equipment. The larger companies are moving ahead. That may be a piece of the change that we have seen.

Mike Schneider (ph): Okay. And then switching gears -- I apologize (ph) as well on the margin and pump side - very nice achievement in a tough market. The orders in the pump side sequentially, you mentioned, were up 1%, but that includes Rheodyne and the other acquisition. I am wondering, is it fair to say that orders sequentially in the pump segment were down 3% to 5% if you back out the acquisitions?

Orders sequentially would probably be down, yeah, 3% to 4%, base business.

Mike Schneider (ph): Okay. And I guess, could you give us some color within that business what applications or markets are still deteriorating? Is it primarily chemical processing or are there others?

We don't see - we don't have great visibility through distribution to specific end markets. We have to look at the macro indicators that we have access to. If you look at utilization in the petrochemical part of the world, it's up off the floor a little bit. It's been relatively flat. So, you know, it's -- I guess it's fair to say, we don't see any deterioration in underlying markets right now based on the data we look at.

Is it robust? Do you see that utilization rates screaming up? No, you don't, but they are not deteriorating. They seem to be staying flat. Orders levels would indicate that that's the case.

Mike Schneider (ph): But it doesn't concern you that -- my understanding is historically we should see sequential acceleration in the pump business on an organic basis from third to fourth quarter, and this quarter you are seeing a 3% to 4% decline?

Well, I think second to third quarter you have the effect of fewer work days in those quarters. I think if we went back and looked at the history in pumps specifically, we would probably see some decline second quarter to third quarter, as is typical. So I am not concerned by what I see there. 3% to 4% base business decline, we would have to go back and look specifically -- back out acquisitions and look at it historically. It wouldn't surprise me if it was in the 2% to 5% range typically.

Mike Schneider (ph): Okay. Thanks again, and congratulations on the margin achievements again.

Thayer Vichero (ph) of T. Rowe Price. You may ask your question.

Thayer Vichero (ph): Just a couple of questions. I was hoping you could break out for us on the three business segments, organic, pre-currency revenue growth on a year-over-year basis for the three segments? And I'll ask one of my two follow-up questions.

You are asking for a level of detail beyond what we have sitting here right now.

Thayer Vichero (ph): Okay. Let me go back to Graham's (ph) original question on engineered products. If we look at 7% revenue growth and the improvement in profit, it appears to be at about a 21% incremental margin on a 7% increase in sales, and there were no acquisitions on year-over-year basis. I am -- normally you think about IDEX businesses as having 35% to 40% incremental margins. With all the Six Sigma and sourcing you are doing, I guess you guys should have better than that.

So, just trying to understand the margin performance, especially on a very good revenue growth, in engineered products, why we didn't see higher margins in the quarter in that business?

One piece of that answer, we are reinvesting in that business in some new product development. And I can tell you in one particular product area we are testing the limits of wireless technology. We're doing a technology demonstration because the potential market that we can serve, if the technology is mature enough and able to do what we need it to do, the market potential is huge. So, we are making some bets there and in other places in the company, as I have been very clear, we want to drive margin improvement, but we want to reinvest some of that margin back in the business to drive organic growth. This is one business where we are doing that.

Thayer Vichero (ph): I guess my question is, in theory, these investments are greater than the sourcing benefits, they are greater than the Six Sigma benefit that -- I mean, they're absorbing that and absorbing some of the normal incremental margins is what you are telling me.

We have and will disproportionately invest in businesses where we have higher growth potential.

Thayer Vichero (ph): Again, let me ask it this way. We think about the next couple of years and the idea was -- hopefully still is -- as the economy recovers you get 4%, 5%, 6% revenues for couple of years. Are we unlikely to see the 35% normal IDEX incremental margins as we reinvest heavily in the business and will see 21% to 22%, like we saw in dispensing -- not dispensing, but engineered products this quarter?

That decision is not made at this point and will depend on the opportunities we see. I do think this company needs to increase R&D spending and we fully intend to do that as the ideas present themselves and we have the margin and cash to invest.

Thayer Vichero (ph): Okay. Just two other quick follow-up questions. The tax rate was lower than I was thinking, coming in at 34.5. Can you just ...

Sure, David. Let me respond to that. Typically at the end of the third quarter, once we've filed our tax return for the prior year, we take a look at our tax provision, effective tax rate, and make an adjustment, if necessary, for the year. We have been carrying a 36% tax rate for the first two quarters. Based on our analysis, we determined the appropriate effective tax rate for the full year was 35.5. On that basis we adjusted year-to-date numbers to be 35.5 percent and that is the reason you saw 34.6 or the effective tax rate in the third quarter, it will be 35.5 in the fourth quarter and obviously that for the full year.

Thayer Vichero (ph): Wayne, you think that is a sustainable rate going into '03?

That's a good planning rate for '03. That's the way we're viewing it.

Thayer Vichero (ph): One other question. Retech (ph), how big is that? Normally you give a size once -- they are tiny. Is this (ph) sort of $5 million, $10 million in revenue? Is that in the right ballpark?

As I mentioned, it's less than $2 million in sales.

Thayer Vichero (ph): I apologize.

No problem. There is a lot of stuff mentioned here. Less than $2 million of sales. But it's importance is disproportionate to the size of sales because it opens up distribution channels that perhaps we couldn't have had access to before because of the nature of the product and its interchangeability with Waukesha (ph). So it becomes a great addition to the existing sanitary processing portfolio products we have today from Versamatic (ph) and Warren Rupp and Johnson Pump in the U.K. that has a nice sanitary load pump already, slightly different technology.

Also, Pulsafeeder. So it enhances the basket of products we can take to the market, so it's far more important strategically than the size of the business would indicate.

Thayer Vichero (ph): Okay. Also, congratulations on a nice free cash flow for the quarter and year-to-date.

Thanks very much.

Gerry Brockman (ph) of Credit Suisse, you may ask your question.

Gerry Brockman (ph): Good afternoon. Moving off the top line, down into comparison year-over-year of your gross margins here. Jumped up 160 points -- basis points. Could you reconcile how much of that is pricing versus your cost initiatives -- where the cost initiatives are coming from? Then, assuming eventual recovery, are we cutting into bone and muscle and risking potential recovery opportunity?

Let me take it a bite at a time. We have seen gross margin expansion. I would say that the element of price in that is relatively small. I would say as a company, we are not losing price in any significant way. But to go out with price increases right now is not the easiest thing in the world to do.

I would say little price impact on that at all. The benefits are really coming through as a result of global sourcing and Kaizen and Lean and Six Sigma and all the things that we have been talking about. You begin to see those flow through. The benefits accrue on that line. Some of the cost goes on the SG&A side. So, they don't both show up as a net number in one place. So, you kind of have to look at both sides of the equation here. But the benefits in the gross margin line are clearly coming from those initiatives and the restructuring.

Gerry Brockman (ph): Right. Are we losing any market share on the top side if we are not going after pricing here? How does the market share look?

To the best of our ability to look at market share, I don't think we are losing in any of our businesses. In fact, I think we are gaining -- I know we are gaining on the dispensing side of the business. That will be -- we will begin to see the tangible benefit of that in future quarters, as the South American customer buys equipment and buys from us, rather than a competitor, and we ship product to satisfy the need of a domestic supplier that's taking competitor equipment out of service.

Gerry Brockman (ph): Okay. Did you disclose your R&D for the quarter?

No, we didn't. We don't normally do that.

Gerry Brockman (ph): Is it safe to say it is up or down? My concern is we are cutting back to get current versus future and want to make sure we are still on track with investing for the future.

In fact, we are taking it up. I can't give you a real-time number. We don't track it. Perhaps we should. There are various stories across the company of investing in new products. There is another move afoot that I mentioned in the last conference call where we are focused on converting sustaining engineering, fix-it (ph) engineering, if you will, through the use of Six Sigma, converting that to R&D.

So the total engineering spend doesn't necessarily change. But what we use it for changes.

Gerry Brockman (ph): Okay. One last question. You were saying distributor upgrade. Can you describe what that is?

We are constantly looking at the distributors in the pump business, primarily, where we sell 60% of pump product through distributors. Distributors are a key strength to the company and very, very important to us. We are constantly looking at, do we have the right distribution region by region? It is a regional question. Do we have the right niche distribution? Take the sanitary branch for example. What distribution can we add now that we have Retech (ph) plus these other products? So those are distribution plays we are constantly looking at to upgrade, add to, to further enhance our reach to the market.

Gerry Brockman (ph): Okay. All right. Thanks very much.

Our next question comes from Carl Merganthaler (ph) of Bank of America. Sir, you may ask your question.

Carl Merganthaler (ph): Hi, guys. Just a question about the balance sheet. If I am reading correctly, I think you booked 48.7 million in goodwill during the quarter, you went from 469 at end of the second quarter to 518.5 this quarter. So, I have a question as far as, what are we looking at in terms of pricing of the two acquisitions that you did complete? What are you looking at in terms of metrics for acquisitions that you might complete in the future? If you could comment on the goodwill number, if I am mistaken or what have you?

Carl (ph), you are correct. We did add to goodwill, and that reflects the acquisition to Rheodyne. Again, while we do not -- we completed the smaller Halox (ph) transaction in the second quarter of the year. As a practical matter, we do not discuss the specific multiples that we are paying for businesses. Again, the operative range that we typically have used in terms of multiples of EBITDA have ranged from 6 to probably 8.5 times current EBITDA, and essentially is reflective of the presence of that particular business in the marketplace, what sort of leadership position it has, what sort of growth characteristics it has.

It goes into the equation as we price the acquisition. We did not release specific terms of the -- at this point of the Rheodyne acquisition.

Carl Merganthaler (ph): But it would be safe to assume that these recent acquisitions are in line with historic multiples?

That's essentially correct.

Carl Merganthaler (ph): With that in mind, what does the current acquisition pipeline look like going forward? You have plenty of balance sheet capacity.

We do have plenty of capacity. We are constantly looking at opportunities, trying to find things that fit. We are looking hard to add to the Rheodyne, Micropump (ph), Ismatec (ph) portfolio products. We are looking at things in that area, higher growth, higher tech kinds of potential. We are looking there and looking at traditional businesses. I think it is fair to say we are looking at things that fit each one of our three groups.

Carl Merganthaler (ph): Great. Thank you very much.

Once again, to ask a question, please press * 1.

Our last question comes from Scott Graham (ph) of Bear Stearns. Sir, you may ask your question.

Scott Graham (ph): Hi, just two follow-ups. The free cash flow, could you walk us through that, how you get to the number -- I'm coming up a little short.

Little short. Basically it's cash flow from continuing operations; for the nine-month period, it is $86.3 million less capital expenditures of 13.1.

Scott Graham (ph): Right. What I am talking about is detail within the cash from operations.

Okay.

Scott Graham (ph): I have -- D&A, I can assume, is about 8. I know that. For the quarter, of course. But what would be the working capital change and the -- sort of all other items change year-to-date, separately?

Okay. Accounts receivable here, let me see here. Accounts receivable giving us $2 million. Inventory $2 million. Accounts payable, use of $2 million. Accrued expenses, a generation of 3.3 million. All other net 2.7 million.

Scott Graham (ph): That's year-to-date?

Third quarter.

Scott Graham (ph): Third quarter. That will get me there. Lastly, could you maybe talk about these initiatives which obviously have great traction on the cost side? Are they more skewed toward the pumps businesses? Could you give us, relative to each business, where these costs savings are dropping in?

We are using it across the company. There's no focus on one part versus another. But each business has its own potential for savings. If you look at Bandit (ph), for example, their main raw material is a globally priced metal called stainless steel. You don't get much leverage because of the nature of the product that we buy, global sourcing in that particular business.

But I will tell you, those guys are probably the best in the company in terms of merging Lean, Kaizen, and Six Sigma into true operational rapid improvement in everything that they do. So, they see benefits and continue to see benefits in the operational things. Their biggest play in global sourcing is the tools used to apply the banding, where they're able to do nice sourcing on those tools. So we're not targeting one business versus another. We want each and every business to participate because each can use it and use it as appropriate for their business.

Scott Graham (ph): Not that you care about this, but from a modeling standpoint, would it be fair to say - use percent of sales relative to the cost savings that we are estimating that you guys are picking up?

First order, I would use that. I don't look at it at that kind of level of detail. We give the targets. We track the performance relative to target. If you want to prorate it, it is not a bad way to do it.

I agree.

Scott Graham (ph): Thank you.

At this time, there are no further questions.

Well, I would like to thank everybody for participating. We had a good quarter given the economic environment. We are hopeful things will improve. We are working on all of the ideas that we can generate right now to position ourselves to better leverage the sales increase that we think will come. We fully expect to drive up our R&D spending so that we can drive organic growth.

But as we expand the top line, the bottom line will expand as well. So we think we are working on the right things. We are getting good traction. And we are all hopeful the economy will pick up. So, thanks for listening in, and look forward to talking to you at the end of the fourth quarter. Thanks very much.