藝達思 (IEX) 2002 Q4 法說會逐字稿

Welcome to the IDEX conference call and thank you for standing by. All participants will be able to listen only until yet and answer session of the conference. This conference is being recorded at the request of the IDEX corporation. If you have any questions, you can disconnect at this time. I would like to introduce Ms. Lisa Fortuna with FRB Webber Shanwick. Ma'am, you may begin.

Good afternoon and thank you for joining us for the IDEX fourth-quarter conference call. Earlier today we sent out a press release outlining the results for the fourth quarter ending December 31, 2002. If anyone has not received the release call FRB 312-266-7800 or visit IDEX's website at www.idexcorp.com and you can retrieve the document there. Joining us today from management of IDEX corporation 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 open the call for Q and A. Before we begin, I would like to remind all participants that the conference 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 Lisa. I'd like to welcome everyone to the conference call. I would like to introduce everyone to the conference call. The agenda I will follow today is first I'll talk about fourth-quarter results, then 2002 full-year results, some comments on the groups, progress report on our initiatives of operational excellence, global sourcing and eBusiness, and then some brief comments on the outlook.

Starting with the fourth quarter in total, the company's orders and sales were flat sequentially, and up very nicely from a year ago; however, there is substantial mix changes in the business and we have encouraged some one-time expenses in the fourth-quarter, 2002. We continue to see improvements in gross margins as a result of our drive for operational excellence, which has allowed us to increase the investment in our business.

Looking first at orders in a little more detail, orders of $189 million were flat sequentially and up 17% year-over-year. If you exclude acquisitions and currency adjustment, orders were up 11% year-over-year.

Turning to sales, sales at $188 million were down less than 1% sequentially, and up 11% year over year. Again, excluding currency and acquisitions, sales were up 4% year-over-year.

Looking at the foreign sales content, foreign sales were 43% of the total unchanged from the fourth quarter of 2001. Now, in this comparison, Europe was up 23 %. Asia was down 1%. And the Americas, excluding the U.S., were down 6%, and that 6% decline is totally caused by slowdown in Latin America. Sequentially, total foreign sales remained unchanged at 43%, and in this sequential comparison, Europe was up 1%, Asia up 18%, and the Americas, excluding the U.S., were down 13%, and that's really attributed to both Canada and Latin America.

Looking next at margins. In the fourth quarter, gross margins were 37.5%, which was down sequentially 40 basis points and up 220 basis points on a year-over-year basis. The gross margin expansion year-over-year is the direct result of our global sourcing excellence operational activities.

SG&A has also grown as a percentage of sales as we have reinvested in the business. That reinvestment is in many different forms, the addition of a marketing, sales and application experts to increase share and penetrate new markets and applications. The R&D associated with new product development. The implementation of a common ERP system across the company. The rollout of our eBusiness activity. And the continuing investment in training of our people as we evolve to a more process-driven company. And as I discuss the groups today, I will highlight some of these activities to get a perspective by group of some of the activities there.

Turning to operating margins, in the fourth quarter, the operating margin was 12% compared with 14.2% in the third quarter, and that was also compared to 6.9% in the fourth quarter of 2001 on an as-reported basis. The operating margin was down sequentially 2.2 percentage points for three reasons. First, we saw a significant mix shift within our business units, the most significant was the shift away from Viking and Warren Rupp [ph] to other less profitable businesses in our portfolio. As we stated in our press release, we saw a very abrupt $3.1 million or 8% decline in those two businesses. We believe this was caused by the continued weakness in chemical processing and general industrial markets, and was possibly accentuated by year-end budget cuts by some of our customers and channel partners. Recently available fourth-quarter federal reserve data showed a 2%-plus annual production rate slowdown in manufacturing output in the fourth quarter and a 5% to 6% reduction in chemicals, plastics and rubber products. We will have to see how things rebound in the first quarter and we will take whatever action is necessary. In total, this volume decline and mix shift cost us 2 to 3 cents of earnings.

Second, we incurred some higher-than-normal costs. These costs amounted to about $1.2 million and were mainly caused by the filing of the registration with the SEC for the secondarily common share offering and the reserve taken in anticipate of the settlement of a patent infringement suit in our band-it business. These costs obviously worth 2.5 cents in earnings.

Third, we reinvested in our business as I described earlier, and even as we reinvest in -- in the businesses for the future, we will continue to look at the order rates and staffing levels to make sure we have the right number of employees and the right blend of skills. So far in the first quarter, we have taken some actions in three of our locations.

On a year-over-year basis, the operating margin improved 5.1 percentage points on an as-reported basis and declined 40 basis points on a comparable basis, excluding goodwill amortization and restructuring. The margin generated by the incremental sales increase was offset by the higher cost cited previously, and there was a interesting mix shift in this comparison as there was in the sequential comparison.

Finally coming to net income and EPS. Net income was $12.2 million in the fourth quarter versus $14.8 million in the third quarter and with compares a fourth quarter of 2001 at $4.3 million. Net income declined 18% sequentially due to the reasons I mentioned previously and was up 184% on a reported year-over-year basis. If you look at it on a consistent accounting basis, excluding goodwill and restructuring, net income was up 10%. Earnings per share, 37 cents in the fourth quarter versus 45 in Q3. And 14 cents as reported in the fourth quarter of 2001. So on a year-over-year basis, fourth-quarter earnings per share were up 23 cents as reported and up 2 cents excluding goodwill and restructuring and down 8 cents sequentially.

Free cash flow in the fourth quarter was $27.7 million. That was a 59% improvement over the fourth quarter 2001 and 2.3 times net income. So it was another great cash generation effort in the fourth quarter. Debt-to-total capitalization was 32 percent at year end, an improvement of 10 points from a year and the strongest year-end financial position in the history of the company.

If we now look at the total year, orders were $750 million, 5% increase year-over-year. Orders were up 1% on the base business and acquisitions and foreign exchange accounted for the remaining four. Sales at $742 million were up 2%. Sales were down 2% in our base business acquisitions and foreign exchange accounted for a 4% improvement netting out to the plus-2. International sales were 41% down slightly from 42% in 2001. In this comparison, Europe was up 7%, Asia down 11%, and the Americas excluding the U.S., were down 5%, again, totally due Latin America.

Gross margins improved 1.6 percentage points to 37.9%. As a result of our operational excellence and global sourcing activities, as we don't believe we had any net price increase in 2002. As I mentioned earlier, we have invested back in the businesses as we said we would do to drive the long-term performance of the company.

Operating margin for 2002 was 13.5%, up from an as-reported 10.1% in 2001. Excluding goodwill and restructuring expenses, operating margins declined slightly. Net income at $54.1 million increased 65% on an as reported basis and was up 5.7 percent on a comparable accounting basis excluding goodwill and restructuring. Diluted EPS increased from $1.67 from $1.05 on an as-reported basis last year in 2001. Excluding goodwill and restructuring, the diluted EPS increased from $1.65 to $1.67. Free cash flow increased 16% to $97.1 million from $84 million in 2001 and was a record for the company. Last year was a record, and we certainly increased above last year by 16%. Our working capital decreased to 15.2% of sales, another record performance in that area and this compares with 17.5% of sales at the end of 2000.

In summary, the short-hand comparison for 2002 versus 2001 and are doing this on a comparable accounting basis, sales up 2%, net income up 5.7%, earnings per share up 2 cents, cash up 15.7%, working capital as percent of sales down 2.3 percentage points, and gross margin expansion of 1.6 percentage points which is funding the reinvestment in the business.

Now let's look at the groups. We will start with pumps. Pumps represent 58% of sales and 62% of the income. Sequential comparison, orders down 2%. Sales down 3%. Operating income down 16%, and the operating margin 15.3% versus 17.7. Fourth-quarter year-over-year orders up 13%. Sales up 10%. Operating income down 2.5%. And the operating margin, 15.3 versus 17.1. On a 12-month comparison, orders up 5, sales up 2, operating income up 3.5, and the operating margins 16.5 versus 16.3 a year ago. So for the year, pump sales increased 2.3% and operating income increased 3.5%. The operating margin increased slightly to 16.5 as I mentioned.

Due to the difficult fourth quarter both the sequential and year-over-year comparisons are unfavorable from a profitability standpoint. Sequentially, the main impact is from the sales reduction and mix shift within the pump group. There was also small increase in product development and marketing costs and a small increase in the implementation costs associated with the ERP change that's under way in Viking and in Knight.

The year-over-year decline is attributable to a number of factors including product development, the addition of sales and marketing resources, ERP implementation, and a mix shift at some of our higher margin businesses did not participate in the 9.5% sales increase we did experience in this comparison. New product activity has increased in all of our pump units as we drive harder to improve our product offerings to grow share and expand into new markets.

Let me take a moment and just give you some new product highlights just to try to put a little flesh on this. In Trebor, we have introduced a new innovative quartz heater technology that won the semiconductor international award for one of the ten most innovative products of the year. And I think this is particularly important because not based on what a magazine may think but based on customer nominations. So, it's an important award for Trebor.

In Rheodyne, the new tightened valve has been introduced. This is designed to both satisfy current applications in the analytical instrument market, but also have a number of both high-tech and low-tech applications, ranging from the extreme high-tech end of protiomics to the low-tech end of recreational water. An interesting development there.

In Liquid Controls, a combined pump meter product to better serve both the LP gas and petroleum OEM markets -- excuse me -- and Viking, some sanitary pump products and industrial low pumps. A few other products I won't take the time to mention. Pulsafeeder, Pulsafeeder is pursuing a very interesting new pump technology and configuration that we believe will serve customers better and we are anxious to get that into production later this year. And Halox, working on the next generation chlorine dioxide plus a dosing [ph] system for the current design. These are just a few examples of some of the new products we have under way in the pump group. We expect sales contributions from all of these products in 2003.

In 2002, we didn't see much of recovery and utilization rates we see coming from the government in either chemical processing or the general industrial category. In fact, a as I mentioned earlier, the fourth quarter showed somewhat of a decline. Consequentially, we will really watch the orders level in the first quarter and take whatever action is necessary to protect margins and to make sure we have the right skill sets to grow the business.

Turning now to dispensing equipment. 19% of sales and 16% of income. The sequential comparison, order is up 29%, sales up 4%, operating income down 28.5%, and the operating margin 8.4 versus 12.2%. Year-over-year comparison, orders up 42%, sales up 23%, operating income up over 900%, and the operating margin 8.4 versus 1 a year ago. On a 12-month basis, which is probably the most meaningful way to look at this segment, orders up 8%, sales up 1%, operating income up 4%, and the operating margin 13.4% versus 13 a year ago. We've seen a nice share gain in the Americas that increased shipments in the U.S. in the fourth quarter, and that will continue into the first quarter.

In Italy, we received the first large order from Maxim Novell as they begin to roll out their new tinting system we have talked about in the past in Europe. This order was about 3 million euros for 260 machines. And in total, this dispenser will account for about 25% to 30% of the sales at Fast [ph] in Italy in 2003.

The Netherlands continues to drive down the learning curve on new designs in anticipation of eliminating the older designs as early as possible this year. For the full year we saw a 4% increase in income on a 1% higher sales, year-over-year sales and income were up significantly from a very weak fourth quarter in 2001; however, operating income in the fourth quarter declined sequentially due to increased costs associated with the introduction of new products in Europe and some normal year-end adjustments and a further decline in the Lubriquip business.

In looking forward in this group there are addition to all the new products we have introduced, we have launched the design of a new generation of personal care products -- product dispensers. This is really a second generation of machines that we think will satisfy the emerging needs that we see in this new marketplace. We expect to see some prototype activity with a number of customers this year and production equipment coming along in 2004 and beyond. So this is a very important investment for the future of that business.

On the local big box front, Home Depot and Lowe's both plan to open about the same number of stores in '03 as they did in '02. Plus Home Depot has announced they are increasing their budget to upgrade existing stores which should lead to some additional sales in 2003.

Turning to our engineer products, 23% of sales, 22% of income. Sequential comparison. Orders down 9%. Sales up 1%. Operating income down 10%. And the operating margin, 14.5% versus 16.3%. Year-over-year basis, orders are up 10%. Sales up 8%. Operating income down 14%. And the operating margin 14.5% versus 18.2%. And the 12-month comparison, orders up 4%, sales up 3%, operating income down 8%, and the operating margin 15.1 versus 17%. First, we saw a sequential decline in orders, and that's mainly due to a large multimonth order that we got from Stewart and Stephenson in the third quarter that did not repeat in the fourth quarter.

In all periods, there was a decline -- excuse me -- in operating income and operating margin. There are three main reasons for this decline. First, with the exception of the costs associated with the SEC filing, nearly all of the higher-than-normal costs are in this segment. Second, we are investing the business as we are in other portions of our business, specifically here we are in the middle of implementing the new ERP system in Hale, Lukas and Bandit and there obviously incremental costs associated with that implementation.

In addition, we have added sales and marketing personnel working on the introduction of a number of new products and here again, let me give you some new product examples. At Lukas, they designed a new product for the German rail system. It is rerailing equipment. When there's been an accident. Historically, Lukas would have sold that mainly in the German market. Today they are selling it aggressively in the world market. There are orders on the books as we speak in the U.S., India and Korea. Lukas is marketing aggressively globally, and they have the clear global leadership in this niche market.

We've introduced the new line of stainless steel valves. We are just ramping up production and expect to see about $2 million in sales for this product in 2003. Eskee [ph] which is the vehicle multiplex system I spoke about before from Class 1. We continued work on new applications there. And we expect to more than double sales year-over-year to about $5 million in '03, and this is due mainly to the sales from the bus and police car applications that we worked hard to develop in 2002. They have also developed a new compressed air foam system, which is a one-button system that eliminates all the complexity that all the other systems in the marketplace have today. It is the only product of its type, and it is a real innovation. We are seeing some very interesting global interest in this product so we expect to see sales start in the second half of '03.

We've also started the consolidation of our portable pump designed globally. This will be completed this year with sales starting -- of the revised design in the second half.

On the Bandit side of the business, I have mentioned I think on a previous call that we are working on new auto applications, and taking a global approach to this. These are in the heat shield, sound shield, and air bag areas. This business has really started to blossom. The latest win is on the Nissan Ultima, and we will start production the second quarter of this year of Bandit clamps for those applications and we expect over a million dollars of incremental sales from these markets in '03.

Finally, we are doing a very interesting technology demonstration that will be completed in the first half of this year. We've not talked about the details of this project because of the sensitive nature of the potential innovation, but this could create a pretty sizable market potential in 2004 and beyond if the technology demo is successful, so we are investing there in something that could be a substantial advancement for future products. The third reason is a mix shift within the Hale business. We have seen our specialty harness business increase which is lower margin than the other Hale products. We are currently evaluating some increasing global opportunities that will increase the margins on these products and bring it up to the standards that we want.

Finally, funds are being released from the 2002 Fire Act and we do expect to see some benefit from this funding in 2003. A status report on that. $315 million of the grants have been awarded against the 2002 authorization of $360 million. And we expect additional grants this month to reach the full $360 million authorization. By the end of January, there will be a breakdown of the grants by category of where the money will be spent. That will be issued so we will have an idea that the point where the funding is going. But anecdotally, we have seen some increase in backlog in some of the vehicle OEMs so there might be some activity related to the grants there. The 2003 budget request is for $900 million but at the moment no funds have been allocated yet to that budget line.

Turning to the initiatives, we saw great progress through the year on the use of the tools, but I think more importantly we are seeing our business unit presidents starting to run the business differently. There is an evolution under way moving us from tools to process management. And we are starting to create a culture of rapid, continuous improvement. To provide some comparative numbers, I will give you an update on Six Sigma, Kaizan [ph], Lean, and global sourcing. And Six Sigma, 703 total belts, 372 projects in 2002 versus 108 in 2001. $9.3 million of savings in '02 versus $2 in '01. An average black belt project saves $61,000 and an average green belt, $17,000. Kaizan [ph] and Lean events were also important the last year, and they produced about $2 million of savings across the company.

In addition, our on-time delivery performance was better at 20 of the 27 locations where we tracked this metric. Two were equal to last year's performance and both of those were in excess of 95% on time and five were slightly below last year's performance. So, we are seeing improvement in our operations and our customers are starting to feel the difference and that's really important.

In Global Sourcing, our savings in 2002 were $11.8 million versus $3.6 in 2001. Savings were 30% versus a prior source. We are shortening cycle times on our qualification process and continuing to drive this important initiative into '03 and beyond. We see lots of opportunities still remaining there.

In eBusiness, we have 75 distributors using our system now and we will continue adding additional distributors and functionality. We just added a first distributor in Europe so it's now moving off the North American continent.

Turning to the outlook, the orders for the last four quarters have been essentially flat at $190 million. And frankly, we don't see any near-term catalyst for any kind of capital improvement, but the orders would indicate that things have been quite flat through the year. Being a short-cycle business, our performance is entirely dependent on the incoming order rate for every month of the year. We ended every month with 50% to 60% of that sales month in backlog. So we are dependent on turnaround business every month. Consequently, we've got very limited visibility for the first quarter of 2003 in total. We are confident we are working on the right things to weather this extended downturn and to deliver improved performance when the economy picks up.

In summary, 2002 was an important year in the evolution of the company in many -- in many respects. I've talked about some, but one that I haven't talked about is in the shareholding. The company had a significant change in shareholders as KKR sold 5.6 million shares that they and their limited partners have held for 15 years. The limited partnership where 3.4 million shares were held was in its terminal year in '02 and that provided the impetus for the offering in April. As a result of the sale of those shares and some of the KKR partner shares, the average trading volume has increased from about 40,000 shares a day to over 150,000 shares a day, which is really good news for our investors. And KKR retains just under 10% ownership in the company and that shareholding is obviously important to us as well.

The operation excellence tools we have talked a lot about that, but they've really started to evolve into a new culture across the company, and I think the proof is record free cash flow, lowest working capital as a percent of sales in the history of the company, growth margin expansion that allowed us to reinvest in the business. We are also seeing a lot of new product ideas generated as we emphasize organic growth.

We would always like our performance to be better, but we believe that the strategy that we laid out in 2001 is taking hold even in this challenging environment that we are in today.

So with that, I will open it up for questions.

Thank you. At this time, we are ready to begin the question-and-answer section. If you would like to ask a question, please press star 1 on your touch-tone phone. You will be announced prior to asking your question. Please limit your follow-up questions to one or two. If you would like to ask a question, once again, please press star 1.

Our first question comes from Michael Schneider of Robert W. Baird. You may ask your question. Mr. Snyder, your line is open.

I apologize. Good afternoon, Dennis.

Hi, Mike, how are you?

Good. I wonder if you can address the gross margins. I look at the improvement you made this year and it really does demonstrate the success you have had on the initiatives. Tell me if you have a gross margin target in mind and if you believe the historical 40% gross margin that you had earlier in the -- in the '90s is kind of the cap on this business.

As we -- literally as we speak right now, Wayne and I are trying to put the finishing touches on what we will take to the Board for the '03 plan, and it will include a gross margin expansion above what we are able to generate in '02, which I think is very much doable given all the things we have going on. Can we get back to the 40% level? I think the answer to the question is, yes. It will take a combination of higher gross margin, new product development, a lot of which I think we have under way, as well as the continued emphasis on just constant improvement in everything we do in global sourcing. So I think there is a chance we can get back to that. To be honest, we haven't looked that far out to give a multiyear target. We are trying to nibble it, off year-over-year improvements, and we are pretty confident we can do that.

Okay, and just as follow up on the margin side, the SG&A expenses obviously rising commensurately with your spending and your initiatives. You look back over the last five or six years, SG&A spending has outpaced the top-line growth even with the acquisitions. Can you give us a sense of when we turn the corner? Is 2003 the year? Or are there additional increases in the spending and in the initiatives that would drive a similar kind of negative leverage?

Again, for the 2003 plan that we are trying to wrap up at this point, it will have as an element of that a lower SG&A expenditure as a percent of sales. You know, this is -- we are really talking about a mix shift of some of the things that are within the SG&A accounts. So we have -- constantly upgrading our skill set to be exactly what we want it to be. So there will be a shift to some of the things within that, but net-net, I believe that we can take SG&A down as a percent of sales in '03.

Great, thank you.

Okay

Alexander Paris of Barrington Research.

Nice quarter given the conditions. You did very well.

Thank you very much.

Just one question. You have a policy to get all of your division heads to reduce their market share or, in other words, increase the size of their addressed market. After I think at least a year of that, do you have a rough guess of the size of markets that you were addressing at the end of 2002 versus 2001. Have you expanded it significantly?

Every business has a task to redefine their markets so they are looking at a little bigger pond to play in. We don't total those, so I can't give you any aggregate number. I am not sure it would be meaningful if I could. But we don't total it. We try to look at it business by business, of how are they redefining it and having once done that, what are they going to do about it. I think if you look at -- there are several examples to look at, the rerailing opportunity I mentioned before. Lukas [ph] used to look at that business as a supplier to Deutsche Bank, [ph] to the German rail system. And not much beyond that. They had an opportunity to redefine and redevelop a product for the German rail system. They did that, but their vision now is global, and they have taken orders in places where they have never taken an order before. U.S. being a great example where they now have taken orders there. We just got a sizable order from India and also from Korea.

So, in this particular case, it was a product they had before, leveraged off their hydraulic technology, but they begin to look more globally and view themselves as the global market leader which they clearly are in the segment. It is that kind of a story that we look for. The second one I would note and I've mentioned it before, I think it is starting to get some legs now, and that's on the whole personal care product side where we are launching development of a family of products that will begin to address the needs that we are uncovering and frankly, this is a market we are creating.

Not just hair coloring. It is beyond that?

It's beyond that. I am not at liberty to talk a lot about that because of some agreements we have with some companies, but it's -- it's akin to the change that went on in the paint industry where they went from discreet colors to blended colors. So you had a multiplicity of choices. Exactly like what we saw on the hair coloring side but you see a lot of interest in some other areas. There was a company that used to define themselves as the world leader in tinting the paints that are now beginning to think more about being a world leader in tinting whatever it is you want to tint. And that's a whole different mind-set. You know, how big is the personal care product market? I have no idea to tell you the truth because it is not data that you can look at today to say it is this big or that big, but I tell you just in Germany alone on the hair-coloring side, there's 60,000 salons, probably 20% large enough to need at least one machine of the type that we already have out there, the tinting machine. It is driving a behavior that we like. We haven't done the map to try to sum up all the numbers, but we try to work with every business to look at every business to look at their biggest and greatest opportunities and make sure we are finding ways to fund those.

Just one quick question on costs. You have been talking about in your 2003 plan, higher gross margins, I presume higher operating margin. Talk about continue operations excellence. In your planning, are you planning to have -- to -- if you had flat sales for the year to have some margin improvement?

We believe that we can do that.

Okay, thank you very much.

Okay.

Scott Graham of Bear Stearns, you may ask your question.

Hi, Scott.

Hi Dennis, Wayne. How are you guys doing?

Good.

Could you maybe -- I've got two questions really, and they -- one relates to expenses and one relates to revenues, the expense question. I am really hoping that you guys could rank for us -- and particularly within the pumps business, because I think I have a good handle on the other businesses, but rank for us, you know, the margin pressures that that business is seeing. Let's even exclude mix, because I know that was a big hit this quarter, but just by and large for the full year, new product development versus the additional marketing, sales and marketing, feet on the street, if you will, versus the ERP.

In terms of a breakdown of which -- of which is in what bucket.

If you just could rank them, which is the biggest hit versus the other -- versus the other two. Because I suspect that whatever you say for pumps will pretty much be the same for the other businesses as well.

Well, actually not from an ERP standpoint, you know, it's a discreet business approach. We have not edicted that every business has to convert by a certain time. It's when there is a need and a cause to convert, you convert to JD Edwards. And so we have actually seen -- we have seen more ERP implementation in the last year in Hale and Lukas and Bandit -- excuse me -- and moving into this year, we've got Viking, Knight, -- help me out here. Fluid in the Netherlands, Fast. So those are where the needs are either because of the need for better data or lack of supportability of an operating system or some old hardware. There are a number drivers that make you want to prioritize the business one way or the other.

As far as new product development, it really is dependent upon where we have got the most interesting ideas. The largest dollar investments that we will be making will probably be in the Hale family and in the Fluid Management side in terms of absolute numbers. But we have got product development activity going in every one of our businesses as we try to convert -- we are trying to do a couple of things there. One is to convert sustaining engineering to product development engineering. In other words, use the tools and techniques we have got now to understand what the real issues is with products and fix them and then not have to continue to spend. And we, like other businesses, I think have repetitively spent on trying to fix the same problem in some cases.

So we've seen some great examples where that's taken hold, Fluid Management probably being the standout there of converting -- basically cutting their sustaining engineering in half and doubling their R&D portion of it without impacting the bottom line whatsoever. And so we are trying do that.

We are also trying to improve the cycle time of our product development by use of the tollgate gate approach, and, again, Fluid Management probably is one of the leads there where they have shortened cycle times. Maybe it took them over a year before and we are trying to get products out now in six months. So we have a lot of process things going on.

We are also trying to, as you have seen in the numbers, increase our gross margin so we can put some of it back into product development and had it not been for the higher than normal expenses, we would have dropped a little more through to the bottom line this year. So be it. That's the way it was. So we are trying to keep -- keep true to the plan that we laid out which is to drive operational excellence, to get gross margin, let some drop through and let some go back into the business. And that's the model that we have been trying to hold to.

But we have got activity going across all of the businesses to some greater to lesser extent.

Okay. If we could go to -- and this is at the risk of getting a five-minute answer to a couple a second question. But within the pumps business, you outlined, I count six examples of products in businesses that you have high hopes for in 2003, 2004. Can you give us an idea of, you know, which of those products probably hold most promise and why and additionally, if you can cite, you know, kind of linking -- kind of keying off of the previous gentleman's question, which would essentially be new market stuff versus more market share growth stuff.

Hold on, I am going back to my list here.

And within pumps.

Okay. I'll try to do this quickly. Trebor, brand-new market. This quartz heater technology is very interesting and we are getting on a lot of new platforms. The semiconductor industry is obviously on its back right now, but when it comes back, the key to that is being on new platforms and between our new pump development, that I didn't mention, plus this quartz heater technology, we think we have got some very good products and will grow share and move into new markets. Rheodyne, the tighten valve is a replacement for a lot of their current product but it also takes them into -- as I mentioned both high-tech and low-tech, whole new markets. Recreational water market and I don't want to talk a lot about that because there are some things I don't want our competitors to know. But some very interesting potential there, and on the -- on the absolute extreme leading edge of protein-based pure technology, we have a product that looks quite interesting of a protein fusion machine that is an hour-long discussion. So I won't bore you with that at this point. LC is a combined leveraging in the marketplace of two business of Corken and LC. Viking, we have focused on sanitary products as a market growth opportunity to take share and move into some different market areas. The Pulsafeeder product would be basically a replacement for some of the products they have today but with an entirely different technology that looks quite interesting. Halox is a new generation of chlorine dioxide machine, as we invest in that business to try to allow it to reach its full potential. So, you know, everyone has got its own story.

That's fine. I will move back to the end of the queue. Thanks.

Okay.

Gerry Brockman of Credit Suisse First Boston. You may ask your first question.

Good afternoon, guys. Can we try to reconcile from the third quarter to the fourth quarter, the operating margin. I've got $1.2 million for the patent infringement and equity registration. I wonder if you could give a little color onto the nature of that suit. If we could put some numbers, pre or operating income numbers on the other two, being the mix and the pump group, and the internal initiatives how that hit the margins on a consolidated basis.

The -- as I mentioned in the comments, the mix shift is probably worth 2 to 3 cents.

Yeah, so on operating income, that's about $1.2 million as well?

Exactly, Gerry.

Yeah. And on the internal initiatives, how much are we investing there?

We didn't mention it, but it is of order of magnitude. Probably the same order of magnitude.

That's about what I have got. On the suit, can you provide some color on that?

Sure, this is a -- it is in our Bandit business and it is relative to Panduit [ph], that is a competitor. I will give you the microwave version. There was a ruling in our favor. Then it got overturned and we think we are on the path getting resolved. We took a reserve to cover what the expense would be.

Of that $1.2 million, how much is that?

We haven't dimensioned that and I would prefer not to for competitive reasons.

Okay, fair enough. Fair enough. Okay. So if I go back and look at the sequential run rate in these margins, I guess the only thing if you could just comment on this, I look across each of these different divisions, you know, just the suddenness of the drop-off in the earnings here, and then what should we expect kind of going forward. You look at the pump group in the third quarter which was reasonably well, took a hit here. And the chemical market as we look across some of the other players out there, it has been weak for a while and I am kind of interested in what you are seeing and then what you are expecting going forward. And then on dispensing group here, we are not quite as bad as we were in the fourth quarter last year. And the same sort of thoughts on the other, engineering where it kind of really hit the bottom and kind of happened all of a sudden relative to the third quarter.

Well, as I tried to point out in the comments, each one of those has got a story that goes along with it.

Right.

You know, as far as the pumps are concerned, the drop-off we saw was pretty dramatic.

Right.

And in Viking and Warren Rupp. [ph] And those are high-margin businesses, and within a quarter, you can't possibly hope to get any kind of cost out because it happened to you before you can even begin to react.

Right.

A lot will depend on what those businesses do in the first quarter.

What are you hearing from your people with their feet in the street in the chemical industry?

We've heard -- this is anecdotally because we can't hang any numbers on it, but we heard shutdowns in December because things were soft, and I think that ties back to the output numbers that we -- that we saw from the government that showed outputs down in those areas. Some of our -- our channel partners were being very, very cautious about inventories so I think they may have slowed down a little bit. I think some -- some maintenance budgets may have just been terminated for the rest of the year. We all have experienced those where maybe even given the order myself a couple of times, don't buy anything else for the rest of the year. So we are going to have to see how it comes back in the first quarter. We have seen a couple of weeks worth of data, but I would be doing everyone a disservice by saying, therefore, this is what the first quarter will look like. I simply don't know.

Okay, fair. On the dispensing group then?

Dispensing, we -- you know, we saw some significant improvements. Quarter over quarter. But it is not as meaningful. I think the year's numbers are the best way to look at that business where we saw some margin expansion on a slight sales increase. The operating margin did -- did improve. We are putting the Fume [ph] machine into production for Action Novell We'll see --

And a lot of that cost just kicked off in the fourth quarter here?

You have start-up costs, a number of related expenses starting -- to start up with the production area, and we've seen on the Dutch side the business, we have got both new machines and old machines in production. So we are carrying some extra cost there is and ramping up production on the new side.

Okay.

So there's -- we did see further deterioration in Lubriquip.

Right. And going forward, most of these new production costs should fade away within the first quarter? Are they gone already?

I -- I mean, if you believe in learning curves, which I do, and I know we have been tracking down learning curves in the Netherlands, I believe we will see those diminish in the first quarter as we ramp up production.

Okay. Great. And then on the other engineering? Same sort of question.

In other engineering, again, we had the Panduit [ph] related costs. If you take out the [indiscernible] cost, the vast majority of the remainder of that $1.2 million ends up in the other engineered equipment. We have made significant investments there, and we think that there are some great opportunities. We see some of those turning into sales in '03, and this is what I was trying to do is to give everyone a perspective of where we think we'll begin to see some payback.

And we did have a mix shift there. We do make specialty harnesses in our Florida operation and it is an interesting outcome of improvements. We were capacity limited and couldn't take any more business in that area. We Kaizaned [ph] it and Leaned it and did all sorts of things, creative capacity and took some more business and got some more business in that area. Its inherent margin is less than some of the other products. So, we are looking at Mexico right now. We have sample products in from Mexico that look quite interesting on the harness side. We think we can cure the mix-related issue with time.

Good, thanks, I will get back in line.

Okay.

Once again, if you would like to ask a question, please press Star 1. Mike Schneider of Robert W. Baird, you may ask your question.

Dennis, I guess my question is somewhat similar, and just more broadly. The spending on new initiatives, new markets, et cetera that went on during the fourth quarter, roughly about a million to a million and a half bucks, how much of that continues into the first quarter because I am trying to get a sense, if we X out the equity offering, the patent suits, is there anything other than the mix that continues to impact the first quarter on a sequential basis?

To the extent that we do not take action to adjust SG&A and the engineering expenses, that would be ongoing, but as I said in the comments, we -- we have already taken some actions in three of our business units, minor, but still some actions, and we are looking at all the rest and we will look very closely at the first quarter order rate to make sure that the SG&A is at the appropriate level. Plus total, we think we can take it down for the year. So I would -- I would say not necessarily that the engineering expense would come down, but the SG&A and engineering costs in total as a percent of sales we believe will decline through the year. And the rate at which it declines, we haven't gotten quite that fine a point on the pencil yet.

In the actions taken at the three businesses already, were those severance costs and related costs run through the P&L in the fourth quarter or do they hit the first quarter.

In one case it went through in the fourth quarter, but every other case it will be first quarter and it will be pretty well neutral in the first quarter. I mean, these aren't sizable -- we aren't talking about millions of dollars here.

Have you thought about giving guidance assuming flat orders as we have been witnessing for the last three to four quarters?

No. The last time -- to be honest, Mike, the last time I connected those dots up, admittedly it was only for two quarters, I couldn't have been more wrong. And to be honest, we don't know. You know, if -- if I said it's going to be flat because the last four quarters have been flat, I couldn't answer the first question that one of you listening in would ask me, why do I think it is going to be flat, I can't answer that question because we don't have that good of visibility.

But I guess you guys do know the expense side of the equation and if you were to -- I guess what I think would be helpful to the callers and to the investors I talk to, people want some assurance that the cost equation is, indeed, known to you as we progress through the first half of the year. And if you were to just lay out a scenario assuming flat orders at about 185 million to $190 million there are is what we would earn, I think it would instill a lot more confidence and convince people that indeed some of these costs are nonrecurring.

Uh huh. That's a fair comment. And, you know, I think we could fix a few things of both volume and mix, because you know, as we -- as we have demonstrated when we get a rapid mix shift away from some of our higher profitability businesses, it has an impact, but we fix mix and fix volume, we could begin to dimension the business case.

Sure.

I am not sure how meaningful it is. But I understand your point. It is a good point. Thanks again.

Dave Gireau of T. Rowe Price, you may ask your question.

Two questions. I wrote this down. I think you said -- If I got wrong, I apologize, you did not get price realization in 2002? Did I understand that correctly?

Yeah, I don't think we've seen the rollup from the businesses for the year, and I would say that net-net, I don't think we got any price in the year.

Dennis, why is that? I guess when you guys went on the road show, you talked a little bit ,about even in 2001, in a very tough environment when your sales were down a lot more than 2002, you were able to get I think at one point sort of net pricing and in 2002 more of a flat environment and your pricing was going down. Is that -- can you talk maybe about why that is? Is pricing on a secular business getting worse? What is driving that negative trend? Especially, since you introduced all these new products which I would guess you will be getting a higher price per product on.

As -- I mean, part of our objective when we introduce a new product is to have a higher margin contribution in the product. That's part of the criteria. As far as the difference between when we were on the road, we did, in fact, realize price in the prior year, and I think -- again, I will give it to you anecdotally because I can't give you hard data to tie it out three ways. I think every business -- let me say it another way. I don't know a single business. I have not talked with any counterpart in any other company where they say, gee, I am not feeling any price pressure and I am able to raise prices whenever I feel like it. I don't think those days exist right now in any -- in any business. And so we're -- we're not immune. I think we are holding our own in price, net. Some places we probably have more pressure than others.

I guess, Dennis, I am trying to understand what -- it was a very tough environment in 2001 with sales of 10% and it was sort of impressive you were able to gain price in that kind of tough environment and then sort of in the flat environment, just trying to understand exactly what has changed from 2002 versus 2001. I mean, the environment has been more steady this year relative to the material falloff we had in 2001 in the pricing front.

I think it is merely time at a lower level.

Okay.

And some of the prices -- price activity in '01 had been put in place at a time when things weren't quite as bad, and then, you know, the end of 2001 was pretty tough on everybody. And some of the price increases were already in place. Now we have -- we have instituted price increases in some of our businesses in '02, and we have announced some '03 price increases selectively. I think we will get some. But net-net, I am not anticipating any price increase across the board for the company in '03. We are going to try to get it, but, you know, sitting here today, I am not banking on it.

Okay. Another question. This sort of revolves around, as we go after all these sort of new markets, changing the -- you know, the size of the market that we can go after, is there any sense that -- I mean, I don't know if from an 80/20 perspective we are spending a disproportional amount of time going after $1, $2 million opportunities and the costs of that from 80/20 perspective, if you will, is it's really not that profitable. I mean, have you -- how do you think about that? I don't know -- not a way to think about it, but can you think at all about -- is this really going after and getting $3 million incremental sales but the incremental are indeed incremental distributions costs, incremental costs of attacking that $2 million to $3 million market or that new $2 million to $3 million product. Is that really adding to the profitability or is that, as ITW said, if you do that you tend not to have a whole lot of profitability associated with that?

We spend a lot of time trying to dimension markets and that's part of -- excuse me, that's part of the analysis that the businesses goes through that we discuss with them and we do have discussions up close and personal once a year, eye to eyeball, in the strategic review and also quarterly we discuss this. We are trying to make sure that the businesses aren't chasing every -- every bunny that runs by. Because you are exactly right, you can spend a lot of money chasing one-off applications that in the end can sink the ship. So, we are trying not to do that.

Dennis, do you feel comfortable right now saying that has not contributed to the lower profitability.

Absolutely. I can tell you that it has not been.

And actually -- I said one question -- two questions. Third question, give us an idea of sort of the Cap Ex trends or Cap Ex level for next year or just general ballpark, up, down.

Yeah, let me hop in on that, David, we spent $19 million in 2002. A little less than we had planned just because we were able to hold back some expenditures. In the new year, 2003, I would think we could spend $25 million, $26 million. Again our depreciation in the new year will probably be about $28 million or $29 million. So that's sort of a planning number at this point in time, but it is obviously subject to having us control it based on -- on business conditions.

Okay. Thank you very much.

Okay.

Scott Graham of Bear Stearns, you may ask your question.

Hi, hopefully these are two specific and nontime-consuming questions. What were the year-end projects outstanding in Six Sigma?

I haven't got that data in front of me, but it is at least -- it is at least equal to what it was at the end the third quarter and probably higher. But I haven't got that number here in front of me.

We can get that back to you.

We will get that to you.

Okay. Could you tell us where capacity utilization is running in each segment right now?

In our groups or end markets or what?

In each of your reported segments.

AH ... that's a -- I don't have the answer to that question either. I mean, I could give you a guess, but it's -- you know, generally we do not run full three shift operations at any place. Many of our operations are running a one-shift production operation and a partial shift on the second shift. So we have ample opportunity to expand, is the generalization, our production capacity without having to have bricks and mortar or major investment of any sort, in machine tools or other equipment.

Let me say that another way. In 1998, you had an operating margin of 17%. When we X out the benefit of FAS-142 in 2002, I am calculating an operating margin of 11.5%. Let's say that we were able to sustain a 2% to 3% top-line growth, how much of that variance do you think would be made up strictly off of improved utilization of capacity?

Well I think we begin to see pretty high flow-throughs from the -- from the volume. It would probably be running 25%, 30%.

Easily, yes.

At least.

25%, 30% higher margin than you're currently running at with 2% to 3% volume growth. Am I hearing you right? I think what we are trying to say is that the profit volume relationship on the incremental sales likely to be somewhere around 35% flow-through on the incremental sales. At the operating income line?

Yes, at the operating income line.

To answer the question another way perhaps, I've had only one discussion where a business was talking about the need to think about expanded capacity. And they believe that they can go fix the problem themselves without investment by running some projects and Kaizan [ph] activities will eliminate some of the downtime that they currently have in the equipment today. So I can give you one example where one business was saying maybe we need some capacity expansion because of some improved business conditions.

Okay. You know we have belabored this question, I think, in the last conference call, but, you know, given the -- you know, the falloff in the operating margin here, obviously what I am trying to get at is buckets that would raise that -- not to say we can get back to 18% OM, but, you know, kind of where can we get to, particularly given the higher spending requirement necessary for the buildout strategy. I guess that's maybe a rhetorical question, but I guess my thinking was, you know, that -- that a competitive nature of your core businesses has maybe taken away 200 to 300 basis points of margin, would you say?

It is a volume-related question more than anything else, I think. I mean, if you -- if you were to take the acquisitions and add them on to our base businesses at their peak -- so in other words go to a peak volume level, we are well in excess of 800 million. I haven't done the math recently, but we are down substantially from what a peak volume level would look like. And were we back at that level, we haven't gone and done the calculations, but we'd be, I would suspect, at or above the record earnings for the company. I haven't done the math, but you take a high flow-through environment, limited costs, add back in, not a lot of capacity expansion needed, it's volume related more than anything else, I think.

Okay. Thanks.

Okay.

Gerry Brockman of Credit Suisse First Boston. You may ask your question.

Couple of quick ones here. On the balance sheet, other current assets, year-over-year, improved working capital $5.5 million. Other line, current liabilities like at 21.8 year-over-year, and both of those sequentially were about $14 million. Can you give me the nature of some of those improvements and is that sustainable?

Yeah, in terms of the -- on the asset side of the -- of the ledger, clearly a focus has been on inventories and getting inventory turns up. We had success, I think, in terms of the year. I believe we increased turns by about 10% up to about 5 turns from slightly over 4 turns we had at the end of last year. Receivables expressed on a DSO basis, we ended the year at 47 days which is a very attractive rate for an industrial company. We also have been managing the liability side of the balance sheet as well. And making sure that we are appropriately paying our vendors at the right spot without enriching them too soon. And as a practical matter, we recognize we have got to work not only the income statement but certainly the balance sheet as well.

Right, absolutely --

Clearly it is sustainable.

The ones I was referencing here were in the "other" categories. And so -- I have taken a look at the inventory and the DSO and the current, but there's a good $14 million sequentially in 22 year-over-year from crunching these numbers right there coming from other current assets and other noncurrent liabilities.

I will have to look -- it may have something to do with tax reserves too.

Okay. Yeah, interesting seeing what the answer to that one is. And just two quick questions. The lifespan of the product from Fluid Management going moo Home Depot. What is the average lifespan of that product?

Oh, probably -- an automatic machine, it's probably six to eight years.

Six to eight years.

It depends on utilization but something like that.

What are they spending to keep it running over that time span?

I can't tell you. I don't have those numbers.

Okay, I am just wondering how likely a Home Depot investment in their stores next year is going to likely flow into a --

The real question there is really two-fold. It's more their decision, I think. Age of the machine and up-time is one thing, but the second one is they have a lot of stores that are still manual dispensers. So if you want to get credit, you replace with an automatic and you also have older equipment from one of our competitors that is being replaced over time as well. And the fact that Ardeli [ph] has said they are going to take, I think $4 billion, a pretty big number for store refurbishment and part of that is improving the appearance but part of that is to improve some of the equipment inside it. We think there will be some manual to automatic conversions in those store

That was $4 billion.

$4 billion was a number that was talked about in their analyst meeting a week ago.

That's a nice number. Last question, what are you seeing as far as the M & A environment, how it impacts IDEX?

We are constantly looking. We find things that we like that are -- that are accretive and additive to all of our businesses. So we are looking across the board. I would say there is still a disconnect in some potential sellers' mind on price based on what their business wants delivered versus what it is delivering now. So --

Is that softening at all? Have we tried to trend that sentiment? Are we finally acquiescing a bit here?

Time does affect one's thinking.

Right, right.

Yeah, so I think there is some more realistic pricing coming into it and we see things we like at prices that are reasonable, so we are constantly on the hunt.

32% debt-to-cap, not a bad time.

Absolutely.

Thanks, guys. Bye.

Wendy Kaplan of Wachovia Securities, you may ask your question.

My question was answered, thank you.

Dave Girea of T Rowe Price, you may ask your question.

My question has also been answered

Thank you, at this time, we have no further questions.

Okay, well I would just like to thank everyone for listening in and all the great questions. And I think we had an acceptable year. I wouldn't call it a great year, but, you know, under the circumstances, I think the performance was quite good. I think the culture is beginning to change. We have a lot of opportunities in front of us, and I look forward to talking to you in three months and hopefully tell you some of the great things that are going on in the first quarter. Thanks very much.