藝達思 (IEX) 2003 Q1 法說會逐字稿

Good afternoon, and welcome to the 1st quarter earnings conference call. All participants will be able to listen only until the question and answer portion of today's call. In addition, today's call is being recorded. If anyone does have any objections, we ask that you please disconnect at this time.

I will now turn the call over to Ms. Lisa Fortuna. Miss Fortuna, you may begin when ready.

Good afternoon and thank you for joining us for the IDEX 1st quarter conference call. Earlier in the day we sent a press release out outlining the results for the 1st quarter ended March 31st, 2003. The press release can be accessed on IDEX's website at www.idexcorp.com.

Joining us today from management we have Dennis Williams, Chairman, President, and Chief Executive Officer, Wayne Sayatovic, Senior Vice President of Finance and Chief Financial Officer, and Doug Lennox, Treasurer. Management will provide an overview of the quarter and then we will open up the call for your Q & A.

Before we begin I want to remind everyone that the conference call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release.

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

Thanks, Lisa. I would like to welcome everyone to our conference call.

This is the agenda I'll follow today. I'll start with the 1st quarter results, then I'll give you some comments on each of the groups, a progress reports on our initiatives, operational excellence and global sourcing, and some brief comments on the outlook. But before starting, let me just mention that the press release that all of you have seen has been filed on a Form 8K.

So starting with the 1st quarter results, both orders and sales were up nicely from a year ago and from the 4th quarter. We're encouraged by the second consecutive quarter of higher sales at our base businesses. As we pointed out, we've not seen this since the 3rd quarter of 2000.

The mixed shift away from some of our higher margin pump businesses that we saw in the forth quarter has persisted into the 1st quarter. We saw a nice pickup in orders and sales in both dispensing and our fire and rescue tool business.

We had a significant upward shift in our foreign sales and as I go through the presentation, I'll provide some details on all of these items. Also during the quarter, S&P gave us an upgrade to triple B, which is a great confirmation of the financial condition of the company.

So looking first at orders in a little more detail, orders of 206 million were up 9% sequentially and up 12% year-over-year. Excluding acquisitions and foreign currency adjustment, orders were up 3% year-over-year, and 4% sequentially.

Turning to sales, sales at 195.5 million were up 4% sequentially, and up 12% year-over-year. Again excluding currency and acquisition, sales were up 3% year-over-year and 2% sequentially.

Looking at the foreign sales content, foreign sales were 45% of total sales, up 5 percentage points from the 1st quarter of 2002. In this comparison, Europe was up 24%, Asia was up 69% and the Americas, excluding the U.S., were down 1%, which is caused totally by the slowdown that we're all familiar with in Latin America.

Sequentially, foreign sales, as a percent of total sales, were up two percentage points from 43%. In this sequential comparison, Europe was up 10%, Asia up 15%, and the Americas, excluding the U.S., were unchanged.

It is interesting to note that all but one of our business units saw increases in foreign sales. So it's an across the board increase, across the entire company.

The biggest contributors to the foreign sales increase are FAST and Fluid Management in Italy and in the Netherlands, Lukas in Germany, plus our Liquid Controls unit, Micropump and Pulsafeeder.

Looking next at margins, in the 1st quarter gross margins were up, were 38%, which is up 50 basis points sequentially and up 60 basis points year-over-year. The gross margin expansion year-over-year is a direct result, we believe, of our global sourcing and operational excellence activities.

SG&A has also grown as a percentage of sales as we have reinvested in the business. And as I've said in prior calls, that reinvestment is in many forms: The addition of marketing and application experts to help us grow share and penetrate new markets and new applications, the R&D associated with new product development, the implementation of a common ERP system across the company, the rollout of our e-business activity, and the continuing investment in training as we evolve to a more process-driven company.

Looking at operating margins, the operating margin was flat sequentially, and down 90 basis points on a year-over-year basis.

The year-over-year decline results from several factors that we cited in the press release. First, mix. The mix shift that we saw in pumps in the forth quarter continues.

Second, we had an SG&A increase of 8 million. The main elements of the SG&A increase are costs associated with the sale of a non-material production line, or product line, this was the [INDISCERNIBLE] product line in the U.K., a final settlement of the lawsuit we talked about in the 4th quarter call, and higher than normal accounting adjustments in one of our foreign subsidiaries. In the aggregate, these three items account for about 2 million or 25% of the total increase.

Next, higher costs due to inflation, and specifically in the area of pension expense and insurance cost, and reinvestment in the business, as I mentioned earlier, to drive organic growth. These two items account for about 4 million or half of the increase.

And finally, inclusion of the 2002 acquisitions, which account for about 2 million or 25% of the total.

We believe that the recurring SG&A running rate in the 1st quarter would have been somewhat below the 4th quarter rate. Our operational excellence activity has, and will continue to, offset some of these increases, and we expect the full year 2003 SG&A level as a percent of sales to be fairly similar with 2002.

Finally, net income and earnings per share. Net income increased 4% sequentially and was up 10% on a year-over-year basis. And on both a year-over-year and sequential basis, the earnings per share were up 2 cents.

First quarter free cash flow was 13.1 million. On a year-over-year basis, we saw a modest improvement in inventory turns and receivables DSO, but the increased sales that we saw in the third month of the quarter, and the related increase in accounts receivable and inventory to support that increase, reduced our free cash flow versus the 1st and the 4th quarters of 2002.

Debt to total capital was at 31% at the quarter end. Not quite a record. The record was 30% set, I think, three quarters ago. This represents an improvement of nine points from a year ago, and one point sequentially.

So in summary, the -- at least in this portion of it, the shorthand comparison for the 1st quarter of 2003 versus the 1st quarter of 2002: Orders up 12%, sales up 12%, net income up 10%, and earnings per share up two pennies. If you look at the shorthand version of the sequential comparison: Orders up 9%, sales up 4%, net income up 4%, and earnings per share up 2 cents.

It is also interesting to note we've increased our backlog in the 1st quarter versus the 4th quarter by just over 10 million. And that gives us some nice momentum going into the 2nd quarter, which tends to be the strongest quarter of the year.

Now, let's take a look at the groups, and we'll start with pumps. Pumps represent 57% of sales and income. On a year-over-year basis, orders were up 6.7%. Sales up 8.6. Operating income down 4.5. And the operating margin, 14.1 versus 16.1. Sequentially, orders up 5.3%. Sales up 3/10ths of a percent, nearly flat. Operating income down 7.3%. And the operating margin, 14.1 versus 15.3.

Sequentially, we saw a reduction of profitability on flat sales. And this reduction is attributable to continuing unfavorable sales mix shift and some higher costs, which we were unable to offset with productivity.

The year-over-year decline is due to a number of factors, including new product development, additional sales and marketing resources, the ERP implementation, the unfavorable sales mix, plus some higher costs. We're currently looking at some additional trimming of the cost structure to improve profitability.

We're beginning being to see orders and increased quoting activity for some of the recently introduced new products. I'll give you a few examples. Second generation electronic register at Liquid Controls. Again, at Liquid Controls and Corken, they've introduced a pump, meter, and electronic register package and that's gaining some nice acceptance. It is a better solution for the OEM customer.

Trebor has introduced their new quartz DI water heater in the Asian market, as a 208 volt item. We're starting to see some good activity there. And Pulsafeeder introduced what they call their hypopump.

The second and 3rd quarter, there will be a lot more new products introduced. A couple of examples, there's a high pressure load pump from Viking, and in Pulsafeeder their Pulsar, Shadow and Neutralizer pumps will be introduced.

We continue to add new distributors for our sanitary product lines and we're gaining a lot of new OEM accounts every quarter as we focus more and more attention on providing better solutions to these important customers. An interesting example on the OEM side is a micropump application on the new super computer from Cray which is being shipped now, so we have great experience with Cray.

So we've got a lot of activities underway to drive top line growth in the pump business. There are some bright spots in what I would call a generally flat industrial market. The first is the municipal water market where Pulsafeeder is ahead of last year and ahead of their plan for this year. We also know from a Viking distributor meeting that took place last week that they're beginning to see more project opportunities that, frankly, have been absent for several quarters. So we're hopeful that this is a early signal of some improvement coming in the near future.

Turning now to dispensing equipment, 20% of sales, 17% of income. On a year-over-year basis, orders up 17.1%. Sales up 18.7%. Operating income, up 17.2%. And operating margin basically flat, 12.4 versus 12.5. The sequential comparison, orders up 4.9%, sales up 15.7%, operating income up 69.4%, and operating margin 12.4 versus 8.4.

We continue to see a share gain and nice order growth in Fast and Fluid Management businesses. The strongest performance is coming from our two European businesses. Orders for both the new and the older production models have been very strong in the Netherlands, and our Italian operation is increasing the shipping rate of the Axo-Novell [PHONETIC] dispensers that Axo is now putting into service.

We saw a nice improvement in profitability sequentially and essentially flat profitability year-over-year. The operating margins in the 1st quarter were depressed by one to two points due to the higher than normal adjustments to estimates, as I mentioned earlier.

We continued to work aggressively on the new personal care product dispensers. We've shipped a number of prototypes this year in the 1st quarter. And we'll begin to deliver prototypes of the latest design in the 3rd quarter. Some of our potential customers for production equipment have had some focus group testing and the feedback from that has been very, very positive on the concept.

Our global account management approach, which we instituted, oh, about a year-and-a-half ago is really starting to pay off, and we're seeing nice share gains coming from that. We've also seen increasing activity in China where we are very well-positioned with both our manual dispensers, and with a brand new entry-level automatic dispenser that is priced slightly above the manual system, called the Tintmaster 300, a new product that we are just introducing.

Turning now to our Engineered Products, 23% of sales, 26% of income. Year-over-year comparisons, orders up 19.3%. Sales up 14%. Operating income up 26%. And operating margin, 15.5 versus 14.0. Sequentially, orders up 22.4%. Sales up 5.1%. Operating income up 12.8%. Operating margin, 15.5 versus 14.5.

We saw a significant increase in orders in sales in the Hale business unit, both the fire suppression and the hydraulic rescue tool segments in both the U.S. and Europe are participating in these increases.

We're seeing nice increases on new products that have been recently introduced, specifically rerailing equipment, we've had some nice global orders for that new product. And we are clearly dominating that segment worldwide.

Telescopic hydraulic rams, a new lightweight product that's been introduced, is gaining acceptance. Pump modules that I've talked about before, a lot of activity ramping up there. Stainless steel valves that we recently introduced, compressed air foam systems, and the ES-key systems, all generating a lot of activity.

What we're also seeing is a lot of what I would call project business that we're doing an excellent job of capturing around the world, and that is more than offsetting any weakness that we see in municipal spending. At a recent FDIC or fire equipment show, there was a lot of enthusiasm. And the current order rate that we see is pretty indicative of this mood.

We have more new products in the pipeline. And we're expanding the number of companies we're working with on modules. Currently we're working with 15 different OEMs on modules. And this is really an important aspect, because our content goes up significantly when we move to a complete module.

In our Band-It business, our automotive OEM business is up 14% as we begin to see a return on the investment we made in sales and application talent. And this is offsetting the decline that we've seen in the more traditional applications. The sale of the product line mentioned earlier, depressed earnings in this segment by about 1 to 2%.

Turning to the initiatives, every year I visit each of the business units, and have a human resource review as part of our management process. I spend at least a half a day with the unit president, generally at their own location.

The change this year has been dramatic. As we see these key leaders are progressing from merely using the tools that we've spend money training people on in the last couple of years, to truly running their business differently. And we're starting to see a real cultural change. As I've said in the past, that's the normal progression that we would expect. And based on the visits in the last two months, we're really beginning to see that.

As I've done in the past, I'll provide a few comparative numbers just so that you can try and keep track of the initiatives. In Six Sigma we're up to 720 total trained belts versus 703 in the 4th quarter. We continue to train primarily green belts as we get more and more people trained in the skills that we need.

At the end of the 1st quarter, we had 321 open projects, versus 252 in the 4th quarter, some nice increase there. In the 1st quarter, 3.5 million of savings, versus 1.4 in the year-ago period. And our average payback for black belt projects is $50,000. That compares with the '02 average of 61, so it's down slightly.

On the green belt side, our average project is producing a $25,000 benefit, and that is up from 17,000 that we saw in '02.

We continue to drive Kaizen, Lean events across the company. They're a great tool for us. We've produced probably a half a million dollar savings in the 1st quarter versus about 200,000 a year ago.

In addition, we track what we call CTCs, critical to customer items at each location. One of those is on-time delivery. Our on-time delivery performance was better in the 1st quarter versus the 4th quarter at 24 of the 28 locations, where we track this metric. So we're seeing improvements, and our customers are feeling the difference and that's really what we're striving for.

In global sourcing, our savings in the 1st quarter were 4 million, versus 1.9 in the 1st quarter a year ago. Savings are running at about 27%, which is slightly lower than it was before as the mix of some of the things we buy changes. Motors, we see less of a savings on, for example. We're shortening cycle times and continuing to drive this very important initiative.

Turning to the outlook, as we've said in the press release, as I said earlier, we're encouraged by the orders level and the fact that this is the second consecutive quarter of year-over-year base business sales increase.

However, being a short-cycle business, as I think all of you know, our performance is totally dependent on the incoming order rate for every month of the year. We enter every month with 50 to 60% of that month's sales in backlog, so consequently we're limited in our visibility for the 2nd quarter and for the year in total.

We're very confident that we're working on the right things to weather this extended downturn and to deliver improved performance when the economy does pick up.

In summary, we saw improvements in orders, sales, net income, and earnings per share in the 1st quarter on both a sequential and year-over-year basis. We continued to execute our strategy and feel confident we're working on the right things. Our Pump group has experienced some mix issues in the last two quarters and we're closely focused on making improvements to get this business back up to its historic levels of profitability.

Finally, we're encouraged by what we've seen in the last two quarters, and we're hopeful that this trend will continue.

I'll now open it for questions.

At this time, we'll begin the question-and-answer session. If you would like to ask a question, please press star 1 on your touch tone phone at this time. I'll announce you prior to your question. If you would like to withdraw the question, press star 2. Again, please press star 1 now if you would like to ask a question, and due to time restrictions, we ask that you do limit yourself to no more than two questions at one time. Our first question comes from Michael Schneider with Robert W. Baird & Company.

Good afternoon.

Hi, Mike.

Dennis, could you focus a minute on dispensing equipment margins? You mentioned that the numbers are depressed due to some of these reserves it sounds like you took. Could you give us some color on why the reserves were taken, and what they relate to?

And then secondly, just address the fact that even if you adjust for that one to two points, on a $39 million revenue run rate, on a quarterly basis that is, you're still off a good 5 points from a year ago, when you did the same revenue level. Maybe you could give us some insight as to what is causing that significant margin decline.

Okay. Mike, this is Wayne. Let me talk about the adjustment to the estimates and of accruals necessary for one of these foreign operations.

During the 1st quarter, we took a look at the reserving levels and accruals at one of the businesses for a whole variety of items, everything from sales commissions to vacation accruals, and decided it was appropriate to really step up the level of expense that was to be recognized. And essentially, as Dennis has indicated, that became a part of that first component that he spoke of earlier. That, in total, was about $2 million of hit for the quarter, for the year. The adjustments that I spoke of were not $2 million. It was, you know, substantially less than that.

In terms of the other margin considerations, there is a mix factor going on in this business as well, in this segment, because we have our Lubriquip business in there, as well as having the dispensing equipment businesses that are based in Europe, as well as the operation here in the states, and each of these businesses are not similarly profitable.

The other thing that I would add to that, Mike, is that we are investing significantly in new products on the personal care side. So that's something that would not have been -- that investment would not have been there a year ago. And we've also still got in the Netherlands, for example, both the old and the new equipment because our customers are buying both. So we will keep both in production for a period of time, and that drives some additional costs.

And the new products, initially, when introduced were not as profitable as the older ones, we've driven down the learning curve, as you do with any new product, to the point where the margins are improving, and we're comfortable that, in the end, we're going to have equal to or better profitability with those new products compared to the ones that they replaced.

So there are a number of factors there. I'm pretty confident that we're going to, you know, if we see the volume, that is indicative at this point, that we'll see those margins improve.

Okay. Thank you. Sorry to focus on the negative in the quarter.

That's fine. That's what these calls are about.

Congratulations, excellent quarter. Thank you.

The next question comes from Scott Graham with Bear Stearns. Your line is open.

Hi, guys, I echo that, a very nice job here, it shows to me that you guys are looking like you are doing a better job of managing SG&A despite the ramp up in spending to drive the businesses. A couple of questions, to that end. You had a pretty good core, for your base business sales increased a little higher than I thought it would be. I'm wondering if there was a way, Dennis, that you were able to look at this from -- I suspect you have this data, new products, new initiative-related sales, you know, the incremental sales that that added, versus sort of the base. If you will.

Yeah.

Of the business.

We don't capture it on a quarterly basis. We tend to look at that, maybe, once a year, I guess, right, Wayne?

But, you know, I can tell you anecdotally we're seeing, and this is part of what I was trying to point out on some of the examples, and I don't want to get into a thousand of examples, but if you take the Band-It example, for example, we invested in people to go and do some automotive OEM work and that business has increased dramatically. And we're getting introduction mid-year end models, which is almost unheard of, because we've got a better solution for some tough issues that they've got.

On the hydraulic rescue tool side, a clear return for the investments we've made there, rerailing, some new tools, new backpack, this telescopic, lightweight telescopic ram is a super new product. And we're starting to see a lot of activity there. Our ES-key systems, I think they are up 70% year-over-year, modules up 60 or 70% year-over-year.

So, I mean, in the aggregate, these aren't -- we're not talking about 50% of the business, obviously, yet. But we're seeing a lot of activity on the new products that we've introduced. So there's clearly some benefit there, and it is offsetting weaknesses that we, you know, continue to see in some of the base markets.

All right. So essentially what I think I hear you saying is that this is more of an IDEX sales growth story, certainly not any improvement that you're seeing out there in the environment?

I -- it's probably a little bit of both. But clearly there is a component coming from new product introduction, there is no question.

Okay. If you are seeing an improvement in the environment, where would you say it was coming from?

Well, again, you have to look segment by segment.

Right.

In the case of the Hale business in total, as I mentioned, we're seeing some major projects around the world that we've been very successful in getting. We have seen some weakness in some municipal spending, but we've far more than offset that through some of the major projects that are coming along. So, you know, it -- you really have to go segment by segment.

The Axo-Novell new product integration, that was driven by regulatory change. That is now being rolled out. I had a meeting with Axo last week, they're very pleased with what is going on. They're very pleased with the partnership we have together and that's working really, very, very well.

So it's hard for us to be able to say it is either A or B. It is some of both. And I wish I had the ability to answer the question that you ask.

It looks a little bit more like you. The final question I have is regarding the cost savings numbers that you cite in your press release, Dennis. Are those numbers, like, for example, Six Sigma, 3.5 versus 1.4; 3.5 is a cumulative number, right?

It is a 1st quarter savings number. And the way we keep score on both global sourcing on Six Sigma, Kaizen, and Lean is a business unit gets to count, basically, a 12-month benefit. So any project that was completed in the prior 12-month period could be captured, but it's things that were done in the period and in prior period. But the counting end is at the end of the 12th month, so that we continue to drive them for new projects and continuous improvement.

All right. So it is like a 12-month moving average kind of thing.

Well, it's really not -- it's not a moving average. It's savings that would occur in the period.

Right.

But if it's month 13, we do not count it anymore.

Yeah. Okay. I think we're saying the same things. Thanks a lot, Dennis.

Okay.

The next question comes from Ned Armstrong with FBR, your line is open.

Yes, thank you. Good afternoon.

Good afternoon.

One question that I had, I just wanted to go back to the decline in the pump business margins, was that entirely due to a change in product mix?

There was a lot of product mix and there was some costs that we incurred. This is an environment that is increasingly difficult to get price increases, so any kind of inflation that you get, you have to offset through productivity and a no-price environment. So it is a little bit of cost. It is some productivity to offset some of the costs. I would say probably the biggest piece of it is mix.

Okay. And was that particular change in mix due to any particular end market or particular unit?

Probably --

We said in the 4th quarter, the fact that Viking and Rupp, two of our higher margin businesses, did not enjoy the same relationship of contribution of sales to total pump sales that they had previously.

Okay.

And that condition really continued in the 1st quarter here. Okay. And has there been deterioration in any of the other pump businesses or is it just continued deterioration or lack of contribution of those two? It is mainly a continuation.

The markets -- the main markets that they serve are the general industrial chemical processing kinds of markets that are, you know, have been -- they're off the bottom, but they are not robust. And we saw some decline in the 4th quarter, actually saw a fairly precipitous decline in the 4th quarter that I think caught everybody by surprise.

We've not seen that get well. Although, the anecdotal comment from the Viking distributor meeting that we had over the weekend was, these guys were more positive than they've been for probably two years. Of saying, you know, we've got more projects to bid. What the conversion time and rate will be, nobody knows, but the fact that they're being asked to bid on projects is something new that they haven't seen for a number of quarters.

Have you seen similar anecdotal evidence from the Warren Rupp people?

Rupp hasn't had a distributor conference. This just happened over the weekend, so it's kind of hot off the press. You'll hear -- you might hear from a distributor that they are seeing more things to bid on. I think if Viking is seeing it, my guess is that Pulsafeeder and Rupp and Versa-Matic will, as well. But that's a guess. I have no hard data there.

Okay. Thank you very much.

You bet.

Our next question comes from Alexander Paris with Barrington Research Associates. Your line is open.

Good afternoon. Good quarter.

Thanks.

Just talking about the dispensing segment, there was a pretty nice sales gain. Was a good part of that in the Fluid Management part of the business?

Yeah, both Fast and Fluid Management are the main drivers of that.

Right. Now the Fluid Management is -- do you have any rough idea of how much the end market for that is determined by remodeling versus new home construction and --?

A lot of this is in Europe. We saw more activity quarter over quarter in Europe, as compared with the U.S., and some of it is regulatory driven, as I mentioned, on the Fast unit that goes to Axo-Novell.

The rest I would say is just general economic improvement in some of the European end markets where they are gearing up for a better paint season, spring season, spring and summer. And so we've seen a -- a very nice increase in activity there.

The 2nd quarter tends to be the strongest quarter for the paint dispensing business. It is "the paint season." So we would expect some uptick, but this was much stronger than what we've seen, clearly, that we've seen in the last year.

So is using automatic paint mixing equipment still relatively unpenetrated in Europe compared to the U.S., so there's more growth there for any given amount of economic growth?

No. In Western Europe, I would say that it is a mature market. But the regulatory change to go to water-based pigments is the driver of new equipment.

That's the driver, okay.

One of the drivers. The under penetrated markets are markets like China where we've seen a nice pickup. We've gone to a global account management approach with some of the major customers, and we ever's seen some nice activity in China, in particular.

And we've got two products that we think are very well positioned there. One is the manual dispenser that you would expect from an entry level kind of market. But we've also developed a brand new product that is, what I would call, an entry level automated machine that we think the initial impressions that we're gaining from China is that it is an ideal product for that market.

So there are some under penetrated markets, China probably being the biggest, most attractive one. As you think about where is the largest growing middle class in the world? It is China.

But the -- I don't think in Europe you had the same amount of big box retailers, like The Home Depot and stuff. Do you need the bigger individual units like that to tell your higher priced, and I presume, higher margined automated systems?

We sell a lot of automated systems to the individual paint retailers. A lot of the paint retailers are big enough to really want an automated system. That's basically what we're selling from the Italian operation is an automated system, a much more complex one than what I was mentioning for China.

Right.

And so the market is sophisticated. There are some of the big boxes moving in. And that is probably most prevalent in the U.K., but Germany and France are moving in that direction as well. So the market is there for the higher priced automated machines in Western Europe, it's just like in the U.S.

Okay. All right. Thank you.

You bet.

The next question comes from Wendy Caplan with Wachovia Securities. Your line is open.

Thank you. Hi.

Hi, Wendy.

I want to understand the municipal business. Because I -- sitting here in New York with doomsday budgets it is hard to understand how the projects look good. Can you give us some color on that, in terms of where the projects are, what kind of general declines you're seeing in municipal, et cetera?

Well, on the water side, as I mentioned, Pulsafeeder, that's the only data that I can give you that's a hard data point, they are up year-over-year and they're up relative to their plan this year. And they're just seeing a lot of municipal activity.

I can't tell you geographically where it is. I know the biggest project that they saw last year in municipal was in the city of Toronto. It was, for them, it was like a $450,000 deal, something like that, which is a very big project for us. So we are seeing those kinds of bids, and are participating in those.

On the fire and rescue side, where we are seeing project kind of business, we have seen some weakness in Germany, for example, were Lukas is home based. Their German domestic municipal market for rescue tools is somewhat depressed, but they've more than offset that with a more global look and a bunch of new products that are gaining acceptance around the world.

So there are some municipal budget weaknesses. I was somewhat surprised by the attitude at the FDIC show which was very bullish. So all I can do is give you some anecdotes, Wendy, that in some cases I'm a little puzzled about, as well. But the orders are the proof.

Okay. And one more issue, SARS. Have you seen any -- you mentioned China several times as being an exciting market at this point. Can you talk about any of the impact from SARS on your businesses?

Well, we, like many businesses, have put a travel ban in place until this gets sorted out, which I think is the prudent thing to do. We have not, I guess, I can't give you any hard impact at this point. Business does continue. We have people working from home, and traveling judiciously, people that are in the country.

So, you know, I think it will take a while for this to get sorted out. And there will, no doubt, be some impact. But we continue our sourcing activity. Those, you know, that continues unabated on things that we already have sourced, so, you know, shipments come in, we build product.

We're also investing in China in a wholly-owned facility which I expect we'll have product coming from in the 3rd or 4th quarter of this year. So, long term, you know, is there a short term impact? Yeah, there probably will be, simply because things like this do have a economic impact, but it will be, I think, very short term and not huge.

Okay. And one last question, if I might. Can you say a little more about the pump business? Specifically, the mix, in terms of what you're -- not that it exists, but how you're tackling this problem?

We are tackling it in two different ways. First, is to go back and look cost-wise in the units that are most affected to be sure that we have the proper cost structure.

As I mentioned, in the comments, we'll do some trimming here and there. We're not going to be closing factories, or anything like that. But we'll give a hard look at the current volume levels and make sure that we've got the businesses sized appropriately. We'll work the cost size of it. We have been and we'll continue to do that.

More importantly, we're driving with some new product introductions, hopefully some excitement in the marketplace, and the ability to generate some top line with products that, we believe, in many cases will generate higher margins.

But just to clarify, you haven't seen an improvement in the chemical process industry other than some -- you mentioned some more products that you were bidding, but there hasn't been any evidence of that, I would assume. Right?

Well, this is the first evidence that I had heard, and it, like I mentioned, it is strictly from a distributor meeting. We had all the Viking distributors together over the weekend. And the feedback from them was more positive than what it's been in a long, long time. Because they are seeing projects to bid on. But they just -- I mean, frankly, they haven't been seeing them for several quarters.

So what's the conversion time? The conversion rates? Who knows. But the fact that they're at least bidding is a positive sign. We'll have to wait and see.

Sure. Thank you very much, Dennis. I appreciate it.

Okay, Wendy.

As a reminder, if you would like to ask a question please press star one on your telephone.

Our next question is a follow up question from Michael Schneider, Robert W. Baird. Your line is open.

Dennis, you made the comment that inventory and receivables were up because of the March strength, can you give us some sense of the linearity of the quarter and, indeed, it's surprising that your March was strong given, obviously, the war developments.

If you compare March with March a year ago, and March with December, which would drive the end of the quarter point, mainly on receivables, it's probably about 10 million higher in sales in March of '03 versus December of '02 and March of '02.

So was that any one order, or -- ?

No.

One of the units that you've been talking about?

No. It was -- I guess I'd have to go and -- I would have to do a business by business comparison. But it's not one business. You know, we don't have one business with one big order that can really swing this. So it's a pretty broad participation. With the exception of, you know, on the pump side where we haven't seen a lot of year-over-year sequential growth.

And can you give us a sense of what you've seen month-to-date in April? And what the fallout of the war has been?

We don't comment during a quarter. Simply because things are never linear. So it is -- you know, if I told you that things were horrible and you extrapolated that, it wouldn't be the right answer. If I told you that things were over the top and you extrapolated that, it probably wouldn't be the right answer. So, you know, we really, we see lumpiness, week to week, month to month in a quarter.

Okay. And then switching topics to R&D, [INDISCERNIBLE] one of the expenses that has been ramping up in the K you disclosed that last year indeed the total was 12.7 million, which was a record 6.5% of sales. Could you give us a sense of what the budget is this year given the litany of products that you've listed here that are in development or being rolled out?

It's not 6.5% of sales.

It's not 6.5%.

That would be a huge number, Mike.

Well, it was $12 million, 12.7 million.

Yeah. We don't have a hard target put out in front of people at this point. We tend to manage it on gross margin and on SG&A and operating margin. And to -- we'd have to go and do the sums to figure out what the -- what is implicit in that plan.

I haven't got that number. But my expectation is that it will be somewhat higher this year. But in the overall context, I think SG&A will be flattish, as we had indicated in the press release, relative to prior year as a percent of sales. So we'll see some increase. In the end, I think this company probably ought to run in the 3 to 4% of sales for R&D, in total.

And is the increase in R&D just a -- somewhat of a forcing the issue, in that you increase the budget and hope that the R&D effort is more successful and more active, or is this just a by-product of your efforts to get closer to the customer and focus on CTCs as you call them.

It is the latter, really.

Okay.

If you force a budget, and say that you are going to spend, you know, X millions of dollars more than you've ever spent before, you better be prepared for not a great result. So we've tried to do a couple of things.

One is to redefine markets. It really has its roots in redefining markets that we've got less than 10% share, so you can begin to see opportunities. And then generating margins through operational excellence so that we can afford to spend more, and we've been doing that.

I mean, the gross margin improvements that we've generated, we have invested back into this company, as I said we would. And I think now that we're getting to a point where we'll see more of that flow through to the bottom line. And we'll still have sufficient R&D money to spend.

So it has to start with ideas, which we're generating more and more of across the company. Then you have to have a way to pay the bill, and then you've got to be able to enjoy the benefits of introducing those new products. So there's been a lot of activity on new product development and organic growth, which is far more difficult than making acquisitions.

But 3 to 4% of sales implies that number, long run, more than doubles in dollars.

Yeah, I think it will.

Okay.

I think it will. But the mix of what we have in SG&A will change also. And the other piece of this is that we've been on a path of converting what I would call sustaining engineering, the engineering you need to support the current products that you have out there, to reduce that through better products and fixing whatever issues you have the first time so that you don't continuously spend on it, and converting that to R&D.

And one example, I think I've used in a conference call in the past, in Fluid Management in America, they cut their sustaining engineering in half and doubled their R&D with no impact to the bottom line, simply by using, mainly Six Sigma tools to understand where they were spending their money and what problems needed to be fixed, and then fixing them.

So there's a lot of things going on under the covers, that, you know, we don't have time to really talk about. But part of the R&D story is the conversion of sustaining to R&D, which is free engineering, in a way.

Okay. Thank you.

Yeah.

Our next question is a follow up question from Ned Armstrong, FBR. Your line is open.

Thank you. Could you comment on the acquisition opportunities that you're seeing and how it compares to periods past?

We constantly look for things that fit with a bias towards higher growth end markets. I would say the opportunities are as robust today as they've been for a while.

Is that opportunities in the number of willing sellers, or the price people are willing to sell at.

Both. Both. There was a period where, you know, a year-and-a-half ago, and there's still some that exists today, where they're mired in the past of thinking the business is worth a lot more than what the current trailing 12-month numbers would indicate.

And so folks that truly are interested in selling have a reasonable price expectation. Those that are just fishing or don't have to sell may be mired in the past. So there's still some businesses that we see where the numbers are crazy, don't make any sense.

But we see a lot of things that are reasonably priced, and then it is a question of how does it fit with the criteria that we have and what we're trying to do with the company.

Is there any preponderance of opportunities in one business segment versus the other?

No. We see opportunities across the board. We're chasing things in all three groups.

Okay. Thank you.

You bet.

And, sir, I'm showing no further questions at this time.

Okay. Well, I would just like to thank everybody for listening in on the call and the great questions. We're encouraged by what we see but, as all of you know, we're a short cycle business, so everyday we go fight the battle. So we'll see you in three months. Thanks for tuning in.

This does conclude today's conference call. We thank everyone for their participation. All parties may disconnect at this time.