藝達思 (IEX) 2003 Q2 法說會逐字稿

Good afternoon and welcome to the IDEX corporation's second quarter earnings conference call. All participants will be able to listen only until the question-and-answer portion of the conference. I would like to turn the call over to your first speaker for today's call, Ms. Lisa Fortuna. Madam, you may begin.

Good afternoon and thank you for joining us for the IDEX Second Quarter Conference Call. Earlier in the day we sent out the press release, which outlines results for the second quarter ended June 30, 2003. The press release can be accessed on IDEX's Web site at www.idexcorp.com

Joining us today from management we have Dennis Williams, Chairman, President and CEO, Wayne Sayatovic, SVP of Finance and CFO, and Doug Lennox, Treasurer. Management will provide an overview of the quarter and then we will open up the call for Q and A.

Before we begin I want to remind every one 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 will turn the call over to Dennis Williams.

Thanks, Lisa. I'd like to welcome everyone to our conference call. This is the agenda I will follow today. First, I will talk about the second quarter results, some brief comments on the first half, some comments on each of our three groups, a progress report on our initiatives, operational excellence and global sourcing and a few comments on our new China investment that I am not sure everyone is aware of. Then, some comments on Sponsler, our latest acquisition and then some brief comments on our outlook. So, starting with the second quarter results, sales were up nicely from a year ago and from the first quarter we are encouraged by the third consecutive quarter of year-over-year higher sales in our base businesses. We have not seen this since the third quarter of 2000.

The next shift away from some of our higher margin pump businesses that we saw in the fourth quarter and the first quarter has persisted into the second quarter. We had very strong performance in both the Dispensing group and our Fire and Rescue Tool business, and we continued our upper trend in our foreign sales. As I go through the discussion, I will provide some details on each of these items. Looking first at orders in little more detail. Orders of $204 million were down 1% sequentially and up 8% year-over-year. Excluding acquisitions and dispositions in currency, orders were up 1% year-over-year and down 1% sequentially. Turning to sales, sales of $207 million were up 6% sequentially and up 9% year-over-year, again, excluding currency and acquisitions and dispositions, sales were up 2% year-over-year and 5% sequentially. Looking at the foreign sales content and at the outset, let me caution everyone that all of the comparisons currency translation is a significant factor. I will try to give you some perspective in a few places on that.

Foreign Sales were 48% of total sales, up 6% points from the second quarter of 2002. About half of this increase is due to currency translation. In this comparison, Europe was up 25%, Asia up 48% and the Americas excluding the U.S. they were up 9%. Sequentially foreign sales as a percent of total sales were up 3% points from 45%, about 1% of this increase is due to currency. In the sequential comparison, Europe was up 14% Asia up 9%, and the Americas, excluding the U.S., were down 4%. I think it is important to note in the second quarter all, but three business units saw increases in foreign sales on a year-over-year basis. The biggest contributors of the foreign sales increase are FAST and Fluid management in Italy, and in the Netherlands, Lukas in Germany and Hale, Europe and Viking. These sales increases are certainly affected by the exchange rate, but, I believe they are also due to a more global view of markets plus some new product introductions in several of the companies that were the big contributors.

Due to this organic growth effort, plus our global reach, we were able to offset weakness in the domestic markets that several of our businesses experienced. Domestic sales were virtually unchanged sequentially and were 3% lower on a year-over-year basis. Looking next at margins. In the second quarter, gross margins were 39.6%, up a 160 basis points sequentially and up 70 basis points year-over-year. The gross margin expansion that we saw here is as a direct result of our global sourcing and operational excellence activity, plus some impact due to higher sales volume. In the second quarter, SG&A dropped sequentially as percent of sales by 60 basis points. It was up a 130 basis points on a year-over-year basis.

The increase is due to reinvestment in the business to drive organic growth. That reinvestment comes in many forms, as I have mentioned in the past. That includes things like the addition of marketing, sales and application experts to increase our share and penetrate new markets and new applications, R&D associated with new product development. Implementation of common ERP system across the company, the rollout of our e-business activity and continuing investment and training that we make as we are evolving to more process-driven company.

The year-over-year increase is also due to somewhat I would call non-controllable cost such as higher audit fees, higher D&O insurance, increased pension and medical cost and the cost to implement provision of Sarbanes-Oxley.

Turning to operating margins. The operating margin was up 230 basis points sequentially and down 50 basis points on a year-over-year basis. The sequential improvement is due to the continued improvement in gross margins and the anticipated reduction in SG&A. The year-over-year decline was due to planned reinvestment in the business to drive organic growth that I mentioned earlier. Other cost growth that I mentioned earlier, as well, plus continuing weakness in domestic pump markets.

Looking at net income and earnings per share. Net income increased 33% sequentially on 9% on a year-over-year basis. To put this in perspective, on a comparable accounting basis $16.9 million is the highest quarterly net income we have seen since the third quarter of 2000. Our EPS of 51 cents increased 12 cents sequentially and 3 cents year-over-year. The last time we had an earnings per share of 51 cents on a comparable basis excluding goodwill amortization was the second quarter of 2001. Prior to that we saw the same level in the fourth quarter of 2000.

The second quarter free cash flow was $25.6 million or 1.5 times net income, sequentially we saw slight increase in receivable DSO due to higher foreign sales content, but we also saw slight improvement in inventory turns. Debt to total capitalization was 29% at quarter end, an improvement of 1 point from one year ago and 2 points sequentially. I would like to point out 29% debt-to-total capitalization is a record performance for the company.

So from a summary standpoint, the shorthand comparison for the second quarter year-over-year performance orders up 8%, sales up 9%, net income up 9% and earning per share up 3 cents. In our sequential performance summary, orders down 1%, sales up 6%, net income up 33% and earning per share up 12 cents.

Turning to the first half. I will only highlight just a few points because you have the data in the press release and there is a lot of other things I do want to discuss. So, I will just hit a few of the key points. Excluding acquisitions and foreign exchange, we saw a 2% increase in base business sales. Domestic sales were flat. Foreign sales grew 12%. Foreign sales, including the impact of foreign currency were 46% versus 41% last year.

As I mentioned earlier, I think this has resulted from a global focus across the company and some new product development. Cash flow remains strong, it is nearly $39 million or 1.3 times net income.

Let's look at groups and start with Pump, 56% of sales and 51% of the income. Sequentially orders down 2.4%, sales up 1.9. Operating income up 2.8 and the operating margin up slightly 14.2 versus 14.1 . On a year-over-year basis, orders up 2.1%, sales up 2.9, operating income down 12.7 and operating margin at 14.2% versus 16.8. Sequentially we saw 3% improvement in operating income and 2% increase in sales. The operating margin improved slightly. The environment remains difficult in many of domestic end markets like chemical processing and general industrial market. Utilization rates show no improvement and perhaps a slight decline. The year-over-year margin decline is due to a number of factors --- including investment in new product development, sales and marketing forks, ERP implementation, plus 5.5% lower volume in our base businesses, excluding currency and we had other hire costs. We continue to look at ways to drive volume and trim the cost structure to try to drive improved profitability in the business.

We continue to see orders and increase quoting activity for the recently introduced new products and some examples on these were also mentioned in the last conference call. Liquid Controls we have second-generation electronic register selling very nicely. That bundled with pumps and meters we are getting nice systems sales between Liquid Controls and Corkern. The Treber Coach DIC [ph] water heater has gained more acceptance and has been put on more new systems going into the semiconductor industry. Pulsafeeder introduced hypopump. Warren Rup reintroduced marathon brand of pumps that are doing nicely. High pressure low pump at Viking. In the third and fourth quarter we will have a few more new products introduced.

A couple of examples there from Pulsafeeder, the Pulsar shadow pump and also the neutralizer pump, which we think will do quite well and a recreational water dosing system from Rheodyne. This is a very interesting new product and new market that is enabled by the new low-cost Tightan valve that they have created for their traditional business, but gives us I think some interesting competitive advantage in our entirely new area. Baby units have been shipped and it could be a very interesting market. Hopefully later this year, probably the fourth quarter, we hope to have a full product launch. We are adding new distributors for our sanitary line and gaining new OEM accounts every quarter as we focus more attention on the OEM and providing better solutions for these very important customers. Micropump for example continues to drive a lot of improvement in their OEM sales process and they are identifying and winning a lot of new applications. Knight, a company in the West Coast is developed some very promising new applications in the dairy industry and also in the cement industry.

These are I think, very key successes as that business strives to develop new applications outside of their traditional markets. So, we have many activities underway to drive top line growth in the pump business. During the first quarter call, there were a few questions asked about organic growth. We have done work to attempt to quantify our performance. If you look at the pump group, across the entire group, the first quarter 2003 sales from new products introduced since January of 2001, new applications that have been found and new regions where we were not present in the past, about 12% of sales in the first quarter result from these activities and that is about twice the rate we saw throughout the year in 2002. This is some initial data. We will continue to improve the process so that you can get data in the future on how we are doing in this important area.

Turning to Dispensing Equipment 21% of sales, 24% of income sequentially orders up 11.4% and sales up 20.9%, operating income up 103.2% and the operating margin at 20.8% versus 12.4. On a year-over-year basis, orders up 19.6%, sales 21.9% and I point out here that currency represents about 18% of that so the true organic growth would be around 4%. Operating income up 29.4 and the operating margin again, 20.8 versus 19.6 a year ago. We continue to see nice share gain and order growth in our FAST and Fluid Management business. The strongest performance continues to come from the two European businesses. Orders for both new and the older production models have been strong in the Netherlands and our Italian operation is continuing to shift the Axo Novell dispensers we started last year. During the first half over 500 units have been shipped to Axo.

We saw very nice improvement in profitability both sequentially and year-over-year on higher sales. Operating margin was up substantially in sequential comparison and up 120 basis points on a year-over-year basis. We continue to work very aggressively on the new personnel care product dispensers that I have talked about in the past. We have shipped a number of prototypes this year and will begin to deliver prototypes of the latest design we are working on now in the third quarter.

Feedback from the latest focus group testing has been very, very positive. Let me cover now a few areas of this area called Personnel Care. On hair color we shipped over 100 units to Simpra in Germany. We will probably ship another 30 to 50 in the second half. In addition we shipped prototypes to several other companies. I expect sales in this market segment will increase next year.

In foundations, I expect we will ship another 10 prototypes in second half of this year. There have been a number of focus groups that have been very positive. There is a beta test in a retail store in the Chicago area that will take place starting in August. So it will be will be very interesting to see how that beta test goes. In Skin Care, there has been a second round of greatly expanded focus groups that have been very successful and a new prototype of the new configuration will be shipped later this month. There are also prototypes that have been shipped already that are being used for lipstick and shampoo development. This whole concept of mass customization in the personnel care market appears to be really very appealing to the cosmetic companies. We are working closely with the major players around the world.

In the first quarter of 2003, about 28% of the sales in the dispensing group were from new applications, new regions or new products introduced since January of 2001. This is about twice the rate we saw for 2002. We are seeing in this group a real benefit from the new product work that is going on across the various companies.

Turning to Engineered Products, 23% of sales, 25% of income. Sequential comparison, orders down 7.9%, sales up 2.5%, operating income up 22.7% and operating margin at 18.6 versus 15.5. The year-over-year comparison orders up 9.9, sales up 11.8, operating income up 33% and again, the operating margin at 18.6 versus 15.6 from a year ago.

However, if the reported orders in sales comparisons are adjusted for the sale of the immaterial product line they look really quite different. Orders were up 17.7% and sales up 20.1% on a year-over-year basis. Orders were down 2.4% and sales up 8.1% sequentially. So, that's a more realistic comparison you can see what the underlying business is doing. We saw significant increase in orders and sales in the Hale business unit. Both the fire suppression and hydraulic rescue tool segments in both the US and in Europe are participating with the strongest performance in rescue tools. We are seeing very nice increases from the new products that have been recently introduced, the re-railing equipment, telescopic hydraulic ramps, pump modules, stainless steel valves, calves that are compressed air foam system and SK vehicle Multiplex system. And we are also benefiting in this business from a more global approach, and we continue to capture project business around the world that is more an offsetting weaknesses that we are seeing in municipal spending.

Let me give you a couple of specific examples. The re-railing equipment is a terrific example of new product development and aggressive global thinking. Year-to-date in 2003, sales have more than tripled the 2002 performance, reaching about $4 million in sales.

In addition, we have high probability orders totaling nearly $3 million coming from Pakistan, India, South Korea, and Indonesia. The re-railing business is not a huge market, it's probably a 10 plus or minus million dollar global market. It is a real niche market, but we now dominate that because of new product development and aggressive approach that Lukas has taken. Second example is the pump module.

Currently, we're working with over 15 different OEMs on modules. Year-to-date sales have tripled versus 2002, to $150,000, and we truly expect them to accelerate in the remainder of the year. The numbers aren't big yet, but we think that there is a potential they could become quite sizable because the benefits for the OEM are clear, pre-tested, slide-in modules save time in the production line, and it also saves the OEM money. For some of the smaller OEMs, it may even allow them to go after market segment they couldn't address in the past. For us, the benefits are equally clear. We get a higher content of the vehicle and we displace competitors in some cases , because none of the competitors have the breadth of product that we have.

Our SK Vehicle Multiplex system is another great example. In the bus application that I mentioned on prior calls, our year-to-date sales were over $600,000 versus $14,000 in 2002. In the bandwidth business our auto/motor OEM business continues to grow and we began to realize the return for the investment we made with the sale and application talent we put in the company and this is offsetting the decline that we have seen in some of the more traditional applications. Recently Band-It was asked to bid on the new application that would require about 16 million clamps annually, so it is a pretty sizable opportunity with one of the OEMs. We have seen this auto activity transition over the last few months from what I would describe as push-marketing where we're pushing from Band-It and doing seminars for the engineers and the like to now a real pull from the auto OEMs in the tier 1 suppliers as they are calling us with potential applications so it is a very interesting new application that is going on with a very traditional product.

In Engineered Products, sales from new applications and new products were about 16% of the total in the first quarter of 2003 and this is up about 25% or so from the 2002 total year rate, but, we fully expect the rate to increase in 2003 as a lot of the recently introduced products start to really get some traction. Turning out to the initiatives. Since the last conference call, I have visited many of our units, the majority of them to conduct our annual three-year strategic review. In most cases it has been three to six months since I visited each site.

The cultural change that I mentioned in the last conference call continues to be dramatic, the key leaders are progressing from using tools that we have trained to truly running their business in a different way. We are starting to see a true cultural change across the company. As I have done in the past, I will give you comparative numbers just to put it in perspective. On Six Sigma, 743 total belts versus 720 at the end of the first quarter. 318 open projects versus 321 at the end of the first quarter, so pretty steady state condition there as I suggested that it would be in the first quarter. 300 plus or minus projects I think that is what we would expect to see. $2.9 million of savings versus one-and-a-half in the second quarter of 2002. Our average projects black belt projects saving $45,000. Greenbelt $16,000. In the first half of the year, Kaizen produced about $1.1 million savings across the company versus about $600,000 a year ago, so nearly double.

In addition, our on-time delivery performance was better in the second quarter versus end of last year at 19 of the 28 locations where we tracked this metric, so we are seeing improvement and our customers are seeing and feeling the difference, as well. In Global Sourcing, our savings in the second quarter were $3.9 million versus $2.6 million from a year ago. Savings are 25% versus prior source. We are continue to shorten the cycle times and are getting better at outsourcing work and continue to drive this important initiative. Now, as I mentioned, I talked little about China initiative.

In June we moved into our new facility in Sujo, China, which is just outside of Shanghai. This is a 65000-sq/feet wholly owned IDEX facility that will provide a single location for the majority of our business units. Initial focus is assembly of units for export and also for the Chinese market. We've got product transfer plans underway at this time and I expect we will see production starting in the late third quarter early fourth quarter. The longer-term vision for this facility is to have engineering and sourcing capability in addition to the assembly work. We will also have a wholly owned marketing company which will allow us to sell locally manufactured goods and also imported products into the Chinese economy. This is really important to have this capability, as well, so these two entities will really compliment and accelerate the growing presence we have in Asia.

Looking now at acquisitions. On June 2nd, we completed the transaction to acquire Sponsler. Sponsler is a turbine flow meter manufacturer with annual sales around $6 million and located in South Carolina. Sponsler's main focus has been domestic cryogenic market. Their largest two customers are BOC Gases and Prox Air. Liquid Controls, our company, has had been associated with Sponsler through a private labeling agreement for a few years. They have sold a product in the semi-industrial markets such as agricultural applications. So we know the company and we know the products quite well.

We see growth potential in globalizing the cryogenic application and also see opportunities in refined petroleum metering especially in (inaudible) applications. We believe there are many more industrial applications beyond the agricultural market that we have developed at Liquid Controls. This acquisition allows us to offer alternate precision metering technologies to customers and we think that is really important. We are happy to have Sponsler in the IDEX family.

Turning to the outlook, we are encouraged by the orders level and the fact this is the third consecutive quarter of year-over-year base business sales increase. However, we are short cycle business and our performance is totally dependent upon the incoming order rate for every month of the year. We enter every month with, as I think you have heard me say before, 50 to 60% of that month's sales in backlog. We have very limited visibility for the third and fourth quarter.

As I mentioned in the press release, it is important to remember the second quarter tends to be the strongest quarter of the year, particularly in our Dispensing Equipment business. The seasonality of the paint opportunity. Third quarter tends to be the weakest. This year with the complex dynamic in the economy, it will be very hard to tell how the third quarter will turn out.

We are confident we are working on the right things to weather what I would call an extended downturn and to deliver better performance and improved performance when the economy picks up.

So, in summary, we saw significant improvement in the second quarter on both sequential and year-over-year basis led by strength in the Dispensing Equipment and Engineered Products groups. Our global growth has more than offset domestic market weakness, which is important. We continue to execute our strategy and feel confident we are working on the right things. Our pump group has experienced mix in volume issues in the last three quarters. We are closely focused on making improvement to get the business back up to historic level of profitability.

Finally, we are encouraged by what we have seen in the last three quarters and hope this trend will continue. With that, open up for questions.

Thank you. As a reminder this conference is being recorded. If you would like to ask a question, please press star 1, you will be announced prior to asking your question.

The first question comes from Michael Schneider with Robert W. Baird . You may ask your question.

Dennis, in terms of the seasonality you mentioned at the third quarter sequentially down generally but I note that the orders in the other engineered segment and in the Dispensing Equipment segment were up nicely sequentially and don't seem to reflect that seasonality we had in the end of the third quarter. Is it possible that we don't see the significant step down that we have seen in the past quarters especially with the momentum in dispensing

It is possible, Mike. There were fewer workdays so that is a factor. I would have to judge this year, you know, non-traditional because of the complex dynamic going on in the economies around the world. So, it may well be that it's lessened or even doesn't exist this year as far as third quarter weakness. We will have to wait and see. We have such limited visibility, it is hard to draw a conclusion what we have seen up to this point. But you may be right.

And specifically on the second half in the pump group you mentioned initiatives on Vikings and presumably (inaudible) underway. Can you give us color on that?

We constantly look at ways to drive top line. We have new product activity underway. We are looking at other things we might do to drive volume. We constantly are looking at the cost side of the equation. We trimmed a little cost in the first quarter and in second quarter and I expect we will continue to do that to make sure we have business sized properly for the market.

Is Sujo facility targeted at those two units specifically?

It is targeted at the entire company. The concept there, Mike, was to rather than have each business doing its own thing in China that we would consolidate into a single facility. And in so Viking will have some product there. Rupp will have some, Gas, Bandit, really across the board.

Last question. On margins in the pump group, you are bouncing along at the low 14 level on the operating margin. Are there any expenses that roll off as you head into second quarter or should we expect margins to remain in that level until some efforts take hold?

It is role a volume-based consideration in a couple of the units. So, it will depend upon the volume in Viking, Rupp, the mix we see, it is a volume and mix question.

You don't care to put a range around it?

I'd be making up numbers to tell you what it is. It is really dependent upon the orders in the various business units.

Fair enough. Thank you.

Mr. Ned Armstrong with Friedman, Billings, Ramsey, you may ask your question.

Thank you. Good afternoon. I had just a couple of questions. One with regard to the operating initiatives and the benefits you detailed. How are those spread amongst the different operating segments? Are you getting the lion share that in pumps or is it more evenly across segments?

It is really across all the segments. Each business has their own specific activity underway. We try to leverage sourcing of common commodity-like items across the company. Cast iron, for example, we have a commodity leader that aggregates to buy. So every month we have RQ package that goes out that covers probably five different business units. Similar things on Aluminum casting. So, every business unit has its own opportunities that we do our best to leverage.

OK. With regard to some of the acquisitions that you made last year, the Rheodyne, Halox, Wrightech, could you describe and I know you did a bit with Rheodyne, but just describe some of the benefits you are starting to see as far as product development, additional penetration with new customers, better products for existing customers, that type of progress has been made?

Sure. Let me start with Rheodyne. As I mentioned Rheodyne has an interesting new product based on the Titan valve that goes into what is commonly called recreational water market. Specifically in spas where the spa market interestingly enough has few repeat buyers, one of the reasons is the lack of interest in putting manually putting chemicals into a hot tub. And we have worked with the largest hot tub manufacturer, the market leader, and developed a specific dosing engine that will automatically dose chemicals into the hot tub and ultimately be a closed-loop system. They are quite excited. We have shipped beta test units there. I fully expect we will have a full product launch before the end of the year.

Now, that's an interesting new market area for a company that has traditionally looked at the analytical instrument business. The same Titan valve goes into their HPLC machines. It is also being used as the basis for a new system that we're working on in advanced proteomics, a protein separation piece of equipment we're working with a couple of customers on and it's the same basic valving technology that enables something that is on the absolute cutting edge of personalized protein-based medicine and also being used to enable penetration into the hot tub market. So, that's the kind of thinking and approach we see from Rheodyne.

We are pretty excited about that business. It's been a great acquisition for us. Terrific people there. We recently had a meeting of board of directors meeting out there, so the directors could see firsthand some of the people and the products. So, that's just a couple of examples of what is going on there in addition to their traditional markets. With Wrightech, this is a very small business, but it had sanitary pump design that added to the products we already had for the sanitary market. So, we've seen nice expansion of the business and it is growing at 2 to 300% of a very small base, so we like what we see so far. We have added some additional products to it is enabling us to get distribution in the sanitary area so the impact it potentially has for the company is far greater than just the sales level of the company, itself. Just the fact it makes our offering more complete. We're looking at things that we can add to sanitary product line to be a bigger force in the market.

Is that you mean bringing Wrightech product to your existing customers?

In many cases we are setting up different specialty distribution because our distribution is mainly industrial, and frankly they are not calling on the sanitary kinds of users, so we are using that as basis to find distribution to take that product plus some of the other products through a different channel to some different customers.

OK and then, how about with Halox, any success stories there?

Halox is an interesting technology at this point. It is -- it has been proven and is gaining a lot of support as the most effective way to deal with legionella. In the UK there is legislation requiring hospitals to have this type of control mechanism. There is a growing interest in the U.S. in the same area and so we're having some interesting discussions. I will have another meeting next week in some areas where I think we can have a real impact in making hospitals a safer place. It's a very long, involved discussion, but sufficed to say that this also is a very small business that has the potential to grow dramatically. I fully expect over the years, coming years that the UK-type of legislation will find its way through more of the European union as well as into the U.S., which will mandate hospitals to have this type of control mechanism.

Very quickly on the expense side, I believe last quarter you mentioned you thought you could get SG&A as a percent of sales to roughly last year's level, which would be around the 24% level, do you still think you can achieve that for fiscal year 2003?

It becomes more challenging because of the lot of non-controllable things that I mentioned. We are working hard to try to get it there. We did see a sequential improvement, so we are working away out of very hard, but there is a lot of, I think I mentioned in the conference call last quarter, just the less than controllable hire DNO insurance, medical lease kind of things, we are talking about a couple million a quarter year-over-year. So, we're working hard at it. If we can get it there, we will. We may be a touch above, but we are trying to get the productivity to drive it down and still absorb the higher cost in other areas.

OK. Thank you.

Mr. Scott Graham with Bear Stearns. You may ask your question.

Hi, Dennis, Wayne, Doug, how you doing? Could you give us a little bit more on FX, the year-over-year sales impact by segment, if you could?

By segment. Yeah, I can. Hang on a second, I can give you a feel for that.

In terms of looking at the just the six-month period of last year versus this year in pump products FX helped us by about $5 million year-over-year, little less than $5 million. Dispensing Equipment, $11 million and other Engineered Products $3.5 million, totaling about 19 or $20 million. It was pretty much a similar kind of contribution in total for each of the first and second quarter.

that's great. Now is there a way to determine how much that you know near $20 million impacted operating income in the first half?

It probably would be if we gained 5% of sales in total, it is reasonable to assume that for that portion of the business, meaning our offshore business, we probably got 5% additional contribution at the operating income line.

OK.

Not the normal kind of flow-through you would expect from incremental sales.

Right. Could you talk a little about the current state of the fire and rescue market? It looks to me like you guys are doing a real bang-up job frankly both domestically and internationally. Like you read OEMs and some of the domestic OEMs' comments and they are pretty concerned about municipal budgets that despite the Fire Act really started to open up nicely now. That the municipal budgets are a little bit problematic for the second half of the year, that year, backlogs have essentially been run off. What you're seeing sort of today times zero, where fire and rescue spending stands for the second half, you think?

Well, we're dependent upon that insight from the OEMs and we hear some other things from the OEMs. I think the success that we've enjoyed in that business year-to-date have been due to the things that I mentioned in the comments. There are a lot of what I would call global projects where there are defined government-funded projects for either rescue tools or re-railing equipment or fire rescue vehicles where we have been very successful at getting probably more than our fair share, and so we've been able to offset municipal spending weakness through some of these projects that we've been very successful at.

This re-railing example is a great one. Well, that's not traditional fire and rescue, it's an outgrowth of our hydraulic technology at Lukas in Germany. We are now the dominant player in this very interesting small-niche market, and will probably see somewhere between $8 and $12 million of sales this year just due to that product alone. The Indian opportunity that I mentioned is a secondary purchase. They have already purchased a combination of rescue tools and re-railing equipment of $3 million, as I recall, and they will probably buy another $3 million of re-railing equipment. So, we've been able to through a new product development and being more aggressive globally, succeed in a lot of these project areas that have served us well in offsetting some of the traditional domestic spending. In Germany alone I have one data point I can give you in Germany, hydraulic rescue tool spending municipal is probably down 20%, and were we not able to find some other things we would be suffering because of that.

OK. Last question and maybe handle this offline. Wayne, could you give me a call back after the conference call. The cash from operating activities number on a year-ago basis, having little trouble tying that to the 10-Q, maybe you can help me out with that?

Sure. We would be happy to give you a call.

Thank you.

The other thing I would mention, Scott, just on the same fire and rescue side. This module approach is also important. Look at our competitors in pumps, in valves, in gauges, in electronic components for fire and rescue vehicles. There is no one common name, there are many different names, but they are not the same across all the product (inaudible). So consequently, we can put together with our own components a module and that is very attractive, especially to the smaller OEMs, and as a result we will gain some share because you know the small OEM wants to buy the complete package, and while it is only a $150,000 at this point. I fully expect that will ramp up because of the number of OEMs we are working with and the fact that they find this pretty attractive, so I think part of it will be a share gaining story as well.

OK. Thank you.

Mr. Walt Liptak of McDonald Investments will ask a question.

Thank you. Good afternoon guys. I guess in reference to the last question, foreign currency was I believe left in the order numbers. I wonder if you could break out what foreign currency impact there was on orders?

It is approximately the same by group, Walt .

Thanks. Then, on those spending items that you mentioned that you got control over, I wonder if there is any moving parts to that, for instance training or e-business where the cost will be ramping down the second half and the other cost ramping up?

Uh, I think the training will be flat to slightly down. E-business probably about the same. So, as we look at the controllables and the SG&A equation, we will manage them - you know without crippling the things we're trying to do, to be as efficient as we can in the second half, just to try to get close to last year's number.

OK. Are there any incremental costs that you've been absorbing because of the China initiative or anything that will be coming out?

You know, this is a small incremental cost, but as we ramp production up there it pays back very quickly. So, there is cost there, but it is not a huge number.

OK, and with the order from Axo, can you quantify a little bit you know how that ramps and maybe help some of the other dispensing orders that you see in the pipeline, how those ramp in the second half?

We have limited visibility there, traditionally the second quarter is the strongest. In the case of Axo, we shipped 556 units or some number like that, that was midway between 500 and 600 units in the first half. I would guess that would be somewhat less in the second half, which is kind of the traditional way that these guys tend to buy. I would call it somewhat down in the second half, based on what history would tell us. Whether history will repeat itself this year remains to be seen, but typically the orders are somewhat less and sales are somewhat less in the second half as compared with the first half.

OK. Thanks.

Mr. Michael Schneider with Robert W. Baird, you may ask your question.

Wayne, just a housekeeping item here. Goodwill during the quarter was up $12 million sequentially. There is some true-ups for prior acquisitions or is that all current quarter's acquisition?

There is probably some true-ups in there, but primarily acquisition of Sponsler.

OK. I know it is a small deal, but I guess if you assume most of it is related to this quarter's acquisition it implies acquisitions are going at 2 times revenue or so. Have you seen any reduction in pricing expectations by sellers?

I might just tap in on the goodwill issue. one more point, Mike. Goodwill is also affected by currency, too so it tends to move around because of that. You may want to respond to the other one.

We typically, I think you know pay between 6 and 8 times trailing multiple on EBITDA so, we do not look at it as multiple of sales, we look at as a multiple of EBITDA, and If it is a highly profitable business, obviously the prices is going to be somewhat higher and a higher multiple on sales. As far as pricing in general, I guess I would tend to call it somewhat bifurcated, where the true sellers recognize the pricing is based on true trailing performance not on what it was two years ago, or three years ago, or what you think it is going to be in a year or two, so, the true sellers are pretty realistic on price, and we continue to find things in the range that we were comfortable paying that give us the proper return on capital and are creative in all the parts of the screen that we try to fill. There are some opportunities that we have looked at were clearly the owners were looking for someone to come along and pay him a high price, and they are not motivated sellers, they are just looking for someone to come along and give them a good deal and we pass on those. So, you still see both has been changed over the last year and probably little bit towards the more realistic side as those who had thought this was a V-shaped recovery, it has been shown that it is not a V-shaped recovery, so the forward estimate pricing on forwarding estimate is somewhat more passé.

Dennis, now that you have enough momentum assumingly across all the businesses with your initiatives, do you prefer to do similar smaller deals and more of them rather than a larger transaction?

We look at both, Mike. You know, as I think probably all of you have heard me say before, net-net, I much rather make you know $1 or $200 million dollar acquisition because the amount of effort you put in it is not that much different than what you do for a $10 million acquisition, so, I would be much happier with larger acquisitions and we certainly got the fire power to do it, but you have got to find the ones that are proper fits so that you do not do something crazy, so we look at small ones, we look at bigger ones, and I would much rather do things on the larger side, all other things being equal.

Sure. Wayne, just a final question on currency, again the orders you mentioned a comparable impact, but on a sequential basis, the FX impact on orders would be fairly small?

Yeah, it would be fairly small.

Those numbers are fairly accurate if we consider this sequential ones.

That is correct.

Thanks.

Wendy B. Caplan with Wachovia Securities. You may ask your question.

Good afternoon. Couple times Dennis during -- many times during your remarks you talked about the globalization of IDEX. A lot of -- you mentioned specifically moving to China, which is a strategy that a lot of diversified industrials have embraced going to lower-cost regions. How do you view this strategically and should we expect to see more of this going forward?

Well, I think if you look at our U.S. market penetration in our various markets, we are under-penetrated in foreign markets, that is a general statement. That would maybe dispensing being the outline there where I think you know globally we have a good share everywhere, so that means a number of things, Wendy. You have got to manufacture locally and it means you have to engineer products for the local market requirements because they are generally different than the domestic market requirement might be whether it is metric, whether it is look and feel, whether it is the user interface. There are differences. It's my strategy; the company's strategy to drive to be more local, so, I think our move in China is merely the beginning. We've looked at some acquisitions there that we will make if the opportunity is right. It's a very big market. It is not a U.S. domestic market.

There are some differences in features and in price points and you have got to be on the ground there to be effective to gain a market share. You can't import U.S. product into China, as an example, and hope to gain a leading market share because it doesn't work that way, so I would say simply stated, I think it is the beginning and there will be more and more of it. We will build up, as I said, part of our vision in China, I want to engineer products there. I want to drive local sourcing. We are doing a lot of sourcing today, but it is largely driven from the U.S., and there is no reason to do that. We have hired some very talented people. The guy who is leading our activity in China is a bicultural guy, lived in the U.S., lived in Canada, lives in China now. He is really helping us attract great talent and I fully expect that this first facility will get filled and we will be thinking about another one.

So, Dennis, if I am hearing you correctly, your motivation strategically is to penetrate these under-penetrated global markets, as opposed to simply looking at low-cost regions in terms of manufacturing, is that correct?

It is both. One is more tactical. You know, there will be Asian imports coming into the U.S. in some market areas. We need to be able to defend those positions with Asian-sourced products. There will be exports from China too to our traditional markets without a doubt and that is really where we are starting this, but I want to quickly move to gaining market share within those markets. In Europe, I view Europe the same way. We have a lot of opportunity in Europe where we export U.S. product to Europe now and we have a reasonable sales level, but we can do far better than that. But, it will take a different strategy than we have been following. That will be something in the future that we will pursue.

Thank you. I have two quick questions. I noticed DSOs were up about 3 days this quarter. I looked back and saw they are always up in the second quarter. I'm sure I must have known this at some point, but Wayne can you remind us why that is?

I think in the case for this particular quarter it reflects the fact that we had higher percentage of our sales going to foreign customers, where terms are longer than they are for U.S. customers. I think that balance of non-U.S. versus U.S. customers has something to do with it for this quarter. Also, we wind up typically having a strong shipping month in the month of June and you known clearly the fact that we have made shipments in the recent period, it is unlikely you are going to have those collected at the end of the month.

Thank you very much and one last question, the year over year decline in the consolidated operating margin of 50 basis points, you mentioned in your remarks that it was partly due to weakness in the pump business, but also due to reinvestments, can you give us some sense of, which was at half-in-half or where the bulk of that decline was?

Uh, your talking year over year

Yes.

Then clearly if you are looking at the segment table, a big piece of it is really pumps, when you look the change from 16.8% margins that we enjoyed in the second quarter of last year versus 14.2 this year and that representing you know 55 to 56% of our total sale that it only has an impact on overall role of the numbers.

OK, thank you very much.

Once again, to ask a question please press star, 1. At this time, there are no further questions.

Well again, I would just like to thank everyone for listening in on the call. I think we had a good quarter, and there are more opportunities to improve throughout the rest of the year. We are driving hard to make sure we continue to drive this improved performance. I look forward to talking to you in another three months. Thanks very much.