藝達思 (IEX) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the IDEX Corporation third quarter earnings conference call. All participants will be able to listen only until the question-and-answer session of the conference. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce your host for today's conference, Miss Susan Fisher, Director of Investor Relations. Ms. Fisher, you may begin.

Thank you, Teresa. Good afternoon, and thank you for joining us for for the IDEX third quarter earnings conference call. Earlier today we issued a press release outlining results for the quarter ending September 30th.

At press release, it can be accessed on our company web site at www.IDEXcorp.com. Joining us on today's call are Dennis Williams, Chairman, President, and Chief Executive Officer, Wayne Sayatovic, Senior VP of Finance and Chief Financial Officer, and Doug Lennox, our Corporate Treasurer. The format for today's call will include management's review of the quarter followed by a Q&A session. Before we begin, I would like 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. I will now turn this call over to Dennis Williams. Dennis?

Thanks, Susan. Before proceeding with today's call, I would like to formally introduce Susan Fisher who joined the company at the end of September, as our new Director of Investor Relations. Susan has extensive experience in Investor Relations across a variety of industries, from Financial Services, to Information Technology, to Manufacturing.

She's joined IDEX to bring a full-time focus to our communications with analysts, shareholders, and prospective investors. It is a focus that we feel is appropriate, given the 2002 share registrations, the increased float, and our continuing dialogue with an expanding customer base. So welcome, Susan, and welcome everyone to our conference call. The agenda that I will follow today, of first, the third quarter results, then a brief comments on the nine months results, some comments on the group's progress report on the initiatives, some comments on classic engineering, our latest acquisition, and some brief comments on the outlook. Starting with the third quarter results, sales were up somewhat from a year ago, and lower than the second quarter, as we anticipated. We're encouraged by the fourth consecutive quarter of year-over-year sales growth in our base businesses. We've not seen this since the third quarter of 2000. The mix shift away from some of our higher margin pump businesses that begin in the fourth quarter of 2000, has persisted in the third quarter. We had strong performance in both dispensing and fire and rescue businesses and as I go through the presentation, I will provide some details on these. Looking first at orders in a little more detail, orders were down two percent year-over-year excluding currency translation and acquisitions.

And that's due primarily, excuse me, to very weak August. The weakness in August was unique compared with what we've seen in recent years. July was about at the first six month average order rate and September was slightly below that six month average, but August and the first week of September were about ten percent below the first half average order rate. But despite the short-term weakness, we're able to post a reasonable third quarter orders level. Turning to sales, sales at $197 million were up four percent year-over-year, excluding currency and acquisitions and dispositions. Sales were up slightly year-over-year, representing the fourth consecutive quarter of organic growth, despite the continuing weakness in the industrial pump segment. Looking at the foreign sales content, foreign sales were 44 percent of total sales, up 1 percent from the -- one percentage point from the third quarter of 2002. In this comparison, Europe was up about 8 percent, Asia up 23 percent, and the Americas, excluding the U.S. were up 1 percent. In the third quarter, five of our business units saw significant increases in foreign sales.

And those business units are Hale, Fast and Fluid management in the Netherlands, Fast and Fluid management in Italy, Band-It and Liquid Controls. Now let me provide some more in-depth comment on the top three gainers. With Hale, the gains have come from new products and a much more global focus. We have bid on and won more global projects this year in rescue tools, and fire suppression. Winning these products is more than offset the weaker municipal spending that we've seen. The increases in our two European fluid dispensing units is largely attributed to a complete set of new products, a closer focus on key global customers and the regulatory change in Europe. In general, as I think all of you know, all of our businesses today have a much more global focus. Looking next at margins - in the third quarter gross margins were 38.6 percent, that's up 70 Basis Points year-over-year. The gross margin expansion is a direct result of global sourcing and operational excellence activity plus our ability to maintain or slightly increase price levels. And the third quarter SG&A was 23.9 percent. It dropped sequentially as a percent of sales by 150 Basis Points. It was up 30 Basis Points on a year-over-year basis. The year-over-year increase is due to our reinvestment in the business to drive organic growth, plus increases due to higher insurance costs, audit fees and pension expenses.

The reinvestment comes in many forms. The addition of marketing, sales and application experts to increase share and penetrate new markets, and new applications. 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 as we evolved to a much more process-driven company. We're continuing our drive to improve efficiencies in our general administrative areas to reduce the G&A expenses, while 23.9 percent SG&A is below the 2002 average, yearly average of 24.4 percent, historically SG&A has been higher in the fourth quarter versus the third. So we would expect to see some increase in SG&A in the fourth quarter. Turning to operating margins, the 14.7 percent operating margin is the highest third quarter margin we have achieved since the third quarter of 2000. It is the 50 Basis Point increase year-over-year and a 40 Basis Point improvement sequentially. Year-over-year the gross margin improvement, more than offset the SG&A increase. Looking at Net Income and Earnings per Share, Net Income increased 12 percent on a year-over-year basis. On a comparable accounting basis, $16.5 million is the highest quarterly Net Income achieved in the third quarter, since the third quarter of 2000. Out Earnings per Share of $.49 cents increased $.04 cents year-over-year. Last time we had a third quarter EPS greater than $.49 cents on a comparable accounting basis, excluding goodwill Amortization was, again, in the third quarter of 2000. The third quarter of free cash flow was $38 million, or 2.3 times Net Income. This represents a 38 percent increase year-over-year.

This is the highest quarterly cash flow the company has ever generated. Nearly 25 percent higher than the prior record, which was in the fourth quarter of 1999. Working Capital was reduced to 14.3 percent of sales. A 230 Basis Point improvement year-over-year and 120 Basis Point sequential improvement. Debt to Total Capitalization was 25 percent at quarter end, an improvement of 8 points from one year ago and 4 points sequentially. 25 percent debt-to-cap represents the strongest financial position in company history. So a quick shorthand comparison for the third quarter, year-over-year, orders up three percent, sales up four. Net Income up 12, Earnings per Share up 9 percent, and free cash flow 38 percent increase. Turning to the nine month comparison, I will only highlight just a few points since you have all the data in the press release. Excluding Acquisitions and foreign exchange we produced a two percent increase in base business sales, domestic sales were down one percent, while foreign sales grew 11 percent. Foreign sales including impact of foreign currency were 45 percent, versus 42 percent last year.

And as I mentioned earlier, I believe this has resulted from a more global focus on all of our businesses, plus a lot of new product development. Free cash flow of $76.6 million or 1.7 times Net Income is running eight percent higher than last year's record pace. And gross margins are up 70 Basis Points nearly offsetting the 100 Basis Point increase in SG&A. Now let's look at the groups and start with pumps. Pumps represent 56 percent of sales, and 53 percent of income. The sequential comparison, orders up 3 percent, sales up 2 percent. But getting behind the sales number our base business was flat and the 2 percent is largely due to acquisitions and currency. Operating income 15.7 percent increase, and our operating margin was 16.2 percent versus 14.2 percent. On a year-over-year basis, orders up 4 percent, sales up 1 percent, but, again if you get behind that number, our base business declined about 4 percent on a year-over-year basis. Operating income down 7.5 percent, and our operating margin, 16.2 percent, versus a prior 17.7 percent. So sequentially we saw a 16 percent improvement in Operating Income on a 2 percent increase in sales. So operating margins improved substantially. The environment remains difficult in many of the domestic end markets like chemical processing and general industrial and the government public utilization rates show no improvement in capacity utilization.

The year-over-year margin decline is due to a number of factors including investment in new product development, additional sales and marketing resources and ERP implementation. 4 percent lower volume than our base business, excluding currency, plus some higher costs. We continue to look for ways to drive volume and trim the cost structure to improve the profitability. New products are starting to flow from the various pump companies. I mentioned a few examples in the last call. Let me give you a few this time as well. Starting with Pulsafeeder [phonetic], they've introduced what they call their new Hypo Pump. This is a sodium hyperchloride degassing diaphragm pump for water treatment. It's a real innovation compared with the host pumps that have been used historically. It's getting a lot of attention. It's patented and offers significant advantages over the host-type pump. We sold 60 and 80 in backlog. There are several hundred that are actually being quoted and it's about a $4,000 pump. So we're very, very, pleased with this new product.

Second item from Pulsafeeder [phonetic] is called a Neutralizer, a piston pump. It's another great innovation that took an idea from Riodine and adopted it for their application. This is a pulseless pump for small well water treatment. It's in product testing now with -- really beyond a BETA test, it's really early- production units. It's going very, very well. It's getting a great response, and a lot of these have been quoted as well. And this is between $150 to $200 a unit. The next generation controllers undergoing BETA test right now. Again, very, very positive response from the test site. The initial application here is in a boiler control area. In Liquid Controls, electronic registers, they have obsoleted their generation one register, introduced the gen 2 register and doubled the volume of registers that they have sold. This helps us with another approach that we're taking, which is bundling product together for better solution for the OEMs. And so pumps, registers and flow meters so the register has really driven a lot of activity in that business. Sponsler, the new acquisition fits well into the strategy bundling for the cryogenic market is an idea that we're pursuing -- cryogenic market is an idea that we're pursuing. I will talk more about that later.

And the Sponsler meter, getting it qualified for the petroleum market is done. The inspector commented -- kind of an unsolicited comment, said that this is the best meter that he's tested. At Riodine, they have leveraged their core valve technology to create a chemical dousing machine for hot tubs. The BETA test units have gone very well. They will be introduced November 4 through 7 at the Spa Show in New Orleans. We expect it to go into production next year and will ramp up. Viking, their industrial load pump is progressing well, we have orders in hand. It will be in production this quarter, also the magnetic drive which is going into production this quarter and we have new all-purpose gear pump. It's in design right now for both the U.S. and Asian markets. First frame size will come out this quarter with additional sizes next year. And we intend to manufacturer that both in the U.S. and in China. Warren Rupp, our natural gas pump. In June we got what is called a blue flame approval which is a gas compatible approval for this natural gas pump. First one.

Only one in the industry. We've got many orders in hand for the one-inch pump. We're also working on some smaller pump sizes for this market. So there's several other examples I could give you on new product and new markets but this will give you a sense of some of the activity that's underway in the pump group. We're closely tracking the sales of new products and new applications for all three groups, for the first nine months of 2003, about 10 percent of the pump group sales are as a result of new products or new applications introduced since January of 2001 This is about twice the rate we saw in 2002 as these new products have built momentum. Turning now to dispensing equipment, the sequential comparison is down, as we said it would be, because it is a seasonal business. Orders down 25 percent. Sales down 23 percent, Operating Income down 40 percent, and the Operating Margin 16 percent, versus 20.8 percent. The year-over-year comparisons, orders up 12 percent, sales up 13 percent. The majority of the sales increase being currency. Operating Income up 47 percent, and the Operating Margin 16 percent, versus 12.2 percent a year ago. So in the third quarter we saw the expected sequential decline, due to the seasonality of the paint business.

On a year-over-year basis we continued to see share gain and order growth in our Fast and Fluid management businesses. The strongest performance continues to come from our two European businesses. Orders for both the new and the older production models in Europe have been strong in the Netherlands and our Italian operation is continuing to ship the (inaudible) dispensers over 700 of these were shipped in the first nine months. We saw a very nice improvement in year-over-year profitability on higher sales. The operating margins were up 380 Basis Points on a year-over-year basis. We continue to work aggressively on the new Personal Care product dispensers. Since August, there's been a BETA test unit dispensing cosmetics in the north Chicago area. And the results is been very, very, positive. Our second BETA test unit is being installed this month in a major department store in the City of Chicago. On hair colorants, we have shipped over 100 units to Simpra in Germany and will ship many more in the fourth quarter. In addition we shipped prototypes to several other companies in the hair colorant market and they are moving through their internal test programs and I expect sale in this market segment will increase next year. During the third quarter we shipped additional prototypes for cosmetics and the internal testing programs with all of the Personal Care companies are progressing well.

We see this as a very interesting market. Hair colorant machines will sell to $5 to 6,000 a unit and the cosmetic dispensers will be in the 5 to $10,000 dollar per unit range depending upon the features that the individual customers require. In addition to the revenue stream from the equipment, we see a service revenue stream and also a consumable revenue stream. Market acceptance here is certainly not 100 percent of shared but we're pretty excited by the progress that has been made. This whole concept of mass customization and personal care appears to be pretty appealing to the cosmetic companies and we continue to work closely with all of the major players. In the first nine months of 2003, about 28 percent of sales in the dispensing group were from new applications, new regions, or new products introduced since January of 2001. This is approximately twice the rate for 2002. So we're seeing a real benefit from the new product work going on in this group. Turning to our Engineered Products, 23 percent of sales, 26 percent of income. Orders sequentially down 4, sales down 2 percent, Operating Income down 1 percent, and the Operating Margin 18.7 versus 18.6. Year-over-year, orders down 1, sales up 7, Operating Income up 23, and the Operating Margin 18.7 versus 16.3. However, the reported year-over-year orders and sales comparisons are adjusted for the sale of the immaterial product line, they look really quite different.

On an adjusted basis, orders are up 6 percent and sales up 14 percent year-over-year. We continue to see significant increases in orders and sales in the Hale business unit. Both the Fire Suppression and Hydraulic Rescue Tool segment in the U.S. and Europe are participating with the strongest performance in Rescue Tools. The success is mainly due to new product innovation and a more global focus. First, any weakness in the U.S. and European municipal spending has been more than offset with global projects. India, Pakistan, Korea, Philippines, Malaisia, and several other countries -- Malaisia, and several other countries, our aggressive global focus is allowing us to see more and win more of these global tenders. Just this week the head of our Hydraulic Business Unit was visiting a foreign Air Force and they decided to purchase $6 to $700,000 dollars of Rescue Tools, so we have seen tremendous opportunity globally in that business. On the innovation front, the list of new products is just getting longer. At the August IFC Fire Show in Dallas, we introduced three new products in fire suppression.

The first is a new stainless steel pump called Stainless Max. It is the only stainless steel pump available in the marketplace in the world. It has already been selected for eight of the show trucks that will be at the large FDIC Fire Show next year in Indianapolis. We're the only company in the world that can offer a complete stainless system. Pumps, valves, and manifolds, and this provides significant durability improvements and corrosion resistance versus the traditional cast iron pumps and brass valves. The second new product was called the Command [phonetic] Master and this is an integrated display that can be used to display various functions and parameters by selecting the item to be displayed. This saves a lot of space in the vehicle and makes it easier to monitor and control the equipment in the truck. This is another first for the industry. The third new product was a programmable smart switch which can be programmed 27 different modes for integrating control of vehicle functions. Another first. We have three pump modules at the show, two installed in vehicles and one in our display booth that was subsequently delivered to a customer. We're working with several different OEMs, both small and large, and our current backlog for modules is over 40 units. The modules are something that we are uniquely positioned to engineer and deliver because of the breadth of the product lines that we have.

We are still in the early stages of modules so we'll probably see the backlog move around a little bit, up and down. But it represents a great long-term opportunity for both the OEMs and the company. On the Rescue Tool side, we introduced the mother of all cutters. The most powerful cutter in the world. It produces 150,000 pounds of cutting force and is the only tool that can cut large rebar for building rescue operations and also the high-strength posts in the new convertibles and SUVs. We also introduced a light and quiet portable power pack for the Rescue Tools. And this product in the previously introduced backpack power unit give the rescuer unprecedented mobility. In the Band-It business our automotive OEM business continues to grow. We've begun to realize a return for the investment we've made in the sales and application talent. Recently Band-It was selected for a new application that will require 16 million clamps annually when it reaches full production rate in two to three years. This single application from one OEM will create a double-digit growth for that entire business.

And Engineered Products sales from new applications and new products introduced since January of 2001 were about 18 percent of the total in the first nine months of 2003. This is up about 25 percent from the 2002 total year rate. And we expect this rate to increase in the coming quarters as recently introduced new products really start to gain some traction. Turning to the initiatives, our Six Sigma lean and Kaizen [phonetic] activity remains on tract across the company. Through the first nine months the savings are running about 75 percent ahead of last year. On global sourcing the savings through nine months have been about $12 million, a 50 percent increase over the same period in 2002. And as I have mentioned before, these initiatives are the key contractor to the gross margin expansion we've seen in the last several quarters. Our China initiative in August, we've assembled the first pumps in our new facility in Sujo. We now have pumps from two different business unit being assembled and a third unit will start later this quarter. Production for these units will ramp up in 2004. And additional business units will move product into China and we're very, very, pleased with the start-up of this operation and expanding our presence in China. As I mentioned in previous conference call, this is a wholly owned 65,000 square foot facility located near Shanghai, and we expect to assemble and export products U.S. and European markets as well as assembling products for China and the other Asian countries. Now looking at acquisitions, just a short update on the Sponsler integration, this was the June acquisition that I mentioned in the last conference call. We initially targeted two market areas, the global cryogenic market which builds on the domestic position in the market that Sponsler has, and the global petroleum market where Liquid Controls has a strong position.

We've made great progress in both areas and believe there's product bundling opportunity in both the cryo and the petroleum market. This integration I think is going very well. Classic Engineering, last month we acquired Classic. It's a $4 million business in Jacksonville. Classic engineers and manufactured standard and custom chemical feed systems for water, wastewater, chemical and general industrial markets. This allows us to sell systems rather than just components. The market demand is moving in this direction, and we feel this acquisition gives us a real head start and, in fact, driving the change in the marketplace. The integration is moving quickly here. Just as an example, this week there is a show in L.A. called Weftec [phonetic], it's a water technology show. We've had three classic systems in our booth, which generated a ton of excitement. And Classic is being run as part of our Pulsafeeder [phonetic] business. Turning to the outlook.

We're encouraged by the fact that that it is the fourth consecutive quarter of year of year-over-year base business sales increase, however, being a short cycle business our performance is totally dependent upon the incoming order rate for every month of the year. We enter every month with 50 to 60 percent of that month's sales in backlog, consequently we're dependent upon turnaround orders and we have limited visibility for the fourth quarter. As I mentioned in the press release, its important to remember that the second quarter tends to be our strongest quarter of the year. Particularly in the dispensing equipment businesses. The third and the fourth quarters tend to be our weakest, and in fact, in recent years, if you look at the data, the fourth quarter has been lower, in fact, in the third quarter. We're confident that we're working on the right things to position the company to deliver significantly improved performance when the economy picks up. So in summary, despite a weak August, we were able to generate improved results on a year-over-year basis. We have had four consecutive growth quarters of year-over-year Organic sales growth and five consecutive quarters of year-over-year earnings growth. The third quarter improvements were led by strength in the Dispensing Equipment and Engineered Product Groups where the global growth more than offset the domestic market weaknesses.

We continue to execute our strategy and we feel confident we're working on the right things. New products are beginning to flow, we're having great acceptance in the marketplaces that they serve. Our Pump Group has experienced some mix and buy issues in the last four quarters and we're closely focused on making improvements to get this business back up to its historic levels of profitability. I think we've made some good progress in the third quarter. Finally, we're encouraged by what we've seen for the last four quarters and we hope this trend continues. So with that I will open it up for questions.

Teresa, we're ready for the Q&A.

At this time we're ready to begin the formal question-and-answer session. If you would like ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question please press star two. Once again to ask a question, please press star one. One moment. Mike Shader of Robert W. Baird, you may ask your question.

Hi, it's Mike Schneider. Could you give us a sense of orders if you back out currency by each of the segments? And in particular, in the Other Engineered leaving aside the product line sale as well.

Do you want me to hand -- Yeah, you have the data. Mike, do you want it on a year-to-date bases?

For the quarter and then year-over-year. That's all I need.

I'm trying to work my way through this here. In terms of Pump businesss, in the third quarter, year-over-year, they - essentially was flat. 4 percent up in total and all that came from acquisitions. Dispensing equipment --

There was no currency benefit in there?

Unfortunately we do not push the currency back into the separate segments here.

Okay.

We only do it for, in total, for sales.

I can give it to you for sales but not for the orders, Mike.

Okay, well, then for the other two segments.

The other two segments, Dispensing Equipment total, well, it's obvious it's up 12 percent, and in terms of the Other Engineered Products this is third quarter over third quarter, up 6 percent in terms of, if you will, continuing businesses and that was offset by the divestiture of small business earlier this year and that accounted for a 7 percent decline.

So on a net basis it's a 1 percent decline in orders. If you look at it for the year-to-date, if you are interested in that, Pump Products down 1 percent, Acquisitions up 5 percent, giving us a Net 4, Dispensing Equipment is unadjusted, it's up 16.5 percent, Other Engineered Products up, if you will, base Engineered Products up 15 percent. Partially offset by the divestiture of 6 percent giving us a net 9 percent.

Okay and then with all of that in mind, just looking back for the last year, this is first negative order number you've had year-over-year, I think in the last five quarters. What -- what's unusual about this? Is it just the comparisons are getting modestly more difficult? Or was there something new this quarter that maybe hadn't been in the numbers before?

I guess my -- my reaction to that is that August was -- was uniquely different this year. As I mentioned, in the comments if you look at the month of July, it was almost dead on what the first six month average run rate on orders was. July looked just fine. Then August and the first week in September dropped down 10 or 11 percent below that run rate, and then it came back in the last three weeks of the September. So September was not quite up to the first six month average, but it was fairly close.

So, you know, it was -- it was a unique August, and I've heard this from many other people that I've talked to and some of the logistic companies. All experienced an extraordinarily weak August. But I think if you look back at our data, our monthly data, that stands out as being very unique.

And, again, looking at the orders by segment, it would aware that Pumps was hardest hit by that August decline?

I don't have that split out.

But just knowing that their orders were flat, ex acquisition.

I can't say that with absolute certainty without looking at the data. But, yeah, I would say generally it was a fairly broad impact.

And it was more than just the European August -- more than just the European August vacation schedule?

If you look historically, we went back and looked at historic August data, and it, you know, was similar to July, in some cases higher than July. So it was uniquely different, and, you know, Europe -- you know the historic European vacation period has always been there, so there's something different that went on this August.

Okay. I'll get back in line. Thank you.

Yep.

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

Good morning.

Hi, Scott.

Good afternoon. Let me ask Mike's question again, because I'm not sure I followed your answer, Wayne. On a year-over-year basis, in -- or orders for pumps the plus four was all acquisition? Right?

Yes.

FX was no effect?

No, I did -- I said FX is part of it, but we did not separately indicate what -- what factor it had on the overall pump increase. On the overall pump increase of 4 percent.

What we do is we -- on a detailed basis, we do go through and look at the impact of foreign exchange on sales, and assign it to the various three business groups. We don't do that to the groups, if you will, for orders. In total, for orders, I can give you this slant on it, Scott. In total, we talked about our orders being up year-over-year by 3 percent, and if you would look at the detail there, foreign currency in total, favorably impacted that by 3.7 percent across all -- all three segments.

Right.

The acquisitions and divestitures netted out to really about 1 percent, a little less than 1 percent, and base business orders Ex Currency and Ex Acquisitions and Divestitures was down 1.5 percent.

Okay, what I was really driving at here is -- okay. What I was really driving at here is actually the number that you do have then. I was more interested in the sales. So year-over-year sales in Pumps were up one, including currency, minus 4 on the base business.

Yeah, the reported number is up 1 percent. Base business sales, the same-store sales exclusive of Acquisitions and Currency were down four.

Got you. And same -- the number for Dispensing was essentially then flat, since that was the -- the plus 13 was all Currency?

No, 11 percent was Currency.

Plus two and then of the plus 14 base business sales, you know, excluding the Divestiture in Other Engineering, what portion of the plus 14 was Currency?

Currency was 3 percent and the base business was 11.

Good, okay. That's all I had. Thank you.

Okay.

Ned Armstrong of FBR and Company, you may ask your question.

Yes, what type of activity and opportunity are you seeing in the Acquisition market and how is that compared with what you've been seeing over the last few quarters?

I guess I would describe the -- the pipeline as pretty full. We're -- you know, we're constantly looking at things. I looked at a couple of opportunities last week on a trip and a couple of weeks before that, I looked at something.

So we're constantly looking at things that would compliment all three of our business groups. And I think the pricing has gotten more realistic. The true sellers of businesses, the pricing is more in line with reality. As we get further away from peak performance, people are a little more realistic if they truly want to sell a business.

All righty. The companies that you are seeing are they more or less small one or two product line type companies or are you starting to see any larger companies with multiple presences up for sale?

We've seen some larger ones that are multi industry.

And has that -- has that factor become more prevalent over the last few quarters?

Has it become more prevalent? Maybe a little bit. I wouldn't say there's a step function change. It's probably increased a little bit.

Okay. Thank you.

Jamie Cook of Credit Suisse First Boston, you may ask your question.

Hi, guys. My first question is: Could you quantify -- you mentioned that pension and insurance costs were higher in '03 versus '02. Could you quantify what you're expecting, and also if you could do the same for what you're expecting an increase in '04 versus '03?

In the last conference call, I mentioned that if you look at pension costs, insurance, extra audit fees, Sarbanes-Oxley, D&O insurance, all of those kind of noncontrollables, in a way, in our estimation gonna be somewhere between $1.5 and $2 million a quarter this year. Next year, we haven't -- we don't have a lot of visibility into it, but I would -- I mean, I would expect that to the extent there are any increases they would be -- they would be relatively modest and we're hopeful we can keep them flat.

And my next question is in terms of pricing, are you seeing that more in terms of a specific division? Are you getting better pricing on the new products that you are putting out?

We're getting pricing everywhere we can. Implicit in the -- the number one, number two niche strategy approach for the company is that you -- you have some pricing power. And so we -- I think it's fair to say that we probably adjusted prices to some greater or lesser extent in every business unit that we have.

And is it across old and new products or just the new?

No, it's -- it's a selective approach, so it's -- you know there's not a lot of blanket price increases that have been passed along; although, we have done a couple of those in a couple of our businesss, but generally, it's based on, you know, whether it is a new product, or whether it's spare parts or an existing product of what we think is reasonable in the marketplace.

Okay. And then just my last question, could you comment on -- I know you haven't put out a forecast for '04, but what are you -- does it appear that the customers are more optimistic about '04? I guess what are you hearing anecdotally?

We're so short cycle, that, to be honest, we have a hard time getting any meaningful anecdotal information for the next quarter.

Okay.

Let alone the next year.

Okay.

I think everyone reads what's in the press. I think everybody feels better now than what they did a quarter ago, but, you know, some of the things that we look at on the industrial side, you know, utilization rates haven't ticked up much at all. They have to go a ways before there will be any significant reinvestment. So it's -- I think it's -- it's a wait-and-see approach and what we have tried to do as a company is to aggressively move, no matter what the conditions are. So to really cultivate a -- an atmosphere of speed.

Okay. Great. Thank you very much.

You bet.

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

Thank you. A couple questions. First is, Dennis, as you look at Acquisitions today, I know you have a disciplined list of criteria, what on that list have been the most formidable obstacles to your making Acquisitions at this point?

I think it's probably the proper fit. You know, we've seen a lot of things. It's fit and pricing, I guess would probably be my input on that one off the top of my head. You know, we look for things that are adjacent to what we do.

You know, there are a lot of things that float through here that just don't have any -- any relevance to what we do and that's not -- that's not what we want -- that's not a direction we want to take. So, you know, the screen, I think is fairly tight but we do see a lot of opportunities and, you know, it's -- it's a matter of price and fit, as well as the all the other things on the -- on the list.

Okay. And -- and speaking of pricing, can you -- is there any way to quantify the price increases across the company that you have been able to affect over the past quarter?

We try to take a look at it once a year and it's not an exact science. The company's averaged probably a couple of percent historically. Last year, to the best of our ability, to estimate it, we thought it was about a -- about a push, about a net wash. I think we'll see -- if I had to guess -- and this is a pure guess, it will be somewhere between zero and 1 percent. That's a guess but I think it -- that's my gut feeling.

For '03.

I'm sorry?

For '03 you said.

Yeah. Yes.

Yeah. Okay. Finally, as we look at incremental margin for the company, and clearly as we've often discussed, we really don't have a sense of how IDEX can perform, the new IDEX, if you will, can perform in a very strong economic environment.

But if we were to take just the last four quarters, we've seen -- or the last just three quarters of this year, we saw a 4 percent incremental margin in 1Q, 8 percent in 2Q and 24 percent 3Q, clearly a positive trend, but what's your expectation in terms of overall incremental margin for the business once -- once the -- the economic improvement is realized?

Well, I think -- I think we'll probably see $.35 cents -- 30 to $.35 cents on the dollar pretax. We've got excess capacity everywhere. You know, simply because of Kaizen [phonetic], and Lean [inaudible], you create capacity every time you do one of those. We don't have a great deal of investment to make.

There would be some, certainly, direct labor, but, you know, not a lot of indirect people. We would not have to add back people at the rate at which we took them out, simply because of the -- the streamlining we have done in the business. So I would guess it would be in the $.35 cents on the dollar range.

Thanks and just one more quick one. In terms of your own capital spending, can you comment on how you can characterize your capital spending, maybe a mix between maintenance or growth spending and if you could split it geographically, where are you spending money?

Well, let me -- let me try to peel the skin of the onion away here a little bit. We are running -- I think we can run this company for at least the near term at about an 80 percent reinvestment ratio. So 80 percent of Depreciation. And the reason we can do that is that we have changed our make/buy structure. We've looked at -- we actually go through a little nine block examination of where we get competitive advantage and what we're good at.

And the things that are more commodity like, that don't give us a competitive advantage, those become the key targets for outsourcing, and in fact, some of those things we were doing before. And so we are not finding the need to invest in a lot of machine tools, selectively we are. We're doing things that do give us competitive advantage, but the bulk of our -- our P&E Expenditure right now is for Tooling for global sourcing. And we're also spending, to some extent on IT, as we get a common ERP system across the company and we do some reasonable, sensible things on eBusiness. So I think in total, an 80 percent reinvestment ratio is not a bad number to use. And I will tell you, we have not starved this company for investment at all. We are comfortably living with that, including IT investments.

Thank you, Dennis.

Charlie Brady of Hibernia Southcoast Capital, you may ask your question. Charlie Brady, your line is open.

All right, thanks, just a couple of questions on China specifically. You've got, I guess two lines running through there with a third. Can you tell us which -- which lines are running through there and at what point -- how many lines are you going to run through the Chinese Manufacturing Operation?

The -- we set up a singular facility to try to leverage the overhead so we would be as efficient as we know how to be and keep it under one roof. So the facility we have is mainly aimed at assembly and test for products from all of our units. The first units that have gone in are from Warren Rupp and Viking. We'll follow that with units from Gast, who's next in line, and the other business units.

We've got a Phase One, Phase Two, Phase Three plan that will take more and more product there for assembly and test. I expect that -- although we do have some engineers on the ground on sourcing activities, that we will add more capacity to our sourcing ability over there, and also add Engineering with time, and we've pursued one relationship with the university there for some technical work. So it's -- it's an expanding presence in the fullness of time, I think we'll have a presence to some greater on lesser extent for every one of our businesses.

Okay. Great. And then my next question would be on the opportunity you talked about with Band-It in the Automotive Sector for the clamps. You said it's a three to five-year ramp up. Is it a steady ramp up or is it fairly back-end loaded?

I believe it will be fairly steady, but we don't know that in total from the OEM. We'll have to see how it plays out. It will depend on how quickly they introduce it across which models.

Okay. That's it. Thank you very much.

You bet.

Greg McKosco of Lord Abbott, you may ask your question.

Yes, thank you. With regard to your discussion about short cycle businesses and some of the comments in the press release itself, would you say that -- that the short cycle nature of the overall business has -- the visibility has decreased sort of sequentially over the last year or two and so this ability is less and is it particularly less in the fourth quarter?

No. I -- I would say since I've been with the company, we have always had between 1.0 and 1.2 months of backlog on the books at any given time. I mean, it's -- it hasn't changed. The backlog picture has not changed. The, you know, roughly half of that is -- is shippable in the next 30 days. So we -- you know, for the last three plus years, on day one of a month, we have half of the projected sales in backlog for that month.

So we're dependent upon turnaround orders. We have deliberately worked hard to shorten cycle times to make ourselves more competitive. So we're able to deliver even faster than what we could three years ago, which I think is a good thing. It makes us more competitive. And I don't think it's necessarily affected our backlog in total, based on the numbers that we see. I think to the extent there's more uncertainty, it's -- it's a result of the world. I think the world is a little more uncertain today than it was three years ago but it's just a sign of the times. So I don't think we have necessarily any less visibility or any more, it's just that we're a very short cycle business.

And this being the end of the year, do you ever see sort of final filling of budgets by your customers? Does that affect your demand in the fourth quarter or at year-end?

It can, Greg and it really depends on whether there's budget left to be spent that if they don't spend it, they lose it, or whether it gets cut simply because somebody wants to cut it. That's what makes the fourth quarter perhaps a little bit more unpredictable. So we -- we see it going both ways where, my gosh, I have to spend this money, otherwise I will lose it or, gee, I had a budget yesterday and my boss cut it, and I don't any more.

And you have no sense of that at this point?

No, we don't. I wish I did.

Thank you.

Beth Klinger of McDonald Investments, you may ask your question.

This is Walt Liptak with McDonald. I got into the call late. In your discussion about China, you don't mention adding salespeople or marketing or developing the -- the China market. Is that part of your long-term plan in China?

Well, in fact we've already done that, Walt. We've consolidated our sales force in Asia on the Pump side. We did a lot of cross training. We've added a number of distributors and continue to do that. We've added sales people.

It just got looked at again, as to how do we leverage what we've got there, more and add more to it. So we're -- we view China as a very interesting end market. And certainly, we are -we've ramped up and we'll ramp up more salespeople as appropriate there to sell the stuff that we're making. We really have two wholly owned foreign enterprises there.

One -- I don't know if you know or not, but in order to sell in local currency, you need what is WOFE or a Wholly Owned Foreign Enterprise to be able to do business there, otherwise you are forced to do business in dollars, which is not very convenient. We have both our foreign trading WOFE as well as our manufacturing one, and that allows us to sell in R&B. We're going after that market because we think it is a pretty big and interesting market.

Okay good. And you may have also addressed this but is there any concern over protecting your technology? Typically you've had niche markets in North America and not a whole lot of competition from abroad. What type of steps do you take to make sure that that continues?

Well, I think that's a good question. There's -- I think there's several things that you do. The -- the first is on things that we assemble in China, that not everything will be sourced there. The things that we believe give us the real competitive advantage, we will kit and send over there for assembly.

So it gives us an element of protection that is the key to success of certain products. But I think it also lies in higher value add. That's why something like Classic Engineering is an important Acquisition because it takes to you a system level, where you need references, and it's not just buying a pump in a box, which is somewhat easier to follow. Also, the channel control is incredibly important. Someone could have a pump that's equally good or better than a Viking pump, but if they don't have the industrial distribution, they can't get it to market very well. So the channel, the distribution partners that we have are incredibly important.

So I would say it's innovation. It's higher level system engineering activity, it's keeping a very close control over -- over what gives you competitive advantage. And it's channel.

Okay. Thank you, Dennis.

Yeah.

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

Dennis, I don't know who I'm indulging here, you or me, but could you go through the Six Sigma exercise, tell us how many open projects and how many bells?

By pocket or demand, I had taken that out.

That was not my demand.

We'll follow up with you on that one. I haven't got it here. We'll send it to you. The numbers are pretty similar to what you have seen before. The activity continues to ramp up and move along but we'll get those numbers to you.

Okay. And I'm a Kaizen [phonetic] fan as well. I'm running these numbers through the model with the currency adjustment and I'm coming up with about a $3 million level of divestitures in the -- of product lines in the Other Engineer. Does that sound about right to you?

What period of time?

Year-over-year, this quarter.

Year-over-year, this quarter that would be reasonable.

That's -- yeah --

That's reasonable.

Has that been the case the last couple of quarters or will it be the case the next couple of quarters?

It was the case in the second quarter. It wasn't the case to any great extent in the first quarter. But it will, again, be present in the comparison on Q4.

Okay. Last question: Could you speak a little bit to, you know, obviously this Federal Signal Announcement last week was a real shocker for -- I think we all knew municipal spending was weakening and I certainly know that you guys are increasingly insulating yourself from that, but could you talk about order rate that you've seen, you know, over the last several weeks within that business? Have you seen sort of a Federal Signal effect here?

We -- I don't have the numbers here to give you a -- a domestic municipal budget breakout. And the Federal -- you know, the Federal Signal is a domestic company. And they are fire vehicle related, and certainly a portion of our business is domestic and fire and rescue vehicle related but we have a lot of things that are not. We are global. And the whole global beat has been very buoyant this year from a -- from a project kind of business where we have sold Rescue Tools, Rerailing equipment, hydraulic Rerailing equipment, think I mentioned that in prior calls. We are clearly the world leader in hydraulic Rerailing. It's probably, on, $10 million niche market but we own it! We own it globally.

So we've sold big projects in India, in Pakistan, Malaysia, Korea, Philippines, Thailand and others where these are global tenders and we have been very successful, both on the Rescue Tool side and on the Rerailing equipment. So our business is fundamentally different than Federal Signal. As far as -- if you look at only the domestic piece, I don't have the numbers here but let me give you some anecdotal evidence about why it's different. We introduced this module concept. And it's -- for the small OEMs, it is a no-brainer because it makes them -- it gives them the ability to be equivalent with the larger OEMs in terms of engineering capability. We provide to them a fully tested, slide-in module that has pumps, valves, push/pull control levers, gauges, customized control panel, engine speed governor, compressed air foam system if they want it, etcetera, etcetera, etcetera. Pretested, slide in place, there's cycle time on the production line is less, we deliver it just in time, and that has allowed us to take some share because we were not getting either the Pump or the Valve businesses in some cases. Where now we're getting both plus the additional value add of the module.

So we have -- we changed the dynamic a little bit. That is very, very difficult for our competitor to follow because they don't have the gauges. They don't have the electronics. They're not innovating in those areas. And we've now introduced the next generation of Stainless Steel Product that takes it even beyond what's available in the marketplace today. So I would argue that the innovation that we're doing, the bundling of product that we're doing, providing a better overall service to our OEMs, both large and small, clearly differentiates us and the numbers show it.

I might add, Scott, that just looking at our 2002 annual report, you would see on the grid that 55 percent of our Hydraulic sales -- and that would be the Rerailing, as well as the Rescue Tools would be to customers outside the United States. And also 25 percent of the total Fire Suppression sales for 2002 was outside the United States. So we really are a world player there. And as Dennis indicated, we deal in the states not only with Emergency One from Federal Signal but the other competitors they have as well.

The other thing I would add to it, you know, things like ESKE. You may recall our discussions of the Vehicle Multiplex System. We moved into buses.

And so every Thomas, Dennis, major metropolitan-style bus that goes off the assembly line has $5,000 of our components on it. We're at a rate of ten a month right now. And that's ramping up. We'll probably get to 15 or so and Thomas Dennis has some very big tenders out for some longer term bus orders so we are into some different end markets. We also started to work on what's called a -- they call it a Cut-Away van, but when you go into the airport and jump in the bus to go pick up your Avis car, that kind of van, we have one that's about to be delivered to Class One so we can begin the integration of ESEK into that. We've branched into other areas that are pure growth.

Understood. Last question if you don't mind my sneaking one last one in here. I know, Dennis, of your, you know, inability to give guidance with any type of comfort. Historically the fourth quarter versus third quarter is anywhere from $.05 to $.10 cents a share lower. Sometimes less than that, but, you know, let's -- maybe -- sometimes less than that but, you know, let's go $.03 to $.08 cents. Do you have any sense as to if you can get to the low end of that or do you kind of see it maybe being, you know, still kind of normal?

Well, the simple answer is no, I can't tell you because I don't know. And if I voiced an opinion, first question you would ask me, Scott, is why I felt that way.

No, I wouldn't. I just --

Yeah, you would! [ LAUGHTER ]

Well, maybe you're right.

No, look, I don't know. You know, it's -- you know, I would love to be able to tell you the answer. I've had the luxury of running a long cycle business in my career more than once and then I could tell you pretty closely what I think we could do, but in this case, it will depend a lot on what happens in December. Back to the question that Greg asked, you know, do you see people spending money because they are going to lose it or do you see people not spending money because they lost it? And I don't know what the answer is going to be.

Okay. All right. Thanks, guys.

You bet.

Charlie Brady, you may ask your question.

On the total debt to cap ratio, you've been paying down more debt, at some point what do you do with the cash other than to pay down debt? Buy back stock? Obviously more Acquisitions are in the pipeline. But, you know, if you can't find enough Acquisitions in the dollar amount size to do that, what exactly --any additional comments on what to do with the cash or how do you pay it down?

Well, we haven't -- we haven't gotten to the point where the Board has felt the need to discuss this, so I -- I can't tell you what their opinion would be. But I do believe that with the things that we've got in the pipeline that that's not going to become an issue.

Okay. And then just jumping back to the municipal question on the Federal Signal question, is it fair to say that you are obviously selling to competitors of Federal Signal and that what happens internally to them on a market share basis didn't read across to you because they are losing market shares with someone else, you would -- you know, it's invisible to you because you are selling to a competitor? Am I picking that up?

As a general statement, I would say that's true. We sell to everybody in the industry. We have higher market shares in some than others. With very a broad product range. So in some cases we -- we may have more of a share in some products areas than we do in E1. So there's no singular absolute answer, but by and large, you know, if they lose share to somebody else, we have a very good chance of getting it.

Okay. Thanks very much.

You bet.

At this time we have no questions.

Okay. Well, I would just like to thank everybody for participating in the call. I think we had a reasonably good quarter given the weakness in August, and we look forward to driving in some better results in the fourth quarter. So thanks very much for attending the call.