藝達思 (IEX) 2003 Q4 法說會逐字稿

Good afternoon, thank you for holding. (OPERATOR INSTRUCTIONS). I would like to turn the call over to your host today, Ms. Susan Fisher, the Director of Investor Relations at IDEX Corporation. Ma'am, you may begin.

Good afternoon, and thank you for joining us for our discussion of the IDEX fourth-quarter and full-year 2003 financial results. Earlier today, the Company issued a press release outlining our financial and operating performance for the three and twelve month periods ending December 31st. This press release can be accessed on our corporate Web site at www.IDEXcorp.com.

Joining me today from IDEX management are Dennis Williams, Chairman, President and Chief Executive Officer, Wayne Sayatovic, Senior VP of Finance and Chief Financial Officer and also Dominic Romeo, Vice President and Chief Financial Officer elect, who joined IDEX earlier this month.

The format for this call will include management's review of the quarter and year and then we will open the call for your questions. Before beginning, I would remind everyone that this call may contain forward-looking statements that are subject to the Safe Harbor language in today's press release and in our Company's filings with the SEC. With that, I will turn the call over to Dennis Williams. Dennis?

Thanks, Susan. Before proceeding with today's call, I would like to formally introduce Dominic Romeo, our new CFO. Dom started his career at Price Waterhouse, from there, he went to GE and then to AAR. He spent the last nine years at Allied Signal, which then became Honeywell. In his most recent job, up, he was CFO of Honeywell Aerospace, which is a $9 billion global business. Over the coming months, many of you will have a chance to meet Dom and I am sure you will be impressed by his integrity, and his skills and his ability to help propel IDEX to a higher level of performance. So Dom, welcome to the Company.

I would also like to formally thank Wayne for the many contributions he has made to IDEX and the predecessor company, Hooteye (ph) Industries. Wayne has been instrumental in the growth and financial success of IDEX. His 32 years of leadership in the financial organization have helped create the skills and ethical behavior that have been the foundation of this great company. So Wayne, thanks for your great leadership.

Thank you.

Let me now welcome everyone to the conference call. This is the agenda I will follow today -- I will start with fourth quarter results, then the full year results, some comments on the group -- the various groups -- progress report on our initiatives, some comments on Manfred Vetter, our latest acquisition and some brief comments on the outlook.

Starting with the fourth-quarter results, sales were up 6 percent from a year ago and flat compared with the third quarter. We are encouraged by the fifth consecutive quarter of year-over-year sales growth at our base businesses. We also saw a nice improvement in gross margins, operating margins, net income and earnings per share. In addition, orders in the public group base businesses rose both sequentially and year-over-year. As I go through the presentation, I will provide some additional details on all of these areas.

Looking first at orders in a little more detail, orders were down 3 percent year-over-year excluding currency translation and acquisitions, due primarily to the timing of two large orders in our dispensing business in the year ago period. Orders in the dispensing business tend to be somewhat lumpy, so the orders level in the fourth quarter did not pose an immediate concern to the business. The total monthly order rates were typical of the fourth quarter, where October is the highest month and both November and December our weaker due to the holiday periods. Orders in our pump group were up sequentially and year-over-year. Excluding acquisitions and currency translation, the pump group base business was up 2.4 percent year-over-year and 1.5 percent sequentially.

Looking at a little closer at just the industrial part of the pump group, base business orders were up 4.3 percent year-over-year, and 1.6 percent sequentially. The orders here are a combination of yearly blanket orders from OEMs, which are typical this time of year, and orders resulting from project activity with our distributors. It's, in our opinion, too early to call this a sustainable recovery, but is certainly a positive sign.

Turning to sales, sales at 198 million were up 6 percent year-over-year. Excluding currency and acquisitions and dispositions, sales were up 1 percent your year. That represents the fifth consecutive quarter of organic growth. For the pump group, base business sales are flat year-over-year, which is a positive trend versus the last few quarters where base business declined year-over-year. Looking at the foreign sales content, foreign sales, including the impact of foreign currency translation, were 44 percent of total sales, up 1 percentage point from the fourth quarter of 2002. In the fourth quarter, several of our businesses saw nice increases in sales. Hale and Fast and Fluid (ph) management in Europe led the way as they have throughout the year. With Hale, the gains have come from new products and a more global focus. We continue to bid on and win more global projects this year in rescue tools, re-railing equipment and fire suppression. These projects continue to offset the weaker municipal spending both domestically and in Europe. The increase at our 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 we talked about in the past in Europe. In both these businesses, we believe we have gained share throughout the year.

Looking next at margins -- in the fourth quarter, gross margins were 38.8 percent, that's up 130 basis points year-over-year. The gross margin expansion is the direct result of our global sourcing and operational excellence activities, plus our ability to maintain or slightly increase price levels. This is the eighth consecutive quarter of year-over-year gross margin increases. In the fourth quarter, SG&A was 24.6 percent, down 90 basis points from a year ago. The year ago period, however, was abnormally high due some non-repeating onetime expenses that were referenced in the press release. The SG&A in the fourth quarter was about the average that we saw in 2002, and slightly below the 2003 average.

Turning to operating margins, 14.1 percent operating margin is the highest fourth-quarter margin we have achieved since 2000, and represents a 200 basis point increase year-over-year. Looking at net income and EPS, net income increased 33 percent on a year-over-year basis to 16.2 million. Our EPS of 48 cents increased 11 cents year-over-year. Including the 48 cents is a one cent foreign currency exchange gain specifically related to the Vetter acquisition. We pointed that out in the press release, as I am sure you noted. The fourth-quarter free cash flow was 14.7 million, which represents a 25 percent decrease year-over-year. However, about 9 million of funding was added to the pension plans during the quarter. So a comparable free funds flow would have been 24 million, which is one and a half times net income and a 20 percent increase year-over-year on a comparable basis. Our debt to total capitalization was 23 percent at quarter end, an improvement of 9 points from one year ago. And this represents absolutely the strongest financial position in company history.

So a shorthand comparison for the fourth-quarter year-over-year performance would be orders up 3 percent, sales up 6, net income up 33 percent, earnings per share up 30 percent and adjusted free cash flow, up 20 percent. We are very pleased with our fourth-quarter performance.

Turning to the full year comparison, I will only highlight a few points since you have all the data in the press release. Excluding acquisitions and foreign exchange, we produced a 1 percent increase in base business sales. Domestic sales were up 1 percent while foreign sales net of foreign currency translation grew 8 percent. Foreign sales, including the impact of foreign currency, were 45 percent versus 41 percent last year. Gross margins increased 90 basis points to 38.8 percent. R&D expense, which is accounted for in gross margins, increased 50 basis points to a total of 2.2 percent of sales. These results are a direct product of the strategy we put in place to drive operational excellence and increase R&D spending to propel and drive innovation in the Company. R&D has more than doubled since the year 2000. SG&A increased 60 basis points to 25 percent. Virtually all of the increase are the costs associated with the higher D&O insurance, Sarbanes-Oxley implementation, higher audit fees and pension plans. Throughout the year, we carefully managed the remaining SG&A by improving the efficiency in our general administrative area, while making deliberate reinvestment to drive organic growth.

Free cash flow of 91.4 million or 1.5 times net income is 1 percent higher than last year's record. However, the free cash flow, if you adjust it for the higher pension contribution, the free cash flow would have been approximately 108 million, which is 1.7 times net income and represents a 20 percent increase over last year.

Now let's take a look at the groups, and we will start with pumps. Pumps represent 57 percent of sales and 55 percent of income. I will give three comparisons. The first is the sequential Q4 to Q3, then the Q4 year-over-year and then the full-year comparison. First, sequential -- orders up 3 percent, sales up 2, operating income, up 7 and operating margin, 17 percent versus 16.2. In the year-over-year comparison, orders up 9, sales up 6, operating income up 18, and again, 17 percent versus the 15.3 a year ago. For the full year, orders up 5, sales up 5, operating income down 2, and 15.4 percent operating margin versus 16.5 a year ago. Sequentially, we saw base business orders improve 1.5 percent, and nearly unchanged base business sales. Operating income improved 7 percent, operating margins improved 80 basis points to 17. In the year-over-year quarterly comparison, base business orders increased 2.4 percent and again, base business sales were unchanged. Operating income increased 18.3 percent and the operating margins improved 170 basis points. The full-year comparison base business orders and sales were down 2 percent; total orders and sales were up 5; and the operating margins dropped to 110 basis points. The decline in operating margin is due to a number of factors, including new product development, additional sales and marketing resources we put in the business, ERP implementation in several of the units and reduced volume in some of our more profitable base businesses.

We are encouraged by the fourth quarter performance in the pump group, but it's too early to declare this as a long-awaited recovery. The increase in orders is consistent with the published industry utilization rates that have been slowly increasing. I suspect many of you have seen those rates. They have been tending upwards.

New products are starting to flow from the very pump companies. I mentioned several in the last conference call. And I will cover a view of these just to give you some highlights and some updates. In Pulsafeeder, the new hypo pump, as you recall, this is a sodium hyperchloride pump from municipal water treatment. It is a real innovation. It continues to get great reviews from the initial users. It is a patented design, offers significant advantages over the traditional hose type pump and the normal diaphragm pump. We exceeded our 2003 forecast by about 35 percent. We have an increasing number of pumps in the quotation cycle. It sells for around $4000, as you may recall. This hypo pump won the Frost & Sullivan 2003 product innovation award for positive displacement pumps. We are very proud of that.

Classic engineering, a recent acquisition, is off to a great start. Their capability is allowing Pulsafeeder to be very aggressive in selling systems rather than just pumps. In the last quarter of 2003, which is the first quarter the Company has been with us, Classic finished well ahead of their plan on orders, sales and profitability.

Liquid controls, a great success and a complete IDEX product offering for LPG. It's a cork and pump an LC meter and an LC register. The largest proof of the acceptance of this concept is the exclusive agreement we have reached with a leading LPG marketer. And we see similar packaging opportunities in refined petroleum and also in cryogenics. The Sponsler integration is going well -- weights and measures testing for their meter for the petroleum market should be completed in the next two to three weeks, and that opens up a new market for that turbine flowmeter. Rheodyne continued great progress on the dosing unit for hot tubs. Beta tests continue to do well, and production should start to ramp up by midyear this year. Viking, the industrial load pump, the introduction is going well. Some interesting new OEM and industrial applications that range from synthetic rubber and polymers to paper coatings to believe it or not, dog food. So some interesting things going on there with that new product. The all-purpose gear pump, first prime (ph) size was introduced on schedule. And we have a lot of interest from OEMs on that pump.

The micropump one I did not mention in the last call, we have got prototype pumps in the new OEM application that are working very well. We can't talk much about it. But if successful, this will be the highest production rate pump in the history of the company. So a very exciting opportunity there for a micropump. This is just a sampling of the new product activity across the pump group. We're closely tracking the sale of new products and applications in all the three groups. For 2003, about 10 percent of the pump-group sales are the result of new products or new applications introduced since January 2001.

Turning now to dispensing equipment, versus sequential comparisons, orders down to 11 percent, sales down 3, operating income down 13 and the operating margin 14.4 percent versus 16. Year-over-year for the quarter, (technical difficulty) 23 percent, sales up 5, operating income up 79, operating margin 14.4 versus 8.4 a year ago. For the full year, orders up 6, sales up 15, operating income up 38, operating margin 16.2 versus 13.4. In the fourth quarter, we had the expected sequential decline in orders and sales due to the seasonality of the paint business. In the fourth quarter year-over-year comparison, we experienced a decline in orders mainly due to the timing as I mentioned earlier of two large orders in the year ago period. In the year ago quarterly comparison -- in the year-over-year -- I am sorry -- quarterly comparison, we had a 79 percent increase in operating margin on 5 percent higher sales, and a 600 basis point improvement in operating margin percentage. For the full year, we produced a 38 percent increase in operating margin on 15 percent higher sales. Currency accounted for 13 percent of the sales increase. And the operating margin increased 280 basis points. We continue to work aggressively in the new personal care product dispensers. In the hair coloring segment, Sempra, the German company we have been working with, continues to take additional units and expand their presence in Europe. There is additional testing work going on in Europe and in the U.S. also, by other companies. I continue to believe we will see increased production for this market segment in 2004. In the cosmetics segment, we have had two machines in what I would call beta tests in the Chicago area. Both have been in cooperation with a company called Reflect, True Custom Beauty. If you want more information about the Company, if you go to reflect.com, you'll find an interesting company that does custom beauty products. Fluid management's personal care product line under the brand name Infina is offering new cosmetic manufacturers, like Reflect, as well as traditional off-the-shelf cosmetic manufacturers, the ability to bring completely customized products to the retail store. On the third floor of Chicago's signature Marshall Fields department store, Reflect offers their customized cosmetic products without a wait. A key element of the product offering is their liquid foundation products, which centered around fluid management's Infina dispensing and mixing system produce personally customized foundation by a kiosk-style touchscreen interface. The final product is dispensed, mixed, bottled and labeled in a matter of minutes. The software interface is easy enough for a customer to use on their own, or with the assistance of a Reflect cosmetic specialist. The Infina system can be applied to any type of cosmetic products, such a lipstick, eyeshadow and nail polish, as well as personal care products, like lotions, sunscreen and soaps. Future possibilities of the Infina system include beverage dispensing, and laboratory dispensing and mixing. We continue to work with all the major players in the cosmetic market and are optimistic this idea of mass customization will accelerate.

On the paint side of the business, we have shipped several of what we call an all-in-one machine. It's pretty exciting. This is a machine that dispenses both the base tint and the coloring, thus eliminating the need for shelves and shelves of base tint in the store. The base is dispensed from a central large tank. And so we basically create a paint factory in the store. We have worked with micro-blend technologies to develop this machine. Several of the all-in-one machines are up and running in actual retail operations, and we also have received several more orders for new machines. Thus far, the equipment has performed well and the paint and color has exceeded the expectations of the users and the retailers. This approach creates shelf space, greater productivity in the department, fresher paints and more accurate tints. We believe this concept will gain some pretty significant acceptance across the industry.

In 2003, about 34 percent of the sales from the dispensing group were from new applications, new regions, new products introduced since January of '01. So we are seeing a real benefit from the innovation that's going on in this group.

Turning now to our engineered products, 23 percent of sales, 25 percent of income. Sequential comparison, orders flat to roughly a half percent. Sales down 2 percent, operating income down 3 percent, and the operating margin, 18.5 versus 18.7. The year-over-year comparison for the quarter, orders, up 9, sales up 4, operating income up 33, operating margin 18.5 versus 14.5. And the full year comparison, orders and sales both up 9 percent, operating income up 29. And the operating margin, 17.8 versus 15.1 for 2002. If the reported year-over-year orders and sales comparisons are adjusted for the sale of the Scienfix (ph) product line that we've talked about earlier in the year, the results are even better. For the fourth quarter, on an adjusted basis, orders were up 12 percent and sales up 7. For the full year, orders and sales were up 10 percent. We continue to see significant increases in orders and sales in the Hale business unit. Both the fire suppression and hydraulic rescue tool segments in the U.S. and Europe are participating. But the strongest performance is in rescue tools. The success is mainly due to new product innovation and a more global focus.

A weakness in the U.S. and European municipal spending has been more than offset with global projects in India, Pakistan, Indonesia, Korea, the Philippines, Malaysia and others. Our aggressive global focus is allowing us to see and win more of these global tenders. In this month alone, we received a large follow-on order for re-railing equipment from Korea. They made their initial purchase for re-railing equipment in 2002. We continue to win the vast majority of the re-railing opportunities around the world. So we really dominate that niche. Pump kits and modules continue to build momentum. We have talked about this for a while, but in 2003, we shipped 62 modules or kits. Currently, we have 49 units in backlog, and believe we will more than double the 2003 sales in 2004. We're currently working with 18 different OEMs. So this concept is wide acceptance. In 2003, the systems approach allowed us to gain share in pumps and valves, and we expect this trend will continue in 2004. As I mentioned in the last conference call, we also introduced smart programmable switches. We're currently installing this system in what is commonly called the cutaway van. This is the typical van you would see for rental car companies at airports. That work should be completed later this quarter. And just to put it in perspective, there are about 10,000 units built annually in the U.S. with this type of van. So there is very strong interest there. There's also very strong interest in the switches in the recreational boating industry.

On rescue tools, we talked about the big cutter that we introduced, the so-called mother of all cutters. It's selling very, very well, 109 units shipped to date, 76 in backlog and many, many more expected in 2004.

Band-It continues to grow the automotive business. It also has some new applications in the recreational boating area, so it's an interesting market for them, as well. In engineered products, sales from new applications and new products introduced since January 2001 were about 19 percent of the total in 2003. We expect this rate to increase in the coming quarters, as these recently introduced new products really start to gain some traction.

Turning to the initiatives, our Six Sigma lean and Kaizen activity remains on track across the Company. For the full year, savings increased to 15 million, which was a 33 percent increase over 2002. On global sourcing, the savings were 15.8 million, 34 percent increase over 2002. These initiatives are key contributors to the gross margin expansion we had seen in the last eight quarters. A key part of our Six Sigma activity is also to focus on what is critical to the customer, CTCs, in our terminology. On-time delivery is one of these metrics, where we continue to see improvement. In 2003, the average On-time delivery improved 4 percent across the Company. So our customers are feeling the difference.

The China initiative, our presence is growing in China, as we ramp up production for various products in Sujo (ph). Recently, we found our capability in China has become a very effective selling tool for OEMs who are moving their production to Asia. Our presence there, coupled with some superior product features, is allowing us to capture a major OEM from one of our competitors. We are very, very pleased with the progress of Sujo.

Looking now at acquisitions, earlier this month, we acquired Manfred Vetter in Germany. This is really a terrific Company. Vetter is the world leader in the design and manufacture of pneumatic products for rescue, disaster recovery, environmental protection and industrial maintenance. Historically, Lukas had sold pneumatic products. But this acquisition puts us in the clear leadership position for these types of products in the traditional fire, rescue, disaster recovery markets. It also opens the door to some new military, industrial and municipal markets with a wide range of really innovative products. Our knowledge of the markets and the strong leadership we have at Lukas in Germany should allow us to integrate this business very, very easily and smoothly. Our global reach and global mindset should allow us to grow that business very nicely. So we are very, very pleased to have Vetter in the IDEX family of businesses.

Turning to the outlook, we are encouraged by the fact that this was the fifth quarter of year-over-year organic growth in our base businesses. It was modest growth. But the economic conditions are slightly improved. We are also encouraged by the pump-group orders in the fourth quarter. As I mentioned earlier, it's too early to declare victory and call this a sustainable recovery. As a short cycle business, we are unable to provide guidance for this quarter or for the year. We are totally dependent on the daily order rates for turnaround business in each and every one of our business units, every month of the year. At this time, we would not expect any deviation from the historic relative quarterly performance, being that the second quarter is our strong this quarter. In the past two years, however, the earnings in the first quarter have been somewhat lower than the third quarter. We remain confident our strategy is working and we are well positioned to deliver improved results, as the economy improves.

So in summary, we are pleased with our performance in 2003 and the continuation of some trends that we saw start in 2002. Five consecutive quarters of base business growth, eight consecutive quarters of year-over-year gross margin improvement. Six consecutive quarters of year-over-year earnings growth. Record free cash flow, while contributing an incremental 17 million to improve the funded status of our pension plan. Increased R&D spending to 2.2 percent of sales. Increasing flow of new and exciting products across the Company. And the strongest balance sheet in the history of the Company. The strategy we put in place in 2001 is truly delivering results. We are encouraged by the somewhat improved economic climate and the first quarter of year-over-year orders growth in pumps in several quarters. We're hopeful that that trend will continue. I will now open it for questions.

(OPERATOR INSTRUCTIONS). Alexander Paris, Barrington Research Assoc.

Nice quarter.

Thank you.

Couple questions, you mentioned a number of pension fund contributions. Are you up to funded now so you don't have to make as many pension fund contributions in 2004?

Clearly, the Company was affected as many other companies were over the last couple of years because of the decline in the discount rate and plus the decline in the actual return on investments. As a result, we entered the year 2003 with an overall funded status across all of our plans of around 55 percent. And on the defined benefit plans, they were about 65 percent. As a result of the additional contributions that Dennis spoke of, we are increasing the overall funding to 75 percent worldwide in U.S. plans to 91 percent. So that's a long-winded answer. But we have taken the steps we think are necessary to really get our pension plans back where they ought to be on a go-ahead basis. So we would not expect to have significant contributions out of the ordinary in the 2004 year.

Secondly, your program to expand the markets that you address, part of that is acquisitions, which you have made one already this year and higher new product introduction, I presume. That 2.2 percent of R&D, is that going to continue to rise as a percentage?

I think it will, Alex. If you recall back in 2000, it was 1 percent, which clearly isn't enough. So we have more than doubled it now to 2.2. The right number for the Company is probably between 3 and 4 percent, would be my guess. But it's really more dictated by the idea that exists in the business. So our intention is to continue driving the strategy, drive gross margins, let some drop through to operating margin, but also re-invest some back in to continue to build the portfolio of new products.

One other question -- again, this drive to expand your our markets, it sounds like it is doing very well and getting you into some -- a lot of different markets. I don't know if you sell directly to their retail for these color management and so forth, or I guess you probably sell through OEMs, primarily, right?

We would sell, presumably it will be similar to what it is in the paint industry, ultimately, where in that case, we sell to paint manufacturers or in the cosmetic case, to the cosmetic companies. So we have large retailers buy direct. So we do have Home Depot and Lowe's and things like that. And I would expect there would be some larger retail outlets that would by direct. But that's yet to be played out. It really, initially, with Sempra, it has been through Sempra to the salons. So that's the initial model that's being followed.

I guess what I'm getting at, with the changing businesses, if you look back at your last cyclical peak in gross margins and operating margins, ignoring your operations excellence gains and so forth, with all things being equal, would margins still tend to be the same at the next cyclical peak?

I think if you fixed the mix in the Company, recognizing we do have mixed differences -- we have made some acquisitions. But if you fix a few of the critical things like mix, I believe that the company can get back to the 22 percent EBITDA levels, maybe exceed it. It's a question of volume. I'm not sure if that answers your question. If it doesn't --

What I'm saying is, if there is not enough of a drastic change in your overall markets that it would tend to, all things being equal, change your margins at the point when your sales are more optimal?

It's not going to be a first order of consideration, I don't believe.

One other really small question, this all-in-one paint mixing and product that you have -- does that include a paint matching instrument, what they call photo spectrometers?

Most of the retailers that have photo spectrometers actually buy those on their own.

Alexander Paris; So that wouldn't be a part of this?

No, they tend to interface with our equipment, so we work with the photo spectrometer companies and then with the retailer. Not everybody uses them, but those that do, it's not something we sell today.

Scott Graham, Bear Stearns.

A couple of questions -- I think you know the one I always ask, if you can -- I know you did it for dispensing but I missed it -- but if you can break out the currency implications by segment for sales, I would appreciate it.

We did on pumps. Hold on a second. In pumps, from an order standpoint, sequential, up 1.5. These are base business numbers. Sales, more or less flat. And year-over-year for the quarter, base business orders up 2.4 percent, sales flat. And for the year, orders down 2 and sales down 2. That's on pumps.

I only need the year-over-year for the quarter Dennis, just to save some time.

In dispensing equipment, orders would be down about 30 percent, and sales down about six. I think you have got the other one, right?

The other engineered, I have the numbers x-divestitures, but I don't have it, divestitures and x-FX.

Fourth quarter year-over-year orders would be up 12, sales up 7.

So no FX implications on that?

It pretty well balances off the disposition of Scienfix.

Could you also tell us the open projects at year-end?

I haven't got that here, but we can get that for you.

Okay, lastly on the global sourcing, where I think for the full year, you did about 25 -- a little more of 25 -- percent on each PO, what is the sustainability of that? I assume it's going to continue to drift lower. But how much lower will it drift, do you think, in 2004? And what is the dollar value of the POs you are going to put into the system in '04?

I can't answer the dollar value because it's going to depend on what parts we outsource and what suppliers we find and how many components we resource. We have actually had some success in resourcing from one supplier to another to actually provide some incremental savings. It really tends to -- it depends on the mix of what you are outsourcing. Let me just give you an example. On machine cast-iron, the savings can be as high as 50 to 60 percent. In motors, it might be 5 or 10 percent. So it really depends on the mix of things that you are outsourcing that ultimately dictate the average savings. So the average is kind of a misleading number in a way. Because the range is from 5 to 10 to 60 percent. As far as the sustainability, there is more things. We've got a lot of things on trial right now. So there is more to be done there.

Okay great. Thanks for your time, and welcome aboard, Dominic.

Jamie Cook, Credit Suisse First Boston.

My first question is if you could talk about any trends you are seeing by your major end markets, whether there is any differences, for example, than a couple of months ago? My second question is in particular on the pump side of the business, has there been any change of mix versus parts business -- versus original equipment or original orders?

As far as the end markets, probably the biggest -- the most significant change we saw in the fourth quarter was in fact, in the pump area, where as I mentioned, a couple of times, we did see positive sequential and year-over-year growth of our base businesses. And it's been several quarters since we have seen that. Obviously, the sales also picked up, so the orders in sales on the industrial pump side is probably the biggest thing I would point at, as far as end-market changes. And if you look at the government-reported utilization percentages for the various industries and segments, all of them -- I think it's fair to say, all of the relevant ones for us are trending up. They are not hockey sticks, but they are trending in the right direction. So that's probably the biggest end-market change. Paints and coatings remains quite strong for us. It's a seasonal business. Fire and rescue, what we have seen before of global projects offsetting domestic weakness remains the same. So we still see a lot of global opportunities there and are aggressively going after them. So I would say really not much change in those segments at all. I would say probably the big news is on the pump side. And it's what I would call one in a row. We have to see what this quarter produces and what the next quarter produces before you want to declare victory and say, by gosh, the thing has really changed directions here. So it's encouraging. The anecdotal things from our OEMs and distributors is positive, distributors saying we are quoting more project activity and starting to get some of those to close.

How is the distributor inventory level? If there is a pick-up, do they have enough inventory? Or do you think you would see a pretty rapid pick-up?

I think the inventory levels are at a historic low. No one has built inventory yet. So we have worked hard with our channel partners to shorten cycle time. So no doubt, there will be some pick-up in inventory. But frankly, we are not banking on that.

As far as your other question on the split between spare parts and OEM or original pumps, I guess it's fair to say we have not detected any significant difference there. We have seen consistent, with the pump change, some pick-up in the fourth quarter year-over-year with some of our more profitable base businesses. And you see that reflected in the margin improvement. So we did see a little pickup there, in total. I can't give you a split. To the best of my knowledge, there is no big real change between spare parts and whole components.

Lastly, if you could talk about your acquisition pipeline for 2004, like you said, your debt to capital is 23 percent, which is pretty conservative. Do you feel the pipeline is pretty full for 2004? Or would you consider raising it, raising your dividend, or a share buyback or something like that?

The pipeline is pretty full at this point. I think it's fair to say everyone is saying the same thing. There are more targets that are popping up everyday.

What about big versus small?

We have looked at some fairly sizable things that we could certainly afford to do. But we obviously have not done one of those yet. But we are looking at big, we are looking at medium-sized kinds of things. We've even looked at a few really small ones that are strategically important to us for one reason or another. So I would say that the pipeline is relatively full -- more full than it was six months ago or certainly a year ago. As far as the dividend, the Board does contemplate dividend changes yearly, and they will do so again this year. They always do. And I can't pre-judge what decision they will take on that. And, did I get all your questions?

Yes, I think I am all set. Thank you, very much.

Charlie Brady, Hibernia Southcoast capital.

Can you guys discuss a little bit of the pricing environment in the quarter, and I get more specifically, has there been any improvement in the printing sequentially as you went through? Or is about flattish to where it was three or four months ago?

I haven't got any hard data on the sequential comparison on pricing. But my gut feel is that there is not much of a change. We have put through price increases in the majority of our businesses -- I can't say all, but I think in maybe nearly all of our businesses that either have taken effect for this year, or will take effect. That's part of what we have done in the past. In 2002, I would say, as near as I can recall, we were about a wash. In 2003, we have not formally looked at the data yet. But I would be surprised if it's anything other than flat to slightly up, would be my guess. I think we have had a more favorable pricing environment in '03 than we did in '02. Given the fact that '02, to the best of our ability to calculate it, was flattish, I would say we would be flat to slightly up.

On the back of Jamie's question, on the acquisition pipeline, when you look at pricing of deals out there given the pick-up in the overall economy, and I guess particularly on the large size, are you seeing any significant ramp up? I imagine some of the prices desired out there have gone up, but I wonder if it's gone up significantly?

I think it has trended up. There is not a lot of data, not a lot of deals have been done. So my guess is that it's trended up a little bit. There is -- anytime you look at a book, it always has a hockey stick forecast in it, so that people won't price off a hockey stick. But if you price it off trailing 12 months, I think there has been some uptick. The financial sponsors have got a lot of money and they are willing to pay up for some things. And corporate buyers seem to be more inclined to pay a good price for things. So I would say it's probably a little bit higher pricing environment, generally.

But in reference to just you going out and IDEX going out and talking to people about working towards -- to the end of some deal, are you finding people more reluctant to take a price that you are willing to offer to buy them, because there are other competitors out there who are willing to pay more? Is it tougher for you to compete on deals now because of your pricing discipline?

I wouldn't say that it is, no. We look at things that, in many cases, are pretty niche, and not a lot of other companies are looking at. For example, Vetter, there was probably one other serious buyer. In the final analysis, there were other people in the game. But in the final analysis, there was probably one other serious buyer and they were not strategic. So we think the analysis that we would do makes that business worth more to us, and so we are able to be successful there. Time will tell. As we go through this year, I think this could be a fairly dynamic year. And I think we will be able to make acquisitions at historic levels of trailing 12-month EBITDA that we have been able to do in the past.

Switching gears for a second, on the gross margins as far as when you look at Six Sigma and the other initiatives you have taken on, how far sort of through -- you're not done with those, I suppose, but how much more can it really go? Is there a way you can gauge how far you are from beginning to end to where you are in the cycle, taking more cost out of the business?

It's really hard --

Has it been done across all business units or are there some units that you have not had time to get down to it yet, but at least sort of on the calendar to do at some point?

We have it kicked off in every business. We kicked it off across the company back in '01. So it's going in every business; some businesses are further along than others (ph). I will not (ph) try to characterize the total company. If it's a nine-inning game, maybe we are in the fourth inning or fifth inning maybe, somewhere around there. And like you said, you are never really done, it's the whole notion of continuous improvement. You still get incrementally, gains, year-over-year. In addition, every time we make an acquisition, that's fertile ground. And so, with Sponsler, we have had Kaizen events. And once we get comfortable with Kaizen, then we will move into Six Sigma. What we found makes the most sense is use Kaizen and Lean initially. That allows you to get a lot of non-value added stuff out of the way and get normal processes in place that are repeatable, and start to generate some data and then you can go in and start to use the Six Sigma methodology on it. So there is a lot more to do there. There always is. I think if you talk with some of the people that have worked with companies doing Six Sigma, their estimate of the cost of poor quality is a number like 30 percent of sales. It's a huge number, it's more than anyone would ever add up, because it's varied in all sorts of different places through the company. All sorts of re-work, everyone in the company. So it's a pretty big pot to start dipping into. So I think there is a lot more there to be done.

In China, you talked about producing product in China to export back to North America. Can you quantify that at all? Where you are on that?

We are ramping up. I think December sales were -- to guess, maybe $50,000. So we are just ramping up. That number will expand pretty dramatically next year, as we put in the kind of phase two products and some of the bigger production volume associated with this one OEM. So the numbers will increase pretty dramatically.

To what level, do you think? Do you have an idea?

We have done disclosed any numbers There. In to be honest, that plan is evolving.

Ned Armstrong, FBR.

My question regards your debt ratio. In absence of funding an acquisition via debt, would you be wanting to reduce your debt even further than it's been reduced over the past few years?

No, I don't think so.

Okay. And with regard to acquisitions, again, are you focusing on -- are you seeing more in any one particular segment than the other? Or more in Europe versus the U.S. versus Asia? Can you give a little bit more color there?

I would say that the majority tend to be in the U.S. and Europe. There are a couple of Asian things that are interesting. But the majority being U.S. and Europe. As far as the parts of the business, we are looking for fits everywhere, all three (ph) of the groups. So we are not trying to bias and one way or the other. And you also cannot plan these things so they are somewhat lumpy. But it's pretty active and we have looked to some things that are -- we have looked at a couple of larger ones that would be, say, less adjacent, still akin to what we do bit maybe not as adjacent as some of the other things that we have done as we contemplate how we break this company out.

Would the common denominator there be more of a customer base or product technology, when you say kind of adjacent?

It could be both or either. We don't want to get too far afield from what we do and what we know. But there is a lot of adjacent areas that are interesting.

Walt Liptak, McDonald Investments.

My question is to drill down a little bit more into the sectors. Can you talk a little bit more specifically about some of your larger sectors, chemical, oil and gas, health and paper, food processing, and which ones in the pump segment of the business are you seeing a pick-up, or are things still a little bit sluggish?

I don't have the kind of visibility that either I would like to have or you would like to have. When you sell through distribution, you don't get that kind of clarity. I can tell you, if you look at the government published indices of utilization, they have ticked up; general industrial has picked up; chemical processing has picked up. So all of them are pointed in the right direction. Like I said before, they are not hockey sticks but they are positive trends and have been for a few quarters.

Maybe another question, 2004 CAPEX and D&A?

I would expect the depreciation and amortization to be very much in line with what we experienced in 2003. In terms of capital investment, I would think a good planning number at this point is probably $24 million.

Where is the 4 million increase going?

Some of it is carryover from the 2003 year. Some of it has to do with newer acquisitions as well.

Okay. And then the investment you are making into new products -- this might be a difficult question -- can you talk about maybe in aggregate, the market opportunity and what kind of incremental revenue you might see in 2004?

The market opportunity, let's just start with hair colorant or the personal care area -- there are no estimates the anyone has because we are creating a market. I can tell you if it goes, it's huge. But I cannot tell you if it will go or not. I could give you probably a $1 billion number or zero on that one because it really depends. It depends on the acceptance of it. Reflect has had terrific success, both in the Fields store downtown, as well as their own little cubby hole in North (ph) plaza out here not too far from our headquarters, where they are using the equipment daily, and dispensing custom product that is really starting to get people's attention. So that market could be absolutely gang-busters. We think it has a strong potential, that's why we are investing in it and spending the time we are to develop the very specific products that they need for the various products that they want to dispense.

Let me ask the question this way then -- is there a return metric that you use on new product investment?

Certainly.

Can you tell us what that is?

We have not disclosed that.

Wendy Caplan, Wachovia.

A couple of questions, to follow-up on this reinvestment in the business. You mentioned that you are at 2.2 percent of sales in R&D, which doesn't seem like a particularly impressive number. And you talked about going to 4, which is certainly a lot better. Can you let us know, Dennis, kind of where in the business you expect to spend at? Is it sort of across the board, or are there certain opportunities that appear to be greater than others? I am guessing the answer is more in the dispensing area, perhaps. But if you could answer that for us.

We are spending it across the board. First, let me start with the premise that 2.2 isn't a shocking number. It isn't, but when you consider it was one percent in 2000, I think we have made a lot of progress. And we have also been successful in converting what I would call sustaining engineering, product maintenance kind of engineering by using some of the tools to make more of that productive engineering in the R&D sense. So we have been able to ramp up to the 2.2 percent level. Like I said before, I think 3 to 4 percent may be the right number, but it's going to be dependent upon the ideas that we have and what we can afford to do. So it will go up, there is no question in my mind it will go up. We're spending across the board. There are always areas that are more interesting than others. We have spent a fair amount of the dispensing business, as we completely overhauled that product area. We spent a fair amount in our fire and rescue business, where the flow of new products is really astounding, what that business is doing, as well as things like the module, which is arguably, not a huge piece of engineering per say, but it's finding a system solution for a market that is never had one before. We have also spent a fair amount in our pump units, as we roll over some of the new products in that area, and move more towards solutions. So we are spending across the board, and we are driving every business to do the market re-definitions, to look at product opportunities, to look at adjacencies, to see where they can move either globally or into some different adjacent marketers.

When I think about IDEX and we have known it for a long time and we think about the next peak and certainly, although you are not ready to pull up the flag yet and say that the recovery is upon us, certainly many of your industrial peers have been singing that song that song during this reporting season thus far. And as we look at IDEX at the next peak, it seems that we probably don't even know how good this company can be, given your emphasis on new products and new applications and new markets, as well as your, again, emphasis on improvement on the cost side. As you think about incremental margin -- and we have not seen it yet -- I think the incremental margin in '03 really wasn't spectacular -- what are you expecting going forward? And again, I didn't hear the answer to the question about the next peak -- kind of where you think the operating margin can be, if you could repeat that for me, please?

I guess I wish I knew the answer to your question. I don't know when that next peak is likely to be, that's economically driven, and I don't know how that coincides with peaks that we might generate by virtue of some of these new products. We may even become somewhat countercyclical because of some of these new activities. It's very, very hard to tell. From a financial standpoint, if you look at the historic average on EBITDA, it has been 22 percent. And we believe that we can exceed the 22 percent level once the volume returns to somewhat more normal levels. So we believe we can take the company up that are, perhaps farther. As we introduce new products, we're always trying to introduce products with higher margins that provide better solutions. So we get into commodity kinds of discussions on products but rather, value-based pricing. So we are trying to drive margins up on all the new things that we're doing as part of the internal measurement system that we put in place, to track the margins of new products. So I wish I could answer your question. I am not trying to dodge it. I just don't know the answer to the question.

I guess that is the question, then because I don't know the answer either. Quickly, the input costs, what you're seeing relative to raw materials, what you expect going into '04?

You see in the newspaper every day, metal prices going up. Probably the most immediate impact that we see is in Band-It, with nickel surcharges on stainless because stainless is the raw material of choice there. Some of the alloys have more nickel. Some of the alloys have less ,nickel so it's less of an issue. So we are watching that, and if it continues to go up, we will probably end up putting through either a surcharge or a price increase to cover it on the Band-It side. The rest of it, copper is up, but we are a copper user in motors. So to the extent it drives motor pricing up, then we will feel some impact there.

Michael Schneider, Robert W. Baird & Co.

Mike Schneider. I wonder if you could first spend a minute, Dennis, and talk about the pump group. The incremental margins are, on a sequential basis, were (indiscernible), they were about 51 percent. And I am wondering if in your comments about the industrial businesses being better, the pump group, there, you are referring to Viking and Warren Rupp, and that maybe explains why the margin mix is improving?

Yes, the reason I gave the industrial breakout, as you look at all of what's in pumps, it ranges from Rheodyne going into analytical instruments to Viking and Warren Rupp and some of the traditional industrial business. So I wanted to break it out to show the industrial piece of it, which certainly grew faster than the average number. In fact, year-over-year, we did see increases in sales at Viking and at Rupp. So I think you could presume that the expansion is because we have seen some improvement in some of the higher margin businesses and we have also worked diligently on cost -- both on variable cost and the fixed cost piece of this.

Right. And you have to go back quite a few years to get a quote unquote, normal year here. But my recollection having followed this thing in the late '90s is that the fourth quarter is generally on par or where they are sequentially down from the third quarter. And knowing that, I am surprised you are not even more encouraged that the orders are up sequentially. Because one would expect them to be down, even in a good year.

I am encouraged. But you know, it's a data point of one. Like I said before, it is one in a row. And things tend to have -- have tended to be pretty spotty last year; you get a good month and then it is followed by a not so good month. So I think everyone is a little gun shy about when do you declare victory. And I don't think we are there yet. We have got to see what the first quarter looks like. I think the first quarter will be indicative, for the pumps anyway, whether this is a more sustainable period or whether it was just a flash in the pan. I don't think anybody, I can speak for myself, I do not want to get out on a limb forecasting something that I don't have hard data to support, because we simply don't know being a short cycle business. But I am encouraged, and I think I said it three or four times in the comments that I am encouraged, but I don't want anyone on this call, and I don't want ourselves to get complacent and think, therefore, it is going to continue to ramp up, because nobody knows.

Am I right though, that there is significance in these numbers simply because they are up sequentially when you would not ordinarily expect them to be?

Absolutely.

And the dispensing group, can you just shed some light again, is it just the lumpy orders that explain why sales are down 6 percent year-over-year on an organic basis? It does seem somewhat concerning.

It is a seasonal business. And the end of the year, it tends to be fairly unpredictable in that business. There is another piece of this -- we put in a new ERP system at fluid management in the Netherlands. And we communicated to our customers ahead of time that we were going to do that. So there was some timing of orders and sales last year, third and fourth quarter, where we said, look, we don't think it's going to be a problem, and in fact, it turned out not be a problem. But there was some timing of orders because of that because of actions we took with our own customers. So there were a number of things going on there. I am not concerned about business at this time. If we found a real slowdown in orders in the first quarter, then I would have a different view. I can tell you that one of the business units is substantially over plan in the first quarter so far. We are in the first month of the first quarter, so you can't draw a lot of conclusions. But conclusions but it's far better than the other choice. So I am not concerned about that business right now. It tends to be lumpy. You've got big boxes, you've got Axon (ph) and Bell. You've got some big players that are not -- releases every month, nice and smooth.

Okay. And speaking of the ERP systems, can you give us a sense of where you are in this corporate rollout, what some of the risks are in '04, if there are big facilities such as fluid management going online?

We are probably a third or more maybe --

Thirty-five, 40 percent of our sales across the Company would be on the JDE (ph) point.

I can tell you we have not shut down any business as we have implemented it. And we've gotten better. When we through the switch at fluid, Fast and Fluid management in the Netherlands, it just continued to tickle on with no problems. So we have built a core competency of doing the process work to implement these new ERP systems across the board. Thankfully, we have been doing it pretty well. I am not worried about that as an impact on the business. We are not going to shut any businesses down. The first one we did -- to put it in perspective -- was at Lukas in Germany. We got short cycled there, because what they were on -- the system they were on -- became nonsupportable. We actually had to turn it on before we were ready. We caused ourselves some extra work, but we did not shut the business down. In fact, the business did rather well. So even in the worst-case we have had, it was okay.

Finally on pricing, talking about raw materials now, have you announced any formal price increases in particular on your products going through distribution?

Yes. We are increasing prices pretty well across the Company as I mentioned earlier -- not due to material increases necessarily. It's just a normal practice for the Company to increase prices, and we will continue to do that. It's one of the benefits of being a market leader -- you can do that and get some realization. So we are increasing prices. And as I mentioned earlier, to the question on material costs going up, in Band-It, where we have exposure to stainless-steel, to the extent nickel surcharges get out of whack, we will probably put through a surcharge there that will be specifically for the nickel content.

Final question, Dennis, you have been there a few years now. You have certainly dug in and showed some great results. What do you view in '04 as the biggest challenge, aside from the economy?

The economy, I can't do anything about. It will be whatever it is. I always worry about, are we moving fast enough in things that we want to do. So I worry about speed. We have people motivated to move faster than everyone else in the industry. We continue to innovate and bring new products out. So it's those kinds of things that, I guess we tend to whip ourselves -- is the business going to create (ph) if we don't, no. But can we grow it faster? Can we move faster? Can we innovate faster? I think it's all about speed and innovation.

Charlie Brady, Southcoast Capital.

On the hair-care product, could you expand on that a little bit? The folks that are using this right now, what sort of operation is that being used in, is it a large-scale, as far as number of customers are using it for? Or is it smaller than that? I am just trying to understand the sense of the impact that they are seeing on their business. and how it might be applicable on a rollout?

It's probably -- we've probably shipped I'm going to say 125 units, either 125 or 150 units, somewhere in that range. They are in-service everyday. They are in salons, mainly in Europe. Maybe almost exclusively in Europe right now because we have been working with Sempra, which is a German hair coloring company. The potential for a major rollout, the numbers are huge. If you consider the number of salons -- retail points for hair colorant, it's a huge, huge number. It helps the salon from a training standpoint, because it's repeatable. You don't have to have someone who is trained and trying to custom blend a color from tubes, that isn't repeatable. So it's actually -- the one salon I went into was a training salon, so they had young, inexperienced people mixing hair colorant using this piece of equipment and getting it right and repeatable every time. So there is a training element to it. There is an inventory element to it. There's a customer satisfaction element to it. There is nearly 300 unique and individual colors that you can select. When you go into these salons, there's books of little hair swatches. So you can pick the color you want, and it's reliable and repeatable every time. The world has never seen that before.

What's the unit cost for one of these?

It will be probably 5 or $6000 for the hair colorant machines. When you get into the cosmetic machines, they are a little more expensive, a little more technology in them. We're still in the beta tests kind of phase. So we are going to have to wait and see what whistles and bells ultimately get put on these things. But they are, like with the opinion of Reflect, and the machine they have in the Marshall Field's store, it's a kiosk kind of arrangement with a touchscreen. And in fact, you can self-serve there. You don't have to be helped. So that tends to open up all sorts of retail points that don't require a cosmetic specialist. So the numbers -- to be honest, we have not even tried to sum up all the numbers, because we know they are huge, and it's not the most important thing. The most important thing right now is driving the innovation to satisfy all of the major players around the world that are testing these things to make sure that we are giving them what they want, so that they can roll the product out as soon as possible.

When you look at the owners of salons -- and I am just ignorant of how this business works as far as -- my sense is that -- and maybe it's just in the U.S. -- that hair salons are mostly mom and pop operations. Are there large companies that own chains of hair salons that would buy this equipment and outfit all of their franchise units or chain units? Or is it predominantly going to be sort of one-off purchases by independently owned salons?

It's going to be both. There are major salon owners. I think the largest is called Regal (ph) or something like that. I don't recall the exact name. But there are chains and franchises. But even the mom and pops -- the way this thing presumably would work -- a mom and pop is going to buy their hair colorant, they buy it today from company X. So company X says I have got a better deal for you. You are not going to have to stock all this inventory, and I will put the machine in your shop and you have to buy my colorant as a result of that. That is a model that may work. In fact, that is what's done in the done in the paint industry in Europe, by and large, where there are mom and pops paint stores, well as the Company stores.

So there would not be a capital outlay for the independent small, two, four, five seater. They would not have to do that capital outlay, they would just be hooked into buying the colorant from whoever sells them -- the hair colorant company?

That is one possible model. We also had lots of discussions with these companies on lease programs. -- what I would call almost a wet lease where you do service as well. So there is a lot of different ways to deal with what a small salon would consider a majorly (ph) capital investment. There are probably ways to satisfy that, up to and including the hair colorant company owns the equipment, puts it in there as a marketing incentive to get them to buy their colorant system.

Thanks, that clarifies it. I appreciate your expanding on that.

I am showing no further questions at this time.

Okay. Let me just thank everyone for listening in on the call. We are proud of what we have done in the year. And I hope we can string another data point here that says the industrial business has continued strong in the first quarter. We will all know at the end of the quarter. We will talk to you then. Many thanks.

Thank you for your participation. You may hang up at this time.