藝達思 (IEX) 2004 Q1 法說會逐字稿

Welcome to the first quarter earnings conference call. [Operator Instructions] At this time I would like to turn the meeting over to our leader, Director of Investor Relations, Ms. Susan Fisher, ma'am, please go ahead.

Thank you and welcome, thank you for joining us for our discussion of Idex Corporation's first quarter results. Earlier today the company issued a press release outlining our financial and operating performance for the three months ending March 31st. This press release can be accessed on our corporate Web site www.idexcorp.com. A replay of the call can be accessed at 800-216-4437, beginning about an hour after the call concludes. Joining me today from Idex management are Dennis Williams, our chairman, president and Chief Executive Officer, as well as Dom Romeo, our Chief Financial Officer. The format for today's call includes management's review of the first quarter, and then we'll open the call for your question.

Before beginning, I would remind you that this call may contain forward-looking statements that are subject to the Safe Harbor language contained in today's press release as well as in our company's filings with the SEC. With that, I'll turn this call over to Dennis Williams. Dennis?

Thanks, Susan. I'd like to add my welcome to everyone to our conference call. The agenda I'll follow today first I'll talk about the first quarter results, then some comments on the group, on the various groups that we have, progress report on our initiatives, operational excellence, Kaizen lean Six Sigma and global sourcing, progress report on China, and some brief comments on our outlook. But before moving into the quarterly results, I would call your attention to today's announcement on two actions related to Idex common stock.

First, the board has declared a 3-2 split for common stock and approved 29% increase on our quarterly cash dividends. Our strong performance has created the opportunity for a stock split. The company's third such split since going public which we believe will help enhance the liquidity in the trading of Idex shares for current and prospective shareholders. The dividend increase reflects the board's confidence in our company's outlook as we continue to pursue our operational excellence and global growth initiatives. Now to the first quarter results both orders and sales were up nicely from a year ago, and from the fourth quarter. Orders reached an all-time high of 238 million, while sales also set a new record at 215 million. We are encouraged by the sixth consecutive quarter of higher sales in our base businesses.

We experienced a broad-based improvement in demand, both domestically and both domestically and globally, which led to a nice pickup in orders across all three segments. We saw a year over year orders increase in all 14 reporting units. Base revenue growth and pump products and engineered products, more than offset the weaker demand we experienced domestically in dispensing equipment sales. 12 of the 14 units reported year over year sales increases. We're especially pleased to note a 4% base sales increase within pump products. As we go through the presentation, I'll provide some details on these items. Looking first at orders in a little more detail. Orders of 238 million were up 23% sequentially, and up 15% year over year. Excluding acquisitions and currency, orders were up over 19% sequentially, and up 7% year over year. Order rates improved in all three segments, and were notably strong across all of our industrial pump units. The industrial pump base business orders were up 10% year over year, and 12% sequentially.

This marks the second consecutive quarter in which we've experienced year over year and sequential order growth in industrial pumps. Order rates at Hale also continue to show strength worldwide. The strongest order month was March, which was by far the all-time record order month for the company. Turning to sales, sales of 215 million were up 8% sequentially, and up 10% year over year. Excluding currency and acquisition, sales were up 5% sequentially and 3% year over year. This is now the sixth consecutive quarter of organic growth. Year over year, the base business in pump products grew 4%, engineered products grew 6%, and base sales in dispensing equipment were down 4%. As I mentioned in our fourth quarter call, fluid management in the Americas had a large order for the replacement of some competitors' equipment.

This was a fourth quarter order and mainly first quarter sales. If we exclude this one-time replacement, the fluid management business unit also showed year over year growth. Looking at the foreign sales content, excluding foreign exchange and acquisitions, foreign sales were essentially unchanged at 44% of the total. The geographic mix changed somewhat, as Europe declined slightly and Asia increased slightly. In the first quarter of 2004, Europe represented 25% of sales, Asia was 9% of sales, and the Americas, excluding the U.S. were 7%. Asia, and specifically China, continues to be important to us. In the first quarter of 2004, we saw increased sales for both pumps and engineered products in this region. For example, in Asia, the pump group increased sales about 30% year over year.

Looking next at margins, in the first quarter 2004, gross margins were 39.9%, up 120 basis points sequentially, and up 190 basis points year over year, our highest gross margin since the first quarter of 2000, and the company's ninth consecutive quarter of year over year gross margin increases. The gross margin expansion is the direct result of volume leverage coupled with our global sourcing and operational excellence activities. SG&A as a percent of sales was down 70 basis points from a year ago, the year ago period had some abnormally high legal, professional and other costs which were offset by acquisitions, currency effects and expenses related to higher volume in 2004. Sequentially, as a percent of sales, SG&A was up 70 basis points.

Total SG&A increased versus the fourth quarter due to acquisitions, currency effects, timing and volume-related expenses. The first quarter SG&A percent was about the average for 2003, and we would expect the SG&A percent for the full year 2004 to be roughly flat compared with 2003. Turning to operating margins, the operating margin was up 50 basis points sequentially, and up 260 basis points on a year over year basis. The 14.6 operating margin is the highest first foreclosure chief waived instance 2004, looking in net income and earnings per share, net income increased 9% sequentially, and 39% on a year over year basis.

This is the highest net income adjusted for goodwill amortization since the first quarter of 2000. The first quarter earnings per share of 52-cent were up 33% year over year, and up 8% sequentially. First quarter free cash flow was 14.1 million, up 8% year over year despite 6.7 million of annual pension plan contribution. As a result, our domestic pension plans are now fully funded. Excluding this contribution, comparable free cash flow in the first quarter of 2004 was approximately 20 million, or about 1.1 times net income. On a year over year basis, we saw an improvement in inventory turns and receivables DSO.

We increased turns by half a turn to five and a half turns, and we shaved three days off DSO s to 46 days. Debt increased 22 million during the quarter, and that's due to the better acquisition, and debt to total capitalization was 25% of the quarter end, and improvement from 32% a year ago and up from 23% on the fourth quarter. So, the shorthand comparison for the first quarter of 2004 versus first quarter of 2003 is orders up 15%, sales up 10, net income up 39%, and the earnings per share increased 13 cents. We are pleased with our first quarter performance. We saw certainly some signs of recovery across our business, and the company continues to perform very well operationally. Due to the strength of the first quarter orders, our backlog increased from around one month to 1.3 months sales. This should give us some momentum, heading into the second quarter, which tends to be the strongest quarter of the year.

Now let's look at the groups, we'll start with pumps, they represent 56% of sales and 56% of income, sales of 121 million were up 9% year over year, 4% base business growth, 2% currency, and 3% due to acquisitions. We saw base business orders in pumps improve 8% year over year, and 10% sequentially. If we look a little closer at just the industrial part of the pump group, which excludes business at micro pump, Teffect and redine. Base orders during the first quarter of 2004 were up 10% year over year, and 12% sequentially. We saw double-digit improvement in nearly all our industrial pump businesses. I think everyone still wonders whether this is a sustainable recovery, but it certainly is a very positive sign.

In fact, the first quarter was the third highest for orders in Viking's history and March was the third highest month for orders in Viking history. Operating income of 18.8 million, or 15.5% of sales, rose a 140 basis points year over year due to volume leverage and our corporate initiatives. All of our pump units are driving hard in four areas. New products, improved distribution, OEM focus and globalization. New products we continue to see the benefit of innovation, and just a few examples, some of which I mentioned on last call but let me give you an update. The hypo pump from Pulsa feeder continues to gain market acceptance as a real break through in water treatment. First quarter orders quotes and sales were all up nicely versus the fourth quarter.

In fact, orders are up nearly 30%. Our recent acquisition classic engineering is performing very well, orders here are up nearly 30% sequentially as well, Viking's new all purpose pump generated over $100,000 of orders in the first quarter with the bulk of its coming from Asia, a significant portion of these units will be delivered from Sujo, our operation in China.

We also introduced the second frame size, slightly larger frame size of the all-purpose pump in the first quarter on schedule. Industrial load pump, Viking is also growing nicely. At liquid controls, the market continues to respond well to our system product offering of metering, electronic registers, and pumps. All of our units are enhancing distribution, new distributors in our main markets, both domestic and globally, new niche distribution, we're providing better selling tools and we have broader sales coverage of the distribution. Our industrial distributors seem to be reporting I think totally a higher quoting levels and a lot of new project activity. We've added resources to gain OEM business and it's truly paying off. In Vicing alone, we have seen an incremental 1 million of orders in the first quarter we have also seen nice OEM wins virtually across the board, Pulla feeder, liquid control, Versumatic (ph) gas.

OEM will create I and Trevor have micro pump. We have seen some great gains globally, especially in Asia. In China alone our pump business more than doubled year-over-year. In the first quarter, about a 11% of sales in the pump group, are from new products, new applications, or new territories introduced since January 2001. Turning now to dispensing equipment, which represents 19% of sales, and 21% of income. Orders increased 61% sequentially, 55% base, and 6% currency and 19% year-over-year, 4% base and 15% currency. We would expect a strong first quarter in orders as we move into the historically strongest period in sales for the dispensing business.

Sales increased 17% sequentially, that's a 12% base increase and 5% due to currency, and a 6% year-over-year growth which is a 4% decline in the base business, and a 10% currency adjustment. As I mentioned earlier, the year-over-year decline was due to the replacement of competitors' equipment at one of our large customers. Operating income grew 54% sequentially, and 63% year-over-year. Operating margin reached 19% up 460 basis points sequentially and 660 basis points year-over-year. We're confident that we have gained share in our traditional paint business. Due to the continuing flow of new products and our global focus, in addition, we're seeing growing interest in the all-in-one machine I mentioned in the fourth quarter call.

There's also significant interest in what we call a simple machine, which is a derivative of our hair color and cosmetic product family. This allows a customer to get a small paint sample rather than having to purchase full gallons of paint that may not be the exact shade that they desire. The hair coloring activity continues to expand in Europe with Sempra and there are several prototypes in testing with other companies. In cosmetics, the reflect beta tests is continuing successfully, and we have received orders from other potential customers for prototype units, so we're very happy with the progress we're making in the personal care area. In the first quarter, about 37% of sales in the dispensing group are from new products and applications, introduced since January of 2001. Turning to our engineered products, which represent 25% of sales and 29% of income. Orders improved nicely both sequentially and year-over-year. Sequential orders were up 27%, that's 18% base business increase, 7% due to acquisitions, and 2% due to currency and 14% year-over-year, 7% base, 1% in acquisitions, and 6% in currency.

We're seeing strength in both rescue tools and fire suppression, as well as our branded custom banding business. Sales are up sequentially 15%, and that's comprised of 5% base, 8% from acquisitions, and 2% in currency, and 14% year-over-year, 6% base, 2% acquisition, and 6% currency. Operating income grew 27% sequentially and 49% year-over-year as operating margins reached 20.3%, up 180 basis points sequentially and 480 basis points year-over-year. In fire suppression, we've seen nice global activity in places like the UK, Middle East and Thailand, plus continued interest domestically in our fire pump truck kits and modules especially from the small and midsize OEMs, we shipped 34 kits and modules in the first quarter versus 62 for all of last year and there's no question that the kits and modules, this approach has given us some share gain. Our rescue tool business continued to do very well. New products are helping to drive growth, for example what we call the mother of all cutters, which we introduced in Europe a few months back, we introduced that in the United States in the first quarter and already we have over 65 orders on the books.

Our new portable power units have been a big success and we have over 100 of those ordered in the first quarter. And federal grants and Homeland Security funding are also driving growth in the U.S. rescue tool business. The global project business remains very strong, with large orders recently from Korea and India. In fact, the Indian order was the first leveraged order for both Hydraulic rescue tools and pneumatic rescue equipment coming from our recent acquisition Vetter. The FDIC show will take place next week in Indianapolis. This is a big show in the fire industry. We'll have three stainless max pumps on vehicles there and we will introduce the new stainless steel mid ship pump the only one in the world of its type. We'll have eight of our new command master integrated displace, and various SQ and new proGraham that will switch units in the show plus we will have an outdoor live demo of our single button control CAVs and pump systems. So, with all the new products there, I think this is going to be a pretty exciting show for us.

Band-It is also doing well with strength in their traditional markets plus continued growth in some new market areas, like the automotive area, and for example, Band-It got its first order for tools and banding from a Japanese tier-1 auto supplier for exhaust system shielding. At Band-It, we have a very disciplined global market focus in these new markets we're penetrating. In engineered products, sales in new applications and new products introduced since January 2001 were 17% of the total first quarter sales.

Turning to the initiatives. Over the past three years, this company has progressed from learning new tools to truly running the business in a different way. In the first and second quarters, I traveled to many of our business units for our annual human resource review, which is a core business process in the company. The changes that have occurred are nothing short of remarkable. From just tools to the notion of rapid process improvement, every business now is very process-focused and we're finding more and more new best practices that we can leverage across the company. Like the opening scenes screens on everyone's computer in the morning that show how we did yesterday on key customer business metrics to real time access of metrics down through the sub process levels and one facility I visited two weeks ago is producing their products, the same amount of product maybe a little more, in one-third the floor space they needed just two years ago. So it's really dramatic what's happening in the company. The proof of the success is measured in margins, growth, and cash. As volumes increase, we will see the real benefit of the hard work and changes that have occurred over the past three years. We will continue to keep score on key initiatives like Kaizen, Lean and Six Sigma and global sourcing, but the real measure for these is in gross margin.

In the first quarter, we generated 2.6 million of savings from Kaizen, Lean and Six Sigma activities and 2.9 million in global sourcing savings, which represents a 26% savings from prior sources. We continue to train new belts and to move our experienced belts into critical operating positions where they can put their experience to work to drive change in the business. And turning to our China initiatives, last month we had our official grand opening of the Sujo (ph) manufacturing facility, we're transferring products to China based on local market opportunities, and our overall business needs and we're very pleased with our progress there.

Turning to the outlook, we are encouraged by the orders level and base business sales increases in the first quarter. The economy is clearly improving, and I'm confident we will deliver improved performance as the recovery builds momentum. However, as a short cycle business, our performance is totally dependent on incoming order rates for each month of the year. We enter every month with 50 to 60% of that month's sales in backlog. Consequence ever subsequently we have limited visibility for the remainder of 2004.

As I mentioned earlier our backlog of 1.3 months of sales provides some momentum as we head into the second quarter, which is seasonally our strongest quarter. So in summary, we saw improvements in the first quarter, in nearly every business unit, in orders, sales and net income, both on a sequential and a year over year basis. We continue to execute our strategy and are more confident than ever we're working on the right things. We continue to benefit from a more global focus and new product innovation in all of our business units. We believe our strategy is working well. Finally, we are encouraged by what we've seen in the last two quarters, and we are truly hopeful this trend will continue. I'll now open the call for questions.

Thank you. [Operator Instructions]. Our first question comes from Alexander Paris.

Good afternoon, great quarter.

Thanks very much

I'm from Barrington Research. On the dispensing equipment, just to make it clear, the big order that was making for the difficult comparison was that in the fourth quarter of 2003 or 2002?

The big order would have been in 2002, and most of the shipments were in the first quarter of 2003. There was about a quarter lag. Some of the sales were actually in the fourth quarter of '02, but most of it was in the first quarter of '03.

But taking that out, it looks like the orders were just booming in that segment. Is that right?

Well, they were up nicely.

Is that mostly in the dispensing equipment, is that mostly new OEM projects, or does some of that go through distributors so you can't tell?

No, it's all, in the dispensing side the main piece of that is fluid management and fast. And so those are direct sales either big boxes like depot and Lowe's, Sherwin Williams, in Europe it would be to action on cap rail a lot of the paint manufacturers, so they're a discrete customers and virtually nothing in Fast and Fluid management go through distribution. It's all direct sales.

So not much of the growth would be for like oil dispensing equipment inside a factory or something like that? Don't you do that kind of business too?

We do as well and there's been some growth there as the industrial economy has picked up, but I would say the bulk is on the paint and code coating side

OK. Somebody should ask about steel and other commodity prices because they've gone up so much. Can you just make a few comments about your overall vulnerability to that and how well you're hedged at least in the first half?

Sure, I'd be happy to. I knew that would be a question in everyone's mind. We have a process in every business unit where we are tracking increases if we can't fight them off, if we have to accept them, we're tracking them very closely so that we can pass along either through surcharges or price increases, to our customers. And at the moment, I would say that certainly we're experiencing some price increases. We see it in things like motor where there's copper content, so we're get something price increases like that, we also see it directly on sheet metal, we're not a huge user of sheet metal but we see it there, we see it in castings, so we see those kinds of things. Probably the biggest vulnerability we have as a company as an individual business unit would be with Band-It, where their product is stainless steel, by and large, and so nickel price increases, molybdenum increases are all certainly something we watch very closely, and we are passing along successfully at this point either surcharges or price increases, and we think we're covering the increased costs that we're absorbing.

So your vulnerability is more not the direct commodity that you use, but the higher prices of the components that you buy that your suppliers have cranked in the price; is that right?

Yeah. It's a little bit of both but generally we're not buying -- we don't buy copper at all, I don't believe. If we do it's not in any significant amount but we do copper wrapped in motors. So we would expect to see that price increase coming from a motor manufacturer

OK, thank you very much.

You bet

Thank you. Our next question comes from Wendy Caplan.

Hi, it's Wendy Caplan from Wachovia. Dennis, or Dom, I see on the balance sheet that it looks like working capital as a per sales dollar is the lowest we've seen at 12 cents, in a long time. And the payables were up significantly. Can you comment on that, and what are, I assume that inventories and receivables are up because of Vetter, but if you can comment on that as well, and where you think working capital should be by year-end?

In the working capital equation, we focus on all elements of it, including payables, so that we work the payable side as much as we can. We did get a half a turn improvement in inventory turns, so we're at five and a half, which I think is a very nice improvement. We came down three days on DSO's, we had a big sales month in March and March was a big month for us. So I think, you know, you'll see some receivables go up in an absolute sense, because of the higher sales. But by and large I think, you know, this is reflective of the kinds of things we're trying to do across the company. Just to give you an example, Wendy, we have clearly a companywide best practice in fluid management Americas on inventory management. And just to put it in perspective, their work in process turns, if you look at just whip, is over 150. And so we have now taken that best practice and we're leveraging across the company, and we have seen some inventory improvements, and I think we'll continue to see some turns improvement as we go through the year. You know, will it be a full turn, will it be more than a turn? We don't know yet, it will depend on how well this tool works in other businesses, but I think it's going to work pretty well. On the receivable side, we're down at 45, 46 days, maybe a little improvement still there. You know, we're not going to get it to 30 days, realistically, but I think there's probably a little movement we can get there. And like I said, we're constantly looking at payables and making sure we're doing the right thing there.

And one last question. Dennis, can you kind of spell out for us the acquisition prospects, some kind of relative sense of what you're looking at and what kinds of businesses you're looking at and whether you, as one of your predecessors used to say, would be disappointed if we didn't see an acquisition by year end?

I'd be disappointed if we didn't see an acquisition by year-end. Seriously, we continue to look across the board, we have a bias towards things that have a little higher growth, so we look for, you know, things that might be adjacent to the micro pump redine (ph) family for example are on the fire is suppression side and rescue tool side. We like the Vetter acquisition we think is going to be a winner for us. As I mentioned the, the Indian order we just got we leveraged that, got not only rescue tools but also pneumatic rescue equipment. So we're able to start to leverage that. So I think we're going to be able to take them more globally. I don't think this is what I think. I don't know for a fact but I don't I don't believe they had ever sold anything in India before so I think our global focus is really going to help them a lot. I would describe the pipeline is better than what it's been. You know, I think there's -- you look at the overall M&A up, numbers they're certainly up. We're seeing a number of interesting things, and we're constantly in the marketplace.

Thank you.

Thank you. Our next question comes from Mike Schneider.

Hi, guys, its Mike Schneider from Robert Baird.

Hi, Mike.

I guess first question really resolves on SG&A. Dennis, you mentioned SG&A for the year, if I heard you correctly, would be flat as a percent of sales, is that correct?

We think it will be flat-ish, maybe down a touch, but we think it's will be about flat year over year

I guess that strikes me as seemingly conservative, just given the fact that we are now seeing some nice mid single digit organic growth. Why wouldn't you get more leverage on the SG&A line this year?

I think he we may' but it's going to depends on the volume picture. If we have a very strong volume picture, then as a percent of sales it will go down. But you know, being the short cycle business we are, you know, it's not like we've got three quarters of the year in backlog.

Right, right. Well, on those lines, just about guidance, we're basically done with the month of April or most of the way through it, you've got a month and a third of backlog for your earlier comments and to me that tells me what two-thirds of your quarter looks like. Why can't you begin to give us some guidance even for the one quarter forward?

Well, I go into the next month still with 50 to 60% of that month in backlog, and the month after that, if I look at what is the backlog we have two months out now, I'm going to guess that it's less than 10% of the sales that we need for sales in that month. And I mean, I'd love to be able to give you some guidance, but you know, I'm not one-answer deep on why I feel that way. Other than I'm connecting the last two dots and I think it's going to continue in the same direction.

OK.

It's really hard to do. I mean, I used to run a long cycle business, you know, I could have tied it up pretty tightly for new that business, probably a year and a half out. But it's just, this business wants to run with 50 to 60% on day 1 of the month, it hardly gets any better than that, and in some businesses it's, you know, less than 20% on day 1.

OK. And just final question on China. What products are you moving over there and what are the biggest markets you feel are right for your products in terms of local demand and local selling?

Well, you know, just maybe a little bit of background. We did have our grand opening at Sujo, and when you go to Sujo, the first thing that strikes you is the size of it, the industrial development that's going on there is 215 square kilometers, just the industrial park. And there are buildings going up everywhere. So, there's demand for a lot of our products. I mentioned the all-purpose pump that Viking has just introduced. We've now introduced another frame size, a little bit bigger frame size. Probably, a little bit over half of what we generated in orders in the first quarter will come out of Sujo would be delivered from Sujo.

We've moved that production over, we're kind of running dual production right now, we're moving pump products, some pump products over there, some gas products over there. We've got some Band-It product being manufactured there. We've got some things we're working on in fluid management. We've got a schedule of products that we want to move in there. We've got, you know, an interesting product that we'll start to manufacture there this year for micro pump and (inaudible) that may turn out to actually the highest volume product that the company makes, we'll see. We're working with a particular OEM on an interesting opportunity. So, I would say generally its pump-related products, and if you look at the demand in the building, in the investment that's going on in China, there is market there for every one of our products. And so our intent is to fill this building up and move on to the next one and move on to the next one, because I think there's tremendous local market needs there, whether it's rescue tools, whether it's Band-It, we may have a slightly different Band-It product that we introduce there. There's just opportunity everywhere, Mike.

I'll be there in six weeks, can't wait to see it. Thanks again.

Yeah, you will be amazed.

Thank you. Our next question comes from Ned Armstrong.

Good afternoon, Ned Armstrong, Friedman Billings Ramsey.

Hi, Ned.

Hi, I just wanted to talk about margins a little bit. In recent history, your first quarter margins have tended to be somewhat lower than those of the subsequent couple of quarters, and I was wondering if you see that pattern continuing this year, or will that difference be narrower due to the implementation of your various operating initiatives?

I think we're going to see margins expand with volume. And typically, the second quarter has been the highest volume quarter for the company, and to the extent that's what happens in this second quarter, then I would expect margins will be higher. You know, third and fourth quarter, again, it's a volume question. Mix obviously plays into that, but we're not seeing huge mix swings at this point, so I'm not sure that becomes a big consideration for us. But I would say it's generally a volume kind of question, Ned.

OK, shifting on same topic but in the longer term, do you think -- or what level do you think you can get operating margins at over the next, say, four to five years and do you think that it would be an even progression, or would it be much more front-loaded again driven by the success of operating initiatives?

No, I think again volume plays a huge role here. We've got tremendous leverage on the additional volume that comes through. And we have said historically that we think we can get back to and probably exceed the historic EBITDA levels of the company of 22%, and I still believe that's the case. So, you know, I think we've got certainly more runway in front of us. We're trying to introduce new products that have higher gross margins, that's part of what we're driving the businesses to do. So, you know, I'm pretty optimistic that we'll get higher numbers here in the future, especially with the return of volume. You know, we're getting very good volume leverage.

And final question, in this respect, with this topic. Historically, your gross margins have kind of topped out at 40% or just a little bit above 40%. Again, with the success of your various operating initiatives, can that number be higher, i.e., 41, 42%, is that out of reason to think something like that?

No, I don't think it's out of reason at all.

OK, thank you, I'll get back in line.

OK, thanks.

Thank you. Our next question comes from Charlie Brady.

Hi, thanks very much. Could you guys just give us an indication on R&D as a percent of sales, where that's sitting around today?

It's around 2%, maybe a touch over 2%.

OK, so there hasn't been a whole lot of movement in that. Because I think on the previous calls you had indicated you want to try to move that up 3 to 4% level. Is that still directionally where you're sort of looking towards?

Yeah Absolutely. We're trying to drive the innovation machine here, and if you look back to what our strategy has been, it's been to drive operational excellence and to get the margin and the cash that we can reinvest back into the business while dropping some to the bottom line but be able to take R&D up to, I'm guessing here with the right numbers but I think 3 to 4% is probably the right number. But if we find that we've still got a bunch of good ideas at 4% we're going to keep going, because I think what we're proving to ourselves is that the new products we're introducing are generating a lot of interest, and that's part of what's driving the top line growth.

OK. And then just in terms of inventory levels to the distributors, what's the level of that today?

You know, I guess I haven't seen -- we don't track in every business. Viking probably has the best view of that, and to be honest, I didn't look at it at the end of the quarter, but I know the last time I checked, there hadn't been any significant buildup in inventory in any distribution. They're starting to see some activity, but we've worked hard to shorten cycle times, so we're trying to avoid the buildup of inventory in the entire system. I mean, inventory is bad, in my mind. And to be extent you can have cycle times that support what the customers want, then you don't need the inventory. So we're driving hard on cycle times. I don't hear anyone saying that they're building inventory.

OK. And then on the specific end market. Any improvement or what's the chemical market look like these days? Any kinds of recovery that pertains to Idex?

Yeah, we've seen, because we sell the pumps through by and large through distribution, I can't give you a hard breakout on numbers, but we do know that there are some what I would call medium sized and actually pretty good sized chemical industry investments going on; a lot of them in Asia. And there's a lot of the smaller, de bottlenecking kinds of projects going on that we see through distribution. So, it has been definitely improved, and even the utilization rates that get published have ticked up. They're not growing full percentage points in utilization, but a few 10th ear or there. So it's a more positive outlook for sure.

More positive since the send of the send since the end of the year.

Yes

And then on for cap spending for '04, still around $24 million?

Yeah, I think that's probably a pretty good number.

OK, that's it for me.

Thank you

Our next question comes from Scott Graham.

Good afternoon.

Hi, Scott

Hi. A couple of questions. If you were -- I know these are not mutually exclusive, but Dennis, if you were to give us a list, order of magnitude wise, what the driver for the gross margin was in operating margin in fact, maybe cut between your -- the impact of your initiatives and just pure volume leverage, recognizing that the second has a lot to do with the first, but where would you say was it more one or the other in this quarter, in your view?

That's a tough question it's kinds of hard to parse out the various pieces. We know that the savings from global savings are there. We know that the savings from Kaizen, Lean and Six Sigma are there. We see, it you walk through the factors, you see, it you know it's there. You see it in head count. And when you start to run volume through a facility like that, the leverage is pretty significant. So it's really hard for us to parse it out and say this piece is due to that and this one is due to the other. But volume has a great deal to do with it, for sure.

The mix in the pumps business looks like it improved a little bit this quarter?

Yeah for sure. From an order standpoint, and I tend to look more at orders there than sales, we look at both but orders are important and we saw really nice improvement on the industrial side, and like I said, Viking had, if you look in Viking's history, the first quarter was the third highest quarter from an order standpoint in the history of Viking, and the month of March was the third highest orders month in the history of Viking. And so that's a positive swing for sure. And we saw good double-digit performance in virtually every one of the industrial units, Roup, Pulsafeeder, all those guys had a nice quarter.

Two other questions. Full year tax rate, where do you expect that to come in?

They were at about 36-5 and for the first quarter that was some of the fix, Scott in terms of international profit so I would say 36-5 or so is the number we would expect the full year toned up at.

OK and in the quarter, corporate expenses looked a little higher than usual. And was there anything in there, or is that a new run rate?

Are you asking sequentially or year over year in

Well, really both.

Sequentially, there's some timing of some expenses but year over year that is the run rate.

And we've gone from last year, which was a little over 4, to this year, which is a little over 6?

We're right, if you look at SG&A as a percent of sales, we're right about on last year's full run rate in the first quarter this year. And, you know, the comment I made is that I think SG&A as a percent of sales is going to be about what it was last year, maybe down, and it's going to depend on volume.

OK, all right, thank you.

Thank you. Our next question comes from Jamie Cook.

Hi, guys, how are you?

Good

Quick question. On the distributor level are there any concerns out there about products shortages as demand picks up, people won't be able to manufacture quickly enough?

I haven't heard that from any distributor. I suppose -- I suppose that's a generic concern that people might have, but let me just tell you what ear doing to try to make sure we're not part of the problem. As part of the Six Sigma activity, since day 1, we have always tracked customer metrics, things that are important to customers, and on-time delivery is clearly one of those items. And so we track that religiously. And every one of our businesses. And I mentioned that one of the business that is when employees turn on their computer in the morning, the opening screen that they see has customer metrics and one of those metrics is on-time delivery. What is it year to date, quarter to date, what did you do yesterday. So, we're keeping a bore sight focus in on time delivery and using all the tools to make sure we're keeping it at the high levels where we are today

Do you have any fears of shortages in terms of getting supplies from anyone?

Not at this point. You know, there hasn't been any rationing yet. You know, will there be in I don't know. It will depend on the strength of the recovery and how the commodity suppliers react. It's hard to tell.

and then one -- two more questions. The first one, sorry, I didn't hear if you covered this. As you look -- as we're a month out, are you seeing any -- is the order trend for the month of April, is it about in line with the first quarter, or is it stronger? And then my second question is a follow-up on Wendy's in terms of acquisitions, are you seeing any difference in the valuation out there for companies whether people are expecting higher prices, now that we're seeing an improvement in the economy?

OK. Let's see. Our April orders. We don't comment on the quarter during the quarter. What I would tell you is in the first quarter, March was by far the strongest orders month. So, we saw significant strength in March. And we'll have to see how the quarter plays out. For us, month to month, it can be a bit lumpy, so we tend not to talk about month-to-month orders, because it isn't necessarily indicative of what's going to happen for the whole quarter. And the first quarter is a great example. The first two months, if there'll nearly identical in volumes month and the third month was much higher.

OK.

So it's hard to -- even if I told you, it's this or it's that you wouldn't know what to do with the data because I don't know what to do with the data

OK.

From an acquisition standpoint, the pipeline, as I mentioned when Wendy asked the question, I think the pipeline is pretty full. We're looking across the board; prices I would say are higher now than what they were before. And that's -- it kind of depends on the property you're looking at, but if there are financial sponsors that have an interest, because of the looseness of the financial markets right now, they can leverage these things up higher and they become -- you know, they have prices up nearly as high as strategic buyers have historically. And that's the dynamic that's going on in the marketplace, they've got a lot to do with the price level of the acquisitions that are out there, the properties that are out there. So I would say prices are somewhat higher than what they have been, and there's more in the pipeline now than what there has been

OK, thank you very much.

Your welcome

Thank you. We have a follow-up question from Ned Armstrong.

Yes, with regard to acquisitions, if you look at the last eight or nine years, growth due to acquisitions has been roughly 8 to 9% per year on average. Do you think that that's achievable going forward?

Well, let me answer it in two ways. Can we afford it? With the cash generation we have and our debt to total GAAP, answer is yes. There's no question in my mind we can afford it. Can we find the right properties that build on the assets that we have now and are adjacent to what we do, that's always the question? We think it's certainly possible. But you can't time acquisitions because you can't force things on to the market.

Right.

As much as you would like. But I would give you a nominal yeah, I think we can do that. We're coming out of a period where there were fewer things available -- well, there were some things available but fewer and now I think it's bit stronger and we can near with our debt to total cap to 25%, we certainly have a lot of borrowing power and great cash generation characteristics that are getting better. So I think the affordability part is clearly there.

OK. And then just a quick detail question with regard to some cash flow numbers. Do you happen to have the cash flows generated from investing activity and financing activity available?

No, I don't. Cash flow from operating activity was about $20 million. That should be in the release.

OK, thank you.

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

Well, let me just thank everybody for listening in on the call. We're pretty proud of the first quarter, and we just hope that the momentum that's built continues on and if it does, we're going to deliver some fine results for the rest of the year. Thanks very much for listening in.