藝達思 (IEX) 2004 Q3 法說會逐字稿

Good afternoon, and welcome to the IDEX Corporation third-quarter earnings conference call. At this time, I would just like to inform you that you are in a listen-only mode until we open for questions and answers, and that this call is being recorded.

And also, at this time, I'd like to turn this call over to Ms. Susan Fisher, Director of Investor Relations. Thank you, ma'am; you may begin.

Thanks, Kathy. Good afternoon, and thank you for joining us for the IDEX third-quarter and year-to-date 2004 earnings conference call, which is also being webcast today through the link on our company home page at IDEXcorp.com. Earlier today, our company issued a press release outlining our financial and operating performance for the three and nine-month periods ending September 30th. A copy of this release also can be accessed on our company website.

Joining me on today's call are Dennis Williams, Chairman, President and Chief Executive Officer, and Dom Romeo, Vice President and Chief Financial Officer. The format for our call will include management to read management's review of the quarter and the first nine months of 2004. We will then open the call for your questions. If you need for any reason to access a replay of this call, it will be available beginning roughly two hours after the call concludes through November 4th at toll-free 888-568-0915. The pass code is IDEX.

Before we begin, I would remind you 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 Securities and Exchange Commission.

With that, I will turn the call over to Dennis Williams. Dennis?

Thanks, Susan. I would like to add my welcome to everyone to the conference call. The agenda I'll follow today is first I will talk about the third quarter and then the first nine months. I will give you some comments on the group, a progress report on the initiatives and then some brief comments on the outlook.

Starting with the Company's third-quarter results, orders and sales increased nicely year over year, and we delivered our 11th consecutive quarter of year-over-year gross margin expansion. We also set all-time record highs for net income and sales. In addition, our free cash flow was absolutely terrific, at 1.6 times net income.

Orders were 21 percent higher than a year ago, with base business orders up 9 percent, and sales were a record at 237.6 million. This is now our eighth consecutive quarter of year-over-year organic growth. We experienced an improvement in demand, both domestically and globally, as 14 of the 15 units reported year-over-year sales increases. The remaining unit was flat year over year. All three segments experienced base volume growth. We are especially pleased to note a 9 percent sales increase for the total company, led by an 11 percent sales increase in our pump products.

In the third quarter, the gross margin was 40 percent, up 140 basis points year over year. We continue to see the benefits of both volume leverage and our focused operational excellence initiatives. As we go through the presentation, I will provide some details on our achievements in the third quarter.

Looking first at orders in a little more detail, orders of 235 million were up 21 percent year over year and 2 percent sequentially. Excluding acquisitions and currency, orders were up 9 percent versus the third quarter of last year, and down 2 percent sequentially, as we would expect due to the seasonality of the business. Monthly orders during the quarter were fairly uniform, in the $77 to $80 million range. In July, 79.8 million; in August, 77.3 million; and in September, 78.0 million. Order rates during the quarter improved in all three segments. This marks the fourth consecutive quarter in which we have experienced year-over-year orders growth within pumps.

Turning to sales, sales at nearly 238 million were up 20 percent year over year and 2 percent sequentially. Excluding currency and acquisitions, sales were up 9 percent year over year and down 2 percent sequentially. This is now our eighth consecutive quarter of organic growth. This is our highest organic growth rate since the second quarter of 2000. Year over year, the base business and pump products grew 11 percent, engineered products grew 8 percent, and base sales of dispensing equipment were up 5 percent.

Looking at the foreign sales content, excluding foreign exchange and acquisitions, foreign sales were 42 percent of total sales versus the 44 percent last year. The geographic mix changed somewhat, as we continue to expand in Asia and are down someone in Europe. For the third quarter, organic growth was 33 percent in Asia, and we were down slightly in Europe. In the third quarter of 2004, Europe represented 24 percent of sales, Asia was 9 percent of sales and the Americas excluding the US were 8 percent.

Looking next at margins, in the third quarter of 2004, gross margins were 40 percent, up 140 basis points year over year. This is now the Company's 11th consecutive quarter of year-over-year gross margin expansion. The gross margin increase is a direct result of volume leverage, coupled with our global sourcing and operational excellence activities.

Total SG&A of 55 million was up 16 percent over last year, mainly due to acquisitions and volume, and partially offset by savings from our ongoing cost control efforts. In the third quarter, SG&A as a percent of sales held flat to the second quarter and was down 70 basis points versus the third quarter a year ago.

Turning to operating margins, the operating margin of 16.8 percent was up 210 basis points year over year.

Looking at net income and EPS, net income increased 41 percent on a year-over-year basis, and 2 percent sequentially, to 23.2 million. This is another all-time high for the Company.

For the third quarter, the Company's effective tax rate was 35 percent versus 35.5 percent a year ago.

One other item of note -- in other income, we had $700,000 in expenses related to hurricane damage in our Pulsafeeder facility in Punta Gorda, Florida. That facility is currently operational, and in fact was fully operational within five days of hurricane Charlie. I was very proud of the responsiveness to our customers in an extremely difficult time for our employees. Thankfully, there were no serious injuries to our employees. The building had roof and water damage, and we are in the process of repairing it. Most of that work will be completed before year end.

Third-quarter EPS of 44 cents was comparable to the second quarter and up 33 percent year over year. Free cash flow during the quarter was strong at 37 million. This free cash flow equates to 1.6 times net income, so our quality of earnings this quarter was really terrific.

Total working capital was reduced just over 100 basis points to about 13 percent of sales, versus 14 percent a year ago. Debt to total capitalization decreased to 29 percent at quarter end. This compares with 25 percent a year ago and 31 percent at the end of the second quarter.

So the shorthand comparison for the third quarter this year versus the third quarter a year ago is orders up 21 percent, sales up 20 percent, net income up 41 percent and EPS up 11 cents. Needless to say, we are very pleased with our performance in the third quarter.

Turning to the nine-month results, I will just highlight a few of the numbers. Excluding acquisitions and foreign exchange, we saw an 8 percent increase in base sales or base business orders, and a 5 percent increase in base business sales. Domestic sales were up 9 percent, while international sales were up 2 percent. Year-to-date Asian sales were up about 14 percent, while Europe remains a little weak with a small decline. Year to date, free cash flow remains strong at 79.4 million, which is just over 1.25 times net income and was up 4 percent versus the first nine months of last year. Year-to-date gross margins were 40.1 percent, up 130 basis points. Year-to-date SG&A as a percentage of sales was 23.9 percent, down 120 basis points. The year-to-date operating margin was 16.2 percent, up 250 basis points. And our pretax flow-through from incremental sales is about 35 cents on the dollar.

So the shorthand version for the nine months -- orders up 16, sales up 14, net income up 38 and EPS up 30 cents. We are very pleased with our third quarter and our year-to-date performance, and as we head into the fourth quarter, which tends to be weaker than the second or third quarter, the Company continues to perform very well operationally, and we are delivering solid results to the bottom line.

Now let's look at the groups, starting with pumps -- 58 percent of sales and 53 percent of income. In the quarterly comparison, orders of 145 million were up 26 percent. That's 13 percent base growth, 12 percent from acquisitions and 1 percent from currency. Third-quarter sales were up 24 percent year over year, 11 percent as the result of base business growth, 2 percent due to currency and 11 percent due to acquisitions.

Operating income of 26 million or 18.5 percent of sales rose 230 basis points year over year, due to volume leverage and our corporate initiatives. The last time the pump group had 18.5 percent or greater operating margins was in the third quarter of 2000, so our recent results are clearly reflective of an industrial rebound, coupled with our operational excellence initiatives.

In the nine-month comparison, pump orders were up 20 percent, and that is comprised of 10 percent in the base, 8 percent from acquisitions and 2 percent from currency. Pump sales were up 17 percent, and that is 8 percent base, 7 percent from acquisitions and 2 percent from currency.

The year-to-date operating margin for pumps was 17.2 percent versus 14.9, an increase of 230 basis points. All of our pump units continue to drive hard in four areas -- new products, improved distribution, OEM focus and globalization. Here are just a few highlights from the quarter.

Starting with Viking, Viking won a couple of large orders, both about $1 million. The first was for a new large plastics facility in China, and the second was with a large US OEM, where we displaced a competitor with a new and better product. Year to date, Viking's business is up over 50 percent in Asia, due to our sales force investment and our ability to manufacture in Suzhou. Likewise, Viking's OEM business is up over 20 percent this year, due to their focus on that market segment. Over 80 percent of this new business is the result of displacing a competitor by developing a newer derivative product that gives the OEM a better solution.

Pulsafeeder has also gained share in China, plus share gain in the Mexican water market, and that is due to channel development in that country. The new high-flow pump continues to be well received in the water treatment industry, and continues to exceed our forecast. And they are poised to introduce what they call the new Advanced Vision series of controller in early '05. Trebor has had some nice wins this quarter at Tokyo Electron Laboratory, the largest semiconductor OEM in Japan, and at Taiwan Semiconductor, the world's largest semiconductor foundry. In both cases, Trebor's new Maxim 50 high-temperature Teflon pump performed better than all competitors and was selected. Knight (ph) had an all-time record performance in the quarter, due to new product introductions and customer growth. One exciting example is that they were able to secure their largest single order ever by reconfiguring and adapting an existing product and starting production in just four days. Now, if there was ever any doubt that speed is a differentiator and sustainable competitive advantage, this example should eliminate that doubt.

Micropump introduced a new pump type recently to support the introduction of the new paint tinting product at Fluid Management. This design has some significant advantages over other pumping technologies. They made a cold call to the Sanitary Dispensing Company. It was one of these "We have a solution, do you have a problem?" kind of calls. And in fact, the customer did have a problem, a pretty serious one with the pumping system in a piece of equipment that is widely used in fast food restaurants. Our initial tests have gone well. Future systems are likely to use our pumping system, and a large retrofit program is possible. And there are more applications where this pumping and technology and system make sense.

There are many exciting things going on in Rheodyne and Scivex. We have introduced a new nanovalve, and are working with several customers on a nanofluidic module. These products are ideally suited for nanoscale liquid chromatography. Scivex is also working with several customers who are anxious to find a replacement for syringe pumps in their medical diagnostic instruments. Scivex has developed two versions of an integrated pump and valve module that have much longer service life than the current syringe pumps. We are quite confident we will be successful in this area.

Another exciting area is enabled by our ability to mold, extrude and machine polymers. Recently, a new medical grade and an implantable grade polymer have been introduced. Currently, we have produced a delivery system for bone cement from this polymer. This is a new medical procedure that eliminates the need for metal plates. Our success in this new product area is opening up a number of new opportunities to leverage these core competencies.

As I mentioned, we have seen some great gains in Asia year to date. Our pump business increased nearly 35 percent in this region versus last year. This is directly attributable to our investment in a consolidated sales force, the expansion of distribution and the creation of a wholly-owned foreign enterprise that allows us to sell imported product in local currency, plus our ability to manufacture locally in Suzhou. In total, in the third quarter, about 14 percent of sales in the pump group are from new products, new applications or new territories introduced since January of 2002.

Turning to dispensing equipment, it represents 18 percent of sales and 21 percent of income. In the quarterly comparison, orders increased 8 percent year over year, and that's 3 percent from base growth and 5 percent from currency. Sales increased 9 percent year over year, 5 percent base and 4 percent currency. Due to the operational excellence initiatives and volume, operating income within dispensing grew 25 percent year over year. The third-quarter operating margin of 18.4 percent was up 240 basis points.

In the nine-month comparison, dispensing orders for the first nine months of 2004 were up 7 percent; that is 1 percent base and 6 percent currency. Sales were up 3 percent, which is a 2 percent base decline and 5 percent currency. On a year-to-date basis, the operating margin was 20.8 percent versus 16.7 percent a year ago. This 410 basis point improvement is due to our operational excellence initiatives, as well as some volume improvement in our domestic units.

Some highlights from the third quarter in dispensing -- in hair colorants, Semper (ph) continues to expand their presence in the European professional salon channel. In the US, we continue to work with multiple customers who are considering a move into the professional salon channel in the US.

The first machine targeting the retail drugstore channel was installed in September at a Walgreen's store. The beta test there has progressed quite well. A second machine will be installed next week in a different drugstore chain on the West Coast, and four machines will be installed in new chains over the next five to six weeks.

In cosmetics, Reflect (ph) is very satisfied with the performance of the equipment at Marshall Fields, and I believe they will begin a slow rollout to additional stores starting next year, using the same-store-within-a-store concept that they have used at Marshall Fields.

On the paint side of the business, the paint sample machine beta test has gone very well, and it's quite possible a large paint retailer will begin to introduce these machines into the stores starting next year.

We have reached an agreement with Microblend to be their exclusive manufacturer for the all-in-one type machine. You may recall that this is a machine that dispenses both base and tint simultaneously, and eliminates the need for the retailer to stock cans of base tint. Microblend is now beginning to aggressively market this concept.

In the third quarter, about 25 percent of sales in dispensing are from new products and new applications introduced since January of 2002.

Turning to engineered products, 24 percent of sales and 26 percent of income. In the quarterly comparison, orders improved 19 percent year over year -- 5 percent base, 10 percent acquisition and 4 percent currency. Operating income grew 44 percent year over year, and operating margins during the quarter were 22.3 percent, up 360 basis points year over year.

In the nine-month comparison, orders were up 17 percent -- 7 percent base, 6 percent acquisition and 4 percent currency -- versus the first nine months of last year. Sales also improved 17 percent, with the same composition of 7 percent base, 6 percent from acquisitions and 4 percent from currency. Operating income grew 39 percent, and the operating margin for the first nine months was 20.9 percent versus 17.6 a year ago, which is a 330 basis point improvement.

A few highlights from the quarter -- in fire suppression, the global project business and innovation have continued to help this business to expand. For example, there were project in this quarter in Spain, Italy, India and the Middle East. During the quarter, we received our first large order for our new Stainless Steel Max fire pump from a US OEM. You may recall that the Stainless Max is the world's only stainless steel pump for fire vehicles, and that was introduced earlier this year.

Our pump modules and kits continued to be successful -- 112 units shipped to date versus 62 for all of last year. We will more than double the shipments year over year, which is getting a share gain in pumps and in valves.

The Command Master vehicle display and the ES-Key vehicle multiplex system have been selected for the next-generation electrical systems for Trackmobile. They are the leader in railcar movers. This is another important win, as we move our specialty vehicle electronics out beyond the fire and rescue industry.

In our Jaws of Life rescue tool business, innovation is driving sales and share gain. Combination tools, telescopic rams, Mini Mate portable power units and the Mother of All Cutters, just to name a few of innovations.

In addition, we have seen a continuation of global orders plus significant sales to FEMA. Band-It continues to do well in the automotive industry, picking up three new platforms at GM and Nissan for exhaust system applications, and one new application for an air-conditioning tubing assembly for another OEM.

In engineered products, sales from new applications and new products introduced in January of 2002 were 20 percent of the total sales. Turning to the initiatives, in 2001 we established the strategy of driving operational excellence as a way to increase margins, drive cash flow to allow us to spend more on R&D while improving earnings. Reinvestment in the Company is driving a higher level of organic growth. Much remains to be done, but the strategy is working -- 11 consecutive quarters of gross margin expansion, 8 consecutive quarters of organic growth, 9 consecutive quarters of earnings growth. And 17 percent of our total sales have come from new products or applications introduced since January of 2002.

We continue to keep score on saving from Kaizen, Lean and Six Sigma and Global Sourcing, but the real measure of success is in overall margins. In the first nine months of this year, we generated 8.6 million of savings from Kaizen, Lean and Six Sigma activities, and 10 million in in Global Sourcing savings. And that represents a 26 percent savings versus prior sources. We continue to train new belts and to move our experienced belts into critical operating positions where they can put their experienced to work to drive change in the business.

Turning to China, we continue to ramp up our Suzhou operations based on local market opportunity and business needs. We are currently producing 16 different products for seven different business units in Suzhou. Up to 10 additional products will be moved in the fourth quarter, and at least a dozen more are scheduled for 2005.

In 2004, 60 to 70 percent of the total production will be to support our OEMs in the region and for the Asian market. Our IDEX team in China is really doing a great job, and we're very pleased with all of their progress. The acquisition of Dinglee, the leading manufacturer of rescue tools in China, during the third quarter gives Jaws of Life, that business, a truly global presence -- Germany, the US and now China. The rescue tools market in China is small today, but growing rapidly, and Dinglee, which is located in Tianjin, gives us the on-the-ground manufacturing, product development and marketing capabilities that will be of considerable help in our efforts to further penetrate the Asian rescue tool and fire suppression markets. We plan to sell both locally manufactured and imported products through Dinglee. The Company is also well positioned to be a component supplier to our North American and European rescue tool businesses.

Turning to the outlook, we are certainly encouraged by our base business sales increases and our earnings growth in the third quarter, and feel great about having back-to-back record quarters. The economies in North America and Asia have clearly improved, while Europe remains somewhat soft. I am confident we will continue to deliver improved performance, as the recovery builds momentum and our revenues increase. However, as a short-cycle business, our performance is dependent upon the incoming order rate for each month of the year. We enter every month with 50 to 60 percent of that month's sales in backlog. Consequently, we have limited visibility for the fourth quarter. As I mentioned earlier, the fourth quarter historically is weaker than the second and third quarters. We don't see anything at this time that would make us believe this year would be any different.

So in summary, we saw improvements in the third quarter in nearly every business unit, in orders, sales and operating income on a year-over-year basis. We continue to execute our strategy, and are as confident as ever that we are working on the right things. We continue to benefit from a more global focus and new product innovations at all of our business units. We believe our strategy is working well. Finally, we are encouraged by what we have seen in the last four quarters and we are hopeful that this trend will continue.

I'll open the call now for questions.

(OPERATOR INSTRUCTIONS). Jamie Cook.

Jamie Cook, Credit Suisse First Boston. Nice quarter, guys. My question, though, given the increase that you had in sales, I guess I was expecting a bit higher of an incremental margin, given where you were in the past few quarters. Can you just talk about that a little and just talk about, I guess, why the margin was lower this quarter, and what we can expect going forward?

Sure. What we have said in the past when we have been asked the question of what we thought our flow-through would be, we say typically we think it's going to be 30 to 35 percent. In fact, in the first two quarters, we are a bit above that. But if you look at our year-to-date numbers, we are just about at 35 percent year to date. In any given quarter, there is going to being a mix of business-to-business acquisitions where we really don't get leverage, currency where you get no leverage. So there is a mix from quarter to quarter that would naturally move it around somewhat. And plus, in every quarter there are some year-over-year differences, there's puts and takes in every quarter that would account for some of those differences. But on the average, I would say 35 percent is probably about the right number, and that's what we have said before. And in fact, our year-to-date performance is that way.

And then my next question -- could you just quantify, talk a little bit about steel and the rising price in that, and I guess, to date the incremental steel costs in '04 versus in '03?

Well, like everyone, we have seen inflation in a lot of things that we buy. We are not a huge user of steel, you know, like sheet stock and the like. We buy a lot of different commodities, whether it's cast iron or motors that have copper in them and steel in them and the like.

As a general statement, I would say that we have been able to offset the increases that we have seen with price increases and surcharges in every business. Where we are most affected is in Band-It, where the product is stainless steel. Stainless has been pretty volatile because of nickel pricing, and so we have had -- at this point, I can't even tell you the number of price increases that we have passed along, either through surcharges or list price increases in the product and Band-It. And we have got a pretty robust process in every business unit to keep track of purchase price variation, so we try to stay in front of this. And so far, I think we have done a pretty credible job of doing that.

Being a market leader in dependable niches gives you the ability to have some pricing power. We have been able to make price increases stick. I think the market is pretty well anticipating those, recognizing that commodity prices are going up. So by and large, I think we have been pretty able to stay ahead of this.

And then finally -- this is my last question. I don't think I missed this, but I think in the second quarter, you talked a lot about the industrial pump side of the business, which was, I think, a bit better than you had expected, or stronger than the overall pump sort of segment. Could you talk a little bit about what you saw in the third quarter?

Well, what we have seen, actually, starting I guess four quarters ago now from an orders standpoint -- we saw the beginnings of a rebound in the economy that had been talked about for a long time, but we have not seen anything on the industrial or the pump side of our business in total. And we have now seen that; we have now got four quarters in a row where we have seen year-over-year improvements in the pump side of the business, and this quarter was a very nice increase, and it was actually above the company average; it was 11 percent.

Okay, great, guys. Nice quarter.

Charles Brady, Hibernia Southcoast Capital.

Could you talk a little bit about the margin improvement coming from a mix of volume and operational excellence? Can you break that down a little bit more granularity, sort of how much you're seeing from those two primary drivers of margin improvement?

Well, not easily, no. We do report, as I did in this call, on the savings from Kaizen, Lean, Six Sigma and Global Sourcing. That's a piece of the improvement that we see that tends to offset some other inflationary things in the business, but also some of it drops through. We've got those activities going on in every business; everyone is driving for year-over-year improvement in gross margin. And so, it's really hard for us to break out volume leverage and all the other good things that are going on in the business. It's a pretty tough job to do that.

Given the margins that you have seen in the pump business in the third quarter, which are obviously at a high level, as you mentioned, for some -- given the long time, where do you see those margins going? Obviously, the Company from a comp standpoint is probably better off today, given the initiatives you have been doing, than it was back in 2000. So I guess what I'm trying to say -- on an apples-to-apples basis, given the uptick in business volumes, how much more room do you think margins on the pump side have to go?

Well, again, we have not forecast out what we think those could be, but clearly, volume is a significant piece of this. And if you were to -- I don't know, if you were to go and do the math from the peak that we saw, and how much of that volume has recovered, we are still not back to the volume that we would have seen at the peak. We are still some distance off that, and I can't tell you exactly what percent, but a ways off it. So there is still more volume that we think is probably out there, if the recovery stays intact.

I guess what I am getting at is, for every increase in volume, a certain amount falls to the bottom line. And one would assume that today, more falls to the bottom line than it did in 2000. Is there any way to sort of quantify that in some form, as to how much more is coming to the bottom line today than maybe it did 2000?

I would have to look back to the 2000 numbers, but clearly we are better positioned today than we were at that time. A lot of the cost that we have taken out of here is because we have become a lot more efficient. So, as we grow volume, we do not have to add the same amount of cost back in that we took out. So I agree that in principle, that ought to be a higher flow-through than what it was back in that time period; and, like I mentioned to Jamie, we have seen 35 cents on the dollar pretax across the Company, as volumes have come back.

Can you just -- on a tax rate for '05, tax rate in the quarter was down a little bit. What kind of assumptions should we use for '05? Say, 35 percent or sort of back up to a normal 36, 36.5?

Actually, if you look at year over year, as Dennis mentioned, for the quarter we are at 35 versus 35.5 last year. On a year-to-date basis, that is 36 percent, which is the number for '04. We are still, obviously, looking at '05. The reason for the decline -- we have been doing some work with our R&D credit estimates, and that resulted in a reduction from the 36.5 that we have used so far year to date. So we are not ready to give you guidance on '05, the tax rate. But we will be working through the new laws in the upcoming months. But 36 is the number I would use for the rest of '04.

Ned Armstrong, FBR.

Can you comment on some of the end industries that you serve, and which ones you're seeing that are particularly strong, and which ones may be a little bit laggard?

Well, I think, on the industrial side, clearly we have seen a nice recovery. We have seen, as I mentioned in the comments, on the pump side of the business in Asia, some very nice growth year over year. So Asia as a region remains, I think, quite strong and vibrant. And we are participating there probably better now than what we have in the past. So in general, I would say kind of the industrial/mechanical/chemical kinds of markets have continued to improve over the last three to four quarters.

On the paints and coating side of the business, we did see some organic growth there in this quarter, and year to date, we are about flat year over year in that end segment. And I think it is versus a fairly tough comp a year ago, especially in Europe, where we have seen a relatively soft economy. Compared with both North America and Asia, it's certainly soft, flattish to maybe even down a little bit. So I would kind of judge most of Europe as a little on the soft side.

Our fire and rescue business, there is clearly a domestic municipal budget pressure that I think all of the manufacturers have seen, but we have -- because of our global focus, we have been able to offset that -- more than offset it, in fact, and continue to grow the business. And we are driving a lot of demand simply through innovation. The rescue tools side is just a great example of that, where we have generated a lot of sales simply because we have got new products that fit with the rescuers' want to satisfy some of the issues. So we have gained share there, and we have also driven demand in a market that might perhaps be flat to even down, from a municipal standpoint. And the global project business has been key to keeping that business vibrant, so you kind of have to look at each one and dig into it a little bit. But we have been able to drive some good business in some relatively flat markets through innovation.

Along the same lines, are there any markets that you are serving that you think may be at or near their peaks, or do you still think from that aspect, most of the end markets have a ways to go before they are starting to peak out?

Well, if you just look at our monthly order numbers, we don't see anything peaking out; we have seen a fairly flat orders number through the quarter. All three of those months were nearly identical. So you can't draw a lot of conclusions, because our monthly numbers do jump around a little bit, but we don't see any signs of slowing down, and likewise we don't see any signs of acceleration. So, absent any major world events, we see, I think, what everyone else sees, which is reasonable strength in the economy and no peaking out that we can see at this point.

Then, with regard to the other engineer products, the margins again were pretty healthy this quarter. Do you think they are sustainable at that level, or could be even be improved upon?

I think we can always improved margins. It's part of what we do. So we are constantly driving as an organization to improve margins. Volume in all of our businesses is really a critical aspect, and so in a constant or expanding volume environment, I think there is more room in the margins.

Scott Graham, Bear Stearns.

I have got a couple questions for you guys on working capital, pricing and SG&A. The working capital question -- you indicated that year over year, your percent was down 100 basis points. And I guess I'm having a little trouble calculating that, even on a pro forma basis. Could you maybe put together how you came up with that?

Well, Scott, let me start by -- when you look at the balance sheet, obviously, you have got the impact of the acquisition. So it's a little bit skewed. And you have got the balance sheet without the sales. So we looked at it also on a relative performance for the DSO went up, actually improved two days versus last year at 46. And we are almost a half a turn better on inventories. So the way we think about cash flow is the conversion rate at 160 percent of net income, and if you look at our funds flow, which I know you will once you see our filing, working capital in total actually went down about $10 million in the quarter. So, a very nice performance, in terms of cash flow.

Well, when you say working capital went down, are you including accrued expenses in there?

All elements of working capital; that's correct. If you look at receivables inventory and payables, it's roughly down about 2 million of that 10.

All right. Because the inventory was up 5 million sequentially without -- and all the acquisitions were baked in. I was just curious about that one.

That's right. It's offset a little bit by payables, but that's right.

Is there a way to get at what the SG&A percentage rate was, X the acquisitions?

No. We have never split it out that way.

Dennis, would it be fair to say that the SG&A rate is higher because of the acquisitions at this point?

No, not necessarily. The absolute dollar amount is higher, but the rate -- we haven't broken it out, so we can't comment one way or the other.

Scott, the way to look at that is if you look at our margin expansion, we are leveraging SG&A as a percent of sales two quarters in a row. So the acquisitions are in that number. So that's another way to look at it.

Pricing -- was pricing up this quarter 1, 2 points? Or give us an idea?

We don't track that on a quarter-to-quarter basis. We tend to look at it once a year. We have raised prices in virtually every one of our businesses. We have also done surcharges in the case of things like Band-It or where we have other stainless products where we have had an impact. So we have been able to raise prices and make them stick.

Lastly, R&D -- what would you say that that is running at, as a percent of sales right now versus last year?

I'd say it is probably running at between 2.2 and 2.4 percent, maybe, somewhere in that range. And that's maybe up a touch from a year ago.

I think -- as I have said in the past, Scott, I think we really need to be in the 3 to 4 percent range. But right now, I'd say we are pretty well even with our peer group, and more than double what we use to be.

Barry Haynes (ph), Sage Asset Management.

I had a quick question. You have alluded to within the pump business chemicals as one of the end markets that was improving. And I had just a question about another one. Do you do much in the refinery industry, because, like the chemical industry, profitability there has been on the upswing lately; and if so, I am wondering what you're seeing in that market.

We have a very limited presence in the refinery side; it would be probably products from our Viking part of the business, it would be smaller pumps that would no doubt end up in a refinery. But it's not a big exposure for us. Most of our petroleum exposure right now is in refined petroleum in custody transfers. So meters, high-precision meters for custody transfer, things like jet fuel or home heating oil or LPG, those kinds of products.

John Franzreb, Sidoti & Co.

With the rules for accelerated depreciation set to expire at year end, could you explain to me if you expect your orders to somehow benefit maybe more than normally in the fourth quarter?

We have not been able to see any relevance to that change in our orders pattern. I don't think it really applies much to the businesses that we are in.

Not at all?

Not that I can see.

And also, I was wondering -- if you have said this already, I apologize. But could you break down your pump sales, what the increase year over year was in domestic versus the foreign side of that business?

We didn't provide that.

We didn't really break it down quite that way.

Well, you kind of the alluded to it in the rescue side, when you said that the foreign markets were kind of offsetting weakness in some of the domestic markets. I wonder if you have a similar type breakdown in pumps?

Well, in pumps, what we did say is that pumps were up, I believe, about 30, 33 percent year over year in Asia. And so, both North America and Asia are both up. I don't have the exact North American numbers or European numbers sitting here in front of me, but we did see nice expansion in Asia and nice expansion in the United States, in North America.

Wendy Caplan, Wachovia Securities.

I was listening about your -- especially the haircare and personal care products, and you mentioned some of the rollouts in onesie/twosies. Dennis, how do you think about this in terms of what is it going to take to kind of jump start this? You mentioned that Reflect was going to be putting some machines in other Marshall Fields. What is the sticking factor here that is keeping the product from a kind of more full rollout, the products?

I think it's like any change; there is momentum with the current supply system. And I believe there's a herd mentality with this group, that once the first major customer goes, then there will be more that will follow. Semper continues to expand their presence in Europe, so they are moving continually in the professional salon channel, and in fact they even have some interest on the part of a comparable drugstore channel in Europe that they are working on. And I really think the simple answer to the question -- it's going to take one of the bigger players to make a move. And when they do, I think the others will likely follow. And the question becomes, when -- and if so, when -- will one of the bigger players move? We're talking with all of them, we are working with all of them. As I mentioned in the comments, we're having discussions with several companies that are looking at the professional salon channel in North America. And it is going to take somebody big to move.

I guess my question would be, there is somebody big who has been involved in this, a subsidiary of a large personal care company. And that one in particular -- is it simply the inertia of sort of this is the way we've always done it, or do you sense any kind of movement here, I guess, is my question?

I am trying to think about what I am at liberty to say and what I'm not, Wendy, to tell you the truth. Clearly, Reflect is providing feedback to that large personal care product company, and some of it we are aware of it, some of it we are not. They are keenly interested in what is going on there, obviously, and were it not for success in the Marshall Fields store, they would not be talking about rolling that out into some other similar kinds of stores. And I think it may well be beyond just Marshall Fields; it's that kind of an upscale store where they can set up the store-within-a-store concept.

So I think Reflects's parent clearly understands what is going on and is watching it closely. But I really don't know, beyond that, what the senior level folks in that company are thinking about. It's something they keep very close to themselves, because of competitive reasons.

Okay, that's fair. And I missed the very beginning of the call, so I am not sure if Larry Kingsley is in the room. Is he there?

No.

No? Okay, then I'll save my question.

Michael Schneider, Robert W. Baird.

First, Dennis or Dom, could you address the pricing issue? You mentioned several times that there have been a lot of price increases going in. But my sense is from a lot of other industrial companies that prices, given the spike in materials in August, price increases have been put in effective September 1 or October 1. Is there a benefit that we have yet to see come through from pricing increases that have been put in recently?

I don't think so, Mike. We have been putting price increases in since the first quarter of this year. So throughout the period, we have raised prices in each of the business units. We didn't go out and say to them, hey, on such and such a date, you have to have price increases in place. We told them that they needed to be raising prices where they can and when they can, to make sure that are covering whatever inflationary pressures they may feel on the materials side.

So we have had price increases become effective throughout the year, in each of our businesses. In Band-It, for example -- there's one that I am familiar with. Their latest price increase became effective, I believe, the 1st of October. That is the only one I know of that has fallen in the month of October. So it has really been spaced out through the year, as is typical for the businesses.

And then, when you look at the businesses -- I am trying to get a sense as to what businesses are most surprising to you. Maybe the best way to ask the question is, when you look at your budgets, either year to date or maybe just Q3, what one or two businesses are most ahead of budget?

I think it's fair to say that they are all pretty close to the budgets that they have put in. There's some that are doing better, some that are not doing quite up to what they stretched for early in the year. The process we use in the Company is try not to make the budget process a negotiation process, but to look at what is the best we can do year over year, and let's stretch for it.

So in a way, the business plan is a stretch concept. And so we have got businesses that are stretching and reaching every day for how much more can we do. We have had some great wins in all of the businesses. And in some of these calls, I have tried to highlight some of those, just to give you a little flavor for some of the successes we have seen across the Company.

But I would say all of the businesses are really doing well. 14 of the 15 reporting units were up across the board, and the one remaining unit was flat. It's not like it was down; it was flat, against a fairly tough comp. So I am pretty pleased with the performance we're seeing in all of them.

Then, given your comments about Europe being generally the laggard among the continents or regions, I am surprised dispensing continues to perform so well. Can you just shed some light on what we would see in dispensing, if Europe indeed does begin to follow the recovery here in the US?

Well, again, it's hard to say, because Europe was -- as you recall, there was a regulatory change that was put in place that is now actually playing out over the next probably three years or so; equipment gets changed out. And that was the conversion from an oil-based pigment system to water-based pigment system. So we saw a fair amount of activity a year ago; that's the toughest comps that we have, probably -- driven largely because of the regulatory change.

We also introduced a complete new line of products that, frankly, has allowed us to take share from our competitors. So we have done reasonably well, even in a tougher environment here in Europe. If Europe were to start to grow at a 3, 4, 5 percent rate, we would see more business. But it's hard for me, because of these other factors, to be able to say, therefore, it ought to to track directly. I can't tell you that; I just don't know.

Thanks, and congratulations on a very nice quarter.

Scott Graham, Bear Stearns.

My questions have been answered.

(OPERATOR INSTRUCTIONS). Jamie Cook, CSFB.

One last question. Dennis, I guess, as we look over the past several months, you have made some additions to the management team -- Larry Kingsley, COO. And then I think you named Tom Giordano as Vice President of Support and Logistics. I guess as we look forward, should we expect additional changes to the management team, whether you are beefing that up?

And could you talk a little bit about your plans? I think your contract is up in a couple months, in May or so. So you if you could just expand on that?

Sure, be happy to. Larry has joined us; he is in the saddle as COO, and has spent a lot of time traveling around to the business units so far. So he is really diving into the business and brings a tremendous amount to the Company. His background at Danaher, I think, is just directly applicable to what we do here. The so-called Danaher business system is very, very similar, if not identical to the kinds of things that we do. The difference is they have been doing it a lot longer, so Larry brings in a tremendous amount of global operating skills that directly fit into what we're trying to do in the Company. So he's onboard.

We did add Tom Giordano. This is to kind of add a little bit of resource and support and focal points for all of our sourcing activity. To date, we have done it with the organization we have had in place. We feel now that it really warrants having someone spend full-time on it to drive it and kind of take it to the next level. We see more opportunities out there. He brings a tremendous amount of global sourcing experience, logistics experience. So we are very pleased to have him onboard. He has been onboard now, what, a couple weeks, I think. So he, I think, is going to be a great asset to the team.

We will continue to add talent to the team. As we grow the business, as we become a little more complex, a little more global, all of those things are -- we are a fairly complicated Company. And to think about, in today's environment, to have a Chairman role, the CEO role and the COO or President's role all embodied in one individual in a Company of this size and complexity, given all of the changes going on at the Board level -- it really demands some additional focus. And that is what we have given it, because there is just a tremendous amount of change going on that we need to make sure we are compliant with. And I am quite confident we are, but you need to be ever vigilant in this.

And, being an acquisitive company, as we are, and having the need for integration of businesses that we acquire, we are at 29 percent debt to total cap, and that gives us a lot of firepower. So we are constantly looking for things that we can acquire, and we want to make sure that we give that the right amount of time that it needs. So there's plenty of work to go around. So between Larry and myself, we have got plenty of things to do.

We will continue to upgrade the organization. We have continued to upgrade at the President level and at the staff level within the business units. We have a pretty disciplined process that we use every year to look at our stars, to look at the folks that maybe aren't performing as well as we would like, to have work plans in place to try to help them get better or to find replacements for them. So it's part of what you can expect from this company, probably forever, of never being complacent and constantly looking for better people to give more responsibility to, to grow this business faster and make it better.

As far as my own personal plans, as we have said in the press release, I have committed to the Board to stay on beyond the end of my contract. No decisions were made about any kind of succession at this time. Clearly, Larry's presence here is the way to bolster up that succession planning. That was done with the full intent of having someone who is promotable into this position, and we have done that.

So no decisions are made at this time, and we'll see what happens.

Alex Paris, Barrington Research Associates.

After all this time, I think you have answered all my questions. I just have one question on the margins. You have had a nice three years in a row of increasing margins. Some people asked the question about, do you see anything peaking? And also the breakdown -- I asked about the breakdown between the volume effects and the operation excellence. Where can you go longer-term? I noticed -- from my model, at least -- way back in 1998, probably at the peak of the cycle for the industrial market, you were up to 18.5 or so operating margin. Is there anything different in your business that says that, given time, you can't get back up to that margin?

No. I think it's entirely possible. The average EBITDA has been 22 percent. We ended this quarter at 20. There is clearly more volume that we hope will be out there, and we will leverage it through pretty nicely. And as I think many of you have heard me say before, I have challenged organization that it is impossible for them to exceed my expectation for gross margin. So we are constantly striving for higher and higher gross margins in the business, and trying to incent people to do that.

So if we get to 40, that's great. We feel terrific about having 40 percent gross margins, but why can't we get more than that? So we have got people always stretching and trying to find a better way every day to drive it forward.

But you need volume, I'm just guessing. How many years of economic growth of 3 or 4 percent does it take to get back up to 18 percent?

We have not really modeled it to look at it that way. We can go model it; we just haven't done it.

Right, because you can't get from 16 or so to 18.5 without volume also growing, can you?

No. It would obviously need some volume to get back up to peak levels. If we were at the peak volumes we have seen before, we would probably be close to, if not at or maybe even exceed those numbers. We have not modeled it that way, though.

Charles Brady, Hibernia Southcoast Capital.

A question in regard to the hurricane damage in Florida. Any insurance impact as far as, down the road, having to book a gain? Or is it just so small it's immaterial, doesn't affect that?

Charlie, we are still working with our insurance company, as Dennis mentioned, the 700,000 in the quarter. Any fourth-quarter impact from resolution of insurance, we think, won't be a major, major event for us. So the answer is that it's not a big number.

At this time, I have no further questions.

I'd just like to thank everybody again for listening in on the call. We are real pleased with the quarter we had. We're pleased with our performance year to date, and we are hopeful we can keep it going. So we'll look forward to talking to you in other three months. Thanks very much.

Thank you, and that does conclude today's teleconference call. Everyone may disconnect at this time.