藝達思 (IEX) 2004 Q4 法說會逐字稿

Welcome to the IDEX Corporation fourth-quarter earnings conference call. I would like to inform all participants that you will be on listen-only until the question-and-answer portion of today's conference. I would like to also inform all participants that the call is being recorded today. If you have any objections you may disconnect at this time.

I would now like to introduce Miss Susan Fisher. Thank you ma'am. You may begin.

Thanks, Melissa, and good afternoon everyone. Thanks for joining us for IDEX's fourth-quarter and full-year 2004 earnings conference call. This call is also being Webcast today through the link on our company homepage at idexcorp.com.

Earlier today the Company issued a press release outlining our financial and operating performance for the three and 12-month period ending December 31. A copy of this press release also can be accessed on our homepage.

Joining me on today's call are Dennis Williams, Chairman, President and Chief Executive Officer, Larry Kingsley, Chief Operating Officer, and Dom Romeo, Vice President and Chief Financial Officer. The format for the call will include management's review of the quarter and full year. We will then open the call for your questions. If you need for any reason to access the replay of this call, it will be available beginning roughly two hours after the call concludes through February 10, and the number for that is 800-839-4232, with the pass code of IDEX.

Before we begin, let me 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 SEC.

With that, I will 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 we'll follow today is first some comments on the full-year and the fourth-quarter results, some comments on the group. Larry will then provide a progress report on the initiatives of operational excellence innovation and an update on China and our globalization activity, and then I will come back for some brief comments on the outlook.

Starting with the total year performance, I'm really proud to tell you that we had a record performance in 2004 -- record orders, sales, net income and free cash flow. Excluding acquisitions and foreign exchange, we saw a 9 percent increase in base business orders and a 7 percent increase in base business sales. The improvements were across the board, with orders up in all business units and sales and income up in 14 of the 15 units. This is clear evidence of a recovering economy and the success of our organic growth initiatives. These are the highest annual organic growth rates we have seen in nearly a decade.

Some further details. Base domestic sales were up 10 percent, while base international sales were up 2 percent. We continue to see strength in Asia and softness in Europe. Free cash flow in 2004 was a record at 121 million -- that's 1.4 times net income -- and was up 33 percent versus last year's record performance. 2004 gross margins were 40 percent, up 120 basis points, as our operational excellence initiatives continued to deliver results.

SG&A as a percent of sales was 23.9 percent, down 110 basis points. The full-year operating margin was 16.1 percent, up 230 basis points. Net income increased 39 percent. The incremental pretax income flow-through on the increased sales was 30 percent. Considering that 9 percent of the sales increase was due to currency and acquisitions where there is little or no leverage, the leverage on the true organic growth was somewhat over 35 percent.

So the shorthand version for 2004, the full year -- orders up 18 percent, sales up 16 percent, net income up 39 percent, and earnings per share up 43 cents. We're very pleased with our record 2004 performance. As we head into the first quarter, the Company continues to perform very well operationally and we are delivering solid results to the bottom line.

Let's take a look at the fourth quarter. Orders, sales and cash flow improved significantly year-over-year and were a record for any quarter in the Company's history. Net income was also up nicely, plus 40 percent year-over-year. Looking at orders in a little more detail, orders of 239 million were up 23 percent year-over-year. Excluding acquisitions and currency, orders were up 13 percent versus the fourth quarter of last year, driven by favorable order patterns relative to a year ago in both November and December. Fourth quarter orders by month are as follows -- October, 78.5 million; November, 78.3 million; and December, 81.9 million. Order rates improved in all three segments.

Turning to sales, sales at nearly 243 million were up 23 percent year-over-year. Excluding currency and acquisitions, sales were up 12 percent year-over-year, led by a 15 percent increase in Dispensing Equipment coupled with a 12 percent increase in Pumps and an 8 percent increase in Engineered Products. This is now our ninth consecutive quarter of organic growth, and notably, is our highest quarterly organic growth rate since the second quarter of 1995.

Looking at the foreign sales content. Excluding foreign exchange and acquisitions, foreign sales were 42 percent of total sales versus 45 percent last year. In the fourth quarter of 2004, Europe represented 24 percent of sales, Asia was 8 percent of sales, and the Americas excluding the U.S. were 8 percent. Notably, Asia year-over-year was up 10 percent and China was up around 25 percent. So we continue to see strength in Asia.

Looking next at margins. In the fourth quarter, gross margins were 39.6 percent, up 90 basis points year-over-year. This is now the Company's 12th consecutive quarter of year-over-year gross margin expansion. The gross margin increase is a direct result of volume leverage coupled with our focused operational excellence activities.

Total SG&A of 58 million was up 19 percent over last year, mainly due to acquisitions, volume, foreign exchange and reinvestment in the business. This was partially offset by savings from our ongoing cost control efforts. In the fourth quarter, SG&A as a percentage of sales was down 80 basis points versus the fourth quarter a year ago.

Turning to operating margins. The operating margin of 15.8 percent was up 170 basis points year-over-year due to volume and the continuing favorable impact of our operational excellence discipline, offset by some unusual expenses. In the fourth quarter, there was some unusual expenses due to the settlement of a pump distributor lawsuit and some personnel-related costs, plus an increase in the bonus accrual which affected both year-over-year and sequential comparisons. In both cases, in the aggregate, these items totaled more than $2 million. The operating leverage as reported was 23 percent. However, 11 percent of the sales increase was due to currency or acquisitions, which have little or no leverage effect, plus the higher cost just mentioned. Consequently, the leverage on the true organic sales was again at our expected range of about 35 percent.

Looking at net income and EPS, net income of 22.7 million increased 40 percent on a year-over-year basis. Fourth-quarter EPS of 43 cents was up 34 percent year-over-year. And to be precise, the EPS was 43.496 cents, which rounds in our case to 43 cents. Free cash flow during the quarter was also strong at 41.8 million and is a record for any quarter in the Company's history. This free cash flow equates to 1.8 times net income, so our quality of earnings continues to be terrific. Total working capital was reduced 130 basis points to 12.3 percent of sales. DSOs declined by 2 days to 43 days, while inventory turns are slightly improved from a year ago to 5.1 turns. Debt to total capitalization was 24 percent at quarter-end. This compares to 23 percent a year ago and 10 percent at the end of the third quarter.

So the shorthand comparison for the fourth quarter -- orders up 23 percent, sales up 23 percent, net income up 40 percent, and EPS up 11 cents. We are very pleased with our record performance in the fourth quarter and the momentum in our business as we enter 2005.

Now let's take a look at the groups, starting with Pumps. Pumps for the year represented 58 percent of sales and 54 percent of income. Orders of 139 million were up 17 percent compared with the prior year, and that is comprised of 6 percent base growth, 9 percent from acquisitions and 2 percent from currency. Fourth-quarter sales were up 23 percent year-over-year, 12 percent as a result of base business growth, 9 percent due to acquisitions, and 2 percent due to currency.

Operating income of 25 million, or 17.3 percent of sales, increased 30 basis points year-over-year due to volume leverage and our corporate initiative. The operating income was impacted by the costs previously mentioned, plus about half of the sales increase was due to acquisitions and currency. Consequently, the leverage due to organic growth was again in our estimated range of about 35 percent.

For the full year, pump orders and sales were both up 19 percent -- 9 percent base, 8 percent from acquisitions and 2 percent from currency. Full-year operating margin for pumps was 17.2 percent versus 15.4 percent, an increase of 180 basis points.

All of our pump units continue to drive hard in four areas -- new products, improved distribution, OEM focus, and globalization. Here are a few highlights.

Viking continues to crank up its innovation machine with 13 percent of its 2004 sales coming from new products and new applications introduced since January of 2002. Everything from pumps used in ethanol plants, to wind energy turbines, to the latest generation of aircraft deicing equipment.

Gast recently developed, with a leading refrigerant expert, a controlled atmosphere system used to preserve fresh produce and seafood in shipboard containers. Due to their outstanding performance, they've been asked now to develop a companion misting system.

Micropump has developed a new valveless electromagnetically-driven gear pump known as the I-Drive. This is a patented technology that delivers powerful, continuous performance in a highly compact design, which is particularly useful in a range of applications, from commercial inkjet printing, to fuel cells, to kidney dialysis machines.

In the fourth quarter, Pulsafeeder continued to make inroads in the water and wastewater treatment market. They recently won significant new contracts with the Mexican government and privately owned water suppliers, and during the quarter launched five new pump designs addressing the need of a growing market sector in China.

In addition, Classic Engineering won a major new OEM account for their chemical feed systems -- another example of the power of being a total solutions provider.

Trebor is benefiting from a rebound in the semiconductor industry as well as their own innovation. Trebor's high-purity deionized water heater sales virtually doubled in 2004. They continue to win new OEM business in the U.S. and recently delivered their first order to the semiconductor industry's largest Japanese OEM, Dainippon Screen.

At Rheodyne, the Titan HP (ph) high-pressure valve platform was released in the fourth quarter and already has been adopted by a major analytical instrument manufacturer for use in their 2005 production.

These are just a few examples of the innovation going on in the pump group. In the fourth quarter, about 12 percent of sales in this group are from new products, new applications and new territories introduced since January of '02.

Turning now to Dispensing Equipment, for the year it represented 18 percent of sales and 19 percent of income. In the quarterly comparison, orders increased 48 percent year-over-year. That's 42 percent base growth and 6 percent currency. Both the European and the U.S. operations contributed to this significant increase. Sales increased 20 percent year-over-year. That's 15 base and 5 percent currency.

Due to the operational excellence initiative in volume, operating income within dispensing grew 34 percent year-over-year, and the fourth quarter operating margin of 16.2 percent was up 180 basis points year-over-year. For the full year, dispensing orders were up 15 percent. That's 9 percent base and 6 percent currency. Sales were up 7 percent -- 2 percent base and 5 percent currency. For the full year, operating margin was 19.7 percent versus 16.2 a year ago. This 350 basis point improvement is due to our operational excellence initiatives as well as volume improvement in all units.

Some highlights from this group in the fourth quarter. Beta tests on the hair colorant machine in the North American drugstore channel continue to do very well. Currently there are machines at four different retailers, and it's very likely that one major retailer will conduct a broader beta test to verify the acceptance of the concept. A multi-store retail beta test in Europe which is something new will begin in the first half of 2005 with six units. We recently have supplied also a machine to a new company that is looking at customizing shampoos and conditioners.

In cosmetics, Reflect continues their testing with the store-within-a-store concept, and it's going quite well.

In paints, one major retailer is replacing all the equipment they purchased in the past from our main competitor in order to improve their reliability, and this should be completed in the first quarter. A major retailer has made the decision to launch the paint sample machine in their stores, and this will begin to roll out in the first half of the year. MicroBlend is beginning to aggressively market their concept using our all-in-one paint dispensing machine, and we expect to see revenues increasing during 2005 from their initiatives.

In the fourth quarter, about 37 percent of sales in the dispensing group are from new products and applications introduced since January of '02. The innovation in this segment has just been terrific.

Turning to engineered products, for the year, 24 percent of sales and 27 percent of income. In the quarterly comparison, orders improved 23 percent year-over-year -- 9 percent base, 11 percent acquisition and 3 percent currency. We continue to see strength in both rescue tools and fire suppression, as well as in our Band-It custom banding business.

Sales were up year-over-year by 23 percent -- 8 percent base, 12 percent from acquisitions and 3 percent from currency. Operating income grew 55 percent year-over-year. Operating margins during the quarter were 23.3 percent, up 480 basis points year-over-year. In the full-year comparison, orders and sales were both up 18 percent versus last year -- 7 percent base, 7 percent from acquisitions and 4 percent from currency. Both Hale and Band-It contributed nicely to the orders and the sales increases. Operating income grew 43 percent and the operating margin for the year was 21.5 percent versus 17.8 percent a year ago. That's a 370 basis point improvement. Again, we saw a substantial improvement in both businesses.

Now a few highlights from this group for the quarter. The fire suppression and rescue tool business continues to be pretty vibrant due to the innovation and true global focus that the business has. In the fourth quarter we had good project business from India and the Middle East. In Germany, we were awarded, for the first time, fire suppression business from an OEM in this very vertically-integrated market.

The rescue tool business, especially in North America, remains robust. We see significant demand for our new and existing products -- portable power packs, cutters, spreaders, combie tools and lifting cylinders.

Pump modules and kits that I've discussed before are growing in popularity. Sales in '04 were more than double the '03 level, and a total of 32 OEMs have ordered units. We have a couple of new prospects for our Eske (ph) multiplex wiring system outside of the fire and rescue market, and we have a new -- we've added a new application for displays with a leading hydraulic generator manufacturer in the fire industry.

At Band-It, the automotive application work is progressing nicely and we are increasing the focus on the marine market. In the fourth quarter we received an order for use in the harbor in New York City, and we are developing a full product line for these types of applications, including installation tools that can be used on ships and underwater.

In Engineered Products, sales from new applications and new products introduced since January of '02 were 21 percent of the total fourth-quarter sales.

I will now turn it over to Larry who will update you on our progress on some of our key strategic initiatives. Larry?

Thanks Dennis. Turning to the initiatives.

In '01 we adopted operational excellence within the Company. The strategy was to improve our operating performance, to increase margins and to drive cash flow, to allow us to spend more on R&D while improving earnings.

The reinvestment in the Company is driving our organic growth today. Much remains to be done and there will always be much to do, but the strategy is working. Again, 12 consecutive quarters of gross margin expansion, 9 consecutive quarters of organic sales growth and 10 consecutive quarters of earnings growth.

18 percent of our total sales in '04 came from new products and applications introduced since January of '02.

We continue to keep score on savings from Lean, Six Sigma, and from our Global Sourcing initiative. In '04 we generated $11.4 million of savings from Lean and Six Sigma. We generated 13 million in Global Sourcing savings, representing a 25 percent savings versus our prior sources. We continue to train new Black and Greenbelts and move our more advanced belts into critical operating positions where they can put their experience to work to drive change in the business.

So looking forward as to where we take our operational excellence strategy, it's an evolution. It's not a change in course. Dennis and I have a very similar core value set which includes a relentless approach toward continuous improvement. I just want to reinforce that at IDEX we don't just talk about it, we live it.

This year we'll take our experience with the Lean and Six Sigma tools and tie it to our performance management system. We have been incubating such an operating model within one of our units, Micropump, but we're now beginning to apply it across the Company. In short, it models the complete system. It connects strategy with the three principal voices -- those being the voice of the customer, the voice of our employee, and the voice of our business -- with identified stretch goals and operating metrics.

We've automated the tracking capability within our information systems so that we have real-time desktop access for all employees. This system allows us to rapidly reallocate resources and help guide our day-to-day business decision-making to drive performance.

The foundation of the system is a thorough understanding of business process. That is the point -- from the point of idea creation to cash in our pocket. It involves process mapping across functions at multiple levels within the business, but also value string mapping within specific processes to identify and measure process improvement priorities.

So, this integrated operational excellence performance management model, based on cross-functional process improvement, is really simply the next step in the operational excellence initiative that Dennis and the team initiated back in '01.

Now turning over to innovation. Another core element in our business strategy is to drive innovation throughout the Company. As we have seen in our financial results, innovation clearly differentiates IDEX and drives our organic growth. Dennis provided you with examples of some of the recent innovations at IDEX, from the new I-Drive technology at Micropump, to the paint sample machines, to new firetruck pump modules at Hale. The ideas are coming from every business unit and the innovation process is gaining increased rigor as we move forward.

We're taking a similar process-based approach to innovation that we have on the operating side to drive innovation throughout the Company. We continue to ask our business units to redefine their served markets, to in effect broaden their horizons without losing their niche focus. At the same time we continue to innovate products to meet critical customer needs, whether for greater functionality, meeting requirements, or providing a more integrated product solution.

Building on this concept, we're now formalizing the idea generation and innovation process throughout the Company. The objective is to have an even more robust front-end to our strategy-setting and our stretch goal-setting processes, again, tied to our performance management system so we measure and we live the innovation the same way we do the operational excellence throughout the Company. I look forward to updating you on our progress for both the operational excellence and the innovation initiatives through the course of '05.

Now over to China. Given the rapid growth in Asia, and especially China, we have taken several steps to position our company to more fully seize those opportunities.

First, we consolidated the various sales resources from our pump group businesses into a single focused pump sales force. Our efforts are paying off. Orders for this group in '04 were up substantially. We expect to continue to see strong double-digit growth from this effort for a long time to come.

A little over a year ago we opened our wholly-owned manufacturing facility in Suzhou, just outside of Shanghai. The concept has been to create an umbrella facility to make it easier for our businesses to transfer products targeting the local market, and to support OEM customers that are moving their operations to Asia.

This concept is working very well. We continue to ramp up our Suzhou operations based on local opportunities in the businesses. Currently we're producing 17 products for seven business units in Suzhou, and this number of products should more than double in '05. As our Suzhou facility continues to fill, we're now expanding to a second location in a nearby export (indiscernible). That should help our units be more competitive on OEM and higher-volume products destined for export.

As early as the end of the quarter, we expect to break ground on a new facility for Dinglee, our Chinese rescue tools business based in Tianjin Dinglee. Dinglee is an important portal for both our fire suppression and rescue tools products into the Chinese market. The new facility positions us well to be the leading provider in this very important growth market. We continue to be very excited about the growth prospects coming out of China. Our IDEX teams on the ground in China are really doing just a fantastic job and we're very pleased with our progress.

In '05 we'll also explore possibilities to take in the same umbrella approach that we've taken in China to the parts of the world, such as India and Eastern Europe. This concept clearly works and will enable our units to better penetrate additional emerging markets while at the same time supporting the geographic expansion of our customers.

And with that, I'll turn the call back to Dennis to wrap up. Dennis?

Thanks Larry. Turning to the outlook, we are encouraged by our base business sales increase and the earnings growth in the fourth quarter and for the full year 2004. The economies in North America and Asia have clearly improved, while Europe remains somewhat soft. I'm 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 incoming order rates 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 first quarter and the remainder of 2005.

So in summary, we saw improvements in nearly every business unit in orders sales and operating income on a year-over-year basis for both the quarter and the year. We continued to evolve our strategy and are as confident as ever that we are working on the right things. We continue to benefit from more global focus and new product innovations at all of our business units. We believe our strategy is working well. Finally, we are very encouraged by what we've seen in the last five quarters, and we're working hard to build on our business momentum as we enter 2005.

With that, I'll now open the call for questions

(OPERATOR INSTRUCTIONS). Wendy Caplan, Wachovia Securities.

Dennis, acquisitions have always been an important part of IDEX's growth, yet we haven't seen anything since the little Dinglee transaction midyear. Can you (technical difficulty)

We just lost Wendy.

Melissa?

Yes, one moment. I apologize. Wendy, your line is open.

I was asking about acquisitions, that we haven't seen anything since Dinglee in midyear. Can you give us some outlook in terms of what the pipeline looks like, what pricing looks like for properties, and where we're focused?

As we have said in the past, we are looking across the board in all of our business units for things that make sense to build those businesses. We continue to look at things. I would say the pipeline is fairly robust, perhaps even a bit more than what it has been. Pricing, as I think everyone knows, is a bit higher than what it has been historically. I think a lot of that is due to the financial sponsors being in the market with a little higher leverage rates, and the capital markets allowed them to do that. So we are being very patient, very selective, trying to make sure that what we contemplate will not only make sense from an accretive standpoint, which is pretty easy to do, but also from an ROIC standpoint. So we are actively pursuing things. As we speak right now we have a number of things on the screen; whether they come to fruition or not, who knows? But that's pretty typical of where we have been all along.

And although you referred to some unusual items in the quarter, could you give us what the pump margin would have been in Q4 without these items?

It would have been in excess of 18 percent, right Dom?

That's correct. Wendy, it's probably 18.2 to 18. 3. So essentially flat with our great performance in Q3.

And finally, can you adjust the gross margin for R&D, let us know how much you spent in the quarter and the full year?

Wendy, for the full year R&D is about 2.2 percent of sales.

Dom, your expectation for '05?

As we have said in the past, we think it should be a bit higher than that. We're not going to just raise it just for the heck of it. There's got to be good reasons for doing it. I would expect to see a tick up a little bit, but not dramatically. In the fullness of time, I think we are 3 to 4 percent. So maybe it goes up a little bit this year on a percent basis.

Finally, Larry, you talked about performance-based compensation. Can you give us some details on that?

Sure, Wendy, I can give you a little background. The Micropump model that I referred to is one where it's not just performance-based compensation, it's really tying what we do so well in the way of operating improvement to a management system where we have clearly defined metrics that, in the case of now what we have with Micropump, online real-time capability for viewing our performance to those targets. And then, in the case of the compensation portion of that, the ability to enhance the variable compensation for all in the business. So you kind of envision those folks that are involved in a given process (indiscernible) product to the customer. People all understand where they are at any given point by going to their desktop, looking online, understanding where they need to be versus the target for the day, for the week, for the month, and what it takes to get it done to meet their variable compensation opportunity. It's really driving some very nice behavior in terms of real-time peer-level support, let's call it.

And when would we expect that to be company-wide?

We're going to work it through the course of '05, rolling it out now, and, obviously, across a number of business units. So I would hope by the end of the year that we'll have that fully in place.

Scott Graham, Bear Stearns.

Could you lay out for us what he hit year-over-year was for raw materials, and then also maybe give us an idea of what pricing was in the quarter?

On raw materials, I am not sure we have summed the number for the year at this point. But the strategy that we've taken, as we've mentioned before, is to very carefully track the input material, both forecast and actuals, and then implement surcharges and price increases. And we think by and large we've been successful in offsetting those inflationary pressures through pricing. And there tends to be a little bit of lumpiness of you may get some price in one quarter and have a little cost impact in the next, so that you may not see a nice smooth flow quarter-to-quarter. But by and large, throughout the year I would say we've been able to pretty well offset the inflationary pressures through surcharges and price increases.

In the quarter -- in the fourth quarter, anecdotally what we hear from the businesses is that things have eased off from an inflation standpoint a little bit. We still hear stories where maybe motor prices might be going up in a business because they have had a longer-term contract that may have expired within the quarter, so there would be some price increase there. But at the same time we have heard about some price declines in some of the commodity areas from some of the other businesses. So I would -- on balance in general I would say things have eased somewhat. It's still a worry. As we have put together our plan for '05 we have some inflationary assumptions in there and also some pricing assumptions of what we need to do to offset that. We have got a pretty robust process in every business to track material costs to try to stay in front of the power curve so we don't caught in a squeeze.

Dennis, if I just might ask you to elaborate on this just in this way -- are the pumps operations -- if you look at raw materials versus pricing, is there sort of a larger spread between the negative of raw materials and the positive of pricing in pumps than there is in the other two businesses at this juncture?

I don't think so. Dom, you --

I agree with you. I don't think we have seen that, Scott.

I don't think so.

Let me ask -- turn to Larry for this question. This year we dropped in about $24 million of cost savings into operating income. I'm wondering what that number looks like in 2005. Is it something we can keep north of 20?

Yes. I think that certainly first for both the material savings and the productivity savings opportunity we have going forward, we still have lots of opportunities to work on. And I think the comment on north of 20 is a safe thing to assume.

Michael Schneider, Robert W. Baird.

Dennis, could you address -- you did a nice job on the pump side explaining the unusual expenses, but I guess the same question or concern about incremental margins in dispensing exists as well. I'm looking at the organic growth of 15 percent. That's the best number in five quarters in that segment, yet it was the lowest incremental margin in five quarters as well. Could you spend some time on that segment?

Sure. The things that I cited for overall costs, unusual costs across the Company -- the lawsuits related to a pump distributor obviously falls within pumps. All the other costs of personnel-related costs, bonus-related costs -- they get fairly well paraded across the Company. So you are going to see an impact in every business because of that.

Is there some effect across the businesses that in the fourth quarter you did see some of the raw material contracts that were maybe favorable begin to unwind, and there was a price and cost squeeze that emerged in the fourth quarter that had not been witnessed in the balance of the year?

I can't give you hard evidence one way or the other. We know in all of our businesses throughout the year you have discrete price increases and you have discrete cost increases. And was there a disproportionate share of costs in the fourth quarter versus other quarters? I can't tell you. I don't know. We don't have the granularity of that level of data. It is possible, but I can't tell you for sure yes or no because we don't have robust enough data as we sit here right now. We could go get it, but we don't have it sitting here right now.

And the personnel costs that you mentioned across the business -- this was year-end headcount reductions? Maybe you could shed some light on that.

It's replacement of some people and the addition of some people.

I guess just on pricing itself now, most businesses have gone out in the industrial space with price increases as of January 1. Could you give us a sense of where you are in that, what the receptivity has been? And is there a possibility that you actually gain some cushion vis-a-vis your raw material costs now as we enter the new year?

If you start with history, the Company has a history of price increases, and it's really implicit in the business model of being more engineered product than a market share leader. We did in '04 and raise prices in, I believe, every business. Not uniformly in time or amount, but each business recognizing their ability to raise prices did it is far as they could. I think it's fair to say that every business will raise prices in '05. Some were in January. Some will be later in the year. We don't mandate that they raise prices on a certain date because there are some historic time periods where they have raised prices, and as long as the inflationary pressures are not such to force you to raise them earlier, we are quite comfortable with that.

So I think the answer is we will raise prices again in '05. Whether that builds cushion for us or not will depend upon what we see from a material inflation standpoint throughout the year. In some cases there are surcharges so that we'll back the surcharges off when the material prices decline, so there we'll be able to cover it. Then it's maybe a minor degree of timing. But by and large, I think we were pretty successful in offsetting the inflation this year and I think we'll be able to do it again. The receptivity -- look, nobody likes the price increase, but we have had surprisingly little resistance. And I think that's probably pretty common for a lot of companies that are similar to us, where your customers recognize that you're costs are going up and it's just part of the deal.

Drilling down, just one question on two segments. First within pumps, could you just give us some color or some figures as to the performance of the industrial pump businesses versus your life science related businesses?

They have been -- if we look back at the last quarters, and I haven't seen personally the fourth quarter numbers -- but they have been throughout the year almost identical. So pretty common.

And then dispensing. Could you put some figures around the revenue benefit from both of these major retailers, one replacing the competitors' equipment and then the other roll-out of the paint sampler, just so we can get some sense of what the revenues associated with this is?

I'd prefer not to break these out for competitive reasons. There are a fair number of machines that are being replaced, and we have a commitment on a certain number of machines that this retailer would consider very proprietary. So I really can't -- I'm under an obligation here not to say what those are.

But the replacement equipment -- are these manual dispensers or electronic?

No, they are automatics.

Charlie Brady, Hibernia Southcoast Capital.

Could you in the backlog just talk about the margin in the backlog? Has there been any change in that? Has that shown some improvement from what it was in '04? I know it's short time, (indiscernible) a month or so or sales, but I'm just trying to get a trend -- the monthly trend the last three months has been sort of trending sort of upward. And I'm trying to get a sense of has the margin been steady as well or shown some improvement, or (indiscernible) sales been up with the margins falling back a bit?

To be very honest, because we're so short-cycle the business, we kind of track what the backlog number is but we don't track margin and backlog, per say, aggregated. I suspect each business does. We've not heard anything that would make us believe that the margin and the backlog has changed in any way, other than maybe some mix consideration, but that's -- as far as a decline, we haven't got any indication that's the case.

And from a backlog standpoint, remember that as long as I've been here, the shortest backlog I think we ever had was about 8/10 of a month or maybe a touch more than that. And the most has been probably about 1.2 or 1.3 months. So we operate in a fairly tight band and it's not very long, and half of that is shippable -- more or less half of it is shippable in the next 30 days.

Can you talk about on the tax rate -- your tax rate kind of dipped down from what it was. Was there anything driving that and where do you see that coming out in '05?

At the third-quarter call I believe I had mentioned that we were going through a research and development credit exercise. In the fourth quarter we actually had some additional credits resulting in the fourth quarter rate at 34. For the year we ended up at 35.5. We're still in the process of looking at new legislation. But for now I would say we're at about 36 for next year would be my current estimate. We'll give you an update on that at the end of the first quarter.

Jamie Cook, CSFB.

My first question has to do with in 2005 you talked a little bit R&D could be up a little, but are there any other unusual costs in '05 that won't be in '04, whether it will be additions to headcount, investing in certain areas, whether it be China or whatever that wasn't in '04 that we should know about?

We are constantly reinvesting back in the business. We do have initiatives within the Company for '05 that will have some people impact. There will be some adds, not substantial and not material. The whole premise here that we've had all along is that we earn our way to do these things so that we don't detriment (ph) margins -- in fact, we expand margins. So yes, there will be some investment as we continue to drive organic growth. We've seen some regional opportunities, as Larry mentioned. We will be expanding the activity in China, but frankly, it's because the volumes support it and we're going after one of the major growth markets in the world.

My second question -- if Europe picks up in 2005, or I guess just stronger demand, whether it be by product line, geography, end-market -- are there any concerns in terms of capacity or you being able to meet demand?

No. I don't think we have any capacity worries. It's really the power of Lean. Every time you run a Lean event you create capacity. So we have generated a lot of excess capacity and floor space in virtually every one of our businesses because of the operational excellence things we have been working on. So we do have capacity. We don't run three shifts across the board at any of our facilities, so we have shift expansion capability. So I don't see any capacity constraints at all at this time.

My last question -- in terms of end-markets in general, did you see any material difference Q4 versus Q3, whether it be strength or softness in certain end-market, or are we staying pretty much consistent?

Actually, as I pointed out in the first part of the comments, we saw I guess what I would describe as unusually strong November and December demand, where the orders in December are actually the highest for the quarter, which is somewhat unusual. And I'm not quite sure how to interpret that yet as a single data point, but that was pretty well across the board. We didn't see any one stand out; we saw strength pretty uniformly everywhere, and that was pretty gratifying. Compared with prior years, where December -- November and December tended to be somewhat weaker months, with the strongest month of the quarter being October.

Anything in 2005? I mean, your incremental margins have been very nice I guess. Anything in '05 that you would think, assuming the volumes are there, that you shouldn't be able to target your normal incremental margin in the 30, 35 percent range?

I think those are good numbers. As I pointed out you don't get that on currency, you get it on true incremental volume. And I don't see any reason why we can't generate 30 to 35 cents. That's what we have said in the past and we pretty well hit that, I think, through the year and through the quarter, when you back out some of the what we believe are truly unusual things. So I feel pretty confident we can do that.

Alexander Paris, Barrington Research.

Great quarter again. I just want to get at this -- Europe has been so weak. With the dollar down against the Euro for three years now, do you get the feeling that your competitors are there are just swallowing the cost involved in the currency and not raising prices? Can you isolate that at all? You should be getting more competitive over there.

Competing against a Euro-denominated or Euro cost-based competitor makes our life easier. There are anomalies in some of the distribution channels where a distributor may try to hold onto that extra margin in this kind of a time period because they know it's going to go the other way and they're going to get squeezed in the other direction. So you kind of have to shred it out piece by piece. I can tell you anecdotally from traveling in Europe that there has been inflation in Euro terms in a lot of places where I have been, whether its hotel rooms or meals or things in the store. So I think prices continue to inflate in Europe, which in fact gives us even more headroom as a dollar-denominated cost-based company. So we look aggressively at Europe for our U.S. businesses as opportunity, and will be that way, I think, for some period of time until if and when the dollar swings back the other way.

So the biggest problem is just that the economies there are still so soft? And that will be the signal for you to start doing better European business, when their economies pick up?

I think we will do more. We certainly see opportunities just because of the currency fluctuations that make us more competitive there, so we are trying to leverage that. But just the overall demand really hasn't come back by and large for all products across Europe from what we can see.

Looking at China, I guess there's three reasons you would go there -- to address that huge market, to get lower cost in your products, to then reexport from China or just to follow your customers there. How does your business shake down there or shake out on those three? Are you there primarily for the market?

The correct answer is all of the above. But if you look at what we have done in the last year, I would say 60 to 70 percent of Suzhou production went either to the local market or to support OEMs, our OEMs that had moved to manufacture their products in Asia. So I think as we sit here today, if we look at the Dinglee investment that Larry mentioned -- we're going to build a facility, put Dinglee in it, and use that as the portal to go after all of the fire and rescue market in China and the rest of Asia. So there it is -- there will be some component sourcing we'll bring back into our other markets, and some probably full product that we'll bring back in. But it is largely a local market play that we're going after there.

In Suzhou it's a combination. Like I said, 60, 70 percent probably in categories A and B, and then some export. Larry also mentioned the move into the export processing zone, or export-free zone -- duty-free zone. We are going there because of some business that we have and some other business that's coming on that will be export-related business, where it gives us a little bit of additional margin and it's the right thing to do. So we are along the path on that facility as well. So that's a little bit of a long-winded answer, but we're there for all of those reasons. And I think anyone that goes there should be looking at it that way.

Where are you in terms of India and Eastern Europe? Are you just thinking about it, just getting started, or do you have some facilities your marketing on the ground there?

In India, we have a small facility there today related primarily to our Liquid Controls business. What we're contemplating there is a broader umbrella-type facility much like we did in Suzhou. India, as you may know, has pretty high import duty barriers, so that if you want to really address the majority of the market you need to be on the ground there. So I believe in time -- and we haven't made any final decisions; we haven't taken anything to the board yet -- but we will be moving into India for select products that address the Indian market needs. And in Eastern Europe, we currently sell product there today. We look at Eastern Europe as an opportunity. Our plans are not quite as far along there, but clearly we're contemplating some things in Eastern Europe as well.

Just one other quick question. It's great to see the great results come in quarter after quarter, but it's difficult to forecast if you're looking forward. Your one-month backlog right now -- is that normal or is that a little higher than usual, or what?

I would say it's pretty normal. As I mentioned before, as long as I have been year I think the shortest backlog was like 8/10 of a month and the longest was about 1.2 or 1.3. So, the business tends to run in that kind of -- with that kind of lead time. And of the total backlog we have, about half of it is shippable the next 30 days. That's kind of the way to think about this business. And we're working hard to shorten cycle times. And a part of the operational things that Larry was talking about -- we constantly are putting pressure on ourselves to shorten cycle times because that makes us more competitive. So we may even see that backlog shrink a little bit because our customers are able to wait a bit longer to place orders.

When you're looking into 2005 though, I know you do planning. Is the planning you do mostly on the incoming data from your sales forces around the world, or are there a couple of macro numbers that you try to forecast, and then relate those in turn to your forecast?

To try to do any kind of a regression analysis and come to any conclusion we have concluded is a bit like wattless energy. So what we tend to do, and do it with some rigor, is every business unit comes in with their view of what they can do in the coming 12 months. And we review it thoroughly, we revisit it, and then we take that plan to the Board. So it is a bottoms up business unit by business unit look at the business.

Ned Armstrong, FBR.

Good afternoon. I just wanted to revisit some of your cost saving initiatives. If I heard correctly earlier, you thought you could get another 20 million or so this year between the Lean, Six Sigma and Global Sourcing efforts. Would the split of the benefits be -- between the two be about the same?

Ned, this is Larry. I would say that's a good assumption for '05. It's similar to where it has been in the past.

And then, with regard to specifically the Lean, Six Sigma, how much of that would be affecting the cost of goods sold versus the administrative SG&A-type of operations?

The majority of that is in cost of goods.

Michael Schneider, Robert W. Baird.

Just one follow-up actually on the new tax provision that's been allotted for unrepatriated earnings. Have you guys studied exactly if you have the opportunities to deploy in the U.S., given that it appears as though companies are going to be barred from buying that stock and issuing dividends?

Mike, as I mentioned we're still in the process of that study. I expect to have an answer at the end of the quarter. If you look at the impact of the phaseout of the ETI on us, it's not as extreme as it might be for some other companies. That's why I would kind of tell you right now that the tax rate next year will be 36. But we will give you a full answer at the end of the quarter once we complete our study.

And then, just a question on the FEMA spending that's come out of Washington for rescue tools and fire equipment. It looks like the budget there is under pressure as well, like the total budget funding is going to be down 100 million this year. When you brought the guys in from Hale and LUKAS, etcetera, did they express any concern about that level, or is there so much inertia in this business that may not constrain it in '05?

I think that's a portion of the funding but it's not the full picture. I can't tell you what percent of the total we get, but it's not a huge percentage. We get some of it, but that money goes for a lot of different things. We have seen some nice business in the U.S., in fact around the world, but particularly in the U.S., in the rescue tool area. And they seem to be fairly confident that that will continue to be the case. Because it's not just that one budget line; it's coming from a few other places as well.

Dom, just a specific on the hurricane expense last quarter of 700,000. Did that reverse itself through a refund or something this quarter?

Mike, if you look at other income and expense in our table there's about a $200,000 reversal, but it was offset by -- as you know, we refinanced our debt and had some costs associated with that to write off. So the net net in the quarter of the hurricane and the other event I just mentioned was a -- basically about a $100,000 drag to (indiscernible) to pretax income, but it's in other expense.

Just modeling the other income line, below the segment level, that number has been rising significantly over time now. And at least by my numbers it looks like it was up again about another 500,000, just even sequentially. Could you give us a sense of what is driving the growth there? Is that just the acquisitions, or is that Sarbanes-Oxley or any of the other corporate governance actions?

Mike, it's a piece of that. It's also some of the other items that Dennis mentioned. There is some bonus impact in there, too. But I think the right way to look at that when you look at the SG&A pull is the leverage that we're getting overall at the Company.

Dick Henderson, Pershing.

Dennis, could you comment on the inventory situation, your own distributors and end-users?

In terms of whether it's increased up or down you mean?

Yes, right. Is there an inventory build in the system with price pressures and so forth? Because an awful lot of basic suppliers have moved from -- into the catbird seat in terms of pricing and the pushes on.

I do not believe that there has been any inventory build going on. We have pretty good visibility in our Viking business, probably better there than anywhere. And if anything, versus some more robust periods, there's less inventory, simply because we've gotten better; they have gotten better and we have gotten better. So I don't think there's anyone building inventory. I think all of our customers tend to be pretty focused on this, so that's -- if anything, inventories are probably smaller and cycle times are shorter versus the last period of good times.

Right, because you would think with everyone trying to clean up for year-end there would be a natural drop in inventories. And yet with your orders written and so forth being so strong, I was just wondering what's your sense that there's nothing to be concerned about.

No, I don't think so.

Second question, back on Europe. You mentioned you were there. What is your sense? Are we stabilizing? Are we moving up the hill, or what?

In terms of the economic --

The economic environment there.

I mean, it's kind of hard to tell on a brief visit. Everything that I read says that it is still soft. There's some speculation the second half will be better, but I'm not sure there's any real basis for that. The Europeans have some continuing structural issues, not different than what we do here, but I think they may have some more pressing ones they've got to deal with. I would not put a huge rebound in Europe. We're not planning on any huge rebound in Europe in '05.

Last question. Since you both export and are on the ground in Europe, how do the margins compare?

Europe versus U.S. you mean?

Right. It's not apples-to-apples, but the point being that you do have the export business and you do have operations in Europe.

Our main European operations are Fluid Management -- Fast and Fluid Management and LUKAS are the main, and also there's a Hale operation there that are, I guess, from a manufacturing standpoint our largest ones. Band-It also has a fairly sizable operation there. The margins from those businesses are quite good and comparable to what we see in the U.S.

Scott Graham, Bear Stearns.

Just two final follow-up questions. Dennis, you have, I think, for the second consecutive quarter thrown out some of these percentage of new product new application numbers by region covering the last three years. That is great stuff. And I was just wondering if you might be able to give us, even if anecdotally, what those numbers would have looked like a year ago and what those numbers could look like next year?

The reason we've been tracking it and reporting on it is that it's part of the metrics that we're using to run the businesses. And so, if you went back in time, you would probably find that they are not as high as what they are today. We have seen some trending up in those numbers, as we would expect.

The question has been asked a few times -- okay, what should it be? If you look at a three-year kind of window, what should it be in the Company? And to be honest, we don't know the answer to that. But it's probably north of 25 percent, maybe 25, 30 percent would be, I think, really good performance. Some businesses are actually higher than that now. Because of the three-year measurement you will see some lumpiness in that. As they redesign a whole product family, when that drops off the three-year point, then you'll see some step changes.

But by and large, it has gotten to be a greater number. And we're driving it that way. And part of our variable compensation scheme is to tie some dollars to what has been business unit by business unit. And in order to qualify, it needs to have a gross margins equal to or higher than the product it replaced, or higher than the average in the business unit. So we're trying to drive margin, as well as revenue, through this kind of a metric. We are at the very early stages of that because we are still trying to gather enough data to be able to have a meaningful measurement.

But you are absolutely right to focus on that. I think it's a very important part of the business, and innovation -- in the end, I think the things that are big discriminators for any business are speed and innovation. So we're driving hard on innovation, and I think we've got some great results and I think we can do a lot better.

Final question from me is on the acquisition side. Were acquisitions dilutive to the margins?

You mean in the last year?

In the fourth quarter.

Scott, the way to think about it if you look at the fourth quarter reported margin as a rate -- no, they're not dilutive. But when Dennis mentions flow-through, you don't get the incremental flow-through year-over-year that you would get on organic growth. So our margins as a relative percentage from acquisitions are not dilutive to the Company in total.

Were they accretive to earnings in the quarter?

Yes, absolutely.

Could you give us an idea of how much?

No.

I had to try. Thanks anyway.

Charles Brady, Hibernia Southcoast Capital.

Just quickly back to the unusual items, the $2 million. Could you break it out as to the lawsuit? How much of that is from the lawsuit?

No. Look, these are -- I wanted to give you an overview on flow-through because I know that's always a consideration, but I don't want to get into parsing out what part came from where because there's some sensitive information there that I would prefer not to describe.

No, I understand that. But I think the key thing here, looking at what your incremental margin is -- if that 2 million is taken and you include it, it looks like your incremental margins are not looking so good. And if you're backing that out, then it makes a big difference on what your incremental margins are. And you're talking about trying to get to 30, 35 percent incremental margins; that's a good jump away from where you are right now if you have that 2 million in there. So just trying to parse out between pumps and how much of that gets prorated across the three business units is the only reason for the question. But I understand the sensitivity; I'm just trying to get a sense of are the incremental margins deteriorating, quite frankly. And that is just the main impetus for the question.

Sure. I understand the question, and the way I would answer is that we believe that the 2 million kind of number that I mentioned in the comments are unusual expenses across the Company. And because the lawsuit was in the pump group, then there is a disproportionate amount of that cost in pumps. But there is some spread across the rest of the business because it's right that they would be. I really don't want to get into breaking out how much is in pumps, but as I mentioned in the comments, that if you backed out the appropriate amount, then pumps are up in the 35 percent flow-through kind of category.

(OPERATOR INSTRUCTIONS). I am showing no further questions at this time.

Thanks to everybody. I know we've run over a little bit here, but great questions. Thanks for listening in. We're really, really proud of the year we have delivered and the quarter we delivered, and we look forward to keeping that momentum as we move into '05. So we look forward to talking to you again in another three months. Thanks very much.

Thank you. That concludes today's conference. You may disconnect at this time.