藝達思 (IEX) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Idex Corporation second quarter earnings release conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Susan Fisher, Director of Investor Relations with Idex Corporation. Please go ahead.

Thank you and good afternoon everyone. We appreciate your joining us today for our discussion of the Idex second quarter '05 financial results. Earlier today the Company issued a press release outlining our financial and operating performance for the three and six-month periods ending June 30. The press release along with presentation slides to be used during today's Webcast can be accessed on our company website at www.idexcorp.com. Please note we will be using presentation slides and a word of technical advice I've been instructed that in order to view the slides you must have the pop up setting turned to the off position.

Now, joining me today from Idex management are Larry Kingsley, President and Chief Executive Officer, and Dom Romeo, Vice President and Chief Financial Officer. The format for today's call will include management's review of the quarter and the year-to-date. We will then open the call for your questions. Should you need to exit the call for any reason you may access the complete replay beginning approximately two hours after the call concludes by dialing toll free 800-642-1687 and entering conference ID number 6904116. Or simply log on to our company home page for the Webcast replay. Before we begin I would like to 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 now turn this call over to Larry Kingsley. Larry?

Thank you, Susan and welcome everyone. The agenda we'll follow today is a review of our consolidated second quarter and year-to-date 2005 financial results. Then a review of our segment performance. Following that we will update you on our progress with regard to new product innovations and operational excellence. Then conclude with some brief comments on our company's outlook as we move into the second half of '05.

I'm very pleased to report that we had a record second quarter in terms of orders, sales, and income. Our performance was highlighted by 11% organic growth which represents our third consecutive quarter of double-digit organic growth. This growth is coming from all three business segments with pump products, dispensing equipment, and engineered products each reporting double-digit base sales growth for the quarter.

By the way if you have the presentation in front of you we are now on slide six. Looking first at the quarterly results, orders were $272 million, an 18% increase from the second quarter of '04. Within the quarter monthly orders were 90 million in April, 87.2 million in May, and $94.8 million in June. Base business orders were up 13%. On a consolidated basis sales were up 16%. As I just stated our base growth for the quarter was 11%. Acquisitions represented 3% and the balance was due to currency. U.S. based business growth was 16%, international base business growth was 6%. Within that we experienced strong growth in Asia while Europe, as we have previously discussed, continued to show relative weakness. Overall we are especially proud of our double-digit organic sales growth across all three segments.

Now turning to gross margin. In Q2 we achieved 41.1%, up 90 basis points versus a year ago and up 70 basis points sequentially. This is now our 14th consecutive quarter of year-over-year gross margin improvement. R&D which is accounted for in our gross margin line was 2.3% of sales for the quarter and that's versus 2.2% a year ago. I should note that I am particularly pleased with our continuing ability to offset material and indirect inflation by aggressively managing our spend and by selectively implementing price increases and price surcharges. For the key element to our sourcing strategy the team continues to achieve global sourcing based savings.

Looking now at operating margin for the quarter 17.7%, up 70 basis points versus the second quarter of '04 and up 160 basis points sequentially. This is the Company's highest operating margin in seven years. Total SG&A expense as a percentage of sales increased slightly versus the second quarter a year ago. In dollar terms total SG&A increased due to acquisitions, volume, and reinvestment in the business for growth. As you know we continue to closely monitor our flow through on incremental organic sales. Organic growth of 11% or just over $25 million flowed through at about 30%, or $7 million of incremental margin.

Now taking a look at net income and EPS, net income of $28.9 million is a new all time high for the Company and reflects a 27% increase over last year. Diluted EPS improved by $0.11 to $0.55 per share.

Moving to the balance sheet. As you can see our balance sheet remains very strong. Our debt to total cap is now 20%, in the quarter we generated $30.7 million of free cash flow. Working capital of $134.5 million represents approximately 12% of sales. Inventories were down slightly versus year end and that's despite the significant increase in volume. The inventory improvement on a turns basis was about a half a turn. In summary for the quarter on a year-over-year basis great cash flow, orders were up 18% with base orders up 13%. Sales were up 16% with base sales up 11%. Net income was up 27% and EPS was up $0.11.

During the first half excluding the impact of acquisitions and foreign exchange we saw a 9% increase in base business orders and an 11% increase in base sales. On a year-to-date basis our free cash flow remained strong, $41.3 million, through the first six months gross margin was 40.8%, up 70 basis points. SG&A was 23.8% of sales, down 40 basis points. The six-month operating margin was 17%, up 110 basis points. First half net income rose 30% to $52.6 million, or $1 a share. So in summary our first half performance is as follows: Orders up 15%, with base growth of 9%, sales up 17% with base growth of 11%, net income, up 30%, and EPS up $0.21. We are very pleased with our performance in the second quarter and for the first six months of the year. The momentum in our business is continuing as we enter the second half. Our company continues to perform very, very well operationally and we are delivering solid results to the bottom line.

Now let's look at the segments starting with pump products which contributed 58% of sales and 51% of operating income during the quarter. We continue to experience across the board increases in both orders and sales in the group. Orders were up 24% versus last year while sales increased 18%. 12% of the sales increase reflects base growth, 5% is from acquisitions and the balance is from currency. This is now our sixth consecutive quarter of base growth in pumps and the fourth consecutive quarter that we've generated double-digit base growth.

Our domestic end markets and Asia continued to be strong during the quarter. The domestic growth rate was 14% while the international growth rate was 6%. Operating margin for pumps, of 17.9% of sales increased 60 basis points versus the second quarter a year ago. We continue to make excellent progress in terms of new product innovation in the pump segment and I'll review some great examples here later in the call.

Turning now to dispensing equipment, the group represented 20% of sales and 24% of our operating income for the quarter. Dispensing orders grew 7% while sales growth was 16%. Within the sales growth rate 12% came from base growth and the remainder from currency. Domestic growth within dispensing was more than 20% due to the combination of competitive product displacement and new applications within our core paints and coatings market.

Europe was up slightly in the second quarter. We continue to be concerned with European market conditions and again this is not inconsistent with our internal planning assumptions. Operating margin within dispensing remains very strong, at 24.9% up 20 basis points over last year.

Looking at engineered products this segment comprised 22% of total sales and 25% of operating income during the quarter. Orders were up 11% and sales growth was 12%. 10% was base growth, 1% came from acquisitions, and 1% reflects currency. Sales increased 12% domestically and 8% internationally. Domestic growth was driven by innovation of Band-It and Hale as well as solid demand for our existing products. We should note that in the international growth that the segment benefited from a large order, adjusting for this our international growth rate was just over 3.5%. Again, we don't feel any differently about the European market conditions. The same comments apply.

The operating margin for engineered products increased to 22.9% during the second quarter, up 290 basis points over last year. The engineered products group also continues to do a very good job of driving innovation and again I'll review some of the new offerings here shortly. So moving on to innovation and operational excellence. We are driving operational excellence to reduce costs, improve efficiency, and leverage our plant investment. Our ongoing commitment to operational excellence enables us to better serve the needs of our customers and to expand margins. Our ability to systemically improve efficiency also actually allows our businesses to spend more time developing new products and new markets. Company-wide we've embraced the innovation and growth concepts of stretch thinking, voice of the customer, and a Six Sigma based design principals.

The ongoing focus on process coupled with reinvestment in the Company is driving our organic growth today and is the reason we have such a broad-based set of growth opportunities. For the quarter 22% of our total sales came from new products and applications introduced since January of 2003. Year-to-date that figure is 20%. We continue to see the positive results of our innovation focus across all three business segments. So whether it's new products for core markets or new products for new markets, we see clear evidence that our innovation strategy is working. Beyond product initiatives our growth stems from a large number of new customers and new channels to market.

I would like to now walk you through several examples. And by the way we are on slide 15 of the presentation. As you may have seen last week Hewlett-Packard announced their new photo printer family, the 8200 Series and the pending introduction of the new 3000 Series which is an all in one office product. The new Hewlett-Packard ink based printing platform is designed to improve print quality and to dramatically reduce print time. These products are enabled by innovative pump technology developed by our Micropump and Ismotech (ph) units. The product is manufactured out of our Idex Tsujo (ph) facilities. Micropumps new multichannel pump is a key component to HPs new extremely efficient and accurate ink delivery technology.

Micropumps work with HP represents higher volume opportunity than our typically lower volume high mix product profile. Yet this work is quite similar in that it's advanced, applied, customer specific in nature. We worked collaboratively with HP to produce this high precision engineered solution based on our extensive fluidic design experience. It's a great new market win.

Within our life sciences business we've talked about our innovation within the recreational water market at Rheodyne. We are now in production to provide the dosing engines to the spar market and are already working on a next-generation product, again another great new market win. Likewise, we continue to penetrate our home market space with analytical instrumentation with Rheodyne's new Titan HT, or high torque valve. The new valve is used for very high pressure liquid chromatography applications. The customers product that incorporates the new valve technology will be launched early next year.

Meanwhile within industrial pumps and meters, Liquid Controls has developed new electronic differential pressure sensor for aviation refuelers used to enhance efficiency in the refueling of aircraft. The new sensor is built on our strong North American presence and aviation fuel leader. Through Liquid Controls value-added enhancements like this new sensor plus the bundling of other components we've assembled an aviation fueling system that allows to us meet the reliability, accuracy, ease of use, and fueling audit trail demands of the industry. Through this offering we expect to expand or serve North America market and our presence in aviation refueling in Europe as well as in China.

At Knight we have just introduced a new chemical dispensing system for detergents, bleaches and softening agents that takes advantage of the latest SmartBus technologies to enable allow dual applications within both the commercial wear/wash and laundry industries. This new system is modular so our customers can add up to eight pumps to the base unit without having to wire them or having to keep different configurations of pump on the shelf. The result is a significantly reduced field service and installation time. Lower customer operating costs and lower equipment inventory.

At Pulsafeeder we continue to develop power plant and water treatment pump products for the Chinese market where -- by the way the Chinese water treatment market is growing at 16% annually. Pulsafeeder is also preparing to introduce the new Eclipse series. It's the world's only completely non-metallic gear pump resistant to almost all chemicals. This new pump withstands the harshest of corrosive environments such as chemical processing, pulp and paper, and water treatment. Pulsafeeder is building this pump from the ground up using our new mixed model manufacturing techniques.

At Viking we have talked previously about OEM applications such as the wind turbine and the locomotive products. We're making similar inroads at Viking in the commercial and service equipment market through increased orders for our innovative cooking oil management systems used in the fast food industry. Viking also has had a longstanding reputation as a provider to the fuel additives industry where Federal mandates have increased spending and created new growth opportunities in both fuel additives and bio diesel labs. So these are just a sampling of the great work that our pump businesses are doing to drive innovation and growth.

Within dispensing we continue to make solid progress on our paint sample machine. The response from our first large customer has been quite positive. At the same time the introduction of our Acutenor (ph) DVX automated paint dispenser enabled fluid management to win yet another competitive displacement project. This one with an independent paint retailer. This is currently a regional project with the potential to expand nationally.

Within engineered products the innovation story is equally compelling. And it is beginning to ramp up production of a completely new application for its Tie-Lok stainless teel clamping system. This application is within the automotive OEM sector. Although we weren't able to to be specific about this in the past and this application still is covered by confidentiality agreements I can now tell you that the banded solution is with a major North American car manufacturer. The customer will be using the banded clamping system to apply a tire pressure monitoring system on a portion of it's domestic light vehicles to comply with a National Highway Safety Administration mandate beginning now with the model year '06

Meanwhile at Hale, we continue to gain market acceptance worldwide for our compressed air foam fire fighting systems, our new CASAttack compressed air foam system is creating a lower cost, lower entry level CAS product with the first shipments beginning in Q3. This system is air bottle versus compressor based which makes it more cost-effective and easier to maintain than more conventional systems. It's an ideal choice for the many of full sized pumper trucks, wild land applications, and retro fit trio opportunities. In addition Hale was recently selected as the preferred provider of compressed air foam systems to the city of Tokyo Fire Brigade.

These new product wins are typical, the ideas and the opportunities that are coming from every business units. From faster photo printing to more efficient refueling of aircraft to completely new industrial pump technologies, to a better way to sample paint colors, they are all evidence that our strategy is working. We continue to focus on product development, process improvement, coupled with reinvestment in marketing and in R&D. We are particularly pleased with the broad base of new business opportunities.

I would like to now turn our attention to operational excellence. We continue to keep score on savings from our Six Sigma and Lean process improvements as well as to manage our material costs through global sourcing. Through the first six months of 2005 we generated $5.4 million in savings from Six Sigma and Lean and $6.6 million in net savings from global sourcing. As I mentioned on our last quarterly call we continue to roll-out the use of our Web-based key process indicator dashboards within the Company. We incubated this process at Micropump and year-to-date, several additional businesses have implemented this real time measurement system.

During the second quarter we accelerated the pace of our training and our new mixed model manufacturing and business process tools. These tools allow us to take process and value stream mapping to the next level to apply continuous flow to our typically low volume high mix manufacturing model. Presently over half our business units are at different stages of implementation with the new tools. Recent example of this is at our Warren Rupp facility in Mansfield, Ohio where our employees have used the new tools to diagnose current process and flow and to map what is now the mixed model value stream within the plant. As a result Warren Rupp is in the process of combining three different assembly lines which had similar processes and work content into a single mixed model assembly cell producing all three pump models.

Benefits of the new single mixed model assembly cell versus the three previously distinct lines are numerous. Most notably both inventory and cycle time will be reduced by more than 50%. We are improving on time delivery to the customer for this short lead time product family from the low to upper 90% range. The use of these more advanced tools is a natural evolution of our Idex tool kit and we believe that the longer term impact of our operational efficiencies and real time customer metrics will be powerful.

In summary we are pleased with our progress. We are most encouraged by organic sales growth and earnings expansion. During the quarter we experienced organic growth in all 14 business units. At the same time we saw improved operating income for all three business segments. We continue to evolve our business strategy with an increasing focus on innovation, with new ideas coming from every unit. We are evolving our operational excellence tool kit to take our experience with Lean to Six Sigma and tie it more closely to our performance management system and we are beginning to adopt more advanced tools across the Company that will improve flow in our high mix operations. As we enter the second half of '05 we are working very hard to build on our business momentum and particularly our ability to deliver organic growth. With that we will be happy to take your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Wendy Caplan with Wachovia Securities.

Hi, Larry, you haven't done an acquisition in a year can you talk about what the current pipeline looks like and what you are seeing in terms of pricing of properties, et cetera?

Sure, Wendy, sure. Let me start with our strategy for what we are looking for remains unchanged and our process remains extremely disciplined. We have -- we continue to look for the companies that offer the leading proprietary technology, those that are highly engineered, those that ideally come with good brands. In short what we've talked about historically as buying good companies and making them better. I would say we've even expanded our definition or our horizons as to what we are looking at. We've recently expanded the M&A team here in corporate. And in terms of the pipeline I don't think we have ever had more in current consideration than we do right now.

As you know we don't forecast any associated activity but I can assure you that we are working hard along the M&A front and that it's occupying a significant percentage of the time here of the senior folks at corporate. I think I remain very, very confident that we will continue to make very handsome, very attractive acquisitions over the next number of months and years. We are looking at both bolt ons as well as new platform opportunities. And we will probably be in a very good position to make both large and small here. So no specific comments as of right now but I can assure you that the pipeline remains extremely robust.

Thanks, Larry. And the margin in your three segments, certainly engineered products and dispensing equipment are looking very impressive. As we look at pump products, though, it certainly has been lagging and certainly below the historic peak. Can you talk about the impact of new products on that segments margin? And also should we expect that dispensing equipment and engineered product margins are sustainable at these 20 plus levels?

Sure. Well, as you know we've got great margins across the business. And we are pleased with the development across the business as well within the pump group. Within the pump group our reinvestment level continues to be quite high. We are -- year-over-year we are investing heavily in marketing sales and also in R&D. If you look at Q2 this year versus Q2 '04 there is about 600K associated with marketing, that's global marketing investment principally for pumps year-over-year. There's another 600K for the quarter year-over-year associated with sales force developments Most of that in China. But in other areas of the world as well.

And on a development basis if do you the math there's about another, well just about $1 million in R&D spend for the quarter year-over-year. So not all of that is what you might want to call incremental. Not all of it is purely pumps but a lot of it is, the majority of it is, and we continue to see just a huge number of great organic opportunities within the pump segment. So we are going to continue to spend. We feel great about our gross margins, the business opportunities that we are seeing are outstanding for both industrial as well as some of the analytical and clinical diagnostic applications and we think that the underlying economic help that we are going to see in the U.S. and in Asia in particular remains extremely strong. As far as the sustaining capability on the margins -- otherwise, I'm confident that we are going to be able to maintain and improve our margins across the business.

Thank you.

Thank you, Wendy.

Your next question is from Alexander Paris with Barrington Research Associates.

Great quarter.

Thank you.

First question is pretty much like Wendy's. A couple of years ago you charged all the division people to reduce their market share from 40 down to 10 which implied a lot more of innovation and new products, acquisitions and expanding overseas. I guess in spite of that your balance sheet is the strongest in its history. Are you having trouble implementing those or are you doing it and just financing it with your strong free cash flow?

Well, the ongoing exercise for us to continually redefine our markets serves both organic sales planning as well as what we want to target in the way of acquisitions. The work that we are doing on an ongoing basis and doing quite well, on the organic side is yielding the kind of results with the large number of opportunities that I was talking about. Yes, and per some of the comments I made to Wendy with respect to our acquisition plans we are absolutely remaining an acquisitive company. We are very interested in making acquisitions to both bolster what we've got in the existing space plus new opportunities all together.

Just to expound a bit on what I've said we've got combinations of new technology acquisitions that we are cultivating right now. We've got bolt-on acquisitions for existing businesses. We've got completely new what we call round out acquisition opportunities. And we've got plenty of fire power. I think that the one word that probably applies to how we view the acquisition opportunities, the pricing in d the market right now, and the process most importantly for what we do is discipline. We are going to continue to make what are great acquisitions, strategic acquisitions as we always have and we are going to pay the right price for them.

Just on a bigger picture, you were talking about the underlying economics. You seem to have just coasted through a difficult quarter where the U.S. manufacturing sector slowed down quite a bit in the quarter and now I think it's starting to go back up again. And yet you -- and also I think capital spending remained strong so does this infer that your results are much more sensitive to capital spending data as you see coming out rather than just broad industrial data?

Well, you have to look at our business by segment but I will tell you first -- I will preface what I said by saying that we are -- we're creating our opportunity in every one of the segments. We are creating it through share gains, through a number of different means. The underlying economic relative health that we see is a lot stronger in the U.S. and Asia than it is in Europe. We remain very watchful of what's going on in Europe. Dom Romeo and I just spent three days over in Europe with our dispensing management team drilling deep into what the issues are that we should anticipate for the remainder of the year, what we should see for next year. I think it's fair to say that we are going to create our own opportunity there. We are going to continue to take share but there's not going to be any underlying economic health.

As far as direct linkage to some of the CapEx and associated other industrial issues and indices that you are perhaps referring to, pumps are certainly serving a set of end market segments that are growing faster than GDP. Positive displacement pumps, the kind of engineered product that we supply versus the more commodity like pump product is growing faster than the end markets due to the fact that they do a number of things more efficiently and more accurately and they are being used to displace other forms of pumping technologies. So we've got some great underlying help that's going to continue to propel us and we think there's a lot of opportunity ahead of us in the industrial as well as as I said the analytical and clinical kinds of spaces that we serve for pumps.

Thanks a lot.

You're welcome.

Your next question is from Mike Schneider with Robert W. Baird.

Larry can you address SG&A? This has been a long topic of focus for me and again this quarter SG&A despite the great results in gross margins and sales performance is still up more again than sales on a percentage basis. Can you maybe dive into where the money is being spent? Is it on the S or the G and the A, and where the inflexion point is again?

Well, Dom's chomping at the bit to answer the question but let me preface that with as I was saying early we've made some (INAUDIBLE) in the equation, Mike, with what we're continuing to invest in in terms of marketing but also Asian sales as you remember we consolidated the Asian sales force a couple of years ago. We've been building on that. We are now populating it and we think it's a very wise investment, we are seeing great reception in China for our products. And we think the business model works very well also. We see the kinds of opportunities there and faster growing, relatively faster growing segments than anywhere else so we are going to continue to make that investment.

The approach is certainly a very disciplined one and we are very measured on where we spend the money. From a bridge perspective why don't I let Dom jump into the specifics just so you can get the complete answer here?

Sure, thanks, Larry. Hi, Mike. Mike, if you look at the first half, SG&A as a percent of sales is about 23.8. So we are in the first half basis down about 40 basis points. So for the first half of the year there is some leverage. You are absolutely right in the quarter we are up about 20 basis points, but as Larry mentioned there's about 1.2 million of I will call it S selling expense in investments for both Asia and some additional marketing resources. So the reason I was chomping at the bit was it's clearly not in the administrative side it's clearly in the investment side for future growth. So while it's up a bit in the quarter it's still leveraged for the first half and again if you look at our organic growth and some of our strategies I think this is a great use of our capital at this point in time.

Is the additional selling expense primarily in the pump group?

It is, it is. As we allocate. If you look at Asia the APG group is a big piece of that investment that was made in the first quarter year-over-year.

And at least the sales force I met when I was over there was a direct sales force of yours. Have you gone as far as using manufacturer's reps over there and that's where the money is going or is it indeed additional heads?

No, it's additional heads, Mike.

Secondly, just on Europe, it certainly sounds like you haven't changed your tune and the economic data over there isn't great either. Can you describe did things actually deteriorate in Asia as the year has progressed for you or are we still at least bouncing along some low base?

I think you mean deteriorate in Europe, right Mike?.

In Europe, I'm sorry.

For the second quarter on an underlying basis I wouldn't say there was deterioration. We are concerned that the signs in Europe in general aren't good. And we are making sure that we watch it very closely. So all that said we continue to reinvest in some of the products there, dispensing being on a percentage basis our largest European content business. We've got a number of new products coming out, in auto refinishing and the paint color dispensing applications but we are very watchful of what we see in the way of early indicator order information. So I would say that we are concerned looking forward.

Are there mix implications for the margins if Europe indeed continues to drag, yet Asia is the source of growth, is that good or bad?

It's neither good nor bad. It's neutral.

Just your comment in the press release. I haven't seen something like this in quite awhile and Larry you make the comment that we are most excited about the number of new business opportunities. Are there any one or two in particular you are most excited about that you took the time to actually include that in your comments?

Yes, in my prepared comments as you saw we highlighted the Hewlett-Packard opportunity first. That's a really great win for the Company. I love it from the perspective that it was developed by our teams together in Zurich and over in Portland. It will be produced out of our Idex Tsujo facility and obviously it represents a great growth opportunity.

Then finally, Dom, possible to get the number for each of the segments of base ordinary growth?

Sure. I've got it right here. For pumps, base order growth was 17% in the quarter. Dispensing -- that's organic, dispensing was 4% and engineered products, it was about 9 close to 10%.

Okay. Thank you again, and congratulations.

Your next question is from Scott Graham with Bear Stearns.

I have a couple of questions for you. I know that the dispensing margin is very high. I guess with the type of growth we saw, albeit coming off of an easy comparison organically maybe I would have expected a little bit more flow through on the margin. Can you comment on that Larry.

Yes, actually Dom has got the flow through numbers in front of him, I'll let him.

Yes, Scott, if you look at dispensing -- remember that in the dispensing side that's a largely European, so currency plays a bigger part of that top line growth equation. So when you take out the impact of currency which doesn't flow through at a significant lever point obviously, we are just over 31%. I think the reported number is 26% if you just look at the actual. So call it 31 which is in our range and again profitability in the quarter just under 25% operating margin very nice progress there. So we feel as though dispensing is well within our range of prior discussion.

Well, see the thing is though, Dom, the FX number was the same as it was last year on a year-over-year basis but the organic growth was 12 versus last year's organic growth which I think was minus 5. So again I just -- I guess I just would have expected that to be maybe a north of a 25% margin. Is there -- alluding to Mike's question earlier are there any things that, because of that European base of the business, are there any things that can go on that can move the margins around a little bit even if it's not purely manufacturing, could it be seasonal production within the quarter, that kind of thing, I don't know, I'm kind of reaching?

No, I think, there could be some modest mix impacts but again, if you take out currency quarter over quarter we are still in the north of 30% range so we feel pretty strong about the performance of the quarter.

Okay. The cash flow performance also was good but there again maybe I would have thought it could have maybe been a little bit higher than what it was. Could you comment on that as well?

Well, we feel it's pretty solid at 30.7. If you look at the components the working capital usage was essentially zero in the quarter and we held inventories down. You saw some build up in receivables and that's largely versus year-end a function of December versus June sales. Our DSOs continue to be in the mid-40s and we have got about a half a turn out of inventory so 30.7 is pretty good performance. We see nothing in our future that leads us to believe we won't be -- or continue to be at 100% conversion over net so we feel pretty strong about cash flow, Scott.

Maybe it had to do with maybe -- well, my question is maybe it has to do with the accounts payable maybe a little bit lower percent of sales of percent of cost of sales, sort of the -- I know that the accounts payable is up year-over-year but when we include -- when you X out acquisitions is there a payable reduction here that might have played a role.

No, no. We continue to work our DPOs as well but there's no major payable reduction in the quarter.

Okay. It sounds like I'm nitpicking it was a very good quarter.

Okay.

The other thing is, could you talk about the new products that you've -- and the new opportunities that you've got on your innovation examples page? Which one of these are on the come versus which ones have actually been launched and you are realizing revenue from?

Well, if you go through that entire list the only one that I would classify, Scott, as on the come, so to speak is the new Rheodyne valve which is six months out or so. We made it very clear that all of these are opportunities that are real. They are all now so to speak. Some of them are more customer specific versus general market in nature. But if you go through all of them they are going to start contributing to our order rate and sales rate in the very short term.

I have no doubt. Larry this is a question I think you will like more than the previous ones. Every quarter you come up with a list of examples like this and you talk about OEMs this quarter and auto OEM which I guess we can understand because of Band-It having some penetration there but also this quarter Hewlett-Packard and others. How does that work within Idex? How do you generate these opportunities, these leads because it's pretty extraordinary? What's the process there?

Well, we've talked before about the fact that a large piece of it comes from mindsets that's been developed and very well entrenched across the corporation but I will tell you if you just take the Hewlett-Packard opportunity as an example, Micropump has been in ink delivery system application for a long time. They developed some of the first ink delivery fluidics 40 years ago or so, different technologies but there's a developed knowledge of how to do it and what market segments apply. We've been in continuous inkjet OEM applications for a very long time. So we operate in a very technical marketplace with a very strong know how and we've got strong marketing capability so that we understand the broader application opportunity out there. And we are very good. We are on the cusp of very good as I tell our team internally in terms of our discipline for how we stake all those opportunities and we pick and choose them carefully and we deploy the resources to make sure that we succeed and that means not just capture the business but capture the business at very profitable margins.

The processes that we have in place that work well with the business units are being cross-bred. In many cases they are now across several of the units. And we have opportunities that bridge units as I mentioned on the case also with the H.P. So I think it's a well developed process. It's a cultural mindset and if you come back to your opening question example with Band-It, the Band-It edge has an Idex tool for how we go develop new market opportunities very critically understand them is the same tool in essence that led to winning the HP opportunity. So it's well defined, well disciplined, and it's executing what we say we are going to do.

That was helpful. Thanks very much.

Your next question is from Ian Fleischer with FBR.

Good afternoon.

Good afternoon.

At the consolidated level I guess new products were 20% of your total sales. You said. What's your goal and what's your time frame to achieve that goal with respect to new products?

On a quarterly basis it was 22% year-to-date it's 20%. We measure essentially on those products that were introduced in this case it would have been since January of 2003 and we move the sticks so to speak with every calendar year and then look out for those products that within a three-year period of time are generating that relative percentage of revenue. We have opportunity for improvement still. Obviously with some of these large new wins that relative rate will increase here through the course of this year. And in terms of goals I would like to see us up in the high 20s as a minimum and with our product mix the markets that we serve that would represent a very healthy vitality rate.

Do you have those numbers by segment.

We actually don't have those numbers by segment for external purpose. We do track them as an internal metric.

Did you see any particular weakness in any country in Europe?

I would say Continental Europe in total is a concern. Western Europe more so obviously than Eastern Europe. And as we've said before in previous calls for our businesses we are concerned about the Germanic countries within Continental Europe.

Any particular product lines?

No. We see it as underlying economic issues that apply and particular in our case again because dispensing is more heavily weighted with European content to what apply there.

Just one other question. It appears your corporate expense went up to 7.5 million from about 6.8 in the first quarter. Could you just provide some color as to why that is and what we should think about going forward?

Sure. If you look quarter over quarter we've obviously got some transition costs with the transition of both Dennis and Larry. In 2005 this will actually mitigate some of the expense year-over-year for options but we awarded restricted stock so there's an impact there and as also Larry mentioned we've beefed up our staffing in terms of acquisitions and also supply chain at the corporate level. So those three, four elements comprise the majority of that $2 million increase.

Great. Thank you.

You're welcome.

Thanks Ian.

Your next question is from Jamie Cook with First Boston.

Hi, good afternoon. Great quarter. My first question, can you talk a little bit about, give a little more detail on your ability to price over material costs and is there any difference in the pricing I guess across big business segment?

Sure. Well, we believe that year-to-date we've achieved a net price impact of just under 2%. And relative to material costs in more specific form we do see that there's a continuing price pressure in copper. There is a selective price pressure that we are concerned about on the horizon with respect to resins although that hasn't been as much an impact as anticipated over the last quarter. Where we've seen some improvement is in most all of the steel products that we purchased. And contrary to what has basically been indicated on a macro form with stainless steel representing an increase our stainless purchase prices have been maintained at a stable rate, flat, essentially since the end of the year. As it relates to business segment content in terms of net pricing achieved it's fairly consistent across the segments. We have done a good job year-to-date and I would say that that average would apply pretty closely within each of the three reported segments.

And what about -- are you also seeing in addition to being able to offset the material costs, you hear from other industrial companies and they are having more of an issue with the suppliers. I mean are you having any issues or does that all seem to be going pretty well as well?

I can tell you, I think we are doing a great job. Our sourcing team led here at corporate by Tom Giordano and the team that's led locally at the business unit levels continued to do just a superb job managing their -- both their supply chain strategy as well as their material availability. And we've not had virtually any interruption in supply this year. We've had, I can give you some very small examples where we've had issues toward the end of the first quarter, early second quarter with Kevlar associated with our rescue tools business, principally supplying Kevlar to our German facility.

Okay.

But nothing of any magnitude.

And then last just in terms of -- the tax rate in the quarter I think was a little lower than I thought what should we use going forward? Should we -- I mean is it more like 35, 36, 35.5?

Jamie we've revised our full year to 35.5 and that was largely a function of mix and also a little bit of refinement of our R&D credit so 35.5 is the number for the full year so what you see in the quarter is 35. We used 36 in the first quarter. So 35.5 is the forecast.

Great, guys, nice job.

Thank you.

Your next question is from Charlie Brady with Harris Nesbitt.

Hi, good afternoon, guys.

Hi, Charlie.

Could you just on the pricing question, as a follow-up to what Jamie was asking, pricing versus surcharges, essentially how much is expected to stick and at some point how much might roll off?

Sure. Most of our price initiatives that we mapped out in our business plan toward the tail end of last year were price increases rather than surcharges. Where we applied surcharges was almost exclusively in the area of motor based price increases that we saw late last year as well as stainless. We used stainless in a couple of businesses. All that said the short answer is that we expect pricing to stick and we just got done with all of our internal Q2 operating reviews and by and large that's the message that was delivered that we are going to be able to keep price where we've achieved it.

Then pricing for acquisitions, Wendy asked the question earlier, but -- and the pipeline obviously is very, very full but can you address specifically asking prices and what these businesses are looking like in the marketplace going forward?

I would just say that historically we've paid between 6.5 and 8.5 times EBITDA for the broad variety of businesses that we've acquired. Those prices are obviously up right now. And there are, again, there are lots of good opportunities out there but we are going to remain very disciplined in our approach.

But is it fair to say that the pipeline is full enough that there are enough ideas out there that fall within your 6.5 to 8.5 guidance?

Well, I would--.

You're not essentially locking yourself out of the market, you are not being priced over.

No, not at all. As a matter of fact it comes down to in many cases just making sure that what we are after is going to afford us the right long-term value, the growth opportunity that's going to fit what we want in the way of strategic growth long-term and we are confident that there is lots of good acquisition opportunities out there.

Good. And this is respect -- any impact or commentaries with respect to the Chinese currency and the movement by the Chinese government to move it off and peg in to the U.S. dollar, how that might impact your business?

I guess the latest is that it's going to likely be tied to a basket of currencies. I think that's the current statement. Whether that impacts us at all short term is very doubtful from my perspective. We see the Chinese market opportunity as one where we can go to the Chinese market, take what we have in the way of products and applications capability and serve what has been a largely pent up opportunity for the kind of engineered product that we design and that we apply. Whether it's industrial pumps or rescue tools there's great opportunities in China.

I was in China I guess it was about six weeks ago now, seven weeks ago, and there is a great opportunity for fire suppression and rescue tools and that opportunity is going to be one that's going to be three, four years of very significant growth. So we look at it as largely growth given what we already do. In terms of the cost basis associated with the currency impact it's not the major portion of what our Asian or Chinese strategy entails but certainly we will have to closely monitor if there's any impact associated with the variable cost impact of what we produce there.

Okay. And just finally with respect to the automotive OE contract you mentioned with Band-It, any quantification, sort of how much that might impact or what the ramp up for that order rate might be?

We are tied to a confidentiality agreement. I can tell you that it is a significant volume opportunity, we are not going to quantify how big it is. Maybe the appropriate thing to do if I go back to that list that we talked about on slide 15, if you look at those opportunities in total, it's slide 15, that list in total once fully ramped up on a full year volume basis is going to represent about 2 points of growth for the corporation.

That's helpful. Thanks very much, guys.

Thank you.

Your next question is from Ned Borland with Next Generation Equity Research.

Hi, guys. Good quarter. Just a quick question on the pump end markets. Were there any of them that were particularly strong and any that were particularly weak?

There has been talk about pharma-associated weakness. We haven't seen it in the applications that we serve. HPLC has an application being the largest within the analytical search segment. We remain quite strong as do our -- obviously our customers. Just combing through my backlog of industrial segments and what might be relative weakness there, I would say on a relative basis food and beverage has been a little slower than some of the other industrial chem and petro chem, or some of the products that we serve and what we've seen out of that globally but, no, the pump serve end segments remain quite strong.

Just going to dispensing for a minute, that competitive displacement that you had in the first quarter, if I remember correctly you were going to finish shipping units in the second quarter. Is that all completed or?

Well, we are talking about two different competitive displacements actually.

Well, no, there was another one you announced or is that a different one?

The one that I just talked about today is a new one.

Okay.

That's with an independent retailer, the one that we had talked about earlier in the year was with one of the Home Center chains.

Right, right. Okay. And maybe I missed it but did you give anything on CapEx for the year, where that's going to track towards?

We are still holding at about 30. Our spend in the first half was 12. Second half will be 18 or so, and that's a result of some of the investment in the acquisitions plus in China with our Dinglee facility, our new rescue tool operation. 30 is the consistent number I believe we've given in the past.

Thanks.

Thank you.

Your next question is from Greg Macosko with Lord Abbett.

Could you talk about the order rate? I sense you said that -- did it accelerate through the quarter? You mentioned months, on a monthly basis?

Yes. It did accelerate through the quarter. Not terribly atypical for what we've seen in the seasonality of our business in years past. So relative to what we've seen, it's consistent. I think in terms of the underlying question, do we feel good about order patterns, the answer is absolutely yes. To bring you back to the numbers if you don't have them jotted down, we saw basically 90 million in April, 87 in May, and 95 million in June. So there was acceleration but not a very large ramp. Nevertheless we feel very good about what we see in the way of order patterns.

Good. And then, I know we've been talking a lot about these big orders, the Hewlett-Packard and the Band-It order. These are -- I assume these are higher volume than you've typically had in the past. Have there been bigger orders? Or that will be bigger volume say over the course of the year when they are at run rate?

We've used baseball vernacular historically to talk about how big our hits are and I would I guess classify it as follows. The Hewlett-Packard relationship has the potential to be a very significant hit. A lot more than a single. The automotive application with Band-It is also a good hit but not of the same magnitude.

Then just finally then on those, with regard to those orders, will those be at margins similar to their groups?

The margins will be fine. They will certainly not be dilutive to our operating margins.

Okay. Good. Thank you.

You're welcome.

Your next question is from William Cram with Reed, Connor, and Bergwell.

Hi, most of my questions have been answered. Just a real quick one for Dom. You mentioned tax rate 35.5%. I was wondering what that's going to be on a cash tax basis.

I don't have that in front of me, I apologize. I will have to dig it up, sorry.

I will just get back to you on that one. That was the only question I had.

Your next question is a follow-up from Mike Schneider with Robert W. Baird.

Larry, on the pumps group you talked mid quarter about this issue of export violations by welding, one of your competitors. Have you seen benefits from that in your pump group and do you expect more?

I'm not sure we want to -- it's not significant, Mike, is the way I would summarize the comment.

Okay. And on the footprint, you look around the globe now and obviously organic volumes are very strong. What are are you doing right now though to prepare for any deceleration that occurs as the next cycle unfolds. Are there footprint plans in place and going on behind the scenes? Are there any facility moves underway right now, maybe you could just give us a sense of your thoughts on the footprint.

Obviously we can't get specific on some of those issues but I will tell you the following. First, on the material side first the more that we move over to lower cost sourcing and at the same time remain nimble in our ability to serve the customers, the better prepared we are for potential top line slow down at some point somewhere down the road. On the labor side we are competitive, absolutely competitive today in all our plans. The work we are doing with our new mixed model value stream mapping is making us a lot more productive in each one of those plants. If you look around the globe of Idex right now we have got 13 plants that have adopted the new tools and another 8 by the end of the year. That will take us to a little better than half the number of plants and certainly much further along on a percentage of revenue basis. So that's going to make us that much more productive in good times or bad.

And from a footprint perspective we are always outlining those opportunities that we think make great integration sense for us as a group and, yes, that is part of our focus. Obviously we are aware of the fact that we are not going to have as much economic help somewhere down the road as we do today. So integration is part of what we need to be managing as well.

Dom, I apologize for the repeat question here in SG&A. If we look again at the first half you are down 40 basis points year-over-year. Is that a sustainable run rate, maybe it varies quarter to quarter but is that the general direction you expect for the balance of the year and going forward or are there additional investments coming that we shouldn't use that as a run rate?

Again, Mike, it would be a volume question obviously as a percent of sales so I can't respond in that fashion. I guess in terms of additional investments or where we are with our investment things for this year I think we are from a run rate perspective where we plan on being for the balance of the year.

Okay.

From a dollar perspective I would say there's not a significant amount of incremental investment planned.

Thanks, again.

Thanks, Mike.

At this time there are no further questions, Mr. Kingsley are there any closing remarks?

I would just like to thank everybody for joining the call today. We are very proud of the organic growth and the earnings expansion for the quarter. And we will talk to you again in three months.

This concludes today's Idex Corporation second quarter earnings release conference call. You may now disconnect.