藝達思 (IEX) 2005 Q4 法說會逐字稿

Good afternoon. My name is James and I will be your conference operator. At this time I would like to welcome everyone to the IDEX fourth quarter 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I'll now turn the call over to Ms. Susan Fisher, Director of Investor Relations.

Thanks, James. Good afternoon, everyone, and thanks for joining us for our discussion of the IDEX fourth quarter and full year '05 financial results. Earlier this morning, we issued a press release outlining our Company's performance for the three and 12-month periods ending December 31st. That press release, along with presentation slides to be used during our call today, can be accessed through our Company home page at IDEXcorp.com.

Joining me today from IDEX management are Larry Kingsley, President and CEO, as well as Dom Romeo, Vice President and Chief Financial Officer. The format for our call includes management's review of the quarter and the year. We'll then open it up for your questions.

If you need to exit the call for any reason, you can access a complete replay beginning about two hours after the call concludes by dialing the toll-free number 800-642-1687, and entering conference ID number 3969023. Or simply log on to our Company home page for the webcast replay.

Before getting started, a reminder, this call may contain forward-looking statements that are subject to the Safe Harbor language in today's press release as well as in our Company's filings with the SEC. With that, I will now turn this call over to Larry Kingsley. Larry?

Thanks, Susan. Welcome, everyone. The agenda we'll follow today is a review of of our consolidated results, then a review of our segment performance. Following that, we'll update you on our progress with regard to new product innovation and operational excellence, then I'll conclude with some brief comments on our Company's outlook as we move forward into 2006. By the way, my remarks track with the webcast presentation if you have that in front of you.

IDEX had another very strong quarter in terms of orders, sales, income, free cash flow. Organic growth was 10% for the quarter, and our operating margin was 18.1%. Free cash flow was $36.4 million.

For the quarter, orders were $259 million, a 9% increase from Q4 of '04. Organic orders growth was 11% for the quarter. Foreign currency rates had a negative impact of 2%. Within the quarter, monthly orders were $87 million in October, $84 million in October November, and $88 million in December.

On a consolidated basis, reported sales were up 8%, U.S. organic growth was 13%, international organic growth was 6%. We continue to experience strong domestic demand throughout the markets we serve. We saw strong growth in Asia, while Europe, as we have previously discussed and anticipated, continued to show relative weakness, specifically in Dispensing.

Looking next at operating margin, and we're on slide 7 if you're following along, for the fourth quarter again it was 18.1%. That's up 230 basis points versus the fourth quarter of '04. Gross margin improved 100 basis points during the quarter to 40.6%. Our team continues to do an excellent job mitigating the material inflation by aggressively managing our spend and by selectively implementing price increases and surcharges.

Total SG&A expense as a percentage of sales decreased from the fourth quarter of '04 by 130 basis points. In dollar terms, total SG&A increased due to volume and for reinvestment in the business. As you know, we continue to closely monitor our flow-through on an incremental organic sales. Organic growth of 10% or $23 million flowed through at just over 40%, or about $10 million of incremental margin. As you know, we target 30 to 35% incremental margin flow through, so obviously we're very pleased with the profitability of our new products.

Now taking a look at net income and EPS, net income of $28.7 million during the quarter reflects a 27% increase over last year. Diluted EPS improved by $0.11 to $0.54 a share.

Now moving over to the balance sheet, we're on slide 9, as you can see, our balance sheet is extremely strong. In the quarter, we generated$36.4 million of free cash, working capital represents approximately 11% of sales. Inventory was down slightly versus year-end '04, and despite the 12% increase in volume, the -- that's all despite the inventory -- the increase in volume, the inventory improvement on a turns basis was about a half a turn.

So in summary, for the quarter, on a year-over-year basis; strong cash flow, orders up 11% -- and that's organic. Organic sales growth of 10%, net income was up 27% and EPS was up $0.11. So obviously, we're pleased with our Q4 results. It was consistent with our performance all year and a very strong close to just a terrific year.

For the full year, organic growth was 10% for both orders and sales. As you know, our focus continues to be growth and niche market segments funded by the return from our operational excellence results. We like consistency. We continue to generate consistent free cash and at the same time, expand our margins. On a full-year basis, our free cash flow was a solid $121.2 million, or 110% of income.

For the year, gross margin was 40.6%, up 60 basis points. SG&A was 23.1% of sales, down 80 basis points. The full year operating margin was 17.5%, up 140 basis points. Net income for the year rose 27% to $109.8 million, or $2.09 per share.

So in summary, our full year '05 performance is as follows. Orders up 12%, with organic growth at 10%. And sales were up 12% with organic growth of 10%. Net income was up 27%, EPS was up $0.41. So, all in, we're very pleased with the performance for '05, our Business is strong, and we continue to deliver just solid results.

So, we'll now look at the segments. We're on slide 10 with pumps. We continue to experience solid orders and sales growth in the Pump group. During the fourth quarter, Pump orders were up 11%. The organic sales growth was 10%. As we've said, we continue to develop outstanding new growth opportunities where we're displacing competitive solutions, but we're also creating new applications for the broad variety of our positive displacement pump and metering technology.

If you look down to operating margin for Pumps, at 19.5%, it increased 220 basis points versus the fourth quarter a year ago. Our margin expansion in Pumps is excellent. Again, a reflection of our ability to add incremental high margin new business opportunities and without the need to incrementally invest, at least not to the same degree, and new plant equipment, and other associated fixed costs within our business units.

Turning now to Dispensing equipment, orders were essential flat, excluding the currency impact. Organic sales growth was 2%. Given the concentration of our Dispensing business in Europe, this impact is the overall segment performance accordingly. And within the sales growth rate we experienced double-digit domestic growth due to the combination of increased share and also new product applications within the core paints and coatings markets. This was offset, in part, by our European operations. Again, the fourth quarter performance for our European Dispensing business is consistent with our internal expectations for the quarter. And I would remind you that our dispensing business is a project-related business.

For the year, our organic growth for the segment was 9%. Overall, the operating margin within Dispensing was 19.1%, and that's up 290 basis points over last year. Again, great executions.

Turning to Engineered Products, orders were up 11% and organic growth was up a huge 15%. The growth was driven by our new business initiatives, most notably pump modules, or what are systems sales versus our former discrete component sales within fire and rescue. We also experienced higher demand for rescue tools and new applications for our band clamping products from BAND-IT. While we did benefit from project-related orders and some easier comps in fire and rescue during the quarter, when you adjust for all these, organic growth was still in excess of 10%.

The Q4 operating margin for Engineered Products is another great story. It increased to 25.7%, up 240 basis points over last year. Again, I'm just very proud of what our business units are delivering to the bottom line.

So, I'll move on to innovation and operational excellence. We're on slide 13. Our ongoing focus on process improvement in the Company is what's driving the margin expansion. Most importantly, it's building the foundation for reinvestment for future outstanding performance. We have a long way to go to meet our own internal operating metric expectations. However, we have a very clear strategy for how we continue to drive operational improvement.

We continue to invest in new business generation capability in '05, just over 21% of our total sales came from new product introduced since January of 2003. While we're leveraging our R&D spend very nicely, we continue to incrementally invest in new people. In '05 we spent an incremental $3 million or so in R&D.

Overall, our businesses have done a really terrific job in '05 bringing new product to our home markets. At the same time, we've done a good job transferring our core competencies to expand our served markets into some adjacent spaces.

As I think back on the year, I'm most excited about our Company's developed ability to stretch our thinking and translate that strategic initiative set into growth actions and to results. In '05 we demonstrated performances, a high volume commercial OEM product supplier for the first time, and that should lead to future growth potential with some similar demanding OEMs. We executed very well moving into new market space such as Med Tech, into the marine subsea applications, and to various new research and clinical instrumentation applications. We also did very well winning customers as a result of reduced planned cycle times. And as a result of improved customer response flexibility.

Last, certainly not least, just the number of new products that we introduced in '05 and throughout all the businesses -- I'll recap a few of last year's specific new product examples. You'll remember, we developed that enabling pump technology that we now manufacture in our Asian operations for the high-volume consumer printer segment. Great new business opportunities for us. We've taken the same dispensing pump technology that we developed for our automated paint dispensers at Fluid Management into a wholly different application and that's in beverage dispensing.

We built on our initial position in the home medical market with applications like the new aerosol nebulizer products. And we're working to expand our served market here again in '06. And we introduced highly engineered med tech products through the competence in the precise molding and the extruding capabilities that we have with several specialty bio compatible materials, in applications ranging from spinal cages to cochlear implants.

We introduced some fairly radical new solutions to industrial segments, like the eclipse pump, our new non-metallic sealless gear pump, completely new technology targeted to low flow, medium pressure applications in corrosive environments. It's actually now being applied beyond the original target market into a broader range of applications in industries such as food and beverage and applications such as beer brewing.

As I mentioned, our fire truck pump modules are gaining acceptance with major OEMs. The new air bottle based compressed air foam system, which was awarded a top new product in category by a leading trade magazine, is expanding our served market for that equipment.

During the fourth quarter, we introduced the newest product addition to our rescue tools family. Our new battery operated combination cutting and spreading tool, much lighter, very compact, yet reasonably high-powered tool. It's especially useful in working in remote operations or in confined spaces associated with structural collapse. And it's early, but our hope is that it will be deployed in rescue vehicles that wouldn't typically carry hydraulic equipment. It's also being targeted as a back-up tool for rescue trucks to enable those remote -- more remote rescue operations. So, some great examples of new products that are and will continue to generate sales opportunities for us.

I'd like to now turn our attention over to operational excellence. And we're on slide 14. During '05, we generated over $10 million in savings from Six Sigma and Lean. And nearly $13 million in savings from global sourcing. We talked a lot about operational excellence in recent calls, and we've talked about Mixed Model Lean tools and the traditional Lean manufacturing concepts that we apply to our typically low and medium volume production environments. The results of Mixed Model Manufacturing techniques, as we're applying them, are just beginning to bear fruit throughout the Company. The approach will continue to enable to us improve working capital to drive margin expansion, and to improve our customer service flexibility.

A good example of Mixed Model at work is at Rheodyne, where our teams recently applied the methodology of our value stream tools where we build the new chemical dosing engine used in the spa sanitization applications. The team reconstructed this assembly area to create a more continuous production flow. And that's a flow that more directly integrates the order replenishment process with our customer's rate of consumption. The results have been impressive. A very significant reduction in operator process time, reduction in lead time from 45 to 10 days, a 43% reduction in cycle time, and a 44% reduction in floor space. And what was 94 pages of assembly work instructions has been simplified into a visual eye-level production flow road map within the assembly area there. Similar to Rheodyne, many of the businesses are now gaining momentum as they become more proficient in the use of the new tools.

In summary, IDEX performed extremely well in Q4, and for the full year '05. Most notably, our organic sales growth, the earnings expansion, and the free cash generation. Our operating margin continues to expand, as our emphasis on new product innovation and continuous process improvement continues to deliver top and bottom line growth. We're improving our operations, we're leveraging our fixed costs, and we're driving productivity. We continue to evolve our operational excellence approach and to take our experience for how we manage high-mix, complex operations to new process improvement opportunities throughout the Company. And we're reinvesting in the Business.

So I'll now turn to slide 16 with a few comments related to '06. We continue to target organic growth in the mid to high single digit range. As you know, in '04 it was 7%. In '05, organic growth was 10%. As the market conditions look today, we continue to have what we think are excellent growth opportunities. We continue to target 30 to 35% flow-through on the organic growth. As you saw on our Q4 earnings release, effective January 1, our Company is adopting the provisions of FAS 123-R. While the calculation of the anticipated impact is still under review, we expect an annual expense of approximately $8 million or $0.10 per diluted share.

At existing exchange rates, currency will be a head wind in the first half of '06. The effective tax rate is forecast at between 34 and 35%, right now we're using 35%. And finally, we anticipate CapEx for '06 in the $25 to $28 million range.

So as we enter '06, we're working very hard to continue to drive the organic growth and to improve our operating capability and to expand our business through strategic acquisitions. I'm very pleased with the results our Company generated in '05. And most importantly, I am very proud of our operating teams. With that, we'll be happy to take your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Wendy Caplan with Wachovia corporation.

Hi, Wendy.

I think Ms. Caplan withdrew her question. Your next question is from the line of Michael Schneider from Robert W. Baird. Mr. Schneider, your line is open.

Good afternoon, Larry.

Hi, Mike. How are you?

Good. Congratulations on a great year.

Thanks, Mike.

I guess for the entire team. Maybe you could just address Europe for us. Seems to be the market that remains the laggard, in particular, in dispensing equipment. If you could just spend a minute on pumps and dispensing equipment for Europe and what the momentum is heading into '06?

Sure, Mike. If you look at across the entire portfolio, the European performance was good. We're up about 4% across the Company. And Pumps continued to do well through the course of the year in Europe. We still think we've got our entitlement opportunity, as we call it, to grow our share in Europe, and we continue to do so.

Dispensing, as you know, is about two-thirds or so represented on a revenue basis in Europe versus the Americas. And we continue to see, not so much just the economic, but really more of the -- what I would call the market impact of the current state of the purchases of the paint companies for equipment. It's a lumpy business, as you know, Mike. And given where they are right now in their various lifecycles and where they are in terms of replenishment of existing equipment -- the way we think about dispensing in Europe is it's going to be a little bit more of the same for sometime to come. The paint companies continue to view the market model in Europe a little differently than they do in the states. And that is, they typically source the equipment to the channel -- to either the retailer, or the wholesaler or selectively to the DIY. And so the equation in Europe isn't the -- as you see here, the DIY justifying new equipment purchases as a function of store openings and things of the sort. It tends to be more of when the paint company decides that they need to go ahead and source that equipment to what is principally the existing independent channel.

And I was over in Europe with our Dispensing business, let's see, the week before last I guess it was, and had a very in-depth review with the team there. I think the best way for us to think about it is, it's a great business, obviously if you think about the full year '05, as a segment, all up 9% growth, but it's always going to be lumpy. And the way we think about it going forward, at least for the first half of '06 is pretty consistent with where we've been over the last couple of quarters.

Larry, if you can try and decipher -- you must be gaining share there because you're up organically when most are down. Can you give us a sense of what your guys on the ground are saying about just core economic momentum over there? Have they seen improvement as they exited '05?

I can tell you, Mike, on a company-wide basis, certainly IDEX is gaining share in Europe, no question. When I was over there a week before last I had a number of discussions with acquisition candidates and leaders of those companies, and folks of the sort. And I wouldn't say that most of them, for their European -- certainly not their continental European market expectations are thinking about a very large economic base growth opportunity for the early part of '06.

Okay. And then just domestically in Dispensing, have you changed your outlook or adjusted your plans at all given the commentary out of a lot of the DIY players, even out of Stanley Works this morning, affirming that the inventory adjustments with the big retailers is underway? Did it hurt you in the fourth quarter? And I guess, have you changed your outlook for that residential DIY market in '06?

On the domestic side, the architectural paint business is strong, and the DIY's continue to invest in equipment. And we did not get impacted in Q4 '04, given the inventory adjustment issues.

Okay. And then just one nuance. Dom, with the auto guys poised to take significant charges, given that BAND-IT now is launching into that market, do you see any warranties -- I'm sorry, receivables exposures there?

No, Mike, I don't think so. We're fairly covered in terms of not only reserves but how we treat our credit risk. So I don't see any major exposure to bad debts related to that piece of the business.

Great. Thanks again and congratulations.

Thanks, Mike.

Your next question comes from the line of Scott Graham with Bear Stearns.

Hey, good afternoon.

Hey, Scott.

I have a couple of questions for you. Were there any charges or income items that flowed through earnings that you did not talk about in your press release?

No.

No.

Okay. Secondly, with regard to the cash flow -- Dom, do you have the working capital change number handy?

Scott, we'll show that when we issue our filings. But if you look at the 110%, as we've discussed if the past, we feel like that's a very good year on execution. When you look within the components of working capital, you'll see that the big increase or use of capital for the year was receivables, and it basically followed sales. Inventory for the year was flat with a sales increase, and payables, we got a bit of leverage on. So net-net, you'll see that receivables was the use of capital in the year.

Okay. Larry, how far along are we? I know that it's first inning, but maybe could you give us some metrics for Mixed Model Manufacturing -- how many facilities it's in? I'm sure it's still in the early stages of those facilities. And what the ultimate opportunity might be?

Sure, Scott. Spring training doesn't start for another few weeks, and we're back into the baseball vernacular.

It's going real well, as you know, Scott. You've become intimate with how we're doing and you've had some first-hand exposure. It's going just fantastically. Where are we in the process? We've done a nice job introducing it across the North American and European facilities. In terms of penetration, we're probably 10, 12% penetrated in terms of opportunity. We've got a long way to go. So we've got -- in the existing facilities, where we've introduced the new tools and what we're seeing in terms of results, great indication that it's absolutely the right thing to do and a lot of opportunities still in front of us. And there's certainly going to be future business opportunities for us to take those tools to folks who haven't been using them historically, as well.

Two more easy ones. Is there anything that we should be reading into a $77 million cash balance at the end of the year?

Nothing you should be reading into it, no. We --

That was a big number. That's why I was wondering.

Obviously, we're going to continue to generate great cash. And we're going to continue to find great uses for the cash, and we're obviously very interested in the strategic acquisitions as the primary use. Through the course of the fourth quarter, I think made some excellent progress in that regard. And particularly on the bolt-on acquisition side, I think we've got a great number of prospects that are in various stages of discussion. So I think Dom and I feel pretty good that we know how to use the cash. It's just a matter of the right execution within the group of acquisitions we've got.

All right. Lastly, where do you think your inventory turn number can go? And how long it will take to get there?

Well, if you look at the business mix we have today, I'd like to see us achieve about a turn -- or better than a turn frankly, improvement per year. Now, that's a solid objective. That's a big objective. A goal for a number of the units right now. But we -- we certainly can get into the 8.5 plus range, based on the business mix we've got and the model that we operate.

Because it looks like Mix Model is doing a Yeomans job in reducing space and improving turns, and you did a half a point, it looks like roughly, this quarter. Is that -- could we see that the next couple of quarters? Half a turn? You're saying one a year, but I also know that you throw out -- you have a lot of stretch targets, and one-times does sound like a bit of a stretch target. Somewhere in between a half and one? Over the next quarters reasonable?

Yes, Scott, that's a great way to think about it. But you know from your direct exposure that we're certainly capable of achieving some great things based on the discipline that we're attacking the operations with.

Very good. Thank you.

You bet.

Your next question comes from the line of Jack Kelly with Goldman Sachs.

Good afternoon, Larry.

Hi, Jack. How are you?

Good. Just with regard to pricing, kind of a strategic question as you look across the entire company -- given the organic growth numbers that you've had and the orders that you're getting, does that give you more of a pricing opportunity in '06 versus '05? Not that you did poorly in '05, but just, could you -- could there be more of an opportunity in '06 for pricing than there was in '05?

Jack, I'd say at the end of the day, it's going to be fairly consistent with '05. We have a number of the businesses that will do more, but on an overall mix basis, as we move into some more of the OEM segments, those will be challenged to keep up with the same kind of end user base, price increases. So better execution will outweigh that. But I think in terms of modeling, it's probably appropriate to think about it as consistent with '05 -- couple of points.

With regard to '05, can you give us a sense of what pricing turned out to be across the Company? I know it's a tough question.

Yes, a little less than two points.

A little less than two. Okay. Looking ahead to '06, and you talked about some of the initiatives versus '05 -- you had $23 million in savings between Six Sigma and global sourcing. How do you see that number shaping up this year?

If you look back over the last few years, that number has approximated anywhere between $22 and I think it's been as high as $27 or $28. The biggest variable in that would be whether or not you knock down a big commodity in terms of global resourcing in that given year. We'll bracket that going forward for the next couple of years. And I wouldn't want to get any closer in terms of statements than that. We're going to continue to resource product to China and do well with that. And we're going to continue to see the productivity on the implementation of the new advance plant.

Coming back, following up on your comments on Dispensing in Europe and the paint manufacturers, obviously you've had discussions with them. What kind of breaks the cycle here that they start spending? Is it a function of their own profitability? Is it a function -- and maybe it's all of the above -- a function of you coming up with the latest and greatest in terms of dispensing system that they think they really need? What are the critical variables to kind of change the performance in Europe?

Well, there's a number. As I was saying, the current higher inputs piece of the equation is going to keep them from discretionary spending. And they are, as a result of energy costs essentially, and higher direct inputs, they're seeing in many cases some margin concerns for paint product, and therefore, they -- there is a bit of a squeeze there.

On the product lifecycle piece of this, if you look at the top 20 or even concentrate it down to the top 10 paint companies, they manage their product lifecycle in such a fashion that they tend to be three to five years. They come out -- spec out a new paint dispensing piece of equipment that we typically work together with them on in terms of design. We introduce that product, and then it tends to be the product that's used by them to initiate the discussions and to support the sales of their independent channel. And it's always been a project-related business, and it's always cycled a little more dramatically than the rest of our businesses.

Where we are right now looking forward is that, we're just at a point where those top ten or even those top 20 paint companies are not looking at big projects any time too short term but there are some nice ones further out on the horizon. So where we're dialed in obviously what's going on on the market, we've got our tabs on what's going on within all those customers. And we're confident that we're obviously in the right place when they're going to be ready to spend.

Just finally, with regard to your financial position. Clearly, as most companies, you have a preference for growth via acquisition or internal investments. But in looking at the balance sheet at the end of the year with total debt less than EBITDA and the cash position you have, and then combining that with the share creep that we saw in '05 of a little over 2%, maybe a little bit greater than that in the fourth quarter -- why don't you think you have enough flexibility to do some share repurchase as well as keeping some powder dry for acquisitions?

Well, bottom line is we still feel very confident that we've got great opportunities for acquisitions. And we, as a board, just haven't had any discussion around the ideas of a share repurchase. We're committed to acquisition as the primary use of the cash, and the management team here is working very hard to make sure that we're lining up those appropriate acquisition potentials.

Okay. And the share creep doesn't bother the board?

No.

Okay. Thank you.

You bet.

Your next question comes from the line of Wendy Caplan with Wachovia corporation.

Hi. Sorry about that. I missed the beginning, obviously, because I was disconnected. But I don't know if the cash deployment question was -- I just heard questions about repurchase. But I'm having trouble understanding what the issue is with acquisitions, whether they're too expensive, whether you get beaten out at the last minute on pricing, whether -- those sorts of issues. Can you address that, please?

Absolutely, Wendy. How are you?

I'm great, thank you.

The bottom line, Wendy, is we're not getting outpriced. And while the prices are still elevated in the marketplace, we look at our acquisition strategy, all up as essentially two-pronged. We're after bolt-on acquisitions and we're after acquisitions that we -- represent new platform opportunities. The work that has been done over the last six months and particular it the last three months, to generate a lot more in the potential flow on the bolt-on side is impressive. And I really don't want to make more specific comments. I will let you kind of derive your view from there. But I think there are plenty of bolt-on potential acquisitions out there, and they're in various stages of discussion, as I mentioned earlier.

On the new platform side, also, a lot of good work being done. But I'd say we're not quite as far along as we are with the bolt-on acquisitions. We still have some very interesting things that we're kind of vetting out to make sure that we like them. We do see that, given all of the margin expansion, we're capable of achieving in the core business with the tools that that will afford us a better post-integrated margin opportunity with many of the businesses that are going to be high priced, and they're going to probably still be high priced for some time to come.

So back to your question of are we getting outpriced, no. Are we losing those acquisition opportunities to strategic competitors? No. For that matter, we haven't really seen too much in the way of direct competition from some of the private -- the financial sponsors. So I feel very good where we are right now with the acquisition strategy, and I feel very confident that we'll put our cash to work here.

Would it be correct to assume from your comments that the most of the transactions you're looking at are not option-related?

Yes. Yes, absolutely.

Okay. And I'm not sure if anyone asked this, either -- but the question of the margins, which were certainly impressive in the quarter. Should we expect, I know that incrementally you did well over 40, I think it was over 45 actually, according to our calculation. What should we expect going forward, positive comparisons, I assume?

Absolutely. If you do the math on the true organic basis it's a little bit over 40% incremental flow-through. And while we're certainly pleased with that, we definitely think that there's continued opportunity for margin expansion. And again, I draw you back to the math that we talk about, I think pretty consistently, and that is if we continue to grow organically at the rate that we think we can, and we continue to flow through at 30 to 35%, we'll yield at a minimum 100 basis points and up margin expansion. And on top of that, you have opportunities with price and what you do in terms of material and labor productivity. So I will tell you that I feel confident that our team is capable of continuing to expand margin.

Okay. Thank you. And finally, you spoke about the order momentum in the quarter. Can you tell us whether December momentum you believe is continuing in the first quarter?

I would just tell you that we think the market conditions for the various segments we serve, Wendy, look pretty good.

Okay. Thanks very much.

Thank you.

Your next question is from the line of Ned Armstrong with FBR.

Good afternoon.

Hi, Ned.

Your North American performance during the quarter was very strong and quite impressive. Are there any markets that you're seeing that are either weakening or that you have concerns may weaken throughout the course of '06?

I would tell you that again, ex Europe, not just North America -- but you think about North America, Latin America, Asia, for essentially all the markets we serve and we really don't have very much in automotive all up, we feel pretty good. The process industries are going to outperform the machinery segments. The certain process industries are going to be well ahead of GDP, just in terms of underlying growth. And if you think about IDEX, given the fact that we're 60% or so pumps and that represents a very diverse set of process industries, we feel very good about the growth opportunities. And I would actually even say inclusive of Europe, in the case of almost all of those industries. Municipal spending for the segments we serve -- for fire and rescue is good. And we think that just about all the equipment markets that we serve in North America for all the other Engineered Product is relatively strong. So on a North American basis, Ned, and I would say even globally for almost all the product segments and market segments that we're in, we're feeling pretty good.

Okay. And then with regard to the margins in Dispensing equipment again it was very nice improvement. Would you attribute that -- ? What aspects of your operational initiatives do you attribute that improvement to?

There's a couple of things inside of the Dispensing margin improvement. We certainly are driving the same kind of initiatives in Dispensing that we are everywhere else. I'll let Dom comment as to whether or not we benefited at all -- a little bit from mix I think as well.

The new products, Ned, are at a slightly higher margin, so there's some benefit there.

Okay. And then was the remainder away from that mix? Was it more driven towards your sourcing initiatives? More towards Lean? Or was it pretty well spread across the board?

In Dispensing, it would fall about 50/50, in terms of material and labor productivity.

Got it. Thank you very much.

You bet.

Your next question comes from the line of Ned Borland with Next Generation Equity Research.

Hey, Larry, Dom. Kind of a follow-up question to Ned's previous question except on Engineered Products -- second straight quarter of good margin improvement there. Is that more of a -- is the new order of things with the shift towards modules in that business, is that -- can we expect to see this type of margin improvement? Is it sustainable?

The only thing that's in Other Engineered Product beyond -- obviously, the volume leverage you see there for the quarter, that may not be sustainable is that we did benefit from a site integration -- if you look at the fourth quarter '05 versus '04. So there is some fixed cost leverage there that wouldn't be part of the -- what you'd think perpetually about that business. Otherwise, it's benefiting before the same kind of approach we're taking everywhere in the country.

Another quick question on raw material outlook. Anything out there that's giving you trouble?

On a comparative statement basis versus where we've been, I will tell you I think -- I feel pretty good about our ability to stay ahead of the raw material increases that you're reading about. We're keeping our eye on copper still, and we're keeping our eye on the -- particularly the composites, polyethylenes and the polypropylenes and the various other resins. The current outlook that we've got is our ability to cost mitigate and as well to pass through price where appropriate, will leave us in pretty did shape on a variable margin basis.

So you're comfortable with your price-cost relationship? Okay. That's all I got.

Thanks, Ned.

Your next question comes from the line of Charlie Brady with Harris Nesbitt.

Hi. Good afternoon, guys.

Hi, Charlie.

Just on the R&D spending, I know you mentioned in '05 you spent about $3 million incremental. Can you give us some insight? Clearly we're talking about a lot -- seems to me talking about a lot more new applications, a lot more talk about different platforms and expanding of existing platforms. Do you see R&D spending continue to ramp-up similar to what you saw in '05? Or are you at the level where you want to be right now?

We'll continue to spend -- obviously on a dollar incremental basis we'll spend quite a bit more in '06. We're continuing to invest in the business, but all said, if you looked at R&D, we are leveraging that. You can see that in the current numbers and we will again in '06. So we've got a lot of good programs, we've obviously been through our business planning season. We've had some -- just after the first of the year business plan follow-up discussions with the units. We feel very good about the number of programs and where we're deploying the dollars. And we're conceivably even going to look for some other buckets -- some other areas that we want to go spend on some incremental growth opportunities.

If I just look at the markets served today, you've got some that are low -- or high single digits, life sciences, medical around 10, I guess, and food and beverage is fairly small. If you look out three to five years, keeping in mind where you'd like to bring that, do you see any major shifts -- or maybe paint and coatings becoming less of where it is today?

Well, if you think about it on an end segment basis, what is continuing to happen is we're serving certainly more of the process industries, more med tech, more pharma, more life science, more other instrumentation applications beyond the research instrumentation applications. And so just through the current growth and the evolution of the mix, we are be in more of those and certainly on a -- just on a relative basis, a little less in terms of paints and coatings.

My final question, just on the acquisition of Airshore. Market served for that is geographically -- is that primarily serving the Canadian market or do they have sales outside of Canada?

Well, it's a global market. They're serving North America, but the market opportunity is global. It's a nice little acquisition. We like it a lot because it's obviously a great fit within our fire and rescue business and the combination of the pneumatic and the mechanical stress also allows us to enter into some adjacent segments. There's obviously a lot of natural and man made disaster stuff going on unfortunately, and there's emerging applications for which products of the sort had not been used historically, but they're great opportunities going forward.

Just so I understand, right now they're only serving, prior to your acquisition, North American market. But you think you can take existing product and migrate that out to -- globally?

That's correct.

Thanks very much. Great quarter.

Your next question comes from the line of [Jim Young] with Gabelli & Company.

Good afternoon, Larry, Dom.

Hi, Jim.

Could you just give an idea what your exposure is to the residential housing market. Paints and coatings kind of gives me an idea what the product line is but I'm trying to get a better sense of how much you're involved in that marketplace.

Sure. Jim, I actually haven't looked all that recently at the percentage of sales that the paint company speak to in terms of architectural paints, the custom-blended paints that are associated with new residential construction versus obviously the existing construction -- the existing applications of paint and homes. But I would think it's in the -- I don't know, 10 to 15% range on a total. So it would take, obviously, a big change in the new construction numbers to impact the overall architectural coatings business. And that still is not obviously directly correlated with the machine purchases because the -- the machine purchases are funded, at least in North America again by the stores, and that's a function of the new store opening rate. So you'd look, in terms of trying to correlate it more closely to the new stores plus, how they're managing their equipment within the stores. And again, on a North American basis, we feel very, very good.

Okay. So you think it's 10 to 15% of your total sales is to that residential market, so to speak?

No, what I was saying is the -- this is really a paint company question.

Right.

It's what percentage of their sales go to new construction. And it's not a percentage of paint sales, it's a percentage of architectural the custom-tinted paint sales.

Okay. Right.

So that's -- you're probably better off asking someone else that particular question.

All right. Maybe I'll follow up off-line later.

Sure.

Then could you just -- when you talk about acquisitions, could you just give us an idea over the next two years or three years, how much acquisition revenues you would like to add to your current business?

Well, we haven't been in the practice of talking about multiyear acquisition revenue. I would tell to you look at the track record of the Company in terms of what we've done in terms of acquisitive growth. Obviously, we've got an extremely strong balance sheet and that will be put to work. So we're going to remain an acquisitive Company and acquisition-based sales increases are certainly going to be part of the future.

So you don't after target or kind of a -- ?

We haven't stated any public targets with regard to acquisition revenue.

And then in your early comments about foreign exchange being a head wind, I take it to mean that for '06 we're still looking at 2% decrement to revenues from foreign currency?

Jim, I think the best way to think through that is to look at the Euro, because that's the largest piece of the equation. If you were to look at Q4, the quarter we just issued on, the average Euro in '04 was $1.29, and for the quarter ended it was $1.19. So if you look back on the first quarter last year, it was $1.31. So we would expect, based on the same Euro rate obviously, about a negative 2% impact on reported revenues in Q1. That becomes a little bit less in Q2. Then if you recall the second half of next year, if rates stay at the same rate, which is again, an estimate, but you'd have less of an impact. So it's the first half and first quarter head wind for us right now at the rates as they currently sit.

Right. Okay. Terrific. Thank you, gentlemen.

Your next question comes from the line of Michael Schneider with Robert W. Baird.

Hi, guys. Just some clean-up here. First on that FX question, Dom, maybe you can give us a sense, if it hit the year on the top line by probably one point, what did actually do to either operating profit or pretax dollars?

The way -- we're basically local currency, so it's really on the margin. And we've kind of thought about a flow-through on that sales rate of anywhere from 15 to 18%, Mike. So it's that kind of a number in the fourth quarter.

Okay. And then on China specifically, Larry, maybe you could just give us a sense of what you've accomplished now in '05 with the new Chinese facilities and the new strategy and sales approach over there. And then, maybe also, just update us, I think it was in '04 you transferred 17 product lines over there. Maybe where that stands today and then what the forecast is?

Sure, Mike. We're thinking about it a little differently. We're not using the number of product lines transferred as our metric. I will tell you that '05 was a big year. We've got about $25 million in revenue in China now that we didn't have 12 months ago. That's not all serving the domestic market, but it's all born there. The business in [Sujo] is doing extremely well, very pleased with how the team has supported some of the large volume ramp-up. And I think we've still got an opportunity to do even better in terms of the product that we want to serve the domestic market with out of Sujo.

If you move north, up along the coast of Tianjin, the [Dingily] acquisition is essential going along very nicely, very well. If you look at where we are now versus when we bought the business in '04, revenues have more than doubled. Feel great about the opportunities going forward there. The only thing out of Tianjin I don't like is that it's gotten us -- it's taken us a little longer to get our new facility -- our new Greenfield facility up and running, and that's simply because we had to wade through some overall environmental issues that took us a few months longer than we would have liked. But we'll get our team there in a big new bright building and be poised for further growth. So China is moving along very well, Mike.

Larry, when we were over there the big focus of the presentations was all about local market sales. Can you give us a sense of what that run rate is and maybe what the growth was in '05?

China sales growth in '05 was high teens.

Okay. And --

Organic, obviously. Right?

Just switching then as well to the CapEx forecast -- I guess I'm curious when you might see leverage for the CapEx budget, given all of the initiatives and improving productivity and continuous process improvement? It seems as though you must be creating significant floor space globally. Why is it that the CapEx budge set up another 10% in '06?

If you think about '06 versus '05 alone -- just in isolation, Mike, again, some piece of that is China. And we've got, I think it's about $3 million year-over-year that's associated with '06 versus '05 CapEx in China. Beyond that, though, we're sourcing new tooling for China, and we're making selective equipment purchases that are part of how we're thinking about productivity in all the plants. So we're certainly leveraging the plant infrastructure -- the footprint, and we are creating loads of free space. And we have the opportunity to continue to improve the footprint based on doing so. But we're making investments principally for what will be variable cost opportunities, either in China or further productivity enhancements, essentially flow at home here.

Okay. Larry, with everything going so right, I guess it's my nature to look over the horizon now and start to think about when the next slow-down occurs. Can you give us a sense of what you're doing now or beginning to contemplate to prepare for the next slow-down? Because IDEX historically has been a very cyclical business. I think that has certainly been muted through some of the acquisition and all the new products you've rolled out. How do you prevent the type of earnings compression that's occurred past slow-downs now or prepare for them?

Well, I would tell you first that we share that tendency. Whenever things are going great, want to make sure that they're continuing to go great. At the same time, prepare yourself for the what-ifs. But I would agree with your statement. We -- over the last few years, we've done a nice job in billing the counter cyclicality into the business. So we're not as cyclical as we were several years ago.

I can't, you can't, nobody can prevent potentially big things from happening that can destroy industrial growth. If that were to be the case, I think we're actually in a position, on a relative basis, relative to most, to be able to react very quickly. We've got a very good understanding of our footprint. We know where our integration opportunities are, they're pretty well quantified. And we've got, through the work that we've done, a much better understanding of how we can dovetail processes together. So I think we're in pretty good shape to react extremely quickly. And I've lived through that end of the cycle, so I know how to react quickly.

Great. Thank you.

You bet, Mike.

Your next question comes from the line of Matt McGeary from Sentinal Asset Management.

Hi. Could you -- do you guys have hurdles that you talk about publically when you're thinking about M&A?

No. No, we don't talk publically about specific M&A targets.

Okay. Let me ask the same question a different way. How do you deal with the issue? You guys -- I've got to think, targets that you're looking at more than likely are not run as well as you are, particularly looking at margins, return on capital, manufacturing efficiency, et cetera. How do deal with that? How do you think about that? And how long generally, does it take for you to integrate an acquisition, get them on your platform and get them running the way you want to run them?

There's not a cookie approach to acquisitions. Every one is its own being -- its own integration plan. The way we think about it is a function of that individual opportunity. But we're typically looking at what our leverage opportunities based on the material capability that we've got, the global sourcing organization we've got in Asia, the overall commodity spend that we may have versus a smaller company in particular. And on the labor productivity side, it's a matter of how we take the tools to them. Certainly, most of the companies aren't nearly as far along as we are so there's typically a margin opportunity for us there. The fixed cost integration leveraged opportunity is really a function of what it is that you might be buying. So I don't know if I can give a canned answer to that.

So is the strategy somewhat opportunistic? Or are there geographic opportunities you're exploring more than others, or product lines, et cetera?

We're interested in new product lines that continue to round out would we've got within the home space, so to speak. We're interested in market reach, so going after markets that we may not have the absolute best channel for in some parts of the world. And we're interested in, as I was mentioning earlier, new platform opportunities all together.

Thank you.

You bet.

Your next question comes from the line of Jamie Cook with Credit Suisse.

I'm sorry, I've withdrawn my question. Thank you.

You have no questions at this time.

Okay. Well, thank you for all -- for participating. Obviously, we're very pleased with '05, with the quarter. And Dom and I are very proud of what our operating teams continue to execute. So thanks for joining, and we'll talk to you again next quarter.

Thank you for participating in today's IDEX fourth quarter 2005 earnings conference call. This call will be available for replay beginning at 6:30 p.m. Eastern Tim today, through 11:59 p.m. Eastern on February 16th, 2006. The conference ID number for the replay is 3969023. Again, the conference ID number for the replay is 3969023. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Again, the number to detail for the replay is 1-800-642-1687 or 706-645-9291. This concludes today's presentation. [OPERATOR INSTRUCTIONS]