藝達思 (IEX) 2006 Q3 法說會逐字稿

Good afternoon. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the IDEX Corp third quarter 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 would now like to turn the call over to Ms. Fisher, the Company's Director of Investor Relations. Ms. Fisher, you may begin your conference.

Thank you, Tamika, and good afternoon, everyone. Thanks for joining us today for our discussion of the IDEX third quarter '06 financial results. Earlier today we issued a press release outlining IDEX's financial and operating performance, for both the 3 and 6 month periods ending September 30th. That press release, along with presentation slides to be used during today's Webcast, can be accessed on our Company's home page at IDEXcorp.com.

Joining me today from IDEX management are Larry Kingsley, Chairman and CEO, and Dom Romeo, Vice President and Chief Financial Officer. The format for our call today is as follows: First, Dom will take you through our financial results for the quarter and year-to-date, including the segment results. Larry will then provide an update on our progress in Operational Excellence and our growth and innovation initiatives within our 4 segments. Following our prepared remarks, we'll then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes, by dialing the toll free number 800-642-1687, and entering the conference ID number 4089864. Or simply log on to our Company home page for the Webcast replay.

As we begin a brief reminder, that this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in our Company's filings with the Securities and Exchange Commission. And now with that, I'll turn this call over to our Chief Financial Officer, Dom Romeo. Dom?

Thanks, Susan, and good afternoon, everyone. Financially, we had a very solid quarter. Organic sales growth of 9% once again came in at the high end of our stated goal of mid to high single-digit. We've also made some very nice progress on acquisitions. On earnings, we continue to expand margin and grow EPS. Our free cash flow and balance sheet are also very strong. So all in, we continue to see terrific execution of both our growth strategies and our operating initiatives.

I'm now on slide 5, Orders and Sales. In the third quarter, both sales and orders were up 9% on an organic basis, and with the acquisition of EPI and JUN-AIR and also currency, both orders and sales were up 16% on a reported basis. Let me provide just a little bit more color on third quarter orders. Monthly orders were $89 million in July and about $99 million in both the months of August and September. In Fluid and Metering Technologies, orders were up 17% on a reported basis, and when we adjust for currency and about 2 to $3 million of Q3 orders that will flow into next year, the adjusted growth rate would be in the 12% to 13% for Fluid and Metering Technologies. So very solid. And Larry will discuss some of the market trends and how we continue to be very well positioned later in the call.

Turning next to operating margin on slide 6. For the third quarter, operating margin was 18.8%. That's up 40 basis points from last year, and both years do exclude Lubriquip. This includes the expensing of stock options which had a 60 basis point impact. So when you adjust for option expensing, operating margin was up 100 basis points versus last year.

I'll talk about flow through when we review each of these segments, but we experienced higher than our 30% to 35% range, both within Fluid and Metering and also within Dispensing. And we were impacted by mix in Fire and Safety, and then by acquisitions within Health and Sciences. But all in, we continue to see nice benefit here from our operating initiatives. Gross margin company-wide was 41%. That's up 40 basis points versus last year. And again, SG&A including the 60 basis points from stock option expensing, was essentially flat with the third quarter of last year, at just over 22%. So again, from an operating margin perspective, extremely strong execution.

Slide 7, income and EPS. Income from continuing operations of $33.3 million is a 19% increase from last year. Diluted EPS of $0.62 improved $0.09 or 17% from last year. And in our earnings release, you'll note a $13 million gain classified below continuing operations as net gain on the sale of discontinued operations. This amount includes the gain on the sale of Lubriquip as we previously announced, of about $16.7 million. That gain was offset by an estimated loss of 3.7 on our decision to sell Halox. And Halox is a small product line within Pulsafeeder. It had annual sales of about $2 million in a technology that we've made the strategic decision to sell.

Our effective tax rate for the third quarter increased to 35% from 34% last year. This had the effect of reducing third quarter EPS by about $0.01. The range I've discussed in prior quarters was 33% to 35%. The lower end of this range did assume by year-end that the Research and Development credits would be extended. At present, there continues to be some level of uncertainty on the legislative side. So for internal purposes for the fourth quarter, we're using a 34% tax rate. And again though, from an EPS perspective, extremely strong performance for the quarter and also for the year. Year-to-date EPS is up 18%.

Turning next to slide 8, we continue to generate solid cash flow. Year-to-date, free cash flow of $98.5 million is 18% higher than last year. We continue to apply strong discipline towards acquisition, based on both their strategic and financial merits. In the quarter, acquisitions added just under 6% to our top line. On October 3rd we announced the completion of our acquisition of Banjo. Earlier in September, we announced that with Banjo, EPI and JUN-AIR, that our combined annualized revenues from acquisitions would be about about $100 million, with operating margins of 23% to 25%. So just terrific progress here on acquisitions.

Our balance sheet continues to be very strong, with debt to cap of 15% at September 30. And on a pro forma basis, it's in the mid 20s once we add Banjo. On working capital, when you adjust for acquisitions, comparable inventory is up about 4% from the end of last year, with organic growth of 9%, we continue to see a slight improvement there in turns. On receivables, our DSO is in the mid 40s, and CapEx for the quarter was $6.3 million, and is $16 million year-to-date. And we continue to see our year in the range of 23 to $26 million.

Turning next to page 9, Fluid and Metering Technologies. I mentioned the details behind the 17% order growth rate earlier. Sales were up 9%, 1% of which was currency-related. Larry will detail some of the market trends and some of the key growth drivers, but from a margin perspective, FMT is just hitting on all cylinders. 21.6% operating margin is up 150 basis points from last year. And from a flow through perspective, if you adjust for the 1 point of growth due to currency, the flow through on this organic growth is over 40%. So again, consistent with the last several quarters, Fluid and Metering continues to post just impressive income growth, and also nice margin expansion.

Moving next to Health and Sciences, [HS&T] grew at 34% in the quarter. Acquisitions added 23%, and while organic growth was 10%, and year-to-date, organic growth was 14%. Operating income of $14.5 million was a 25% increase from last year. And operating margin of 17.8% for the third quarter was essentially flat with the second quarter, and is down 130 basis points versus last year due to acquisition and related expenses.

Turning now to Dispensing, page 11. Here we continue to see solid growth on the domestic side. And as we mentioned last quarter, we benefit from some easier comps in Europe. But all in, we experienced a very strong 12% organic growth rate in the quarter for Dispensing. And as you all know, Dispensing operates at well under 1 month of backlog at any point in time, as many of our large customers, specifically in the U.S., Have very short order cycles and essentially our third quarter order rate does not reflect what we anticipate for deliveries, in the fourth quarter to our ever expanding domestic retail customers so as such, we don't see that 2% growth rate in the third quarter for orders as indicative of our expectations for growth for this unit in the fourth quarter so we would expect results similar to our company-wide stated goals for organic growth.

On margin, $8.4 million was just over 22% of sales and increased 190 basis points from last year. And again, the flow through when you adjust for currency, was just under 40% in Dispensing, so very good conversion. And so as we said in the past, Dispensing, due to it's lumpy nature, is a modeling challenge. But clearly, a very solid third quarter both on the gross side and margin expansion.

Lastly, Fire and Safety on page 12. Sales were up 10% in total and 8% on an organic basis. And orders essentially followed sales. Operating income of $15.8 million was up 6%. And while the 24.3% is solid, it was down about 90 points versus last year due to product mix and to a lesser extent, start up expenses associated with the opening of our new facility for rescue tools in China. But all in, company-wide very solid performance in the third quarter, and we continue to generate strong organic growth. It's being nicely complemented, as you can see, with strategic acquisitions. And we continue to expand margins and generate strong free cash flow. So with that I'll turn it over to Larry. Larry?

Thanks, Dom. I think you're all familiar with our business model as an applied solutions provider to niche markets and in particular, with our focus on fluidics. And with that in mind, I'm going to flip forward to slide 14. I'm going to update you on our Mixed Model initiative, and do so by way of a current deployment example. As you know, we're one of the leaders applying the principles of Operational Excellence. We're demonstrating consistent productivity gains, cost avoidance, and sustained free cash generation. On a percent of sales basis, our direct labor content has decreased 20% over the past 3 years. Our plants have ample capacity for us to grow 35% or more, and that's without significant incremental capacity based PP&E looking forward. Our free cash, as Dom mentioned, has grown 18% this year. And that's just typical of the consistent outstanding performance that we continue to generate.

We're always asked by investors how long can we sustain our rate of operational improvement? We think we have many continued productivity opportunities from our longstanding IDEX businesses, let alone the more recently acquired businesses. And the keystone to our Operational Excellence deployment is Mixed Model Lean. Many of you had the opportunity to see Mixed Model in action now at many of our different business units. The short summary report is is that all of IDEX has now been trained, and value streams are rapidly becoming the basis for how we organize within our operations. We've begun to extend the Mixed Model methodology to our supply chain, and also to the transactional processes. And we talked about it before, but just to reinforce, Mixed Model is so important for us because of our very high mix, customer specific business profile. We like that profile because it enables differentiation. But it forces a different form of Operational Excellence, hence that Mixed Model approach.

In terms of current penetration or the remaining value creation opportunity for Mixed Model, we think it's about 20% or 25% deployed thus far. But we don't see a short-term horizon to Mixed Model and we don't ever see an end to the greater operational excellence mindset. I just came back from visiting our Chinese facilities. And I'm even more bullish than ever that we can continue to construct the customer-specific business model in China that we have in the western world. And that will be enabled by Mixed Model Lean. Our Chinese strategic sourcing capability will also benefit tremendously from the same kind of lean thinking. So although there's still much to be done, we expect the benefits to accrue globally for years.

I'm going to flip over to 15. We're applying Operational Excellence in the Health and Science businesses in a similar fashion to what we have implemented in our industrial segments, and we're seeing comparable results. And the depiction there on slide 15 is an example of great innovation leading to a Mixed Model success story within 1 of our HST businesses. What I'd like to do, is just walk through this in some detail, because I think it's important to demonstrate why, but also more of the how as to how we apply Mixed Model. Sapphire Engineering, the same business unit that manufactures this product, has very recently been featured in a leading medical trade magazine. The article is a very good overview of how Mixed Model and value stream thinking at IDEX has now been successfully applied to the medical device world. And just as a quick advertisement for the product, for the S17, because it's such an innovative product, this pump can accurately dispense volumes as low as 10 nanoliters per minute.

We guarantee the life of the product for up to 5 million cycles in typical diagnostics applications. To put that into perspective, the incumbent technology for this product is good for tens or maybe hundreds of thousands of cycles. So 5 million cycles versus tens or hundreds of thousands of cycles. Our product utilizes a proprietary IDEX-developed piston technology. And at many of the applications, the pump head is now incorporating a fluid path manifold manufactured by our EPI division, utilizing one of the advanced polymer materials that EPI works with. So remember, we acquired EPI in May.

Most importantly, from the Mixed Model perspective though, these pumps are fully customizable. Matter of fact, we market the product family as customer-specific to optimize the performance in the application. So to comment on the slide, if you look at it regarding customized solution, is not just a product attribute, but that's a core success factor for how we differentiate our capability and a means for how we defend our position. For a customized solution to win, it must be commercially competitive. Customization helps achieve the better value for the customer and for us, but it must also be on time, with short lead times and always meet quality expectations. When we first developed the S17 line, we knew we could manufacture it, but we didn't know that we could drive customer service levels to the degree that we have utilizing Mixed Model.

So, just to give you a sense for the process. Our team developed a complete view of the desired value stream, considering the entire value chain from customer to supplier. We assessed all the shared resources that potentially impacted producing the product in a single piece flow environment. We constructed product and process families, as we call them, with an understanding of the work content, so that we could understand the Mixed Model potential leverage and as for how this product would be manufactured in conjunction with it's sibling products in the plant. We then mapped the desired product and information flows.

We built a thorough understanding of all of the associated shared resources and set up times that apply. Essentially, it's the total analysis for how in this fairly high variety environment we could simulate higher volume or mass flow production. Again, the idea with Mixed Model is to take a broader range or a mix of product, simulate higher volume flow, and take advantage of the classic Lean and Six Sigma operating principles.

So then, through the use of some classic Lean manufacturing tools, we created a demand based single piece flow process where we could focus on waste reduction and particularly as it applies to this multi product family. The Value Stream team, and this is important, not the management group, established the metrics to pace the flow and to measure their improvement. So I think you get the idea, and hopefully this is illustrative of why we're high mix, but also how we're able to embrace customization, and what it yields in the way of operational challenge, but also opportunity.

To give you a flavor of the results, on time delivery for this product has improved to just north of 95%. We've reduced the customer lead time by 50%. First pass yield is up 7 percentage points. We've reduced the inventory associated with producing the product by over a third. And most importantly, and I talked about this a little bit in the last call, our speed to market for new configurations of the family of product has enabled new customer wins. As an example, this pump with an EPI many fold will now be used a new customer technology which facilitates DNA synthesizing. So, hopefully this Sapphire example illustrates why, and also how, and how in a lot more detail, how we apply our Mixed Model concepts within the construct of Operational Excellence.

So with that, I'm going to move a little quicker through the segments. I'm over to slide 16. As Dom mentioned, we're just absolutely pleased with the continued strong performance of our Fluid Metering business. If you remember last quarter we discussed our relative optimism for continued growth prospects in this space based on very strong underlying fundamentals. As Dom mentioned, not only are we growing very nicely at 9% year-to-date, it's very broad-based. And we're realizing impressive margin expansion as we grow. The end markets for fluid metering remain strong and we review our strategic position as excellent.

Most all of the process industries continue to expand, and expand globally, particularly though those infrastructure segments, and the ones that we focused on in the last call. The same drivers that we've talked about previously continue to apply, increased focus on process accuracy, more severe duty applications, more value placed on custody transfer of critical fluids and gasses. They're all driving the opportunity for new fluid metering applications and they all afford the opportunity to grow our sales content in the applications. So, again, the Fluid Metering group did just a super job for the quarter. Dom ran through the numbers, but sales and margin expansion that are very impressive, and obviously they've set themselves up for a great year.

Over to slide 17. Within FMT we're just thrilled to have the acquisition of Banjo to the Fluid Metering group of products. The Banjo team, led by Mike Bowman, is very well respected in their market niche for outstanding product and operations performance. The Banjo has a track record of consistent growth and customer focused innovation. Banjo's position in the OEM and after-market segments of agriculture and the industrial infrastructure segments are obviously natural extensions for our Fluid Metering capability.

I'll turn now to Health and Science on slide 18. Organic sales growth year-to-date of 14%, obviously stellar. And for the quarter at 10%, very impressive. The underlying market fundamentals for Health and Science remain very strong. Growth in analytic instrumentation and the laboratory test equipment, and the continued evolution of the medical procedures are enabling broad-based new growth opportunities for us.

In addition, sales to other applications in patient care and OEM commercial equipment remain strong for the quarter. The integration of EPI is now just about complete. The example I just spoke of with regard to the Sapphire pump product integrating the EPI manifold is representative of the type of sales synergy that we will realize through continuing to buildout our Health and Science product offering. So the Health and Science team continues to forge new opportunities for IDEX and we're just very very pleased with their performance for the quarter and year-to-date.

And in Dispensing, again, organic performance for the quarter, very impressive. And as Dom mentioned, very strong domestic performance coupled with now what we're seeing in the way of Europe and much more stable environment. Domestic demand is being driven by increased competition among the North American retailers for the DIY customer, as we've talked about previously. Additional retailers do continue to expand in customized paints and coatings. The natural evolution to more automated dispensing equipment also continues. We're also beginning to realize the benefits of the DIY in-store equipment replacement sales opportunity.

The dispensing team is enhancing their product line with new global products that are easy to use and more universal in design. As an example, the AT-7000 family is becoming the dispenser of choice for the mass retailer and for the DIY. The product is software and hardware configurable to achieve a broad range of applications, from very small sample size volumes up to 5 gallon sizes. And for a broad range of paints and coatings chemistries, as well. The team has focused on capturing their near term growth, but they are also doing a fantastic job positioning themselves well for the future. So it's a solid quarter for Dispensing and again, the sequential organic nature of the business is very indicative of the lumpy nature of the project associated activity.

So, turning now to Fire and Rescue on slide 20. Organic sales growth for the year -- or year-to-date I should say, is at 9%, and for the quarter was 8%. We continue to experience solid demand globally for our hydraulic rescue tools, for the fire suppression equipment, and the engineered clamping systems from BAND-IT. The '07 Federal and State Fire Act funding has been approved and the first grant release was announced last week. Subsequent announcements are expected on a weekly basis through the end of the year and going forward.

Within fire suppression, we continue to gain share through our focus on pump modules and bundled offerings, including our integrated compressed air foam pump modules. Products like the One-Touch control allow the firefighter to pull up to the fire, essentially engage the pump, and by means of our single step control, easily, efficiently achieve the desired foam, water, and air mix. And that's from very wet to very dry. So to put it in context, the competing systems require several steps to achieve the same operation. The ease-of-use capability has enabled us to win a recent technical run-off against most of the rest of the industry, which will result in a significant new 2 year order, as an example.

We opened our newest Chinese facility, which is within the Fire and Rescue business last week. This state-of-the-art vertically integrated manufacturing facility is co-located with the regional technical University. So we have access to local design and to test capability. And again, our presence in China expands and this will certainly help us continue to meet the rapidly growing Asian market demand for fire and rescue product. And the Fire and Rescue team continues to absolutely outperform the markets, and in general create their own opportunities. And obviously help our customers innovate to save lives.

So while I'll wrap up our prepared remarks, Q3 and year-to-date, outstanding organic performance. 9% for the quarter and year-to-date, and I think what's most impressive is how broad based it is. As Dom walked us through, excellent conversion, solid strategic acquisitions that we think further strengthen our position in the businesses. And we continue to achieve operating leverage through Operational Excellence and with Mixed Model in particular. We're very well positioned in, we think, some very nice growing markets, and our outlook is bullish. And obviously, our team is executing extremely well. So, with that, we'll move on to Q&A.

Tamika, we're ready for the questions.

[OPERATOR INSTRUCTIONS] Ned Armstrong, FBR & Company.

I had a question regarding the business that you garnered in the Fluid Metering Technologies business. You mentioned several areas and infrastructure where you had good sales this quarter. Were the orders that you received, did it mirror those industries? Or were there other industries that were getting stronger?

Well, I would say first, Ned, that the industry segments of energy, water, many of the chemical segments, are certainly experiencing good growth. We think on top of their base growth rate that we continue to gain share, and we're very sure of that in a couple of those segments. We see ongoing very strong orders, opportunities, out of all, as I said, all of the custody transfer applications. That's for both big oil, but we've also seen continued very strong order activity out of the alternative fuels applications on the production side and the logistics side. So I think if I understand your question correctly, from an organic garnering perspective, yes, we think that the 10 segments that our infrastructure associated that are all process industries, that are basically the fastest growth drivers within the FMT business remain strong and we think that we're growing at least as fast as those segments.

Okay. And have you seen any pockets of weakness within end markets in that segment?

Not at all. One of the things, as I mentioned, that we've seen is the growth within FMT has been very broad-based. And obviously, we were pretty optimistic in our comments in the last call. And you can see by way of the results for the third quarter that we essentially feel good about the nature of the FMT markets, so very broad-based. I would say very consistent. And we continue to see the underlying drivers of infrastructure based spend as being quite good.

Okay, my other question regarded Banjo. Once you take into consideration the amortization you'll have for the -- some of the asset write-ups, will those margins be roughly in line with segment margins, above, below? Can you give a little color there?

Sure, Ned, and we gave a general view of all 3 acquisitions at our prior announcement, and I mentioned the $100 million of run rate total annualized revenue in the 23% to -25% operating margin. And that assessment includes Banjo, which has our best estimate right now for the amortization of cost. Obviously, we closed the deal 2 weeks ago, so we're still working on a beginning balance sheet. But the short answer is yes, that Banjo will be accretive to the relative operating performance of Fluid and Metering.

Okay, good, thank you very much.

Scott Graham, Bear, Stearns.

I have a couple of questions about 1, the Health and Science Technologies business, and then also about the Fire and Safety margin. On the Health and Sciences, I think Larry, in the past, you've expressed optimism that this is a business that can grow sort of mid-teens. And certainly understanding that this is -- or teens, let's put it that way. Understanding that there's never a straight line, is this a business where 2 or 3 quarters from now we might see like a 15% growth? Is that kind of how this works, because this is a tough one to analyze.

That's a loaded question, Scott. Scott, I would tell you that we think that the Health and Science fluidics applications and the med tech applications represent big organic growth opportunities. And obviously for the quarter, 10% organic is nothing to be ashamed of. That's fantastic performance. I would tell you that the team that comprises our Health and Science team has got their sights set on big numbers for years to come. And we don't give guidance, as you know, so we're not going to get specific about what we see in the way of a couple quarters out. But the whole idea with Health and Science is to build a high organic growth platform that we don't think in any way cycles with any of the industrial economy. And is the organic growth rate going to bounce up and down a little bit, quarter to quarter? Absolutely. Every business does, and this one will I'm sure. With respect to Fire and Safety, maybe you ought to expound on your question.

Well the margin, as you guys pointed out, of course it was down, and you gave some of the reasons. But it was, even with those reasons, I'm wondering, understanding of course that Mixed Model Lean still will impact that business, would it be fair to say that this business's margin probably has less upside than the other margins?

Well, Health and Safety -- are you talking about Health and Science or Health and Safety, Scott?

Fire and Safety.

I'm sorry.

It's a very big number right now, and the margin, even with it being down this quarter, I'm just wondering if that was maybe indicative of what I said.

No. Again, as both Dom and I commented, the Fire and Safety margins for the quarter have more to do with mix and also with investment, particularly in China, as we built a very nice new facility there, and we're outfitting that facility accordingly with people and machines and everything else. The business mix can be impacted one way or the other by the combination of basically the 3 components. BAND-IT, the rescue tools, and the fire suppression equipment. And we just for this quarter saw, on a relative basis, a less profitable mix. But the overall Operational Excellence initiatives set and certainly our cost mindedness in that group is just as strong and just as applicable as it is anywhere else within IDEX.

Excellent, thank you.

Jack Kelly, Goldman Sachs.

Dom, you had indicated in your remarks that the flow through was a bit better than you guys traditionally get. Can you give us any color on that? I mean, I know it's coming from a lot of different areas, but to the extent that order growth rebounded as you thought it would, sounds like it's going to remain strong. Can we expect the flow through in the next couple quarters, given where you are in terms of utilization rates to maybe be above your objectives?

Jack, that's about 5 different questions. I'll start with the flow through. On both Fluid Metering and Dispensing my point was we were above our norm of 30% to 35%, at about 40 for both. So for both those businesses I would say that 30% to 35% is still indicative of how we see the future. And we made the point on both Fire and Safety and also within HST due to acquisitions, so we still think the 30% to 35% is our entitlement.

Okay. Larry maybe you could just expand a bit on dispensing. You'd characterize Europe as stabilizing. Does that mean it's flattish year-over-year, and is it stabilizing and you can kind of see light at the end of the tunnel in terms of an uptick? Or could you just give a little color on that?

Actually it's better than the way that you're characterizing it, Jack. We saw organic growth in Europe in Dispensing for the quarter of a few percent, and we think the prospects in Europe are actually pretty decent. So it's, depending on how you think about stable, I guess in the IDEX world of high organic growth it's a little less than some of the rest of the businesses. But certainly far better than what we've seen in Europe over the last few quarters.

So we're seeing obviously a the sign of the paint companies coming around? Or is there something else going around?

Well as we said on the last call, 1 is the comps get a little better. But 2, also we're seeing investment on a number of different mid sized project activity fronts.

Okay. And just in terms of the order pattern, maybe you mentioned this and I missed it. But clearly in the second quarter, you indicated things were going to accelerate, or likely to accelerate in the third and fourth quarters and certainly they hit the number in the third quarter, meaning the 9% organic growth. Is that your best assessment looking out over the next quarter or 2?

Jack, we're not going to provide specific guidance, but if you recall on my prepared comments, I think within Fluid Metering, we have 17% organic order rate growth in the third quarter. If we impact currency and also 2 or 3 million of orders that we see as flowing into next year, that kind of adjusted rate there is 12 to 13. Dispensing, our comments there, the order rate growth of 2% is not indicative of how we see the fourth quarter, primarily because of the large retailers in the U.S. and their order patterns. So similar to our prior comments, I think the mid to high single-digit growth rate is how we see things. Obviously year-to-date is 9%, and we don't see a fourth quarter that's going to be a lot different than that type of a growth rate, but we're not going to get any more specific than that.

Okay. Then just on Fire and Safety, Larry, you had mentioned you're gaining share plus the Federal money coming in. Can you quantify to some extent how over a couple quarter period the Federal money hits? I mean, are you getting a sense from your customers who build the vehicles that this could spur demand a lot, or a little, or how do we kind of quantify the fact that the Federal money is now flowing?

Just to maybe paint a little bit more of a picture, I think all in the industry expected that the Federal money would start flowing earlier in the third quarter. It really just started to flow with the first $90 million release against the $540 million total, October 6th, I think it was. And the way they bucketed that, Jack, is about 35% is targeted for overall fire apparatus. And depending on which numbers you believe, plus or minus that number for other associated equipment, and then there's a piece that's there that's associated with training and wellness and some other associated things. So we're going to benefit without a doubt, both in terms of truck volume, as we get -- see the pumps and the pump modules and the [inaudible] systems and the things of this sort on the trucks. But probably most importantly, in terms of rescue tools. And the rescue tools would be a sub bucket within the equipment purchases, which would include SCBAs and other protective clothing and things of the sort.

Obviously, we didn't see any top line help through the third quarter associated with grant money. Or if there was, it was at the very end of the quarter and it was an anticipatory kind of spend out of the departments before they actually released the grant. There is a bit of a substitution effect, we think, in terms of grand money versus municipal spend. So I wouldn't necessarily aggregate all of what would come in the way of grant funded purchase money on top of our outstanding organic growth already. But if you net it all, I do think we see, as Dom mentioned in the last call, we see help for sure, out of grant money going forward. And it's, to your question, not just the next couple quarters, it's through '07.

Okay. Good. And finally just Dom, on the tax rate, this R&D Bill that's been kicked around. Now they're talking maybe early January. But if it were to be passed some time in '06, we would just kind of adjust your tax rate down by 100 basis points in the fourth quarter? Is that --? Or something more? You already accrued it for the first 3 quarters as happening, right? So the fourth quarter was truing up?

No, Jack. The new rules are you can't take any of it until it's been passed by Congress. So it's not in the numbers. And when I gave you the range at the low end of 33%, we thought about that being passed this year. I would tell you that we're kind of running out of time this year.

Yes.

So we're going to use 34% right now, and more to follow if it passes, it passes. And that will benefit that 34% rate in the fourth quarter, if it happens.

So if it happens, the tax rate would be between 33 and 34 basically for the year?

That's a fair comment, Jack.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Charlie Brady, BMO Capital Markets.

Can you just comment on [inaudible] Wal-Mart and sort of how -- I know you can't get specific on it, but sort of where we are. Has there been any additional acceleration in rollout, or where that stands today?

We'll just tell you the following: There's obviously some competitive issues that apply, so we don't want to get into too much detail. But we're basically 12 months into a little over 5 year program, so we've got a long way to go in terms of the rollout. And we're now hitting a kind of a constant rate in terms of machines that we're -- dispensing equipment that we're shipping to them for their various stores. Program is going extremely well. Corporate feels very good about the overall initiative, and we think we've got a great opportunity going forward.

Okay, thanks. And on the fire side of the business, I mean, you talked about the modules. How much of that business is coming out of the modules piece of it today?

How much of the total fire suppression?

How much of Fire is stemming from module sales?

Very small, in terms of existing total sales as the denominator, and modules as the numerator, it's a very fast growing business for us, because again, it allows us to gain share on the truck. And so we're finding with many of our customers now, not just domestic but also international, that they prefer to have us build the module, in many cases including the phone system in the module, such that it affords us a much higher -- much larger opportunity. And them better, more competitive offering for the truck. So on a rate basis, it's certainly growing fast, but it's still a fairly small percentage of total sales.

Okay. Thanks. And 1 more and I'll get back into queue. Just on raw material costs, any significant movement on any particular raw material costs, sort of how you are pricing, capturing that right now?

I would say that the -- and the short answer is the only real sequential movement has been around nickel and stainless. And it's not been significant, frankly, in the total. The overall inputs discussion right now is really not a major concern for us.

Thanks very much.

Robert LaGaipa, CIBC World Markets.

Just had a few questions. I guess 1 on the Health and Science Technology segment. Can you maybe just talk about just the stage we're at in terms of the integration? I know you mentioned on EPI we're fairly -- we're pretty much done. Should we expect any significant integration costs from here on out? Looking at the margin, obviously flat with the previous quarter, you've owned JUN-AIR and EPI for several months now. Should we expect that to move back up at least by the amount of the compression associated with the integration in the quarter?

I think the bigger picture here, Bob, to think through the framework for Health and Sciences is, as you know, the area that we're focused on along with FMT for our primary acquisitive efforts. And we've got our sights set on continuing to grow by way of acquisition, and principally focused on those businesses that we think are great organic opportunities for us. Not just short-term accretive opportunities, but long term good organic growth businesses for us. So the focus here is building out a platform, and growth is the primary metric that we're focused on within the group.

In terms of margins, back to the earlier question asked, there's no reason why we can't get as much in the way of margin improvement in Health and Science as we have in our industrial businesses. And just as an example, I talked about in our prepared remarks with the Sapphire product line, it's indicative of the kind of opportunity we have. I didn't actually talk so much about the P&L improvement in that product line, but it's going to be significant.

And the gross margins in Health and Science are higher than they are otherwise within the business. So you're starting off with a great opportunity to leverage the business as you move forward. The timeframe for which you integrate an acquisition, and when it becomes either neutral or accretive to the overall segment, is a function of the individual acquisition. Specific to EPI and JUN-AIR, I would tell you right now, if I had to guess, I would say EPI is going to get there faster than JUN-AIR. But they are both going to be great growing businesses for us.

Now, what exactly were the costs associated within this quarter, this past quarter, the third quarter? Was there anything significant in this quarter versus the prior quarter? Was it similar? Just trying to get a sense of what specifically happened in the quarter, and what we should expect there moving forward.

Yes, Bob, we're not going to get into fourth quarter guidance. But the second and third quarter were essentially flat in terms of margin rate, and the costs were similar.

Okay. That's what I was looking for.

I'll have to leave it there.

Okay. And on the Fluid and Metering Technology, obviously just a tremendous performance. Probably the best -- I think it is the best margin you've had in that particular segment going back to [inaudible] pump products overall to the mid to the late 90s. And I guess my question is, within that segment, now that you've acquired Banjo, I recognize that Banjo's margins are significantly higher than even the 23% to 25% across the acquisitions that you've had over this past year.

Should we expect now that the acquisition is closed, any significant write ups on inventory or amortization? Whatever the case may be that might impact Banjo's margin and the contribution level in the near term? And I guess as a follow on to that, given Banjo's exposure towards the agricultural market, specifically in North America because I know it's the largest component of their sales, given the agricultural weakness that you're seeing out there that some of the equipment makers have mentioned in the market, is that something that we should be concerned about moving forward, at least in the near term to median term?

Sure. On margin itself, our view of Banjo is it will be accretive to the relative margin of the segment. So we will see improvement there, even after the cost of amortization of goodwill and the acquisition itself. So that will be an uptick to the overall reported margin. I'll let Larry comment on the ag side in terms of Banjo and how we see the end markets. And just to remember, about two-thirds of the Company is after-market, not OEM.

That's actually the core point to be made. And I think on top of that, if you look at Banjo's installed base, where we have product in applications today on equipment and various other user sites, or on user equipment, it's huge. It's absolutely huge. So the one thing we love about Banjo, if you look back, the Company was founded in '59, but really since the early 80s, that Company has just done a nice job of demonstrating consistent performance. And as I said, Mike Bowman and the team there, they understand their market, their customers, they know how to drive sales, and they have proven to do so through the cycle before.

So we think that the base ag market, the complement of OEM plus MRO activity serves as a good opportunity still going forward. We think the incremental sales opportunity on top of that though, is largely in the industrial segments, and includes again, some of the infrastructure opportunities.

Right. 2 other quick questions. 1, on Fire and Safety, you mentioned that Fire Act has finally passed here earlier this month. You mentioned the level -- how does that level -- can you just remind us how that level compares to the last Act? And has the composition of the funding changed, positive or negatively for yourselves?

The funding is basically flat with where it's been. Okay? The composition of the funding is something you frankly don't fully know until the release is granted. To give you an example, of the $90 million or so that was released last week, there were 800 plus specific programs or projects that comprise that. We think that it's net-net, a good thing for us because there was a disproportionate amount of money spent on wellness and things of the sort over the last couple of years. So we believe, particularly for rescue tools, it represents a good opportunity for us going forward.

Okay, and last question if I could. Just on the product line that was divested. If I remember correctly, that was a business. And I'm not sure if the product line that was divested was just a part of that business, but it was acquired 4 years ago. Now, what's changed within that particular market, which I believe is kind of water treatment, that caused you to decide to divest this product line? And I recognize it's only a few million dollars of sales, but was there any change at the margin? Is it something that could ultimately affect the Pulsafeeder business overall?

No. Not at all, Bob. It's a very small product line within Pulsafeeder, which is obviously within FMT. And it's a [nichey] application for producing a biocide, chlorine dioxide, on site by way of an electrolytic process. We think there's still a good opportunity for the product as applied in a number of the virus and mold and bacteria fighting applications that it is appropriate for. The biggest issue is 1, we don't see the strategic fit with our business, so it's not going to in any way disable what the Pulsafeeder team is focused on in terms of water and wastewater. 2, it's a different channel to market.

You're talking about serving a variety of infrastructure applications that are different than FMT. It's hospitals and health centers of different types, and things that are food prep associated that we don't have any other associated -- directly associated product sales. So it was a strategic decision and one that made sense for us, irrespective of what we thought about it a few years ago.

Okay. Terrific. Thanks very much.

[OPERATOR INSTRUCTIONS] Mike Schneider, Robert W. Baird.

Maybe we can start with dispensing equipment. I just want to understand the growth that's going on domestically, sounds like it's probably mid-teens at this point. I understand the Wal-Mart rollout is under way. Are there any other major programs being rolled out to explain that strong growth?

There are some other things there, Mike. The Wal-Mart is, from a new retail perspective, the largest program. We still think there's other good opportunities for continued other retailer expansion into paints, but there's obviously none of that in the third quarter number. On top of that though, there's a paint hardware store alliance that's been recently announced, that we 1, saw a little bit of sales activity from the in the quarter from, and will see some going forward, that we don't want to talk about it, because I don't think they've announced it yet. But basically, it forces a set of equipment purchases because their existing equipment in the hardware store doesn't handle the range of new paint. And on top of that, we're starting to see the replacement or replenishment opportunity for equipment within one of the DIYs, which has got a very long tail on it, obviously. That represents equipment sales opportunities for us for a good long period of time to come.

So the dynamic of the channel expansion in the U.S. in particular, but coupled with some other nice dynamics, represents I think a pretty nice prognosis for the domestic side of the dispensing business.

And Larry, what are you hearing from the especially the domestic Fluid Management team about the change in the environment in the DIY channel? We've got a number of these players either reporting either negative same-store comps or lowering guidance. Sherwin Williams this morning explained that they've seen weakness develop during the quarter, and are expecting more going forward. Has this changed their capital allocation plans? We know they 're squeezing inventory of paint specifically, but has it changed their spending outlook as well, on equipment?

Not at all, Mike. Not from what we've heard or I have heard. And I would tell you that, again, if you go back to the model here for dispensing equipment, the equipment is a very small purchase cost, relative to the margin they earn on a customized paint. And as we've talked before, if you were to amortize that equipment cost into the bucket of paint that you produce, it's next to nothing.

And the way that you correlate the sales opportunity in the stores, essentially there is one or more pieces of dispensing equipment that apply per store. And shorter term negative demand from an in-store sales perspective doesn't necessarily change their desire to continue to sell paint, from what we believe. They make, again, relatively very nice margins on custom blended paint versus most of the rest of what they have. So it's a push product for them, I think in either aspect of the market.

Okay then, dispensing is obviously lumpy. We appreciate that. It looks like it will finish flat to maybe down organically for the year. Do you expect this business though, to return to this kind of IDEX corporate average growth rate of the high single-digits?

Yes. As Dom commented earlier, I think, with respect to dispensing, but if not, the answer is yes. We see dispensing as capable of IDEX like targeted organic rates, mid to high single-digits through the long haul. And it's always going to be more lumpy than the rest of our businesses.

Okay, and then Health and Sciences. The internal growth rate there, I'm just wondering, the deceleration that's gone on through the year, it started the quarter -- or it started the year basically at about 16% organic growth and finished at about 10 this quarter. Do you read anything into that? Or is this just the nature of some different product rollouts?

No. I don't read a lot into it. As a matter of fact, I think we'll see because it's more indicative of an OEM quarter format, we'll see some of that in future years. It's a little different than a lot of the rest of our businesses. But as we continue to grow in Health and Science we'll see blanket orders impacting the order stream. And certainly from an overall performance within the segment for what the group has in the way of opportunity, we feel good about the long term prospects, Mike.

Okay. And final question just on pricing itself. Any idea what pricing is contributing to growth at this point? And I guess, what's your view of pricing's contribution kind of within the next 12 months, greater, lesser, and especially vis-a-vis what you see with raw materials today?

Yes, sure, Mike. Is your question on a company-wide basis?

Yes.

It's actually fairly similar. While I think you know we've typically achieved just under a couple hundred basis points in the way of price, I would anticipate that to be a good rule to apply going forward ,as well. We've done better than that in a couple of the businesses within the portfolio this year. But I think that's a good number to apply looking out.

Okay, thank you.

At this time, there are no further questions.

Okay. Well, thank you all very much. We'll look forward to spending time with you through the course of the rest of the year. And we'll look forward to talking to you again on the call in the first part of next year. Thanks.

This concludes today's IDEX Corp third quarter earnings release conference call. You may now disconnect.