藝達思 (IEX) 2007 Q2 法說會逐字稿

Good afternoon. My name is Lynne, and I will be your conference operator today. At this time, I would like to welcome everyone to the IDEX Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) I will now turn the conference over to Mr. Heath Mitts, Vice President of Corporate Finance. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining our discussion of the IDEX second quarter and year to date 2007 financial results. Earlier today, we issued a press release outlining our company's financial and operating performance for the three and six-month periods ending June 30, 2007. The press release, along with the presentation slides to be used during today's webcast can be accessed on our company's website at www.IDEXcorp.com. Joining me today from IDEX management are Larry Kingsley, Chairman and CEO; and Dom Romeo, Vice Chairman and CFO.

The format for our call today is as follows. First, Larry will update you on our progress during the second quarter across our company and four business segments. Then Dom will take you through our financial results for the quarter. Following our prepared remarks, we'll then open our call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 800-642-1687, and entering conference ID 5708063, or simply log on to our company home page for the webcast replay. As we begin, a brief reminder -- this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO, Larry Kingsley. Larry?

Thanks, Heath. We achieved record sales, income and free cash flow for the quarter. We also executed extremely well with regard to our operating and customer service initiatives. Operating margin expansion of 110 basis points is reflective of our ability to continue to leverage both growth and process improvement. In the quarter, we completed the acquisition of Quadro Engineering consistent with our plan to serve high growth niche segments. Quadro extends our capabilities and customized solutions for high value fluids to now include solids, notably in the pharma and the biopharmaceutical markets. I'll provide more detail on the acquisition in just a moment.

A quick summary of our performance for the quarter, though. Orders were up 17%. Sales were up 16%. Operating margin was up 110 basis points. EPS, up 19% to $0.51, and free cash flow increased 42% to $58 million. Most of the markets we serve are growing and forecasted to perform well, both domestically and internationally into '08. As you know, we serve the process industries, specialty capital equipment, health and science applications, and the retail channel for paint. All of the process industries -- that is energy, chemical, pharma, water and waste water, the majority of the CapEx equipment segments, and the core of our health and science markets -- again, are all performing very well. We're pleased with our results for the quarter, and we're laying the groundwork for future growth. Our business model and strategy of niche market applied products continues to yield just great results. And as you know, we're targeting the same Business profile in our acquisitions that we're making, enabling us to further build out our strategy in terms of new products, new technologies, adjacent markets and new and developing regions.

So I'll now run through each of the four segments, and we're on Slide 7. Within fluid metering, we serve a large available market. We move, measure and control high value liquids, gases and solids, and processes particularly where high accuracy and/or severe duty are critical. While we serve a broad market, again, our focus is refined fuels and gases, alternative energy, chemical processing, water treatment, selective high growth sanitary applications within the pharmaceutical and the food segments. There are a number of end market drivers that we see as continuing, most notably energy demands, coupled with constraint supply is driving capital investments to increase capacity and debottleneck both the processing and the supply of the refined fuels, the ongoing growth and power generation and also in mining exploration, continued investment in higher performance process controls and instrumentation for chemical production, environmental regulations for clean air and water, as well as the need to address the water supply and waste water infrastructure issues, and the increasingly stringent standards for food and pharmaceutical safety and security. In addition to the strong end market drivers, our expanding international capability is serving us well, as we see outstanding growth for most of the international markets. Within water and waste water treatment markets, we continue to gain share through our expanding systems capability and with recent orders from a very broad number of municipalities.

Similarly, continued growth in the refined fuels and gas markets continues to drive demand for pumps, flow meters, software and complete systems used in production plants and terminals around the world. From new airports in China and the Middle East, to automated fuel terminals in western Europe, to agricultural production in North America that in turn supports production such as ethanol production, the underlying fundamentals and the market drivers bode well for sustained growth within fluid metering. Dom's going to review the segment in a minute, but just in summary, fluid metering grew 31% in Q2. Operating leverage was outstanding, with a reported Q2 operating margin of 21.4%, and that's an increase of 130 basis points. Continued to find and execute attractive acquisitions in the segment, which in turn delivered great organic growth opportunities, particularly when coupled with our other offerings and with our global reach.

Quadro Engineering is the most recent example of the fluid metering strategy at work. If you look at Slide 8, Quadro is a technology leader in particle control solutions for the pharmaceutical and the biopharmaceutical markets. Quadro is based in Waterloo, Ontario. Quadro's core capabilities include fine milling, emulsification, special handling of liquid and solid particulates used today in laboratory, pilot phase, and production skill processing for pharma and for the biopharmaceutical applications. Their core technologies are a strategic expansion of our sanitary platform in both liquids and solids and they provide a strong basis for us to serve selective high growth sanitary applications in developing markets worldwide. Quadro currently has sales of approximately $22 million and we intend to quickly expand Quadro's global reach as well as our served market in the sanitary applications and that's both in the pharma, as well as outside the pharma segment.

I'm going to turn now to health and science. We're on Slide 9. For those of who you are less familiar with the segment we serve a large addressable market here as well. The focus is precision engineer fluidics that are used in analytical instrumentation, clinical diagnostics, and medical technology products. The end markets are pharmaceutical, drug discovery, new applications in life sciences, diagnostic testing, dental equipments, and patient care. In this segment we also serve home medical applications, semiconductor processing and a couple of niche segments. And although the health and science market continues to be very attractive, our Q2 sales performance was well below our targeted range for the business. As we mentioned previously in the Q1 call, we are exiting a couple of the less attractive OEM relationships within the health and science segment. The decline in specific OEM contracts reduced revenue by more than 2 points of organic growth in the quarter. This will continue to moderately impact growth rates short-term as we refocus our resources to the more attractive health and science opportunities. We will further penetrate four targeted health and science segments that we believe grow well above GDP rates, through and beyond our three-year planning horizon. We've made just about all the organization investment required to achieve that. We're already realizing the benefits of the pull-through sales in those segments with the more recent acquisitions that we've made. In summary, we continue to see excellent growth opportunities and are investing accordingly. In the short-term, we'll continue to prune some of the less attractive customer relationships.

In dispensing, on Slide 10, we're the global leader in automated dispensing and mixing equipment, used primarily today in the paints and coatings markets. In Q2, we achieved organic growth of 7% dispensing, an impressive 230 basis points improvement to operating margin and that takes us to 28.6%. So great execution by our dispensing team. Our focus in dispensing continues to be on developing applied solutions for our customer, encompassing complex color formulation and highly accurate repeatable precision dispensing technology. There's also a steadily growing service and support component to this business, particularly as an increasing number of the retailers expand into architectural paints. Our leading product position enables us to support the continued North American and European retail paint expansion, as well as respond to the changing regulations. Through the first half of '07, we continued to see strong demand at the project-based North American large retailers, while partially offset by softness in the small lower volume retail channel. Western Europe remained stable, while eastern Europe is growing nicely, as that market continues to adopt point of sale tinting. As we enter the third quarter of '07, we're projecting flat year-over-year sales growth for the quarter, due to the continued softness in the smaller U.S. retailers, and due to the project nature of the business.

Moving now to fire and safety, as you know we provide highly engineered pumps, valves, control devices, and other products used in fire trucks and emergency vehicles as well as the rescue tools used by the First Responders. This segment also includes our engineer band clamping business, Band-It. Within rescue tools, we continue to drive international market expansion. Global rescue orders were filled during the quarter for air lifting bags in China; lifting bags, pipe sealing bags, decontamination equipment in Poland; rescue tools for the Jordanian civil defense and a complement of cutters, spreaders, power units, and other similar rescue products for departments, both in the U.S. and globally. In addition, our strategy to modify rescue tools for the industrial markets continues to go well. We're now selling products to stabilize and support mining applications. Within fire suppression, the investments in our Asian business development strategy are tracking to plan, with recent fire suppression wins in Beijing, Shanghai and in Malaysia. Within North America, we view the rescue vehicle market to have stabilized at a moderate growth rate with some truck builders experiencing continued growth, while other truck builders are anticipating short-term, slightly lower order rates. Our ability to continue to grow faster than the market is due to our ability to innovate, to introduce new products, provide more product value to our customers, and as you know, that's something that we've been doing successful for quite sometime.

Band-It continues to experience very strong global orders for its engineer band clamping systems used in a variety of applications in oil and gas exploration, including rig and ship platform construction and repair and underwater pipeline installation. Demand also remains strong from the aerospace, the commercial and military markets. In addition, increasingly sophisticated systems in rail and light rail, hybrid vehicles and medical systems are also requiring the aerospace caliber cable harnesses, which are shielded from EMI and RFI interference, in many demanding applications. The Band-It just continues to expand and do a terrific job with IDEX-like innovation, applied solutions and many different markets. All up, fire and safety performed very well for the quarter, with organic growth at 10% and operating income of just under 25%.

Dom's going to now review the financial results for the quarter and year to date, including more details with regard to our segment operating performance. With that, I'll turn it over to Dom.

Thanks, Larry, and good afternoon, everyone. I'm now on Page 12, orders and sales. Orders of $339 million increased 17% from last year and 7% organically. Monthly orders were $108 million in April, $115 million in May and $116 million in June, so once again, very consistent throughout the quarter. By segment, the Q2 organic orders growth rate was as follows: First, fluid and metering technologies, after a first quarter at just under 11%, FMT posted an 8% increase in the second quarter. And as Larry mentioned, growth in the various markets served continue to be strong and that's evidenced by our order trends and also the pipeline we have of projects. Health and science was up 6% and we do see some improvement in core analytical and IBD markets. Dispensing, due to growth in eastern Europe and improved conditions in western Europe, was up 6%. And lastly, fire and safety and diversified products was up 7% in Q2 and again, when we look at both backlog and our pipeline we see growth for the second half consistent with the first half. Sales of $345 million was an all-time high and again, that was an increase of 16% in total and 8% on organic basis.

Turning next to operating margin on page 13, operating margin at 20% increased 110 basis points from last year and on a consolidated basis, we achieved 40% plus flow-through on organic growth for the quarter. Let me just take you through the math on that. Sales increased $48 million versus last year. Within that, acquisitions provided $25 million of revenue at about 20% operating margin. Currency added $6 million to revenue, with an estimated flow-through in the low to mid teens. Thus the organic revenue growth was about $17 million and the associated operating income on that was $7 million, or a flow-through of over 40%. So, again, as Larry mentioned, from an operating margin perspective, very strong execution and strong leverage.

Turning next to income, Page 14, income from continuing operations was up 21% and EPS of $0.51 is a 19% increase from last year. The effective tax rate was 34% for Q2 and for the year we estimated the ETR in the 34 to 35% range. And as I mentioned in the past, the biggest driver in terms of impact on ETR will be our geographic mix of income. As a point of second half modeling internally, we're using 35% for the second half versus the 34% we've discussed on the last call. So all in, though, from an earnings perspective, again, very strong performance.

I'm on Page 15 now, balance sheet highlights. Debt to capitalization was 24% and our balance sheet continues to be strong. Second quarter free cash flow of $58 million was up 40% from last year, and from a working capital perspective, we made some nice progress in the quarter. Sequentially, revenue increased about 4%, or $11 million. Exclusive of the impact of the Quadro acquisition, inventory was down slightly. Additionally, we improved our monthly linearity within the quarter and receivables were essentially flat. So all in, a very strong performance from a cash flow perspective.

Page 16, fluid and metering technologies, and again, FMT continues to post solid financial results. Orders were up 31% in the quarter, 8% on an organic basis. Sales increased 31%, 23% from recent acquisitions and 7% on an organic basis. Again, acquisitions contributed about 23% to the second quarter sales results for the segment. The combination of Banjo, Toptech, Faure Herman and Quadro contributed operating margin consistent with segment performance and operating income at just over $30 million was a 39% increase from last year, and up 130 basis points from last year. Health and science technologies for the quarter, orders were up 7% on a reported basis and 6% on an organic basis. Operating income increased 4%. Operating margin of 18.4% reflected an improvement of 50 basis points versus the prior year. And as we mentioned, we have two OEM contracts, one on the science side, the other within the medical products line, that for Q2 in the next two quarters will adversely impact segment growth by about 200 basis points.

Turning next to dispensing, Page 18, orders in the quarter were up 11%, about 6% on an organic basis. Sales increased 12% and organic growth was 7%. Again, very strong operating margin at 28.6%. That was an increase of 230 basis points from last year.

Turning to Page 19, fire safety and diversified products -- for the quarter, orders were up 10%, 7% on an organic basis. Sales increased 13% and organic growth was 10%. And as Larry mentioned, growth in this segment is driven by global market expansion and combined with new product introductions. Operating income grew 11% versus last year and margin at 25% was essentially flat with last year. With that, I'll turn it back to Larry.

Thanks, Dom. Given our ability to take share in attractive markets, we continue to invest for growth, while being mindful of what is necessary to react to manage costs and those businesses that are growing at the less than IDEX-targeted mid to high single-digit organic rates. For the back half of the year, we see continued strength in just about all the end markets we serve. Operational excellence enables us to continue to be more productive and further leverage our fixed cost structure. Our strategy and operational execution will continue to deliver strong performance. Commercial excellence is enabling us to continue to expand the available market for fluid metering in health and science, while enabling us to take share in all of our four segments. Our international exposure continues to serve us well and our ability to acquire great businesses, like Quadro, further augments our ability to grow beyond our organic capability.

As you know, we don't provide guidance and we don't intend to. We've made more specific forward-looking statements in this quarter's release and in our prepared comments than we typically do for two reasons. One, some of the larger diversified industrial companies are experiencing slower markets than we are. And two, we wanted to speak specifically about our views of what we expect in the dispensing served markets for the third quarter. And what we see is the opportunity for improved performance in health and science. So in summary, we believe mid to high single-digit organic growth, coupled with similar acquisition contribution will continue to deliver annual EPS growth in the range that you have seen from IDEX over the past few years. For the back half of '07, we're focused on delivering within that same range and setting the stage for a great '08. With that said, we'll open the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Michael Schneider with Robert W. Baird and company.

Maybe first, can you hear me okay?

We can hear you, Mike.

Maybe if you'd just address the contract HST in the quarter. It was 2 points. Can you give us a sense, though -- if I heard Dom correctly, that continues in the second half. Would that also continue into early 2008, or by the year end, do we anniversary that hit?

Yes, Mike. We're not going to delve into the specifics of the OEMs. We did see about 200 basis points of adverse impact organic growth in the quarter that will continue and taper down through essentially the end of the year, into the first quarter. We don't see any impact associated with that OEM exiting beyond that timeframe, and for that matter, we see fairly strong outlook from our core health and science segments otherwise. That is the analytical instrumentation segments, the IBD and biotech segments, the various medical equipment segments, such as dental and some of the other medical capital equipment. So to frame it up, yes, 200 basis points will taper down slowly through, into the first quarter of '08.

Okay, and then as far as the order rates, you did note that orders are up 6% organically. Would you attribute that to the sales force investments you made last quarter in reorganization? Would you attribute it to some change in the actual core markets or both? Just some color there, and then could you give us an update on where you are in that sales force initiative?

Absolutely, Mike. I would start with the segments that we serve, the market that we serve for health and science are very attractive markets that are growing at a nice pace, and they're OEM-structured markets, so there is a little bit of lumpiness or order release to sales rates that varies from time to time. But if you look at those core segments of analytical instrumentation to serve the life science and pharma markets, the various diagnostic equipment segments that serve all forms of patient care for tests and for in-hospital patient care, those segments are growing nicely. We continue to see them grow. The 6% organic orders growth in the quarter is reflective of the markets and their attractiveness. I think we'll still see improved performance in health and science based on the investment that we've made over the last couple years in the front end of the business. And frankly, I won't be pleased until we're performing at the high end of the single-digit organic range that we've talked so much about. In terms of organization structure within health and science, in the prepared remarks, as I commented, we have made most of the investment from a reinvestment on the SG&A line as needed. I think we've got the right structure in place. We've got the people in the positions. We've got the sales leadership in place, the GM talent in place to go after the targeted segments and I think it's a matter of continuing to execute well and to take that organic orders rate from 6 on up.

Okay, then. Just one last question. Banjo -- could you give us an update as to the growth rate of that business now that you've owned it for a couple quarters? And also, presumably it does have a beneficial impact to organic growth as we anniversary that acquisition, as we enter '08?

Sure, Mike. Let me -- we typically don't delve into the business unit organic growth rates, but obviously the ag space is doing quite well and Banjo is doing quite well as a result. But also, the synergy that we talked about a year ago in terms of taking the Banjo product into the industrial applications is working out very nicely. We just had a review week before last and we're actually tracking a little bit ahead of our plans. And vice versa -- some of the products that were taken into the Banjo channel seem to be generating nice little incremental sales for us. We're very pleased with the acquisition of Banjo, doing well in the home space and now we're thinking about how to take it to some of the international markets, where essentially it's untapped and that's, that's upside for us. In terms of the organic rates for the quarter, for Banjo, year-over-year --

Mike, it's in the double-digit range. And as you know, the anniversary date will be the beginning of the fourth quarter. So right now those numbers are included in our acquisition, growth rates for FMT.

That will actually be accretive to FMT's organic growth rate, presuming that growth rate stays where it is?

Beginning Q4 and for '08, obviously.

Thank you.

Mike, thank you.

Your next question comes from the line of Terry Darling with Goldman Sachs.

Just wanted to follow up on health and science. I may have missed it somewhere in the commentary or the release, but what was the acquisition impact on revenue growth in health and science in the quarter?

It's basically nil. The 1%'s essentially organic. As you know, all the acquisitions were apples to apples for the quarter, so we're all organic.

Okay, and in some of the comments, you sort of referred to a core part of the business of health and science and a non-core piece, and I'm wondering, just make sure we're clear on what the non-core piece is. Are there elements of that beyond the customer contracts that we're referring to, that you are looking to rationalize one way or the other? Have we got that understanding correct?

No, Terry. Basically the focus of the health and science team is in the segments of those analytical instrumentation segments which serve the variety of end markets that are pharma, life science, and other drug discovery applications. The IBD and biotech, medical equipment and dental equipment, the laboratory and the automation of the laboratory, then there's some select environmental segments that we like a lot. Beyond that in the segment, we also do serve some niche segments, things like home medical, as an example. Which in all reality isn't going to get us the same degree of attention from us going forward. We're selective in terms of those OEM relationships that we like, that we think are sustainable, differentiated product positions that we'll generate great margins from, and we'll stay in those. Where we don't see the same sustainable margin opportunity we'll be opportunistic about if and when we exit. It's not going to have a big dilutive impact to the organic rate for health and science, though, for anything beyond the midterm.

Maybe asked a different way, if we add the two points from the impact to the contracts back in, growth of 1% goes to 3%, which is still below I think where you -- I think where that business can be longer term. I'm just trying to understand where the additional drag on growth is coming from.

Sure. It depends on if you're trying to bridge organic orders at 6% or the sales result at 1. But bottom line, there's a couple of things relative to just Q2, beyond those OEM contracts that we exited. And that is -- there is a degree of lumpiness to the OEM release rate, and one of the larger customers in general was going through a bit of an inventory correction from Q1 through Q2. We anticipate that their sales will ramp up here midterm. And there is -- I think there's also some sales upside that will come by way of all of that investment that I answered in the last question. So if you look at the mix of market impacted issues and things that we need to do about it, largely, it's on our dime for how we in the back half of the year improve our performance within the health and science space.

Okay, and then I think you had earlier discussions had mentioned that acquisition prices in this particular space on health and science had moved up to levels that were not attractive to you and you were focusing in other areas. Is that still the case?

I would say that comment isn't universal. There are some properties that we're looking at now in the health and science space that bridge actually between fluid metering and health and science that we see as potentially interesting, and valuations would not preclude us based on what we know about those, proprietary deals of getting them done. And really Quadro, in many senses, is kind of the same situation. Quadro is going to be reported in the fluid metering segment, but Quadro serves the pharmaceutical and the biopharmaceutical segments, as well as some other segments such as food, specialty segments within food. And in reality, some of the end market drivers there are similar to the health and science drivers and Quadro was a proprietary transaction. We like the Quadro fit very well in terms of serving those end segments, so depending on how you classify that as either a fluid metering or a health and science acquisition, things like Quadro are certainly very doable for us going forward.

Lastly on margins, second quarter margins actually pretty good relative to our expectations, sort of a wide range between Q1 and Q2. As we look to the back half of the year, do we think more like Q2 or do we think more like Q1?

I think you can assume that our margin generation capability is always going to be strong. We have the ability to flow through very nicely on any incremental growth that's north of mid single digit organic, and as you know from our total growth model, we buy businesses that we can add margin to fairly quickly and the combination of our acquisitive and organic growth is going to continue to yield nice margin expansion.

Okay, thanks much.

And Terry, the other thing to consider, I think when you look at margin, it's better served by segment. As you'll recall, the second quarter for dispensing is typically our highest revenue quarter and obviously in the second half, our third quarter at lower revenue, you'll see a by segment mix impact, but in terms of our ability to flow through at the 30 or 35%, that's still the case.

Dom, maybe my question wasn't clear. I was still exclusively focused on health and science, 18.4 in Q2, 17.2 in Q1, pretty wide range there and pretty good performance despite weaker revenues. In terms of your comment of flowing through at the higher end of the range with mid single digits organic, but we're going to be below that range in the back half of the year. I'm just trying to calibrate there.

No, Terry. I didn't realize the question was health and science. No, we are definitely not looking at Q1 as indicative of the margin opportunity for health and science.

Okay, super. Thank you.

Thank you.

Your next question comes from the line of Matt Summerville with KeyBanc.

Just a couple questions. First, can you provide a little more detail year to date, what the additional spend has been in the health and science business and then what that looks like in the second half of the year?

Matt, it's really not a matter of additional spend within, from a reinvestment standpoint within the health and science segment. We've been investing in the health and science marketing, sales organization, the R&D capability, both internally, as well as what we've acquired for 3.5 or four years, so there's really not a year-over-year issue that particularly pertains. We do have the ability to meter that, obviously, going forward, if we see better opportunities in one of those market segments and one of the businesses versus the other.

Looking at the dispensing business, to switch gears over there, if you look at sequentially in the second quarter over the first, you grew revenue $2 million, operating margins were up something like 4 or 500 basis points. Can you help me understand, I guess, obviously the leverage there is great, but what was going on from a mix standpoint?

Sure, Matt. As you recall in the first quarter we had some severance expenses, so if you take that out it's basically volume and obviously operations initiatives driving the comp. And the better comp here is year-over-year and at this revenue level, dispensing has a significant cost leverage. So that's what you see in the numbers for the quarter. But don't forget the first quarter we had the severance expenses as a number.

Okay, great. Thanks a lot.

Your next question comes from the line of Ned Armstrong with FBR and Company.

Yes, good afternoon.

Hi, Ned.

My question involved acquisitions. I mean there's been a lot of talk about how the financing markets have been [roiled] and that the private equity guys may be pulling in their horns a little bit. Have you seen that out there in what you're looking at and what are your thoughts about that in general as far as presenting opportunities for better pricing?

Well, Ned, as you know, we focus on proprietary transactions. Again, not to reemphasize the Quadro as a prototypical IDEX acquisition, but in terms of bolt-on, it is. When we're looking at a large number of proprietary acquisitions, particularly within the fluid metering space, typically we can find them that fit well within our historical 7.5 to 9.5 times EBITDA range still. And if we've got enough of them underway, we can afford to be selective. In terms of the private equity exit of the middle market industrial and technology space, I would say I've not seen that yet. I think it's likely to happen, but we haven't seen it yet. But in the meantime, our M&A team's working hard to make acquisitions happen. We -- as you know, we deployed just under $400 million in '06 and again a little bit at the beginning of '07 in terms of capital toward great acquisitions. They're doing fantastically. We think we choose them well and integrate them very well and we've got quite a few number, quite a few on the list now for what we would like to get done yet this year and into '08. I would personally be disappointed if we didn't deploy over $500 million in capital over the next 18 months and kind of double that over the planning period.

And maintaining the type of multiples that you've been paying in recent acquisitions?

Yes.

Okay. Thank you.

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

Good afternoon. I have a question on fluid, FMT and one other follow-up on expensing. When we look at FMT, the organic growth rate of the business, we saw it at about 7% this quarter on a comparison of 8% in the year-ago quarter. This is versus the last two quarters, where organic was up 12 on a comp of 12, and 10 on a comp of 10. So something did happen there, even if it's not something that's continuing. Could you give us an idea of what exactly pushed the growth rate down by 5 points this quarter versus last quarter?

I think, Scott, some of that, you basically laid the trend out very accurately in terms of the Q1 '06, Q1 '07 and the same for Q2 '06 and '07. It's not unusual for us in our businesses to have a year-over-year delta of something of the sort. And as you know, within FMT, we typically would see at least mid, if not high-single digit organic growth, particularly with the complement of what we've added over the last few years, and a quarter to quarter organic rate difference of between kind of mid to high single digit and double digit is something that's likely to continue to be the case. So basically to kind of restate what you asked, we saw organic orders growth year-over-year trend almost exactly with organic sales and I wouldn't read too much more into it than that.

Well, what were the underlying markets that felt -- I know that this is not an easy thing for you to get to, because of how many applications you're in in FMT, but were there any markets that did feel weaker in the second quarter versus the first quarter? I would think that there had to have been.

Not really, Scott. What you've seen the last couple years, at the very beginning of the year in particular, is a fair amount of forward investment, particularly in the energy served markets, where they're typically working through some of their spring infrastructure projects. And we've seen that now, actually I think going on three years in a row. In the chemical segment, it's a little more constant through the course of the year. Water and waste water is more project-driven, so that can kind of come up and down and tends to trend a little more up, and I don't want to get any more specific regarding the back half of the year with an FMT, but to tell you that, Dom and I, and Heath, too, just spent the better part of a week with the team and we feel very good about what they have got in their backlog, in their project hopper, and what they are working to make for a very successful '07.

So it's fair to say that that comment within that paragraph of subjective guidance, that FMT should see second half growth equivalent to combined first quarter, second quarter growth. That would mean essentially, Larry, that organic sales growth in FMT in the third and fourth quarter should accelerate versus the second quarter on a year-over-year basis, yes?

That's the right math, Scott. We kind of looked at the year to date first half, which is obviously higher than the 7%, and our comment in the release is the comment.

That's helpful. Thank you. As far as the dispensing business, kind of the same thing, because in the first quarter, we were up 10 on a minus 4 comp and this quarter we were up 7 on a minus 4 comp. Now, next quarter you have a difficult comparison of 12%, acknowledged and that's probably why you're cautioning toward a flat sales number, but it would suggest that in the fourth quarter here again, we should see a nice ramp in organic growth in this business as well, yes?

Scott, I could say this. Yes, you're correct from the standpoint that third quarter for dispensing is a more difficult comp. Two, in the prepared remarks, we talked about the fact that some of the smaller retailers in the U.S. over the last couple of months have been a little slower than they were in the first quarter of '07. The Big-Boxes, the DIY channel is still continuing with their program commitment by and large and most of that looks quite robust. And if you want to look at order rates as a mirror, first half, second half for dispensing -- that wouldn't be outlandish. But we were mainly trying to caution folks relative to the third quarter performance.

That's fine. Last question is on margin, which the contribution margin this quarter as you've laid out was outstanding and it was third quarter with a little bit of European vacationing, what have you, I can understand why you're thinking maybe a little bit lower than that in the third quarter, but then we should kind of be right back in the saddle in the fourth quarter. I assume that all the productivity programs that we've talked about ad nauseum, you and I, Larry and Dom, that everything's on track there.

I don't like the term ad nauseum. We love to talk about it, but I would tell you, Scott, that our productivity metrics, are tracking right where we want them to be for the year. We're tracking ahead of last year in terms of what we call hard savings, both material and labor. Productivity is right on track. Our product moves to our Chinese facilities are basically tracking where we want them to be, and I think in terms of process space and cost base focus, we're right where we need to be. So I feel very comfortable that we'll achieve our targets.

I have one last question, if I might. Sorry, but the health and science, obviously a hot issue today. When we went into the breaking out of this segment to be a stand-alone business, I'm thinking, if memory serves, and I think I do have a good memory on this, that we were thinking that this is a business that, where IDEX is concerned, mid to high single-digit organic growth is what you guys focus on getting, but that this would be more toward the higher end of that range, at least that was the thinking I think going in. Now that you're like retasking this business, give us an idea of A, is it still that type of thinking that this should be maybe a high single-digit organic growth business? And B, what gives you the confidence now that you've had to retask the business a little bit here once that you can in fact still get there?

Sure. Good question. Look, we broke out health and science for a couple reasons. At the time, if you all remember, we basically had a big pump group and we wanted the two to call folks' attention to a couple things. First, that even if you look at what we have with now, within the fluid metering space, we've moved well beyond pumps. We've talked about, you know, ultrasonic technology from Faure Herman and new control and instrumentation products from Toptech and all of what we've done to enhance our metering capability otherwise within fluid metering. But also there was a fairly large component, about 24% of sales, that really went to a little bit different set of end markets than does the classic fluid metering industrial set of applications. That's the health and science piece. And at that basis for sales, we said, one, we need to demonstrate to folks that this business is going to be counter cyclical with fluid metering, that it's not going to cycle with the industrial segments, and that we've got a great opportunity for growth. Our internal expectations for growth for this business are large. We have expectations that this business will grow at the fastest pace within the company. We're not pleased at all with where we are right now. We think we've got great markets to serve and we're confident that we will continue to improve our approach to those markets. So bottom line, we think we've got a great business. We're pleased with the segment. And again, the primary issue at the time when we broke it out was to call out how health and science is a nice complement to what we have in the fluid metering segment.

That was very helpful. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Robert LaGaipa with CIBC World Markets.

Thank you, good afternoon. I hate to belabor health and science, but I just wanted to find out -- the inventory correction that you mentioned as being a little bit of a drag in the second quarter, expecting it to dissipate and become more favorable moving forward. I mean what, what end market was that in? Was it something that was fairly large or really proved to be a drag, or was it something else?

The end market, Bob, is the life sciences segment. And some of it's also big pharma. I'm not going to go into the details of which of the instrumentation OEM partners that that is, but the end markets are very robust. Obviously they are growing very nicely and as a matter of fact, they are forecasted to even accelerate a bit.

And you've already seen that in terms of your order growth there?

What we're expecting is improved order rates, yes.

Okay, and what's been the trends within gas? Because gas -- obviously it's a large part of that segment. At least historically it's been a little bit more industrial and I know you've been making great strides to try to become more health science oriented within that segment, or within that business rather. What have the trends been within that business the last few quarters?

Sure. Gas, as you said, is a pretty broadly served set of markets. They are an OEM niche player. They design and manufacture air handling equipment that goes into a number of the health and science segments, as well as other niche industrial segments. The trends there have been, for the most part, impacted by what we've just been talking about, which is one of the customer relationships that we've decided to exit, which is in the home medical segment. Other than that, gas is performing pretty well. Same comments that apply to health and science all up would apply to gas, though, and the team's working very hard to grow their business at an IDEX-like pace.

Two other questions, one -- in dispensing, the retail orders that, the timing of which obviously impacting the third quarter, do you have any visibility to when they are expected to be delivered? I mean do you know that they are going to be delivered in the fourth quarter? Is this something that we're still going to have to watch out for moving forward?

Yes, we feel pretty good about dispensing and the retail channel of commitment to the various big programmatic activity. We've got fairly decent visibility into those projects and which ones are likely to take place both in the third and fourth quarter.

You're expecting the improvement in the fourth quarter there?

Yes, we feel good with what we have right now in terms of the projects set for the fourth quarter for decent organic growth quarter there.

Terrific. Last question if I could, something that hasn't been talked about a lot so far has been on the fire safety side. Obviously the organic growth has been very good these last few quarters. I imagine a lot of that's driven by the international businesses, but what about the fire and safety -- I know you talked about in previous quarters the fact that the release of funds really haven't come through yet, but that at least for the remainder of the fiscal year which is coming to a close soon, I would think the release of those funds might be on the near-term horizon. Where does that stand?

Where it stands, the $550 million that was originally approved has been flowing, has been released and there's been some debate around whether it may sum up to $490 million versus $550 million at the end of the fiscal year. But I think by and large we're seeing it play out within the federal fiscal year as planned. And so the bigger question, the ones that we're working internally all the time, are to track the release of funds, the specific equipment and specific projects and specific municipalities. But by and large, that's been to plan and according to what the federal government has done similarly in the last three years.

Should we see any bump here in the third quarter and then it start to fall off as we -- the fiscal year I think is the end of September, if I'm not mistaken. Should we see a bump here in the third quarter and see some of that given back in the fourth quarter, or how should we model that in terms of flow?

No, I wouldn't assume that at all. As a matter of fact, as we've said before, Bob, the Fire Act, the FEMA funding basically aren't a real big impact, we think, to our sales. And frankly there's been bigger impacts over the last 18 months out of like the emissions standards changes and things of the sort between '06 and '07. So if I were you, I wouldn't take it in either way in terms of my modeling.

Terrific. Thanks a lot.

Okay, Bob.

Your next question comes from the line of Charlie Brady with BMO Capital Markets. Charlie, your line is open.

Charlie?

Hi. Just one more healthcare question, if I could. You alluded to the fact, or you mentioned briefly, as you're going to go forward to continue with customer rationalization. Is it fair to assume those would not be to the same magnitude as the current OEM business you're exiting now?

Yes, that's fair to say, Charlie.

Okay, and then on the fire side of the business, how much of that business is currently outside U.S., or outside North America and how much of the growth from that business do you see coming from outside North America going forward?

That business, if you take fire and safety in total, is just about half outside of the U.S. and in terms of growth, we'll see probably a disproportionate contribution over the next couple of years from outside the U.S. as more people have adopted some of the rescue tools and more of the developing nations are using more fire suppression equipment, so probably two-thirds of the organic growth will come from outside the U.S. over the next couple years.

And then final question, you talked about mining applications. Could you just go into a little more detail about what you're doing there and more specifically, what type of applications would be under the mining sector?

It's mainly around shoring where we're using all three, mechanical, pneumatic and hydraulic tools, basically derivative products that were originally designed for rescue application, to be used in mining, both for the actual mining specialty applications themselves and getting at the desired material, but also for safety precaution sake.

Thank you.

Sure, Charlie.

Your next question comes from the line of Walt Liptak with Barrington.

Hi, thanks. Good afternoon. Got an H and S question, too. Was there any expense related to the exit of those two OEM contracts?

No.

Okay, and the 50 basis points improvement in margin, was that primarily the result of the exit of those contracts?

There's some impact there and there's also some -- if you remember our comments in the first quarter with respect to the acquisition, associated impact to margins. But basically, Walt, we continue to see margin enhancement opportunities for the health and science revenue space.

Okay, and I wonder if you would comment on the Quadro acquisition and what revenue growth rate might look like.

Well, in all the acquisitions that we're looking at, we're looking for organic capability that's within the IDEX range, hopefully greater than that. And I think Quadro is -- they are certainly capable of that. I was with the Quadro team a couple weeks ago when we went through in detail what their current focus is and how we need to dovetail what they are doing into the rest of the fluid metering strategic plan. The opportunity for taking what we do well fundamentally in sanitary fluid applications augmenting that with some of what they do well, i.e. the solids and the particulate handing and some of those, particularly the emulsification applications where you're trying to create a suspended fluid essentially or substance of some sort. It's something that a good chunk of the pharma, the biopharma, a number of the immunization segments that we serve are looking for someone like us to bring that product capability. So I would be shocked and I would not be pleased if we didn't grow it at IDEX-like or better than IDEX-like organic rates over our three-year planning horizon.

Sounds like because of those synergies that you just mentioned that it could be closer to double-digit?

It very well could be, Walt.

Okay. Then one last one, you mentioned in your commentary about the rescue vehicles in the U.S., and that you made it sound like there was some market share gains that you were getting outside of some of the traditional OEMs. I wonder if I had that right or if you could elaborate a little bit more on that.

I don't think in our prepared remarks we said anything about market share gains relative to the vehicles. We see good growth opportunities both from the vehicle side and on the rescue tool side. And for that matter, also with the Band-It. We see that of the vehicle builders, that some of them are growing nicely, particularly some of the small and middle sized truck builders right now, posting nice year-over-year gains and that is their own unit volume, but also our relationship with them. And the larger ones, it's a mixed bag. Some doing well, some not doing as well.

Okay. Thanks very much.

Sure, Walt.

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

Well, let me just say in very brief form, thank you for joining us. Obviously we're very pleased with our Q2 record performance. The back half of the year for almost all of our business looks great. We're very focused, as always, in terms of operational execution, and we'll talk to you in a quarter. Until then, thanks very much.

Thank you. That does conclude the IDEX Corporation's second quarter earnings release conference call. You may now disconnect.