藝達思 (IEX) 2007 Q3 法說會逐字稿

Good afternoon. My name is Robin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the IDEX Corporation third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer section. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Vice President and Treasurer of IDEX Corporation, Mr. Heath Mitts. You may begin your conference.

Thank you, Robin. Good afternoon, and thank you for joining us for our discussion of the IDEX Third 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 month and nine month periods ending September 30, 2007. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website 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, Larry will provide an view of the current IDEX portfolio and then update you on our progress across the four business segments. Dom will then take you through our financial results for the quarter and outlook for the fourth quarter. 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 two hours after the call concludes by dialing the toll free number 800-642-1687 and entering conference ID 5708545 or simply log on to our company homepage 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 Security and Exchange Commission. With that, I'll turn the call over to Larry Kingsley. Larry?

Thanks, Heath. We will begin with a quick summary of our operating performance for the quarter. Orders were up 15%, sales were up 16%. Operating margin of 18.9% was up 10 basis points and EPS was up 15% to $0.47. Despite some isolated areas of softness, we're pleased with our overall performance for the quarter and we'll get into a lot more detail in the next few slides.

Last quarter, we provided general guidance to clarify our expectations for the third quarter. Given that our third quarter results were slightly below expectations, we provided a summary view on Slide 6 of the presentation to represent the state of our markets and our assessment of each segment. We'll build on that notion to provide a dashboard in a similar fashion on a quarterly update going forward. If you don't have the chart in front of you it's a matrix of business segments arrayed against our relative strategic position, market growth, our global presence and our M&A focus. The sales of the matrix indicate the resultant attractiveness in red, yellow, and green.

The simple summary is that I like our ability to win as much as I like the attractiveness of where we play -- and again, similar to my comments last quarter, most of the markets we're in are performing well and indicate continued very good prospects for growth. Our innovation and share gain capability will continue to create growth that's even better than the market. All of our businesses apply commercial and operational excellence to drive competitive positions and customer service performance. We continue to challenge our business leadership as to how we can expand both our product served markets and grow in the emerging industrial countries. In particular, the fluid and metering served end markets of process and infrastructure are strong both domestically and globally. CapEx continues to flow to projects in support of oil and gas, exploration and distribution. Water infrastructure repair, chemical process planned programs, as well as pharma, food, mining, and power generation.

The Fluid metering strategy of building out the broadest array of technology to move, measure and dispense critical fluids in difficult applications is delivering great results. The business is continually winning new customers, generating consistent organic growth, and our acquisition build out is enabling us to further penetrate targeted growth areas. Banjo, Toptech, Faure Herman, Quadro and those acquisitions to come are all focused toward expanding our product basket while leveraging our channel strength in a very logical fashion. We're building a strong position in Asia and establishing the beginning of a presence in Eastern Europe. So in summary, fluid metering as indicated on the chart is all green.

Our Health and science business is growing due to both solid end market performance and also technology is enabling faster more accurate analysis of critical fluids that we pump, filter, degas, transport and measure. As you know, within the health and science we've talked about non-core, less profitable OEM relationships that we decided to exit during '07. If you reference the pneumatics row on Slide 6, that is the subsegment within health and science that we view as less attractive currently within the health and science portfolio. It's within this portion of the segment that you'd find those referenced exited OEM relationships.

Again, our IDEX strategy and focus is application intensive requirements in global niche markets. We will continue to carve out the best opportunities within health and science pneumatics accordingly and will selectively invest to grow. Our core strategy within health and science though is to continue to build out the critical fluid system components and subsystems that are the foundational elements to health and science analysis and diagnosis equipment. The core health and science outlook is good, based on organic growth opportunities coupled with strategic acquisitions to further enable our capability.

In Dispensing, we're the global leader providing automated dispensing and mixing equipment used primarily today in the paints and coatings market. Dispensing is a project formatted business. Quarter to quarter comparison always illustrate the lumpy nature of the global demand, particularly the U.S. channel commitments for new equipment. However, despite quarter-over-quarter reporting lumpiness, the long term growth prospects continue to be attractive. The dispensing strategy is to continue to develop a global product platform to address Europe and the Americas while leveraging global designs to enter emerging markets. Our new modular product design will improve our operational footprint flexibility to insure that we serve our customers effectively and maximize operating performance. So in our assessment, dispensing is green.

We continue to have a mixed outlook for fire and safety. Fire and rescue tools in the U.S. is a slower growth business for us in '07. The U.S. fire truck builders who are the OEM purchasers of our onboard systems have slowed through the course of this year. Most of the approved federal spend for '07 has been allocated to specific programs but remains unspent as U.S. municipalities sort through local budget issues. Additionally, the diesel engine emissions changes as mandated last year have resulted in less truck sales and associated equipment purchases from us following Q1 of this year.

Outside the U.S, growth prospects are comparatively quite good. As you know, our strategic focus has been to establish the best channels and support organization including local manufacturing throughout Europe and Asia. And we continue to expand our channels in areas like Southeast Asia, Africa, Eastern Europe, and the Middle East. Innovation to enable ease-of-use is our strategic focus. Our rescue tools business is introducing new products that address the needs of a changing emergency rescue and response profile, and has faster tool deployment by way of quick connect hydraulics, universal systems for fast tool changeout and lighter tools for the changing global demographics and for smaller First Responders.

We report our Band-It business within Fire and Safety. Band-It continues to expand both domestically and globally based on new products, expanded presence and outstanding operational excellence. Band-It is the recognized leader for providing band clamping solutions for harsh environments where mechanical clamping force and joint integrity is mission critical. So all up, fire and safety is a profitable, great cash generating segment that will continue to grow internationally at IDEX targeted organic rates. In the U.S. we will manage our cost closely to maximize capital redeployment. So for the chart, it's a mix of red, yellow, and green for fire and safety.

I like the opportunities for sustained operational performance afforded to us by the end markets that we're in and further enhanced by our position and execution capability. We will continue to invest for organic growth in our home and adjacent segments, our business development focus and acquisition pipeline as directed toward the fluid metering and health and science segments. Over our planning horizon, we anticipate closing a combination of meaningful, bolt-on acquisitions and larger strategic investments in these areas that will further enable organic growth capability. Another good example of our strategy at work is today's acquisition announcement. Iso Tech (sic -- see Press Release) is a nice product line expansion in the health and science segment. The diversity of our revenue base serves us well and the existing investment and developing markets is a good foundation to grow from while select domestic markets are soft. So we'll update you quarterly as to our ongoing assessment of the environment, our position and strategy by way of the same high level dashboard.

What I'll do now is quickly run through an update by segment and talk about what's new and focus on quarterly operating performance. We're now on Slide 7. I'm very pleased with our FMT third quarter performance. Sales grew 35%, including 9% organic growth which generated further margin expansion. Integration of our more recent acquisitions is on track. Faure Herman and Toptech are performing well and providing nice incremental opportunities for our Liquid Controls energy platform. Quadro, acquired in June, is a great fit in our sanitary group of products within the FMT segment and we're pleased with the initial integration progress. Within FMT during the quarter, we introduced innovative new products that include Viking's new helical gear external gear pump which improves reliability and provides longer life of diesel engines used for power generation, on board ship and locomotives, and on large portable power generators. Also within FMT, our new ATEX certified explosion proof product family has been expanded for use in a variety of environments where spark free operation is critical. In addition to strong end market drivers, the emerging international market applications for fluid metering represent the best organic growth opportunities. Based on recent enhancements, we now have the industry's broadest line of mechanical solenoid pumps targeted to water and power generation applications in Asia. As a point of reference, FMT's international revenue is 42% of sales and growing.

Turning now to health and science, and we're on Slide 8. As mentioned earlier, the health and science market continues to be attractive. While our total Q3 sales performance within HST was 3%, the core analytical instrumentation, IVD and biotechnology markets performed very well. As you know, this is the area that we continued to acquire in as I mentioned earlier and dedicate most of our strategic investment within the segment too. Those markets were up 10% organically for us. As we noted during last quarter's, call the decline in specific OEM contracts reduced revenue by more than 130 basis points of growth in Q3. We expect the same level of adverse impact of growth through the first quarter of '08. Our strategy of building fluidic assemblies for the most demanding instrumentation applications is yielding good new growth opportunities. Our experience with degassing fluids to enable elemental analysis is now being applied to debubbling and degassing techniques in in vitro diagnostics equipment. The strategy here as well within other HST new products is to combine the various proprietary design components to manufacture fully tested subsystems -- in this particular example to deliver prepared fluid samples to the point of analysis. In the third quarter, the HST operating margin benefited from the improved mix within the segment and that generated 230 basis points of margin expansion. As you know, the OEM nature of HST can result in lumpy quarterly results. We continue to be bullish about the long term opportunities and we continue to invest for growth accordingly.

In Dispensing -- we're now on Slide 9 -- as we mentioned last quarter, for the third quarter we anticipated weak domestic demand for dispensing based on anticipated slower growth from a portion of the customer base, and that's the smaller size retail stores. And to be clear, this includes the regional paint dealers, the independent hardware stores and the co-ops. Their investment in new equipment decreased beginning in Q2 of this year, and while we still see slower hardware and paint store demand for the fourth quarter and headed into '08, the large retailer base spend should be strong. Our visibility into specific program activity and current project commitment lends confidence to a solid order book as we close the year and head into '08. The European demand in dispensing is stabilized and should continue to be reasonable as we head into next year. In addition to dispensing -- dispensing's lack of growth in the third quarter, the segments operating margin was down 750 basis points and Dom is going to bridge the segment results. But it was a combination of volume impact and specific operational issues which contributed to the decline. In dispensing, our field service costs were very high in the quarter due to one of our major customers who experienced broad based machine performance problems, which were due to colorant that was used in the machine that was outside of the colorant producer's specification. This colorant caused a component of our machine to malfunction, hence the result was a load on our service organization that far exceeded our internal capacity and required outsourced support services and a lot of overtime to support our customers. So it's kind of the equivalent of Coca Cola in your gas tank and our required response was the equivalent of a utility company responding to an ice storm.

Moving now to fire and safety. As mentioned earlier, we saw significant U.S. fire truck OEM demand declines in the third quarter. Within the segment, the fire suppression business, which is about a third of the segment or 8% of IDEX revenues, was down 7% organically. Orders were down 11% organically. Within rescue tools, despite funding challenges on the domestic front we continue to drive outstanding international market expansion. We received global rescue tool orders for lifting bags for airports in Mexico and Germany and Hungary as well as rescue tool orders in Italy and Turkey, Russia, Poland from the U.S. Air Force. This segment also includes our engineered band clamping business, Band-It, as you know. And as I mentioned earlier, they continued to execute just an outstanding year fueled by strong end markets and innovative new products. Dom will walk you through our third quarter financial performance including further detail by segments, and with that, I'll turn it over to Dom.

Thanks, Larry and good afternoon, everyone. We're now on Page 11, Orders and Sales. Orders of $328 million increased 15% for the third quarter. As we mentioned in our earnings release, orders were up 3% on an organic basis and were impacted by the timing of OEM demand. Let me walk you through by segment the Q3 organic order growth rate. First, FMT. The increase was 3%. However, OEM timing impacted orders by about 200 basis points. This impact plus our view of planned Q4 book and ship volume equate to a more indicative growth rate of 6 to 8%. HST orders were down slightly versus our view of a growth rate of 3 to 5%. Within HST, we anticipate improved Q4 book and ship volume versus last year in primarily our core markets. Dispensing orders were up 18% versus a more indicative Q4 growth rate of 4 to 6%, and again as Larry mentioned this is largely due to the lumpy nature and project nature of the business. FSD was up 2%, with growth at Band-It being offset by lower demand in the U.S. fire suppression market. Sales in total of $335 million rose 16% and 5% on an organic basis.

Turning next to operating and EBITDA margin, operating margin of 18.9% increased 10 basis points from last year. EBITDA margin at 21.9% increased 70 basis points. The delta represents increased amortization of intangibles relating to acquisitions. In terms of flowthrough on an organic basis, both HST and FMT achieved nice improvements, dispensing was adversely impacted by volume and I'll bridge the other operational impacts in a few slides. FSD was impacted by lower volume within fire suppression and mix as well.

Turning next to income, page 13, income from continuing operations of $38.8 million was up 16% and EPS of $0.47 was a 15% increase. For the third quarter, the effective tax rate was 33.1%. Year-to-date we're just under 34%. For the quarter and versus prior estimate, EPS improved by about $0.01 due to ETR. In our Q4 estimates, we're assuming a 35% ETR, and as I've mentioned in the past, our rate can vary due to geographic mix of income and discrete tax events in any given quarter.

Page 14, balance sheet highlights, sequentially inventory was up slightly and receivables were down due to volume. Debt-to-capitalization was 21% and our balance sheet capability obviously continues to be very strong. Year-to-date free cash flow is just under $123 million. That's up 25% versus last year. And for the quarter, free cash flow of $52.2 million was a 50% increase from last year -- so continued very strong cash flow performance generation.

Turning to Page 15, fluid and metering technologies. FMT continues to post record results. As Larry mentioned, the end markets we serve are very strong. Additionally, our recent acquisitions are performing well and we continue to have a strong pipeline. Sales increased 35%, organic growth was 9% and acquisitions contributed 25%. Operating income of $31.6 million was an all-time high and margin of 21.9% increased both on a year-over-year and sequential basis. And when you adjust for currency and the impact of acquisitions, FMT also achieved 35% plus flowthrough on the organic growth. So again, solid results for FMT reflecting both the strength of our portfolio and our operating model.

Page 16, health and science technologies. Sales of just over $83 million was up 3% and in line with our expectations, as non-core OEM contracts offset solid growth in our core HST Markets. Operating income of $16.7 million was up 15% and margin increased as Larry mentioned 230 basis points. Both better operating leverage and mix contributed to this increase. Here we see the leverage of our prior investment in the favorable mix as core volume replaces non-core OEM contracts. For Q4, we see continuation of favorable mix which will be partially offset by severance actions within non-core product lines. So largely as we look at Q3, as expected results for HST with expanding margins.

Page 17, dispensing equipment. Sales were down 5% organically, and as we mentioned in our earnings release, due to lower than expected demand within our North American small retail channel, operating margin of 14.7% was obviously disappointing and a significant decrease from last year. To the right of the slide, we've included the summary. First of all, currency increased revenue by $1.8 million and has a very minor impact on income. Volume was down $1.7 million and impacts income by over $1 million. Specifically versus last year, the lower volume relates to high margin products. Then cost impacts driven both by in quarter sales linearity and the field service costs that Larry mentioned, severance and product mix unfavorably impacted income by an additional $1.6 million. While we expect the operational productivity in mix to improve for Q4, we anticipate additional severance actions and somewhat lower field service cost. So for Q3, within dispensing, lower than anticipated volume and some discrete cost impacts.

Turning to Page 18, fire and safety diversified products, sales increased 5% organically, and as we mentioned, Band-It growth was offset by OEM demand related to fire suppression equipment. Operating income increased 4% to $16.5 million, margin was down 90 basis points due to volume decline in fire suppression and also due to unfavorable mix. So, for FSD -- at our expectations for band clamping and rescue tool but offset by lower demand on the OEM side on the North American fire suppression market. As we move into Q4, we expect this trend to continue. In addition, we anticipate additional severance actions. These actions in addition to those discussed in dispensing and HST are included in the $0.01 to $0.02 impact included in our earnings release.

Turning to our fourth quarter outlook on Page 19. Based upon current trends in the market conditions discussed, we estimate sales in the $338 million to $346 million range, and that would be an increase of 12 to 15% from last year. Within that organic estimates by unit are as follows: 5 to 6% for the total company. By unit, it's FMT 6 to 8%, HST 3 to 5%, dispensing 4 to 6 and FSD 4 to 5. Currency, mainly the impact of the Euro, is estimated at 2 to 3% and then the acquisitions of Faure Herman, Toptech, Quadro are estimated to contribute 5 to 6. Based upon these volume ranges, EPS is estimated at $0.46 to $0.49, and as I mentioned, this estimate assumes $0.01 to $0.02 primarily for the estimated severance cost and to a lesser extent field service cost within dispensing. The Q4 effective tax rate is estimated at 35%. With that, we'll turn the call back to Larry.

Thanks, Dom. We're going to go ahead and open the line for Q&A now and then I'll summarize after we go through the Q&A.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Robert LaGaipa from CIBC World Markets.

Bob?

If we add back the $1.6 million and those additional costs in the quarter, the margin was still very very weak. What gives you the confidence that that actually improves on a go forward basis? Because when I look at your anticipated core growth for the fourth quarter, how much of that is just due to the comp? Because if we look at the majority of that segment is Europe, how far off is the North American markets relative to what you're seeing previously?

Bob, let me start with the North American market comment and then we'll have Dom go back to the same bridge, maybe provide a little more color. As we said, the smaller retailers, particularly the independent retailers, have come down quite a bit at the end of Q1 and Q2 and kind of bottomed out and we don't see them continuing to decline. The larger retailers continue to invest, and as I said in my prepared remarks, the program activity is actually pretty good. So it lends confidence to the situation in North America that small retail represents about 25% of total dispensing -- that's 25% of global dispensing. And we've got pretty good line of sight within large projects within the larger retailers. So unless any of the larger retailers do an about-face on us which we don't anticipate, we feel pretty good about understanding the growth opportunity. Let me have Dom go back to the bridge again.

Sure, Bob. I think the way to look back on dispensing if you think about margin rate and flowthrough, you see this on the uptick and most of our decline in revenue for the quarter obviously was in the Americas. But if you go back to the chart I provided, volume organically being down $1.7 million, that flows through the income at a fairly substantially higher rate. And I think if you were to go back and look at quarters where we've seen 5 to 10% organic growth within dispensing you'll see that same trend with expanding margins, but I feel very confident that's the uptick side of the equation. What's unique about the quarter is indeed the $1.6 million of the cost impacts that were operational product quality, severance, and product mix. So we expect part of those costs to contribute -- continue primarily in severance and we'll see the field service cost smaller in the fourth quarter, so we feel very good about the flowthrough capability and obviously the long term capabilities within dispensing.

I guess the follow-up to that is just with regard to the field service cost, what happened with the colorant at your customer -- what's your confidence level that was unique? What should give us confidence that that might not happen with another customer? And I guess associated with that, do you re-evaluate your service organization to handle these one-offs or are you comfortable just taking the hit and outsourcing it?

No, Bob. We've been dealing with obviously customer service and support for a long time in the business and issues do come along from time to time, so it's not unusual to have equipment service issues that spike a bit in any given quarter. This one was much larger, and the aggregate impact of what we saw in the quarter for field services associated issues was an order of magnitude more than anything we typically have seen. And it had to do, again, with the paint company's chemistry which was produced, which was way out of spec and basically the equipment could in no way deal with the corrosive nature of it. So the equipment malfunctioned. Obviously our first issues are how to respond and make sure that the customer's properly supported, which we've done. And we can't go into a lot more detail as to who is responsible for various aspects of the cost associated with this. But the derivative impact of this too, Bob, is it's really not just the service cost. It throws the organization into a state of reaction that becomes a lot less productive for everything in general.

And last question if I could before I pass the baton. When you see some of the weakness in some of these select end markets that you have, what actions have you taken to right size some of these businesses? And are you comfortable with the size of some of these businesses or do you take further action to right size them?

We're always looking at what action is appropriate to be taken so that we are appropriately cost efficient in the businesses that serve those respective markets. And an example just to stay within dispensing is I mentioned the remarks here and I think I talked last quarter about it. For the last year and a half, we've been designing a new family of dispensing equipment products which is built on a global platform. It's modular, so different pieces, different elements of the product line can be constructed out of the base design and it can be produced in the North American plant, European plant or even our Suzhou plant in China. So we have a lot more flexibility now in where we produce stuff and that obviously enables our ability to think through footprint optimization.

Thanks very much.

You bet.

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

Hi, Mike.

If you could address just the pneumatics portion of HST. You mentioned that the headwind of the two OEM contracts was 130 basis points, and if we add that back to the growth rate of the segment, you're still at just 4.3% growth for the quarter. You mentioned the markets weakened for those products, but it's at least my sense in following your competitors and even being over in Europe talking to your distributors that those markets are not that weak. Can you be frank and explore with us just exactly what's going on in that division and what might explain not only the market weakness you're talking about but what seems to be at least coincidental now, you have two OEM contracts have come to an end and the market's weakness -- weakening.

Mike, it's not so much an issue of coincidence between markets weakening and OEM contracts ending. If you look at the HST segment, and as you know, the core that we're focused on there is the analytical instrumentation and over the last five quarters or so moving into IVD, essentially all of the diagnosis equipment. That's where we've got the best product line and where we've been focusing our acquisition investment and where we've been focusing a lot of the organic initiatives. We have developed, I think, a very strong front end to the HST organization in North America and Europe, and developing a very strong front end in Asia, and our growth in the targeted core of HST as I said was double digit for the quarter. That's organically double digit. And I think that that's a good set of markets as you say but also that we're performing pretty well. There is a piece of HST which is long term less attractive and it was even shorter term less attractive this quarter and that's some of the stuff that we title as pneumatics. And that's some of the air handling equipment that is in products like home medical and it's in products where you're essentially either compressing air or providing a vacuum capability in one of the applications. Where either as a function of price, meaning OEM pricing that we would have and/or market growth -- nd actually in this quarter's case it was the complementary or the compounding impact of the two of them -- continues to yield dilutive growth contribution to the core of HST. As we continue to build out HST, we still expect for it to be a first, an important countercyclical element to IDEX, so we think it doesn't cycle with anything close to the industrial products. And we think that it's going to be a great growth opportunity that's going to be better than mid single digits. So, as the HST product line continues to grow in the areas that we're focused on, I think we'll see good growth in general.

Well, I guess just phrasing the question differently, the oxygen concentrated market isn't down double digits. The packaging market isn't down double digits. The machinery markets -- certainly the printing press market, none of the key customers of this pneumatics division are down double digits. Is it that you're starting to prune unprofitable customers because pricing has become that much tougher? Is there a technology generation that you missed and now are since losing contracts? Just there's got to be something to explain why this market is down. If you run the weighted averages that pneumatics division has to be down double digits.

Yes, it's not double digits, Mike. But the core of your question is -- is it because what we're doing to prune out some of those lesser attractive opportunities and how much of it is market contributed. More of it is what we're pruning out, and there is slower growth in some of the pneumatic segments. It's not down double digits but it is down for sure. And will it always be down this much in a given quarter? Absolutely not. But we need to, in this segment, continue to focus on where we're not going to see a commoditized OEM response, and we think there's plenty of opportunity to provide slow growth out of that segment that can be complemented with much much higher growth in the core analytical instrumentation portion of the business.

Is it also a by-product though -- you've talked in past quarters about building the front end sales organization for HST. Is it just that you're focused on these other diagnostic areas and that shift in focus is just resulting in lower growth on the other half of the business at least temporarily?

Yes, I mean that's certainly part of it, Mike. Our reinvestment is disproportionate in the direction of the core HST segment. No question.

Okay, and then just in terms of the dispensing business, if you look at Q3 versus Q4 forecast, you got minus 5% in Q3 and basically an equal amount of growth of 5% in Q4. Can you talk through the 18% order growth? Was there something that just presumably the order and the shipment slipped from Q3 to Q4 and is it one program, is it multiple programs? And I guess the question we've got I guess most today is this small retailer just indicative of what ultimately Home Depot, Lowe's and Wal-Mart do and maybe this quarter is evidence of that?

Well, I don't think that -- certainly not short of midterm that the small retailer is indicative of what the larger retailers are doing. Because we have obviously very close conversations with the larger retailer management teams and we know what their strategic investment thinking is and they're obviously very enamored with paint [fill] the product line. It's a very profitable product line and they reinvest in the right equipment. And new equipment and refurbishment are the biggest piece of the story versus new store buildout. And you can speculate all day long about the small retail reasoning or some of the kind of the root causes to their performance over the last couple quarters. But it's probably a combination of their relative liquidity and their overall ability or desire to reinvest right now. We don't think that that segment goes away, but it's not going to be as strong a contribution to the domestic paint business as it has been the last year or so. And then back to your question around the lumpiness, the book to ship mass, I wouldn't get hung up. 18% organic order growth in the third quarter is not going to yield 18% organic sales growth in the fourth quarter. I think Dom mentioned in his comments that the indicative number is in the mid single digits.

Okay, thank you again.

Okay.

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

Operator? I think we're not hearing Scott.

Mr. Graham, your line is open.

Still nothing. Operator?

Mr. Graham, your line is open.

No, it's not.

Yes, it is, Scott, we have you now.

Okay, she said that a couple of times. Yes, I'm using a megaphone over here and it ain't happening. Just a couple of things, first, Dom from a housekeeping standpoint, could you tell us again what the core orders were by segments?

The organic orders?

Yes, please.

And again my comments were to help you bridge as we've provided fourth quarter guidance, help you bridge kind of organic order growth rates to our view of the fourth quarter sales growth rates. By segment, FMT was 3%, but again remember, we had OEM timing that impacted that by about 200 basis points and those orders are booked and planned to ship in Q4. They just happened in October. So again our more indicative growth rate for sales is the 6 to 8% range. HST was basically flat, but as we see the fourth quarter, we've got volume increases relative to this book and ship in the quarter from our core end markets on the analytical and IVD side. Dispensing as Larry just mentioned was up 18%, but as we look at the programs and what we see in the fourth quarter, the more indicative growth rate for sales is 4 to 6 and then FSD was up 2% with Band-It offsetting the U.S. fire suppression side and again our projected growth rate is in the 4 to 5% range for sales.

Scott? Operator, we lost Scott.

Your next question comes from the line of Ajay Kejriwal from Goldman Sachs.

Operator? I think you want to go back to Scott.

Mr. Scott disconnected.

Okay. Let's proceed.

Your next question comes from the line of Ajay Kejriwal from Goldman Sachs.

Operator, we don't hear Ajay.

Hello?

Hi, Ajay.

Hi, how are you?

Okay. You there? Apparently, folks, we're experiencing some technical problems. Operator, do you want to try and assist and get Ajay? Operator?

Mr. Ajay Kejriwal, your line is open.

Hello? Can you hear me?

We can hear you.

Hi. Just following up on HST, Larry, as you work through these issues in the pneumatics business, how should we think about growth over the next couple years? Is it, can you come back to the 6 to 9% or should we think of 3 to 6% as what you have been doing the last couple of quarters as indicative of the next couple of years?

Just to make sure that we're clear, you refer to HST, not FSD, right?

HST, correct.

No, we certainly have targeted mid to high single growth for HST, and obviously we hope the focus on the right segments improves margin as a function of mix.

Okay, so within pneumatics, what actions -- if you could elaborate on the actions that you plan to take over the next several months that would bring growth back to your targeted mid to high single digit rates.

Well, the focus within HST, big picture, is to go after the analytical instrumentation, the IVD, some of the biotechnology and pharma applications which represent the best consistent organic growth opportunities for us. And most of those are served by the HST businesses other than the pneumatics business, although the pneumatics business does have some small portion of its revenue there. So it's not so much action within pneumatics business as it is investment for growth that we've made and we will continue to reinvest and the other HST businesses to go after those what we think are most attractive opportunities. Now, back to within pneumatics, there are some elements of that platform. You remember that we acquired JUN-AIR within that platform early last year and JUN-AIR has been a great acquisition for us. The whole concept of clean, quiet air -- highly precise air compressors for both vacuum and compressed air applications is panning out basically very much per our strategic thinking. Some of the blower generator kinds of opportunities that you would have that aren't nearly as technically sophisticated and don't go after some of the -- as high growth opportunities within the market are not going to be our focus. So it's more a matter of sales focus and where we reinvest on the front end of the business and how we carefully manage the cost so that we don't end up with an inefficient operation and total for HST.

On fluid metering, good organic growth, 9% in the quarter -- but margin improved by only about 30 [bips], so how should we think about incremental margins going forward? I know Dom mentioned 35% flowthrough, but just sounded like a margin improvement in the quarter was --

Ajay, not really. Actually if you think about the numbers, you look at the growth rate of 35% on revenue, 25% of that came from acquisitions and those flowthrough it just over 20%. So if you think about the composite acquired companies at 20%. If you take out currency that has no real accretive impact in terms of margin rate ,you'd get that 35% flowthrough on the 9% sales growth. So the right way, and actually you'll start to see some of that smooth out as we move into '08 in terms of current acquisitions anyway. And we think all of our companies have the capability to grow organically at 35% in terms of flowthrough, but acquisitions are the big reason you see less of a number. Now, if you look at my opening comments too on EBITDA margin, there's about a 70 basis point delta in the quarter between last year and that's also prevalent in the operating margin line that you see in fluid metering, so again, hitting on all cylinders in terms of operating model so I wouldn't be concerned whatsoever. They've got plenty of capability to continue to do so.

Great. Thank you.

Thanks, Ajay.

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

Hi, can you hear me this time?

We can hear you, Scott.

Operator, for the record I did not cut off the line. You cut me off. Anyway, I wanted to understand a little bit about FMT, and I know that you guys are forecasting a good fourth quarter of 6 to 8% organic. However, as you guys well know, this business has been sort of running in the 8 to 10 zone for awhile. Is there something that we should know about that business? Is there anything, any recent end market that's weakened due to the comparison issue? Give us a better read on that if you would, Larry.

Sure, Scott, and if you think about FMT, it's 42% of total sales. We've been talking about how two thirds of that business is focused on what we've been calling infrastructure markets. We think those are going to continue to be very very strong growth opportunities for us. The other third is in a variety of process control end applications where we play as a component to the system and then some onboard kind of OEM products. Now where the growth may not be as spectacular is in some of those onboard OEM products. But again it's a pretty small piece of FMT. So the outlook right now, certainly internationally but also domestically for FMT continues to look pretty good. And we're just getting into our annual operating plan season the next few weeks we'll be focused around '08, but early indications for the business are pretty good.

Okay, and on the dispensing business when we talk about some severance in the fourth quarter, I think you said that related to dispensing. Is this issue essentially now cleared up? Is it behind us or is there other than this, I mean beyond the dispensing? In other words, are your folks kind of back to normal operations now or is there still a residual?

Sure, Scott. If you look back at my comments, on the operating and mix side, and to some extent we'll see a lingering impact from the field service costs -- but my comments relative to severance. If you consider the $0.01 to $0.02 impact we guided on for the fourth quarter, that is largely going to be due to additional severance and that will be within dispensing pockets of HST as well as fire and suppression. So that's why we provided that level of guidance for those impacts in the fourth quarter.

Understood. I guess the last question is maybe a broader question about the whole idea of giving guidance, which you guys have been -- have not done before until now on an EPS basis. I know you had a minor shift in core sales last quarter, but is this going to be a sort of quarter as you go or in the fourth quarter are you going to do a year thing? How is that going to lay out for us?

The short answer, Scott, is -- we'll let you know in January when we get into the Q4 report. But no, we at this point thought it was appropriate for this quarter given the sequential choppiness within dispensing in particular. And we also wanted to -- we're very transparent. We wanted to call out fire and safety, the U.S. fire suppression fees and talk to that and we wanted to make sure people had a good understanding of where we thought the fourth quarter was going to come in. Now, the options obviously going forward would be to do some general annual guidance of some sort which we may think about from the very other end of the range in terms of how specific we would get on a forward-looking basis would be quarterly guidance down to the EPS line. But we'll let you know and get back to you with the fourth quarter call.

Okay, actually I do have one last question, if you don't mind. In the HST business, you're expecting 3 to 5% growth next year in the fourth quarter. I know that you still look at that as certainly a 5% plus organic grower. Is this going to be the case that given the rolloffs of these contracts, Larry, that we could actually start to see in the second half of '08 HST being kind of what we had all envisioned, 5 to 8, maybe even a little bit, maybe toward the 8% growth in that business? Is that thinking in the cards?

Scott, I would fall back into the same answer to the question that you just asked. I think we'll give you a little more specific view as we get closer to '08, but we expect great performance out of HST as we focus on the core markets.

Good enough. Thanks for your time.

Thank you, Scott.

Thanks, sorry for cutting you off.

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

Good afternoon. Can you hear me?

Yes, Walt.

Great. One last follow-up on the dispensing and just so it's clear to me anyway. The one-time costs sounds like they will be done in the Fourth Quarter and we could expect margins to return to some kind of normal level in 2008?

That's correct, Walt.

Okay, and in the fire and safety side of the business, I'm not aware of any -- it's not a great market in my view right now but it's at least stable. And the deterioration that you saw in the quarter, is it related to across-the-board or is it one particular OEM that's having operational issues? Can you talk a little bit more about what you're seeing in that market?

I would say it's neither. It's not across-the-board but it's certainly more broad based than one OEM. If you look at the last two or three years, the strongest growers in the fire truck OEM space have really been the small builders, and they certainly have not performed as well the last couple quarters as they had been. And out of the larger builders, who are our customers obviously, we wouldn't want to talk for them. I think you cover this space well so we would let you ask the question of them. But yes, some of them are performing better than others and I think they will probably talk to that in their calls.

Okay. Yes, I guess it's still not clear to me directionally where you think that this market is going longer term and if this is just a short-term small OEM issue or something that is going to be reoccurring. Because clearly, some of the property tax related issues is putting budget constraints in place, but it doesn't seem like it's that bad to me.

Yes, let me come back and frame it up from an IDEX perspective and I think again you might want to ask questions of others. But from an IDEX perspective, the U.S. fire suppression piece -- total fire suppression is about 8% of IDEX. The U.S. piece would be 75% of that, so 6.5 points of IDEX's revenue associated with U.S. fire suppression. And in our estimation of that market's attractiveness short-term, there's better opportunities for us to focus both in terms of international fire suppression, rescue tools globally -- but also some of the other things that we've got that are comparatively pretty attractive. It's a nice business. It's a profitable business, and obviously, we've got a great brand, so we continue to look at it opportunistically. In terms of the root cause as to what's driving some of the short-term [perturbations] here from quarter to quarter, I think your thesis is probably right. It's probably a matter of municipalities not having as much of a budget to spend or trying to put certain specific projects on hold while they get a good understanding of how much they want to spend. And we've seen some anecdotal evidence of that state by state.

Okay, all right, great. Thanks, guys.

Your next question comes from the line of Ned Armstrong from FBR Capital Markets.

Thank you, good afternoon.

Hi, Ned.

My question also involved the rescue and fire suppression business. You had mentioned, Dom, I think that there was some severance expenses recognized this quarter and possibly next. Is that due more to downsizing or is it more indicative of correcting operational issues?

On the fire side?

Yes.

No real operational issues to speak of. In fire it's more our right sizing the organization in terms of cost as we move forward.

Okay. And then second with respect to acquisitions, just how you're seeing the market versus last quarter's -- are there any difference in prices that sellers are willing to accept, willingness of financiers to finance it and that type of thing?

I would say our view is the acquisition pipeline is very good. We think there's plenty of opportunities both in terms of bolt-ons as well as some larger ones. Pricing has somewhat plateaued and there's certainly not as much private equity playing. We'll see if the capital markets free up a little bit whether that changes again, but we have some pretty good opportunities that we're working right now.

And then with regard to acquisitions strategically, are there any product adjacencies or product technology adjacencies that you're investigating now?

Yes, most definitely.

Or that are appealing?

Most definitely, Ned, but we really aren't at liberty to talk about them but you can imagine.

Well, is it away from your traditional pumping technologies or different types of technologies within pumping? Just want to understand like the breadth of it I guess.

Yes, we're looking at if you think about the FMT space -- that's the infrastructure side of FMT -- and include pharma, there's some elements of that that we also report up through HST. There are some very nice opportunities to strategically build out our existing FMT and HST served product lines by way of other things that we can do in those spaces, both services as well as products. And that is really the first priority of our business development team here at corporate right now -- is the focus on what we can do to build a much stronger product basket in those markets, which we think will sustain 6 to 7% organic growth and then our opportunity to grow better than that.

Okay, thank you.

I really, sorry, Ned, I just can't get too specific for reasons you can imagine.

I understand, thanks.

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

Hello? Operator?

Your next question comes from the line of Matt McGeary from Sentinel Asset Management. Matt, your line is open.

Operator, we're having a problem here with the call.

Your next question comes from the line of Charlie Brady from BMO Capital Markets.

Hi, thanks, good afternoon.

Hi, Charlie. Can you just touch a little bit on sort of the semiconductor end market, I guess with sort of Trebor -- that's one end market I haven't heard you speak about and what you're seeing in that market.

The end market is pretty good, it's actually expected to accelerate a bit going into next year. Trebor has done a nice job over the last two years and this year they continue to drive new product development that is both new pumps as well as new other products such as some of the heaters that are used in the semiconductor fab processes. And there are some things that we I think talked in the last call about that we've now taken some of the acquired EPI manifold capability and built assemblies that in conjunction with some of the Trebor expertise are offering to the semi market. So it is a very nice piece of our business. In terms of the end market growth, now it's been sound and it appears to continue to look just as good or if not a little better next year.

And then on dispensing, to get back to the field service cost, is there an opportunity at some point do you think to recoup some of that expense? Given that it wasn't really design flaw in the machine per se.

We can't comment, obviously, Charlie. You can imagine in terms of how you sort out who is responsible for what element of the cost. It wouldn't be appropriate to comment right now.

Fair enough. Thanks, guys.

Thank you, Charlie.

Let me wrap up, folks. I apologize to those that we cut off and didn't even know we cut off. I apologize to Scott again. I think we provided a lot of detail with respect to our business and the segments. We're very pleased with the progress, and while a couple of the domestic markets are soft, our strategy is absolutely firmly in place. And we think we're in great shape to continue to build out, particularly the fluid metering set of end markets and the products that we offer there, but also continue to focus on health and science and reinvest accordingly. Despite the dispensing disappointing Q3 results, we're very optimistic about the growth opportunities in dispensing midterm here. While we've got some slight challenges in fire and safety all up internationally, particularly with the opportunity to take rescue tools to some of the developing country markets, just a super opportunity there too. So our capital structure is excellent. We're in very good shape. As I stated earlier, I like our ability to win as much as I like the businesses that we're in, the markets we serve. So we'll end the call with that and we thank you for joining.

This concludes the IDEX Corporation third quarter earnings release conference call. You may now disconnect.