藝達思 (IEX) 2010 Q2 法說會逐字稿

Good morning. My name is Kristi, 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. (Operator Instructions).

I would now like to hand the program over to Mr. Heath Mitts, Vice President of Corporate Finance. Please go ahead sir.

Good morning and thank you for joining us for our discussion of the IDEX second quarter 2010 financial results. Last night we issued a press release outlining our company's financial and operating performance for the three month period ending June 30, 2010. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at www.IDEXCorp.com.

Joining me today from IDEX management are Larry Kingsley, Chairman and CEO; Dom Romeo, Vice President and CFO.

The format for our call today is as follows. We will begin with highlighting some of the great work our team has done on the product development front by walking through some exciting new products and initiatives in the IDEX innovation section. Next (technical difficulty) will be our overall performance for the quarter. We will then provide detail on our four business segments. Finally we will wrap up with our latest outlook for 2010. Following our prepared remarks, we will 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 81612030. 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 will now turn this call over to our Chairman and CEO, Larry Kingsley.

Good morning everyone. When we last spoke a quarter ago, order rates from many of our fluid metering and health and science markets were (technical difficulty) [growing] at a better pace (technical difficulty) [than] what we had initially expected (technical difficulty) [for the year]. While we are closely monitoring the current global economic issues, we continue to experience just broad-based growth (technical difficulty) as a function of both [improved] (technical difficulty) but also (technical difficulty) the great execution.

Operationally, we've responded very well to the demands and are pleased with our leadership's ability to prove once again that our operating model works, and it works in all demand patterns. In fact, the compressed lead times while managing a change in mix (technical difficulty) ground in [free] cash conversion. We are very confident that we can continue to grow profitably (technical difficulty) for the remainder of the year.

So I'll talk here briefly about the segments. Within fluid metering (technical difficulty) we continue to see stronger growth internationally, particularly in the Middle East and throughout Asia. Domestically we also see better order patterns in some of the process control end markets.

Our water business on the domestic front is still a little bit slow but growing as expected, and in Europe this quarter we captured additional multiyear, multimillion dollar fresh and wastewater orders.

Our health and science segment grew very nicely again, and again, very broad-based. International and domestic markets are both contributing, and (technical difficulty) we [continued] to gain additional content on new instrumentation platforms.

Our expensing team did a nice job completing very quickly per the customer request a large DIY order this quarter.

And within the fire and safety segment, BAND-IT continues to perform really well, as does rescue.

Companywide our operating metrics again reflect strong margin performance, and we expect this to continue for the remainder of the year.

Regarding capital deployment, our balance sheet is as healthy as it's ever been. Going forward you should expect the following from us, and that is, one, we will continue to exercise our rigorous disciplined M&A approach to identify IDEX-like targets that yield solid returns; and two, over the next 12 to 18 months, we'll be putting that balance sheet to work, and our pipeline is as strong and we are better positioned than ever.

I'm now going to switch to slide five. As Heath mentioned upfront, we're going to spend a little bit of time talking about what's driving our performance before we talk about the quarter. We'll focus on new innovation examples here, but as you know, it's innovation tied to commercial and operational excellence that ultimately (technical difficulty) [sustainable] performance.

As we've discussed in the past two calls, while we made the necessary structural changes to right-size our company through the downturn, we have continued to invest in R&D and new products. In fact, R&D spend in actual dollars was higher in '09 than it was in '08, and it will be higher again this year.

The following products are just a few examples of our team's hard work in anticipating our customers' emerging needs, designing products to improve performance and safety and clean operations, [improve] (technical difficulty) use, and enabled groundbreaking research. I'll provide some examples of all the above as we go through these slides.

The first product illustrated here is an example of our latest fluid metering pump technology, which is designed for (technical difficulty) [chemical] energy end markets. This new pump gives our customers higher flow at higher pressures, while actually shrinking the footprint and weight of past comparable products. Additionally, the Teflon lined heads allow for a much higher chemical resistance, placing our product in a position to win new business where previous models could not stand up to the caustic chemical (technical difficulty).

So this product serves a great growth niche. It's already (technical difficulty) [winning] both in developed but also in the developing country markets.

Turning to slide six, as you know, we've been expanding our served market for water and growing very rapidly in the fresh and wastewater diagnostics and monitoring [brand]. Last quarter we discussed a multiyear program win associated with the UK water industry. That's the asset management program. We are pleased to say over the past quarter, as I said, we have won subsequent multiyear, multimillion dollar projects of similar profile.

Our water buildup strategy is playing out very nicely, and we've also expanded our product offering here with the new monitoring devices, which use new [sensing] techniques and advanced telemetry to communicate wirelessly and automatically upload data to analyze for infrastructure stress (technical difficulty) and measure for the quality (technical difficulty). And we've just rapidly built a reputation as the technology and service provider leader for wastewater (technical difficulty) flow analysis and for leak detection.

On to slide seven, within our energy group, we have developed a new compressor technology used for (technical difficulty) high-value gas. (technical difficulty) most of the applications the purity of the gas is highly critical. (technical difficulty) design (technical difficulty) [lubricating] oil in the compressor from contaminating the gas, high-value gas that's moving.

Another exciting feature of this family of products is its ability to control 100% of the potentially dangerous emissions into the air. Competing (technical difficulty) compressors simply vent these gases into the atmosphere. Our new series of compressor contains these dangerous emissions by pressurizing the chamber with an inert gas such as nitrogen, thereby neutralizing the danger. Again, another example (technical difficulty) of an emerging market opportunity (technical difficulty) where we developed unique proprietary capability, and we are participating already in (technical difficulty) great growth opportunities.

Next, two examples out of fire and safety. Recently, the IDEX rescue team launched a new generation of rescue tools it has the marketplace very excited. (technical difficulty) these new rescue tools (technical difficulty). Essentially we've been able to execute on our end users' dream. That is to break free from the hydraulic power units and hoses to allow for more freedom and more room to operate in (technical difficulty) [rescue] situations, and hopefully to save more lives.

The tools are half the weight (technical difficulty) [of] previous models. They allow for complete mobility. They can be operated in a cordless fashion. They (technical difficulty) handle essentially any emergency or industrial application, as did the former hydraulic products.

For this product we partnered to develop the -- and package the new lithium-ion battery technology (technical difficulty), and we developed ourselves a proprietary electromechanical drive unit, which in combination deliver unprecedented performance, which is clean, safe (technical difficulty) very user friendly. So the heavy -- the cumbersome hydraulics are no longer necessary.

At the global product launch, users from all over the world expressed not just satisfaction but delight (technical difficulty) [at the work accomplished]. They were shocked that, one, we were able to accomplish it -- it's a major feat; and two, we committed the resources in a down market. So in a mixed municipal spend market, this business will grow and quite profitably.

Our BAND-IT business you know is always finding new applications and creating products that typically replace other forms of mechanical retention and bonding solutions. They've also recently developed an intelligent clamping system that will be used for high-volume applications in the OEM production environment. Competition and (technical difficulty) technologies that haven't historically completely solved their (technical difficulty) [problems] or maintained the integrity of the system (technical difficulty) [for time].

And with a lower installed cost, lower profile, and longer useful life, we've developed a fantastic solution for a difficult set of applications. In this case, we're not going to talk too much about the specifics, (technical difficulty) but they are already won, and they are at IDEX-like margins.

On the next chart, within HST, (technical difficulty) health and science, now developed the 25,000 PSI fluid path (technical difficulty) liquid chromatography. That includes new pumps, valves, degassers, tubing, and fittings. This very high pressure requirement is market driven to achieve purity in the substance and hence throughput in the testing procedures, which results in faster analysis than previous generations of equipment.

Increasing demand for chemical analysis, food and water testing, environmental monitoring, pharmaceutical drug discovery, and others are all driving the move to higher pressure fluid path requirements, and enhanced regulatory requirements are also generating the demand for new applications.

These are all global products. The US and the European markets are growing, and growing strong. We are seeing China and India grow at 2.0 to 2.5 times the growth rate of what we're seeing in the US and in Europe.

Also within health and science we are expanding our integrated fluidics platform to be used for next-generation DNA sequencing. Within this application (technical difficulty) we are providing the valves, manifolds, pumps, and the tubing (technical difficulty), and it's all part of an integrated fluidics approach which will enable the next generation of research equipment (technical difficulty) including (technical difficulty) [generation] of full genome sequence.

So we are participating in these emerging fields of predictive and personalized medicine, and our integrated systems will enable modular instrumentation design (technical difficulty) working with our proven products. Combining the fluid path design, the thinking, the fluid path schematics, as well as the final working system is the IDEX inside differentiator.

So to sum up, all of these innovation examples, as I stressed earlier, over the past 18 months during the downturn, we focused on continued R&D and product developments, even when most markets were (technical difficulty) [way] down. We've done just a great job bringing these products to market and continuing to bring new products to market. We believe that will keep us a step ahead of both the competition and even our customers, to help them.

So with that, I am going to turn now to the quarter. Obviously a great quarter. Orders were up 18%, up 17% organically. Sales were up 13%, up 11% organically. Second-quarter adjusted operating margin of 16.9% was up 200 basis points (technical difficulty) period last year. Stronger profitability is mainly a result of the increased productivity and the leverage on the organic growth.

Q2 adjusted EPS at $0.50 was up 35% versus the comparable EPS last year. (technical difficulty) [Free] cash of $60 million was up 21% from the second quarter of '09, and that represents about 150% of net income.

So bottom line -- great quarter and great first half of the year. And we'll now walk through the segments in a bit more detail.

In fluid metering, orders were up 18% in the quarter. That's up 19% organically. Sales increased 11%, up 12% on an organic basis. Adjusted operating margin of 17.6% was up 220 basis points from Q2 of '09.

Within our energy markets, topline growth is materializing. Our investments in the BRIC countries, as we talked about, as well as the Middle East, are paying off very nicely.

Within our water business, as we've discussed for the past several quarters, the results have been strong, and we've continued to show sequential growth. And as we've talked about, the geographical expansion within our water strategy is paying off. And again, as I mentioned again this quarter, big wins, but also solid broad-based demand.

The other FMT-served markets continue to be better than we anticipated at the beginning of the year, even better than anticipated last quarter. And that is both for distribution (technical difficulty) the end markets, but also we are seeing good activity among the OEM direct buyers.

Our updated thinking for the year is that within the segment, chemical and industrial markets will grow, along with the energy and water markets in 2010, and therefore the FMT segment should grow about 10%. That's 10% organically obviously for the full year.

In our health and science segment, our reported numbers include the impact of the Seals acquisition. Total orders were up 40% for the quarter, up 29% organically. Sales (technical difficulty) [were] up (technical difficulty) [36]% in total and up 26% organically. Operating margin of 20.7% was up 500 basis points compared to the prior year, and that's driven again by volume, but also by productivity. And we are seeing again broad-based great performance. The growth rate for the quarter and our full-year estimates is clearly ahead of the market growth rates -- obviously all very good news.

We thought we would bridge a view of our performance versus what we are seeing out of the end markets. And that is roughly as follows. We think that the end markets are growing between 9% and 11%. Our share gain on top of that is about 4% to 5%. We can easily distinguish new product and new geography sales that we haven't historically had, as another 4 or 5 points. And then the balance is project-specific wins, most of which will be ongoing revenue. So a rough bridge between a (technical difficulty) [10]%, plus or minus, organic growth market, and obviously outstanding performance from our team.

Some areas of the world are certainly growing faster than the domestic markets. But we think we are winning just about everywhere right now, and we are capturing great share as a result of it. And as I said, we expect that the strong growth will continue. For the full year [we] see HST organic revenue growth to be in the mid-teens.

In dispensing -- and I'm on slide 15 -- total orders in the quarter were up 11% organically. They are up 14%. Sales decreased 10%, and they are down 8% organically. Operating margin of 23.6% was up 170 basis points from the second quarter of last year. Overall the underlying market conditions continued to be soft in both North America and Europe, and we expect the general environment to remain as it is for the remainder of the year, and we don't anticipate large short-term program activity for the remainder of the year.

As we've previously stated within our guidance, the dispensing team executed that large DIY project in the quarter, and that helped to offset some of the general softness.

The year-over-year sales results for the segment were unfavorable due to a similar but larger DIY order, Q2 of '09.

Our dispensing team continues to do just a great job managing the business and driving productivity. (technical difficulty) segment only makes up about 8% to 9% of the company at this point, but it's very profitable, and it's obviously generating a good deal of cash.

So now I'm on to fire and safety. For the quarter, total orders were down 2, flat on an organic basis. Sales were up 3, organically up 5. Operating margin at 21.9% was down slightly compared to last year. Our rescue tool business continues to grow, especially in international markets. The band clamping business is performing very well and experiencing solid growth year-over-year. Fire suppression in North America is negatively impacted by the municipal budgets, as we predicted, but again, it's performing very closely to our expectations.

So rescue will continue to benefit from the growth in the emerging markets, and BAND-IT growth will remain very solid, thanks to both a recovering economy, but also very, very solid execution.

And as you can tell from my earlier comments, we are very excited by the new products coming out of the segment, and we expect that solid growth will contribute to exceptional profitability as we move forward.

So in total for the segment this year, we still expect organic growth to be flattish, maybe down slightly, with international growth offset by domestic municipal spend decline. BAND-IT and rescue will be up nicely, while fire will be down. Again, probability and cash flow will be very strong.

I'm moving on to slide 17 and our view of the full year. You've all had now the chance to look at our guidance from the press release. Before we get into the details on the guidance chart, I will walk you through our thinking, and we're going to look at it sequentially here comparing first and second half.

So if you look at the first-half actuals, the first bridging item for the first half to the second half is the dispensing volume, as we've discussed, where we have basically mentioned that the second quarter had a large DIY order. That will not repeat, as we said. In addition, dispensing has a general seasonality downtick that occurs in the second half, which nets us a $26 million sequential topline reduction going into the back half, with that associated flow-through.

Next in the bridge, we assume sequential increases out of most all the rest of the businesses as a result of the new product, the project wins, as we discussed, and some seasonality help, particularly in FMT.

We've also incorporated the impact of the Seals acquisition within health and science, which will be accretive in the back half of the year, as you can see.

Lastly, the rising dollar over the past few months, our assumptions there. We're forecasting a back half headwind from FX of about $18 million -- that's again, topline and (technical difficulty) [at] June 30 rates (technical difficulty), [principally] the euro and the pound.

So this gets us to a full-year range of about $1.45 billion to $1.46 billion topline, and an EPS range of $1.85 to $1.90.

So with that first-half/back-half bridge, now we're on to slide 18.

For the third quarter we expect EPS to be in a $0.46 to $0.48 range. We're seeing that we expect the Q3 organic sales to now be up about 10%. FX will have a negative year-over-year impact in the quarter of about 4%, topline. For the full year, as I said, we've raised our guidance. EPS is now $1.85 to $1.90, and that's driven by the organic revenue growth. And we expect that on a company-wide basis to be in the high single digit range for the year.

As I said, we expect for the full year for FMT to achieve about 10% organic growth, and HST to achieve organic growth in the mid teens (technical difficulty). Fire and safety will be down slightly. For dispensing we continue to expect organic sales to be down slightly for the full year.

Operating margin for the company will approach 17%, which equates to a better than 200 basis point improvement over '09. And so our flow-through on the incremental organic revenue is approximately 45%.

And as I said, Seals will be accretive in the back half.

For the full year with the rising dollar, as I said, with FX assumed at the June 30 rates, that has a 2% negative impact on the full year, and in terms of other modeling items, the 2010 tax rate is expected to be 33%. Full-year CapEx will be about $35 million.

We will continue to convert cash very well, well in excess of net income, and our earnings projections exclude estimates associated with any additional restructuring costs for the remainder of the year. The restructuring costs for the remainder of the year will primarily be the $3 million of cost associated with the health and science plant closure that we mentioned in the release and we've talked publicly about already.

So with that in mind, we'll open the call to questions.

(Operator Instructions). Jim Lucas, Janney Montgomery Scott.

First, housekeeping question please. You gave us CapEx. What is the D&A you are now expecting for the full year?

D&A for the full year. Give us just a second, Jim.

I thought it was an easy one.

It should be 60. Heath is (multiple speakers)

60.

Plus or minus 60.

Okay. And one specific question on -- to start with on HST. You are seeing the improvements there. One of the things going into the year was obviously some expectations that stimulus funding may help there, but it seems as if the refocusing of the strategy within the core HST is really paying off, and as you look at the acceleration you're getting there, you gave some good color in the bridge of how you are outgrowing the market, but what has really changed that has helped you accelerate and really meeting the expectation that you have had for this segment for some time?

That's a great question, Jim. I would tell you three things very specifically. First, as you remember, HST, like all of our businesses, given the fact that we are acquisitive, has some elements of it which are going to be always super-high growth, and others that are going to be probably GDP or better, but not that much better than GDP.

I would tell you that of the portfolio within HST, as you know, we've organically trimmed out the drags over the last few years. We've improved our operational performance to the point where we are actually capturing some of that industrially exposed HST business at a much better clip than we had been a couple of years ago, and that's -- it's essentially great operating leadership that's accomplishing that, certainly taking share against some of the peers out there.

Two, the team has moved from being a component supplier to good growth markets to one that's actually enabling better growth in some of the instrumentation customer bases in getting a lot more content per instrument. We've talked a bit about that before, but we are seeing a nice acceleration with these next-generation equipment opportunities where we are getting more revenue dollars per instrument, generally speaking. And a lot of that, again, because they recognize that we are the ones that are going to help them get there.

And then lastly, I think that we've got a better geographic exposure now than we ever have had. I just came back from a trip over to Asia, and our team in China is just doing fantastically for health and science. We've got business now in Japan that we've won against our Japanese peer competitors that historically we've never participated in, and so when you look at the combination of things, you get a pretty easy 10-point organic accretive bridge on top of an already pretty solid market growth rate.

Okay. That's very helpful. And switching gears to the acquisition pipeline, which you referred to as being very healthy now, could you talk a little bit about the composition of that pipeline of domestic versus international, small versus large, just in terms of what you're seeing out there and also from a valuation standpoint, how things are looking these days?

It's still a fairly broad range on all of those specific fronts. We're seeing more international opportunities than we are domestic, and we will close between now and the end of the year more international acquisitions than we will domestic I think at this vantage point.

At the same time, I think we are seeing improved valuations, and we are seeing better flow, both out of proprietary transaction opportunities that we are pursuing, as well as some of the stuff that's coming to market. So our view is we have a -- as you've obviously already figured out -- a great balance sheet, pretty well-positioned right now. No sense to rush after mediocre properties because better stuff is coming to market, and we are at a -- in a really good place to make it happen. And you will see some things happen between now and the end of the year, but I think more importantly, you're going to see a lot more activity, very aggressive activity, over the next 18 months.

In terms of the composition in terms of size, it's a mixed bag, as usual. We certainly see a lot more of the Seals-like profile or Semrock-like profile businesses for health and science, which are nice, meaty adds for us, and they are performing extremely well, by the way, so they're actually even accretive to our base HST growth. And we'll see some little bit bigger ones than that, both for fluid metering and health and science, but also some other things that we're looking at.

So I think you'll see a mix of revenue size, Jim, that will be -- on the low end it will be the things that are really technologically interesting for us to add to the mix, so several million dollars in revenue if it's a key technology acquisition, up to things that are probably still in that kind of sub hundred million dollar range for the biggest of things that we would typically like in terms of where we're going to get a good return out of.

Wendy Kaplan, SunTrust.

Can we talk about the margin of the segments a bit? Could you go through them for us please, Larry, and kind of talk about whether for the balance of the year you expect those margins to be sustainable or to expand somewhat or to contract, based on this -- business conditions you are aware of today?

Sure. Well, you will get a lot of that out of the release and the prepared remarks, but just to walk through it again -- what we saw in fluid and metering was, for the quarter, operating margin that on an organic or comparative year-over-year basis, up 220 basis points. That is at 17.6%. Sequentially versus the first quarter, it was off a tad, mainly due to some legal items, some associated spend on IT, and things of the sort in the quarter, but not things that are systemic in nature.

In terms of going forward -- and I'll take these by segment -- we're going to continue to get great leverage. I don't think there's going to be any adverse mix that's going to hit us, if we think sequentially about what's going on within the segment. We don't anticipate a huge positive contribution from price for the remainder of this year. But it also won't impact us negatively to any large degree. And we don't obviously see any real major material cost inflation at this point, particularly with metals being soft-ish right now. So unless things tremendously change on a macro basis, I think we're going to be fine in terms of leverage for fluid and metering as we go forward and grow.

In -- for health and science, obviously, incredible performance. Now, if you remember from a couple of years ago, we would bounce around in that kind of 16%, 17% operating margin range, and we reported 20.7% for the quarter. Comps are squirrelly obviously from '09, but up 500 basis points. And I think if you look at it sequentially, again, you don't see anything that's really frankly all that interesting to talk about.

Really the biggest issue there is the impact that Seals has in terms of Q2 versus Q1. But flow-through on an organic basis is off the charts. So getting great operating leverage for health and science, and with this kind of organic performance, topline performance, we'll continue to see just fantastic leverage. There's no doubt about it.

And dispensing, really with amazing volatility and overall softness, has done a super job with a business that's still performing and an operating margin that's -- obviously in the quarter, 23.6%, up over the last year quite a bit. But really more importantly, they are operating a roller coaster of a demand pattern and doing a super job still getting to the bottom line.

The structural actions we took in late '08 through '09 have obviously helped quite a bit. We've got a consolidated footprint. We've got capability to build product in Asia now. We are seeing growth in dispensing in Asia, and we are well-positioned to take advantage of it.

But in terms of the short-term kind of view of operating margins, you will see it come up and down a tad with volume, no doubt about it. When the business declines, there is associated negative flow-through, so you should assume accordingly. But without a doubt, the cost position is in great shape.

Then fire and safety is basically operating pretty closely to what we had planned really back to the beginning of the year, and what we are seeing there is good mix in the segment, with BAND-IT up and rescue up, fire down. But of those three components that comprise fire and safety, that works well in terms of margin composition. And I think that on a flattish growth assumptive basis you'll still see obviously very strong profitability.

So I don't know if you want to go into any more detail than that, Wendy, but we are certainly seeing the results of great operating leverage. And again -- I'll repeat it -- it's typical within the IDEX model, we typically get year-over-year price to some degree. None of our assumptions here have any major price built into the model.

Okay. So it sounds like overall dispensing is sort of the one that will wiggle the most based on volume, and the other three certainly are sustainable if not expandable from current levels. Is that fair?

That's fair. Think about it company-wide, obviously for the quarter EBITDA was 21%, and that is getting right back to IDEX-like performance. We're certainly going to continue to improve as volume certainly makes its way quickly to the bottom line. But we don't see that the acquisitions are going to have a hugely negative impact either in terms of our operating rate or performance for the short term. So you're going to see pre-financial crisis, pre-recession kind of performance out of the company in terms of profitability.

Okay. Thanks. And one balance sheet question, if I could. It looks like the working capital per sales dollar was about $0.17 in the quarter. That's -- I looked back in my models, and that's the best I have seen since one quarter in 2004. Higher payables it looks like was creating the most significant delta. Given that business is picking up, what should we -- and working capital being sort of -- should grow a bit, increase a bit because of that, can you talk about kind of what your working capital needs will be over the next 12 months and what we should expect in terms of the working capital? -- in whatever measure you choose to share that.

Yes. No, it's a great question. Really one of the things that's embedded in these results that -- and maybe doesn't jump off the page but really is outstanding performance is what the team has done to manage working capital through this initial portion of the upswing. It isn't just payables. We've actually got good performance out of all three components of working capital in the quarter, and the operating team is laser focused on making sure that that continues.

I don't think we're going to use on a rate -- on a percentage of sales basis any more working capital as we work through the year. We are investing from a CapEx perspective on a slightly higher rate than we have historically, but operating performance, flow through the plants, management of receivables is all in really very good shape.

Mike Halloran, Robert W. Baird.

I know you've mentioned a little bit about the FMT sequential margin decline, largely on some legal and IT expenses. When we think about a go-forward basis, is the first-quarter margin then a better margin to build off of, assuming these costs kind of bleed away here? Or is it really just the second quarter is a better margin to run from?

I would say you are probably somewhere in between, and we are starting to split hairs. Beyond what I said, there is a little bit of negative mix impact from the first to the second quarter, Mike, and a very little bit of material inflation, as metals were higher for a period of time, but they're coming back down. That's why I didn't stress it.

So if you want to model off something in between, that's probably a safe assumption. I think we're not going to see adverse price, but again, not going to see any help from price. So obviously a very strong performance in both quarters, but I would expect if we continue to see the same kind of volume, that you are going to see great operating leverage.

That makes sense. On the HST side, you guys have been seeing extremely strong growth during the first half of the year. And you take that -- the guidance in the mid-teen organic revenue growth, (technical difficulty) [pull] that through, you probably see some deceleration in the back half of the year. Is that just really strong order booking in the first half and that just moderating some in the second half, staying very strong? Is there something else going on, like normal seasonality?

Well, as we tried to walk through in that sequential view of the world versus an organic view, I think it's better for topline sake anyway right now to think about the business sequentially, just to take the noise out. We do think that we are not going to see order rates obviously continue in the mid to high 20% organic range, and so -- and we've mentioned that we've got on an organic basis a full year in the mid teams. Could it be better? Sure.

Again, we don't see major drags at this point from anywhere within the segment. But we do expect that there's going to be -- once kind of pipeline full instrumentation orders will somewhat modify and come back to something a little bit less than where they are now. I think that HST is just doing a fantastic job on the front end of the business and operationally. And I don't think that there's certainly any real worries with respect to coming back down significantly. But I think mid teens assumptions for the full year is a good way to plan.

I agree, certainly on the strength. I just kind of want to understand the delta.

And one other thing on there -- were there a significant amount of larger projects or orders in the first half of the year? Or would you consider it a pretty normal -- and for that question I mean both for FMT and HST.

There was a couple of blankets worth a few million dollars in the first half for HST, both on the analytical instrumentation side, but also a couple of medical equipment blanket orders that play out over a kind of less than 12 month period. So you're seeing a little bit of positive organic orders contribution in the first half, and it is in that $5 million to $6 million range, but it's not huge.

That's fair. Last question, on the incremental margin -- I know you guys in the past have talked about a -- roughly a 45% incremental margin target for the overall company. Does that include currency impacts, restructuring, and things like that? Or was that more of an inorganic number?

You are talking about the incremental flow-through?

Yes.

Yes. Basically I think, if you look at the reported numbers, you've got -- your math you're probably doing is $14 million on $42 million of sales, which gets to the low 30s?

Yes.

And really the organic number is $15 million op income on $38 million of sales. That is 40% if you pull out the -- if you want to pull out the acquisition-related costs in the quarter, that's closer to (technical difficulty)

Yes. No, I just wanted to make sure that I was looking at the input there correctly, so that makes sense. Appreciate the time.

Christopher Glynn, Oppenheimer.

Just like to dive into a couple of areas of your share gain and kind of trace -- and specifically with HST, as you referred just to the -- a couple of the blanket orders and some of the OE wins, what's the opportunity for that to feed on itself? And you have -- you see a lot -- a nice pipeline of continuing to layer in OE wins on top of what you've already done there?

Yes. I mean, that's essentially what's already happening and what you're seeing in the numbers now.

There is -- certainly our capability has expanded nicely, not just with what we've done organically, but the acquisitions that we've made our now really starting to make sense for the instrumentation manufacturers, particularly the guys who are thinking about some of the in vitro diagnostics, next-generation platforms, and some of the stuff that we talked about in the way of new research instrumentation. It's a lot easier for them to come to us and have them say, look, help me design what makes sense here in terms of fluid path. And with that kind of a relationship, we can really build in a fair amount of content. So it is feeding on itself in that regard, both from an organic initiative, but also what those acquisitions have contributed to the solution set.

And as I said earlier, the other thing that's happening is -- and we've talked before in prior calls about this, our competition in the space is a mixed bag. We've got some European privately held competitors. We've got some Japanese, principally what are Japanese, Asian competitors, and we've got some subsidiaries of US public companies that we compete with on a peer basis.

And we've done a really nice job in Asia also where, for the most part, prior competition in Asia was a much more difficult scenario. But our team is strong now, and we are particularly getting some nice new business, not in just China but also in, as I said, in places like Japan, which is a real win from a US competitor working to define and design better product than what a Japanese equivalent can.

Kind of a parallel question on the rescue tools, just a little bit of granularity on what markets are particularly key and where you are on the penetration curve and the runway for increasingly globalizing that offering.

There's two issues to talk about with rescue tools. First, it's -- why does our rescue business continue to defy gravity when maybe national and local spend is somewhat constrained? One is because we are growing in emerging markets, and in many cases they are committing revenue, tax revenue into budget buckets for the first time, where rescue is an increasingly important element to their program. So that just on a natural basis is going to drive, for those who can compete and basically play in those emerging country markets, an opportunity set that you may not think kind of intuitively comes to mind because developed parts of the world are so budget-constrained.

But then the second piece -- and this is the part that's just fabulous -- is that we introduced this new set of products, as we just talked about, which is going to propel growth organically, well above what just our solid execution otherwise would've done. These new tools are really amazing from the standpoint of now having a completely portable tool with the same cutting or spreading force that historically you had to have heavy, dirty, somewhat dangerous hydraulics. Now you can do it with the equivalent of a new technology battery coupled with a super high speed motor, multistage gearbox, and you can get to the kind of mechanical force that people never thought was possible with an electromechanical solution.

So I think it's -- again, it's a matter of good niches to start with, but really solid execution to grow a lot faster than the market rate.

Matt Summerville, KeyBanc Capital Markets.

A couple of questions. First -- and I apologize if I missed this early on. I was switching from another conference call -- but are -- can you maybe provide some higher level just general macro comments? The conversations you're having with customers today in North America, Europe, Asia, particularly China, is there anything you're hearing that's of concern? Anything indicative that we may be in or may be starting to see some sequential slowing?

We really haven't talked in a lot of detail with respect to macro thinking. I can tell you that if you look at our growth rates and you look at them geographically, certainly the emerging country markets that a lot of folks are trying to penetrate, for us are growing at a very, very fast clip, and we expect that to continue. Even if the Chinese economy slows down to some degree, we've got solid plans in place that are going to generate outstanding organic performance, not just this year but for the next three years.

But we're also starting to see really nice gains in India. As an example, one of those product examples I gave you, one of the new fluid metering products, which we had anticipated to go after applications first in North America and in Europe, is actually seeing solid gains early on and quick wins in India. So I think that for us, growth rates for the -- not just the BRIC countries, but the Middle East and some of the more rapidly developing under-penetrated markets for our products will grow, frankly, just fantastically for the rest of the year.

The European markets, if you were to look at if there were geographic drags, some of the Western European markets are slow, and we don't think that they are going to be positively contributing, certainly not to the rate for the full year. In the quarter Europe was off just very slightly in total organically for the company.

The US is good, and we're actually seeing, both for new project and new MRO activity at a plant by plant kind of project basis, pretty broad-based and pretty solid opportunities for fluid metering, for health and science, and for a good chunk of the rest of the company.

So I think, yes, is everybody concerned that the consumer may not be spending at the brisk pace that we would like, and does some of the rest of the macro influence certainly hamper a very, very strong recovery for the US in particular and maybe Western Europe as well for the long haul? It could. But we are working forward. As I said, we spent a fair amount of money through the downturn to have new product ready now. It is ready now. We're bringing it to market, and it's going to pay huge in the short and long term.

With regards to HST, Seals had about $2 million of costs in the second quarter there. Are any of those purchase accounting adjustments going to linger into the -- or the purchase accounting portion of that, is any of that going to linger into the back half of the year? And then what would be the timing of the savings associated with this plant rationalization you're doing in that segment?

Okay. The answer is no to the first question with respect to ongoing Seals associated acquisition accounting. And then secondly, on the plant acquisition, not to talk in too much more detail than we already have, the cost we assume is three year to sub $3 million. And the payback on that will be less than two years, between 1.5 and two years. The body of the spend will be in the third quarter.

And then just one follow-up question on water -- it sounds like you're starting to see bigger, multiyear projects start to hit in that business. Do you think in fact that that's a broader trend in that you're going to see that continue to unfold? And I guess what are you finding with municipal spend sort of strained? What do you find is the funding source for the type of projects that IDEX is able to take advantage of in this environment?

It's a country by country discussion. Where we are winning in water is really very strong globally. That doesn't mean it's not in the US, but it's stronger internationally than it is within the US right now. The national commitment in many country cases to water infrastructure is probably still a year or two ahead of the US.

And what we're seeing there is prioritization for the diagnostics, which is essentially what we do, the analysis. Whether that capital follows after what we do to get the ground dug and to get the situation addressed is a TBD. But again, the part of the model we like, the part that we are participating in, is kind of the justification for capital spend on a larger basis, and that is very broad-based, and we're seeing -- as I said, we are seeing very strong activity.

In the US it's not bad. It's pretty well on-target with what we had internally assumed for the full year, and we see pretty good program activity. We also -- we just reviewed the program wins with our team, and they are doing very well from a share perspective. So it's not bad in the US. It's just frankly not as strong as it is in other parts of the world.

Walt Liptak, Barrington Research.

I wanted to ask about some of the organic growth, the innovations. And maybe to start with, in the back half you mentioned that the organic volume was split between FMT and new products. Are you able to quantify how much is coming from each of those two buckets?

We talked -- we bridged more specifically health and science, Walt, than we did fluid metering with respect to growth contribution. But what we did say is that fluid metering, we're going to see really strong new product revenue growth, both -- obviously immediately in the second half, but also on an ongoing basis.

If I were to tell you globally, I think the fluid and metering segment is probably coming back in the mid to high single digit range, and I think that's pretty sustainable for those that have a good, decent exposure right now -- not too much up-stream energy, they are in the right water markets, they are in some of the newer applications within process control. So there's a natural market entitlement of at least 5% if you are positioned well. I think you can double that with some of the organic internal initiatives.

So I think that you'll see a bit of a mix among our peers as they talk about current performance. Some may not be nearly as strong if they are more up-stream associated, and some could be perhaps even in better, but I think we're -- all up, we are in pretty good shape with respect to our current exposure.

Thanks. That helps with back half modeling, but the question I'm trying to get to is, with the product innovations that you pointed to, as you look into 2011, do you see continued acceleration in the contribution from these new products? Can you quantify the amount of revenue? Can you say that you would get to $15 million or $30 million of incremental revenue from the new products? Is there anything in there that potentially could be a blockbuster?

There -- in the case of our world where we operate a diverse portfolio, it's always about how you bring a lot of really strong incremental growth contributors to the portfolio, and you're working always on tens of things to contribute that kind of incremental revenue, and I think that's what you'll see. We obviously, in the case of a call of this format, can't go through and profile all of the stuff that's going on. But you are likely to see in 2011 certainly incremental growth that's well into the teens associated with just the stuff we're talking about.

If I could switch gears to acquisitions, you mentioned that the domestic market is -- for M&A is weak, and I wonder if -- I guess is it related to valuations? Or is it just there's not as many deals? Or are you more focused on the international markets for the company's future growth from deals?

I didn't say that M&A was weak in North America -- just to be clear. What I said was I think for us in terms of pipeline we'll see more international content, short term. That's more of what we've been farming on a proprietary basis. The opportunity to participate more aggressively in some of the emerging country markets really comes by way of some of these European acquisitions. The Europeans globally have done a much better job getting at developing country opportunities than most of the US technology companies have. So your end game here is obviously the fastest growth markets you can be in. Some of that is a by way of European held -- currently proprietarily held companies.

Charles Brady, BMO Capital Markets.

This is actually Tom Brinkmann standing in for Charlie Brady. Just first of all a housekeeping question. If you could break out the order growth by segment for FX, as well as acquisitions?

We did that as we went through. But we can go through it again. The acquisition impact was solely in HST.

The FX impact, if you go through by segment, you've got order growth of 18% for fluid and metering in total, which translates from 19% organic orders growth in the quarter. And health and science is up 40. That's 29% organically. And Seals had about a 8 or 9 -- no, I'm sorry -- 10 point impact to that. So that's the acquisition impact in the quarter. Dispensing, orders were up 11 total, and the organically they are up 14. Again, you've got noise there with project activity. And within fire and safety you had orders in total that were down 2, and they are flat on an organic basis.

Okay. You also mentioned that dispensing, you expect it to remain soft in the second half. But do you see some further downside from where we are? Or do you think that we've already seen the trough there?

You know, you've got a couple of things. One, take the DIY project out and look at just the base, water base kind of midsize and smaller customer purchases. I think we've certainly seen the bottom of the trough. We're seeing evidence of stronger activity. As I said a few minutes ago, certainly in Asia we are seeing some nice wins.

When we look at it at this point, we've internally modeled still a fairly soft back half, and therefore we've got our cost position in great shape so that we can still make money. The -- I don't think that you're going to see huge gains in (technical difficulty) within the last half of this year. But the business will begin to grow, cyclically come back, probably in -- sometime in 2011.

That's helpful. And also the last question is, really how much do you see the operating margin improvement in the segments driven by volume growth versus cost reduction benefits? You've obviously seen some significant volume coming back here. How is the balance sort of looking going forward?

You know, we're going to -- you're looking at a couple of hundred basis points in the quarter, and there's a lot of moving factors or elements to what you see in the way of what is in total leverage, operating leverage, but we are going to probably see more of that 40% incremental flow-through as you look at a full-year performance out of the company, and we'll get a little bit impacted as we go by reinvestment, and you may see some of that in the third quarter.

I think that for modeling's sake, you should kind of stick to the same thing that we've talked about historically, quarter in and quarter out, and that is the objective going from good to better is always 35% or so incremental flow-through, and anything better than that is a function of some portion of both great growth and/or continued to cost-out.

This concludes our question-and-answer session for today. Larry, I hand the program back over to you for any further comments or closing remarks.

Well, thank you. I am not going to make any long closing remarks today. I'll just tell you that I'm very pleased with how our operating team performed, as we talked about, did a great job responding to the improved volume environment. They did a super job on all aspects of managing the P&L, but also as we talked about with their working capital performance in the quarter.

I think that we are really well-positioned at this point as we look into the back half of the year, and I think the balance sheet will support, as we've talked about, a 12 to 18 month very strong acquisition profile set. So we actually feel pretty good about where we are, and we look forward to talking with you a quarter for now, or as it may be, through the summer as we see you. Thank you for joining.

This concludes today's conference call. You may now disconnect.