Executives
Heath A. Mitts - Vice President, Corporate Finance
Larry D. Kingsley - Chairman of the Board, President and Chief Executive Officer
Dominic A. Romeo - Vice President and Chief Financial Officer
Analysts
Jim Lucas – Janney Montgomery Scott
Mike Schneider – Robert W. Baird
Matt Summerville – KeyBanc
Scott Graham – Ladenburg Thalmann
Christopher Glynn – Oppenheimer
Walter Liptak - Barrington Research
Thomas Britman (ph) - BMO Capital Markets
IDEX Corporation (IEX) Q2 2009 Earnings Call July 21, 2009 10:30 AM ET
Operator
Good day, everyone, and welcome to the IDEX Second Quarter 2009 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Heath Mitts, Vice President of Corporate Finance. Please go ahead, sir.
Heath Mitts
Thank you, Danielle. Good morning, and thank you for joining our discussion of the IDEX second quarter 2009 financial results.
Yesterday, we issued a press release outlining our company's financial and operating performance for the three-month period ending June 30th, 2009. 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, and Dom Romeo, Vice President and CFO.
The format for our call today is as follows. We will begin with an update on our overall performance for the quarter, and then provide detail on our four business segments. We will then wrap up with the outlook for 2009 and the third quarter. 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 888-203-1112 and entering conference ID 6940348; or simply log on to our company home page for the webcast replay.
As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and in IDEX's filings with the Securities and Exchange Commission.
With that, I'll turn this call over to our Chairman and CEO, Larry Kingsley. Larry?
Larry D. Kingsley
Thanks, Heath. Good morning, everyone. Before we get started with the slides, I'll give you a brief update on the market conditions that we are seeing and anticipating for the remainder of the year.
First, as we discussed in our last earnings call, we felt we were finding the bottom in most of our end markets, and that was indeed the case. In general, we have seen a leveling off in demand, and while year-over-year results are still unfavorable, the majority of our end markets have stabilized. In our earnings release, you have probably noted that we took down the top end of our '09 EPS guidance from $1.55 to $1.45. As you will recall from our first quarter earnings call, our forecast assumption to reach the higher end of our EPS guidance assumes some level of second half recovery.
We do not see a broad-based recovery at the present time. However, we have positioned ourselves very well through the counter measures taken over the past few quarters, and we'll be in a very strong position coming out of this economic downturn. And the restructuring actions required for us to achieve our earnings guidance are essentially completed. Our operating margins have been protected, and our cash flow is very strong. So while we lowered our top end of the EPS estimates, due to strong execution, we have raised our profitability and free cash flow estimates. Adjusted operating margins should end the year near 15%. We would expect free cash flow to exceed 120% of net income.
Our new products are on track. Although we have undertaken aggressive restructuring actions, we have protected our new product and growth initiatives. Our customers remain our number one focus. We have maintained or improved our market share through the downturn.
In general, coming out of this, we're in great shape for profitable growth as our end markets do improve.
So now I'll jump into the presentation and talk about the quarter, and I'm on the slide titled Q2 2009 Financial Performance. For the quarter, orders were down 21%, and sales were down 15%. That's down 17%, organically. First quarter adjusted operating margin of 14.9% was down 320 basis points due to the lower revenue, offset by the cost actions taken. Adjusted EPS of $0.37 for the quarter was down 31%. Free cash flow was $50 million, which included approximately $4 million of restructuring related payments, and $6 million of pension contribution, which fulfills our full year pension obligations.
Overall, as I said, I'm very pleased with the results of our restructuring efforts. Despite the top line pressures, we have been able to hold our operating margins in the mid-teens, which is a direct result of our inherent flexibility in the operating model.
Our operating teams have stepped up to meet the underlying market challenges and quickly right-sized our cost structure while preserving the resources to support our growth initiatives. I am also very pleased with our cash flow. Since the end of the first quarter, our inventory is down 9%. We made solid improvements in our receivables. CapEx requirements remain very IDEX-like, which is consistently $5 to $6 million per quarter, mainly to support new products and cost-reduction activities.
Again, our operating teams have responded well to the challenges, and we look forward to continued progress as our strong cash generation facilitates future growth.
So I'll walk through the results by segment. I am now turning to the slide number 5.
For the Fluid & Metering segment, the orders are down 17% in the quarter. Organic orders are down 24%, reflecting CapEx constraints that are present in most of the process and equipment markets. Sales decreased 12%, down 20% on an organic basis. Adjusted operating margin of 17.2% was down 140 basis points from Q2 of last year. The chemical end markets, which represent about 25% of the FMT segment sales, were down the most in the quarter.
Going forward, or sequentially, we expect the major chemical end markets to be flat to down slightly in the second half of '09. And with regard to the other FMT end markets, water, which is also roughly 25% of the segment, improved in the second quarter versus the first quarter. However, much of our water business is still being constrained by municipal budgets that are anticipating federal assistance.
So while we have seen a very nice increase in quota activity, we are only anticipating a moderate sequential improvement in the second half of '09. As you have probably read, the federal stimulus dollars have been slow to reach the market, and we are seeing the same, with projected stimulus impact coming late in '09, and more likely in 2010.
The energy end markets, again roughly 25% of the segment, have experienced less toppling pressure due to global project demand. Again, we saw modest sequential improvement in the second quarter. Going forward, our projected activity that's primarily outside the U.S. will support second half sequential growth.
So in summary, for the FMT segment, energy and water should see conditions improve, albeit modestly, in the second half. The other half of the segment, chemical industrialization and the products that serve some of the food and beverage end markets, may lag in recovery given the over-capacity and lack of demand from some of those end consumers.
In our Health and Science segment, total orders are down 21% for the quarter; that's down 24% organically. Sales are down 15% in total, and down 18% organically. Our core HST business, which represents about 60% of the segment, was down slightly, while the remaining, more industrially focused or exposed HST businesses had a significant year-over-year decline.
Operating margin of 15.7% was down 250 basis points compared to prior year due to the lower revenue. Our outlook for HST has not changed. For the second half, we expect our core HST business to be roughly flat versus last year. However, in the 40% of the segment, which is a bit more industrially exposed, we're seeing year-to-year declines, and they will be north of 20%.
All in, for HST, we expect the second half of '09 to be flat versus the first half. For the long term, our core market focus for those fluidic devices than are used in R&D applications and clinical diagnostic applications continues to provide a powerful platform for growth, and we anticipate that end market demand for the new generation of equipment and our IDEX content from that equipment will drive our growth.
So in Dispensing on slide 7, total orders from the quarter were down 34%, organically down 27%. Sales decreased 19%, and organically were down 13%. Adjusted operating margin of 21.9% improved significantly versus recent quarters due to cost reductions and higher revenue. In the second quarter, we experienced the higher volume of the fulfillment of a replenishment order in the North American retail channel. This project has been largely completed.
Unfortunately, the underlying market conditions, though, for both North America and Europe, remain soft. During the second quarter, we saw demand in Europe drop off significantly. One bright spot in the States, though, is that the new paint chemistries – that is, the low PLC chemistries – the environmentally safe products that are being introduced, require updated dispensing capability, and we're beginning to see system upgrades, retrofits and replacements as a function of those new paint products. We anticipate that both North America and Europe sales will benefit from required changes.
The short term, as we move into to the second half of '09, we are projecting sales to decline versus the first half primarily due to no large retail projects that are committed over the next six months.
In summary for the segment, no big short-term programs, but the drivers will continue to drive, upgrade through replacement, and cost actions that we have taken to size the segment accordingly, positions us well to ensure profitability and very strong cash generation.
Moving now over to Fire and Safety, I am on slide eight. For the quarter, total orders were down 21%, down 16% organically. Sales were down 20%, organically were off 14%. Operating margin at 22.1% was down 230 basis points compared to prior year, and that's almost entirely due to volume
As anticipated, global demand for rescue tools and fire suppression products drove performance in the second quarter. In the second half, we expect rescue tools to achieve flat to modest growth sequentially due to continued international market opportunities.
The rescue tools team has done a really nice job of winning market share through new products and applications, as well as leveraging their global distribution footprint. Fire suppression had a strong first half and is expected now to remain stable through the remainder of the year, although we are keeping a close eye on the municipal spend that is uncommitted to projects in the fourth quarter of this year.
The band clamping market, again within this segment, appears to have bottomed out, and although it will be a couple of quarters until we see year-over-year growth, we do anticipate second half improvement for Band-It due to largely new product wins that we already have in sight. So overall for this segment we expect flat to modest growth sequentially in the second half of '09.
Now I am going to turn our attention to Guidance. Slide nine summarizes our current view. Again, EPS and the $1.35 to $1.45 range, we feel our cost actions have ensured the bottom end of our range and they have positioned us very well. Organic grown down approximately 15%. FX at current rates will have a negative impact on sales of approximately 3%, and acquisitions add 6 to 7%.
Moving forward into the second half, we expect FMT, HST, and Fire and Safety to achieve flat to modest growth versus the first half of the year, and Dispensing to be down in the second half. Adjusted operating margin should finish the year near 15% for the year, and our earnings projections exclude our estimate for additional cost actions of $0.02 to $0.03 in the second half of ‘09.
As far as other modeling items, the tax rate is anticipated to be 34%, and the CapEx will be $23 to $25 million for the year. We will continue to convert cash well in excess of net income.
For (inaudible), our EPS range is $0.33 to $0.37, and within that organic growth is assumed to be down approximately 17%.
With that, we will open the line for questions, Operator.
Question-and-Answer Session
Operator
(Operator's Instructions) The first question will come from Jim Lucas with Janney Montgomery Scott.
Jim Lucas – Janney Montgomery Scott
With regards to the strong cash that you are generating and balance sheet in good shape, could you talk a little bit from a capital allocations standpoint where the priorities are today and where the emphasis is on particular on the M&A side. What you are seeing in the pipeline, particular areas of focus, as well as have you seen any changes in the valuations that are out there?
Larry D. Kingsley
To restate and maybe quantify, we do think we are in great shape. The balance sheet, I think, as you have already noted, has us in a great position relative to coverage ratio with net debt to cap at just under 26%. We have that as a very solid foundation. Cash flow for the quarter is indicative of the fact that we are on top of working capital. We do not see huge CapEx requirements for the remainder of the year.
As a matter of fact, we look forward to the year 2010. With just a little bit of visibility, we are really pleased, frankly, with where the cash position takes us. Plenty of capacity and capability looking forward.
With regard to valuations on properties, there is a little bit of dislocation right now still on the market, I would say, and that is sellers' prices versus buyers' prices are a bit off. We do see that narrowing. We do have a number of very strategic things that we are working on right now, a couple of things that we are traveling for this summer. They fit right in the square of the target of what we are after for existing segment build-out.
As we think about the strategy for capital allocation, essentially we are after where the cash is flowing now as this economy does return. We like the infrastructure position that we have built out, both acquisitively and organically over the last couple of years; more of that to come, including where we would go spend acquisitively. We like the initial position that we have put in place with respect to our Ag space, which we never had prior to a couple of years ago, so there are a couple of things that make sense to compliment our initial position that is acquired there.
We also like the health and science space a lot, and there is some very interesting both organic reinvestment as well as acquisitive investments there. Again, a little bit of a current price dislocation, transactional price dislocation, but things narrowing to the point of where I think we will have opportunities between now and the end of the year.
We are not going to peg a number of transactions or capital spend number for the remainder of the year. We are going to continue to chase the ones we like the most, and over the next twelve months or so, I think you will see the model at work.
Jim Lucas – Janney Montgomery Scott
Switching gears, with regards to stimulus dollars you mentioned on the water side — I think we have all noted how slow those dollars have been to flow down to the project level. Within HST, have you seen any increase in quoting activity there with the potential for NIH funding increasing?
Larry D. Kingsley
We have begun to see the beginning of it. There is new equipment that is likely to be purchased as a function of NIH budget increases. I was with one of our HST teams for a day last week, and certainly there are all forms of incremental spend that are being targeted, but we are seeing the beginnings of quota activity as a function of equipment buy, and that should start to ramp, we think, toward the end of the year.
Jim Lucas – Janney Montgomery Scott
From a geographical basis, could you give us some color on what you are seeing in Europe and Asia, overall geographically or any particular markets, positive or negative, standing out trend-wise?
Larry D. Kingsley
Not a demonstrable difference for us in the quarter with respect to Europe versus North America, North America being a bit better when you take the dispensing replenishment order out; the base rate for the rest of the business was not hugely different. With respect to Asia, we did not see as much growth in Asia in the quarter as we would have liked. Some of that is a function of project specific stuff when we look at year-on-year comps.
Looking forward, for the three regions, we are expecting that North America outperforms Europe for the second half and that Asia outperforms all of the above, but there is work to be done in all three regions to achieve a return to the sequential numbers that we talked about, or achievement of the sequential numbers we talked about in our prepared remarks.
Jim Lucas – Janney Montgomery Scott
Thanks a lot, Larry.
Larry D. Kingsley
Sure.
Operator
Next we will hear from Mike Schneider with Robert W. Baird.
Mike Schneider – Robert W. Baird
Maybe first we can address the order rate of minus 22% this quarter. Can you give us a sense of what that would look like on a monthly basis, and indeed what they were relative to your budget?
Larry D. Kingsley
Relative to our budget?
Mike Schneider – Robert W. Baird
Your expectations.
Larry D. Kingsley
There are two elements to the organic orders in the quarter, Mike, and I'll let Dom give you the linearity after I get started here. One, there was the lack of a big dispensing order in the quarter. You had the dispensing sales in the quarter, but not the order that generated that sale. Two, from a comp standpoint, you had principally FMT, but also relatively tough comp, so that is the issue that applies when you look at the two that construct that organic orders number for the quarter.
And the linearity, Dom?
Dominic Romeo
If you address Q1 versus Q2, and if you take out the dispensing order in Q1, it was a modest increase sequentially. In the quarter, orders were 101 in April, 107 in May, and 110 in June. We digged into that kind of buy, enterprise; it pretty much supports the commentary we have with regard to the second half, so a bit of a modest uptick if you take out the dispensing order that we booked in the month of March.
Mike Schneider – Robert W. Baird
Are you able, then, to adjust for seasonality there? Would a typical Q2 look like this with June being the strongest month?
Dominic Romeo
Typically, that is correct, Mike, it would.
Mike Schneider – Robert W. Baird
Drilling to HST on Jim's question, the NIH money, your customers in that segment, in the core business, are looking for, I guess, lesser single-digit declines in their business versus your earlier commentary, even going back to the beginning of this year of about minus 10 in that business. Have you raised your expectations at all, and is that in the new guidance, or can you give us some color as to why you still believe you are going to be down more than your customer forecast?
Larry D. Kingsley
I think we have yet to see all of our customer forecasts as a result of this quarter's calls. I think we should tune into those, but we have included the assumptions that you spoke of in our aggregate assumptions for the back half of the year.
Within HST, we talked about some sequential improvement for the core business, which is obviously the NIH impacted element of the HST segment. That is offset by what we think on the other side, as you know, the GAST business, and some other non-core businesses where we think the industrial exposure and some of the commercial market exposure there will continue to be down, and maybe be down demonstratively.
The NIH money is incremental to the natural spend rate. I do not think we are going to see it hit us in terms of our impact where we stand within the food chain until the very end of the year. It is with that in mind that we do not see a very big back half lift.
Mike Schneider – Robert W. Baird
Switching to dispensing, the margins here are very volatile, as usual, and when you are running at about this $30, $32 million quarterly rate, the margins are usually down in the low double-digits, and then once you peak over this 40, $45 million rate you are up in the 20s. Can you give us some sense now how this has changed with the Milan closure, and what we should be thinking about on a new-dollar threshold, because I presume seasonally dispensing will be down, especially with the absence of major programs. Are we back to the low $30 million rate and or low double-digit margins, or does Milan make that number substantially higher than we are used to?
Larry D. Kingsley
I do not want to get into break-even points for the business as a function of all of the costs that we have taken out over the last three quarters in particular, but there certainly is a lower break-even point for that business now, and the numbers that we can achieve on a $30 million top line quarterly assumption basis are a little better than what you have to stasis. Not demonstratively so, but a couple of points better.
Mike Schneider – Robert W. Baird
Put differently, what does Milan save you annually?
Larry D. Kingsley
It is about $5-$5.5 million. There is other cost action, obviously globally within dispensing.
Dominic Romeo
As you know, Mike, that is already in the Q1 and Q2 run rates of the margin.
Mike Schneider – Robert W. Baird
Okay, thank you.
Operator
The next question will come from Matt Summerville with KeyBanc. Please go ahead.
Matt Summerville – KeyBanc
In keeping with dispensing, Larry, should we assume — and I want to make sure that I understand the progressions first half versus second half — that we should assume the quarterly run rate in sales, in dispensing, to be more in line with what you experienced in Q1 for the remainder of the year? Is that accurate?
Larry D. Kingsley
That is accurate.
Matt Summerville – KeyBanc
You mentioned in your prepared remarks that there are changes that will be occurring in certain paint chemistries that you believe will drive some replacement and upgrade. Is there any timing, any way you can quantify how much of your install base might be subject to that?
Larry D. Kingsley
The impact over time for both Europe and North America will be over 50% of the paint that is dispensed. The time horizon for which that takes place is probably two years or so. It has yet to be determined based on the specific paint chemistries how much of the equipment gets replaced versus upgraded. In some cases, existing equipment can get upgraded and other cases it needs to be fully replaced. In a very robust economy, I think nearly all of it would be replaced. There may be some thinking toward trying to upgrade versus replace until that economy supports the full replacement activity.
In terms of how it impacts the numbers, we do not think over the next six months it is going to be huge. As we work our way into 2010 it should be quarterly, sequentially, a bigger portion of what we see driving sales activity within the segment.
Matt Summerville – KeyBanc
One final question on HST: During the quarter you experienced a pretty flat, sequential revenue run rate, around $74 million, margins were down a little over 100 basis points. Can you talk, sequentially, about what you experienced there in terms of mix, because it sounded like the non-core businesses were absolutely down more dramatically than the instrumentation side of the business. I am trying to understand what margin dynamics are at play there.
Larry D. Kingsley
The primary issue is volume versus mix.
Dominic Romeo
The margin from core versus the industrial are not too far off, so it is more of a volume-based decline than anything that mix ..
Matt Summerville – KeyBanc
Thank you.
Operator
Next we have Scott Graham with Ladenburg Thalmann. Please go ahead.
Scott Graham – Ladenburg Thalmann
In terms of progression during the quarter, but maybe more specific drill-downs into some of your larger markets — you can skip water — but refined fuels and maybe even on the sanitary side of water, AI, DIY, and general manufacturing chemicals, can you talk about how those orders progressed?
Larry D. Kingsley
Let me give you some more anecdotal than quantitative by specific sub-end market. Let’s classify it into three tiers: good, okay, and still lagging in terms of recovery, and that would apply to both what we saw in terms of linearity in the quarter, but I think also what we are going to see for the rest of the year.
Our energy business was robust in the quarter and improved nicely, and we continue to see a good second half, a lot of that driven by international activity, some project wins that certainly support that already, but also there is infrastructure spend associated with some of the refined fuels applications, even some of the LPC&G applications that might defy logic given the fact that some of that exploration is down. But on the downstream end of energy there is still a pretty decent international spend assumption that we have built into the second half, and frankly seen the evidence of that.
I will skip water, because energy and water will lead FMT. Ag, we remain watchful on short term, but we think it comes back, certainly with the end of the year. The other good segments, the core health-care segments as I mentioned earlier, but that would also include thinks like dental equipment and bio-tech applications. Also within the good category, where we saw good performance during the quarter, where we will see good second half performance will be rescue tools. Again, nice international project wins there, and pretty good line of sight to some nice projects that we will see to the back half of the year.
On what was relatively linear, we are not seeing current signs of big pickup, and probably not through the back half of the year; so the second tier, I would say food and bev is moving along, not dour, not certainly turning south, but not expecting to pick up anytime soon. Some of the big pharma spend we expect to continue to be flat for the back half.
And then mixed signals and semiconductor right now, where we do sell some equipment into the semiconductors space, some of that is improving, changes in CapEx requirements as they retool and re-outfit some of their manufacturing, and other cases deferrals. I would say also in the okay category, and probably flat assumptions for the back half of the year would be Fire and BAND-IT from the prepared remarks, where Fire had a great first half; their back half looks good, but we are watching the last portion of their year based on how muni spend trends continue. BAND-IT has already seen a bottoming. We are not seeing a huge lift, but BAND-IT did start to see signs of some positive growth in the markets that they serve, and it is a pretty broad-based set of industrial markets in their case.
On the ones that are lagging and that that we do not see coming back anytime soon would be chemical, as we said, and I would say more of the factory automation equipment applications that we do serve to some degree; those are going to lag for the rest of our end markets in terms of recovery.
Scott Graham – Ladenburg Thalmann
That is most helpful. It sounded like you are coloring that for the whole idea that second quarter is a little bit seasonally better than the first quarter, is that right? You discounted that within those comments.
Larry D. Kingsley
Not as much this year as last year, seasonally, but that is correct.
Scott Graham – Ladenburg Thalmann
The restructuring. I assume it remains that you are shooting for that 40-plus million linear progression in terms of the realizations. Is that fair, if we were to straight-line that?
Larry D. Kingsley
It is, Scott. I would tell you that the numbers are consistent with what we said in the last quarter call. The good news, I think different from most of all of the companies that we talk to out there, is that we're largely done. We move very quickly, very aggressively. The team does an absolutely phenomenal job. You classified what we are going to do going forward as more tweaking, and things that improve our structural position so that we can further leverage going forward as we grow. But for the heavy lifting, a lot of it is already under belt. Your numbers that you have, you can consistently model probably 30 to 35 million this year, and north of 40, certainly, as an annual savings that we will see out of the work done thus far.
Operator
The next question is from Christopher Glynn, Oppenheimer.
Christopher Glynn – Oppenheimer
Good Morning. On the operating margin guidance, 14%, 15% for the year, Larry, I think you emphasized 15% at the beginning of the call. This is where you were in the second quarter, and with dispensing kind of falling back, what do you see filling that in?
Larry D. Kingsley
Dispensing is about 10% of sales, and we are not saying that dispensing is going to fall back towards where it was in the fourth quarter of ’08 or the first quarter of this year; it will perform better based on the cost actions taken. It does not have to be a large lift otherwise to offset what is the lack of volume in dispensing.
Christopher Glynn – Oppenheimer
At FMT, it looks like there was a bigger difference between the underlying and the (inaudible) this quarter than last. Did you have some incremental integration activities going on there? It looks like the acquisitions are a little bit more of a drag, and how does that go sequentially?
Larry D. Kingsley
In the release, we specify the restructuring that we incurred in the quarter. The acquisitions in terms of operating margin performance are a bit of a drag. We had to take the amortization in accordingly. Does that answer your question?
Christopher Glynn – Oppenheimer
Is there any more inventory amortization?
Larry D. Kingsley
No.
Christopher Glynn – Oppenheimer
And pricing on process instrumentation in general?
Larry D. Kingsley
In terms of our pricing or?
Christopher Glynn – Oppenheimer
Industry pricing, is there any more competitive bidding for process work that you are seeing?
Larry D. Kingsley
We are seeing a bit more competitive activity in the open-bid environment, so on some of the municipal spend associated projects than we have historically. In the classical portion of the majority of the market structure that we serve, and by way of how we go to that market, I would say it is not any different than what we have seen historically. Price was a very little bit of a positive in the quarter. We are not assuming any help from price in the back half of the year.
Christopher Glynn – Oppenheimer
Okay, thanks a lot.
Larry D. Kingsley
We are not assuming any help from price with that (inaudible).
Christopher Glynn – Oppenheimer
Okay. Thanks for the help.
Operator
And the next question comes from Walter Liptak with Barrington Research.
Walter Liptak - Barrington Research
Hi. Good morning, everyone. My question, I would like to go back to HST and just ask the question another way. The operating profit was about $1 million lower sequentially, but the sales were roughly the same, maybe down a little bit. And I understand your comments about under absorption, was there something else going on there with mix or some other cost running through there that are not going to be in the back half of the year?
Larry D. Kingsley
No, Walt. Just the normal mix is how I would characterize it, but there is no abnormal cost increases or other items going through sequentially.
Walter Liptak - Barrington Research
Okay. And then I want to ask, you mentioned the $30-35 million run rate for cost takeout this year. On a quarterly basis where are you at? Are you at the full — if you take the cost out for this quarter, annualize it, you are in that range right now, or do you get a better cost takeout in the back half of the year?
Larry D. Kingsley
You get a little better from a full realization, but assume what you saw in the second quarter is indicative of where we are already positioned to achieve.
Walter Liptak - Barrington Research
Okay. And then in your guidance you don't assume a recovery which I guess in this environment is very prudent, but I wonder if there is something more behind that. Is there customer discussions? Is it just the corporate top-down view? How do you view the chances of a recovery?
Larry D. Kingsley
No. I would tell you, Walt, that nothing that is customer specific is anything of the sort. As a matter of fact, quote activity is actually pretty good and I think the way we would characterize it now is the same as we had the last call that there is a stickiness right now to getting stuff to the point of action, be it from a classical private sector form, the stuff we typically do, or in the open bit public project work that we do. And I think what we are going to find, frankly, is that there's going to be a lot of wait, wait, wait, and urgency to get things done pretty quickly.
And we've talked a lot internally about how we need to be prepared for that. We are prepared for it in terms of resources to apply and also how we need to probably work through the course of the recovery here to build our skid and systems capability in some of the businesses. Because I think in many cases the customers are not going to want to wait to get systems fully deployed and so we are not going to be in a position where we can sell component products. We are going to be developing and selling more of a systems content and we are focused internally on how to take some of the available capacity and migrate it to that.
So I think that we are taking a prudent approach by looking at the second half the way we are. At the same time there is nothing that is customer specific that are down in any way. Things appear to be okay. Not to get into too much detail, but when we look at the month of July thus far, things are certainly okay and when we look at 2010 we think at this point in the game that there's good opportunity for some of the end markets that we're in to come back pretty nicely.
Walter Liptak - Barrington Research
Okay. I hear you, but alright, let's say that in the back half the recovery doesn't happen. You mentioned that there's still some tweaking going forward on leverage. I assume that means that you're going to consolidate some operations, but if things get worse, how much more cost can you take out, or are you done with the real heavy lifting within the operations?
Larry D. Kingsley
Well, we can take out more costs. We do have additional levels, should we need to, that we can go apply. And we have got things that are ready for us to go ahead and work. However, the approach we took was let's get to what is the appropriate cost structure without impairing our ability to take share now or grow on the back side of this. So get right size for the environment, not spend what is the exit of this recession trying to continually consolidate, but get to a position that we can build and hide leverage with a little bit of growth to the bottom line. And if you look at where we are now, we do think that against a pretty broad base of end markets, we are not going to see further fall off generally speaking. Some little bit of sequential lift in the back half, some little bit of fall off, but in 2010, certainly for prognosis for improvement.
And the cost structure is already largely there. The tweaking has to do more with, as you said, finishing out integration activities with certain specific plants and a couple small things that we think make sense to do that both improve our cost, but also improve our customer support capability. And with a little bit of sales growth we ought to see very, very nice flow through. So that is kind of the macro and IDEC specific view, I guess, of our operations.
Walter Liptak - Barrington Research
Do you have a number for us on the percentage flow through?
Larry D. Kingsley
Well north of what we said historically. Historically, as you know, we said 35%. So we think that our opportunity for growth return is much better than that.
Walter Liptak - Barrington Research
So in the 40 to 50% range?
Larry D. Kingsley
Yeah. Exactly.
Walter Liptak - Barrington Research
Okay. Alright thanks, guys.
Operator
And next in queue we have Charles Brady with BMO Capital Markets. Please go ahead with your question.
Thomas Britman - BMO Capital Markets
Good morning. This is actually Tom Britman in for Charlie Brady. I just wanted to know about the sales mix within the Fire & Safety diversified product, how it turned out this quarter? You mentioned last quarter that it had an impact on margins, higher fire suppression a little bit lower, (inaudible) revenue, and I am just curious how that turned out this quarter.
Dominic A. Romeo
The mix was pretty consistent with what we saw in the first quarter in terms of a third, a third, a third, but Fire has had a pretty decent first half so actually if you think about our commentary first half second half, as Fire perhaps comes down we replace that with tools and with BAND-IT that we should see stable to maybe even improving second-half margins. Mix should be favorable in the second half.
Thomas Britman - BMO Capital Markets
Okay, good. And also, you had some upbeat comments about the outlook for downstream and energy markets in the second half on these international projects. Just curious if you could talk about what types of projects is it new refineries, overhauls, expansions, or non refinery work, and what your visibility is in terms of the duration of those projects?
Larry D. Kingsley
Yeah. Where we are seeing the best opportunities now, without getting into too much specificity for market strict reasons, but basically it is distribution of energy in areas of the world that are underserved today. So you can think about Asia and the Middle East, Europe, some centers where we think there are — and we know there are for that matter, good opportunities to continue to grow our presence. And the projects have already got dollars allocated to them.
Thomas Britman - BMO Capital Markets
Okay. Thank you.
Operator
Thank you. We will take a followup question from Mike Schneider with Robert W. Baird. Please go ahead with your question.
Mike Schneider - Robert W. Baird
Hi. Doug, could you just give us some sense on raw materials, where you are in your curve and cost of goods sold and is there additional benefit versus price coming in Q3 versus Q2?
Larry D. Kingsley
Mike, there is ab it of benefit in places like BAND-IT, but overall I would say the run rate in terms of ongoing is consistent with the second quarter. We'll still see our continued global sourcing savings which we discussed in the last call, but those have been fairly ratable over the first and second quarter, so I wouldn't expect to see a major margin impact favorable other than places like BAND-IT where we've achieved some decent buying in terms of the first half versus second half.
Mike Schneider - Robert W. Baird
And then on BAND-IT — Larry, I was intrigued by your comments about BAND-IT getting better during the second quarter. I guess I view that as the best leading indicator within your portfolio. Could you give us just some more color on BAND-IT specifically?
Larry D. Kingsley
If I said second quarter I meant second half, just to be clear. And that BAND-IT is a pretty good proxy for kind of base rate spend. It is both project and MRO based and we do not see a huge return to growth in BAND-IT, but positive sign. Some of that again is based on new products that we are introducing and some specific winds, but we think that BAND-IT, towards the end of the year are going to have a much better view of growth for 2010 in particular.
Mike Schneider - Robert W. Baird
And is that growth because of the new products or because markets are improving?
Larry D. Kingsley
A little of both, yeah.
Mike Schneider - Robert W. Baird
Okay. And then, Dom, on the guidance, am I right that the methodology has changed somewhat? Q1 you were including the Q1 charge and expense, but excluding all future restructuring, and now the slides read that the annual guidance includes all restructuring expenses for the year, including going back to Q1?
Dominic A. Romeo
The current guidance excludes another $0.02-0.03, Mike. As Larry put it, we're still tweaking some of the potential additional actions. So I would think of it more of our commentary with regard to how we did the bridging last time with regard to the second half recovery. That 25 million and $0.13 on the Q1 chart is kind of the number so we have not seen that level of recovery at this point in the year.
Mike Schneider - Robert W. Baird
But the annual range now of $1.35 to $1.45, does that exclude the $0.05 of charges last quarter, that is the first quarter?
Dominic A. Romeo
Yes.
Mike Schneider - Robert W. Baird
Okay. And then finally just on incremental margins, I calculated at least, excluding acquisitions, it looks like it was about a 31% incremental or decremental margin this quarter. Do you have that number ex currency?
Dominic A. Romeo
I do not have it front of me, Mike, but the better way to maybe think about it is maybe if you look at sequential Q1 to Q2 and that is in that 40 to 50 — actually a little bit higher percent range on the uptake. So I'd look at it more that way as you look at the go-forward cost structure than going back to the prior year. But holding 31-percent on the decremental side with a 17-18% decrease organically wasn't exactly easy.
Mike Schneider - Robert W. Baird
Indeed, and impressive. Thanks again.
Operator
And with no further questions in queue I'd like to turn the call back to Larry Kingsley.
Larry D. Kingsley
Okay, thank you and thank you all for joining. In summary we'd say we feel good about where we stand at this point, largely as a result of having completed the actions as we just described. We're at a good position. We feel good about the fact that the markets are stable with signs of some potential improvement coming towards the end of the year and into 2010 and I think the team has done a solid job with operating performance. And as you can see margin in a great place and cash flow for the quarter are just fantastic. And a good position now looking forward, certainly watching the economy, but also working hard to make sure that we guarantee our own success. Thanks for joining and we'll look forward to talking to some of you through the course of the summer and everybody at next quarter's call.
Operator
And ladies and gentlemen, that does conclude today's teleconference. Thank you all once again for your participation.
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