IDEX Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results. IDEX makes engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $624.2M | $622.9M | $1,888.6M | $1,869.6M |
| Operating income | $141.8M | $145.1M | $444.8M | $429.6M |
| Operating margin | 22.7% | 23.3% | 23.6% | 23.0% |
| Net income | $105.2M | $106.4M | $328.7M | $312.4M |
| Diluted EPS | $1.37 | $1.37 | $4.30 | $4.02 |
| Operating cash flow | Not separately stated for Q3 | Not separately stated for Q3 | $376.9M | $325.8M |
| Free cash flow (non-GAAP) | $146.0M | $114.4M | $340.1M | $285.9M |
- Q3 gross profit was $282.0M; reported gross margin was approximately 45.2%, up from 45.0% a year earlier. Nine-month gross margin was 45.4%, versus 45.2%.
- Q3 adjusted operating income was $157.1M and adjusted EPS was $1.52; nine-month adjusted operating income was $462.3M and adjusted EPS was $4.47. These are non-GAAP measures that exclude restructuring and the acquisition inventory step-up charge, with applicable tax effects for adjusted net income/EPS.
- Cash and equivalents were $516.0M at September 30, 2019. Total borrowings were approximately $850.7M, implying simple net debt of about $334.7M. The company had $789.9M of available revolving capacity after letters of credit.
- Working capital was $820.0M and the current ratio was 3.2. The company reported leverage of 1.24x and interest coverage of 15.96x, and said it complied with its financial covenants.
Material changes versus prior comparable periods
- Q3 sales were essentially flat year over year: organic sales were flat, acquisitions contributed 1%, and foreign exchange reduced sales by 1%. For the first nine months, sales rose 1%, including 2% organic growth, a 1% acquisition contribution, and a 2% foreign-exchange headwind.
- Q3 GAAP operating income declined 2% and margin fell 0.6 percentage points, largely reflecting higher restructuring costs and the Velcora inventory step-up. Nine-month operating income rose 4% and margin improved 0.6 points, helped by pricing, productivity and lower SG&A.
- Q3 results varied by segment: FMT sales rose 1% and operating margin expanded to 32.2%; HST sales rose 3% but margin fell to 17.5%; FSDP sales declined 5% and margin was 27.2%. Nine-month organic sales increased 4% in FMT and 2% in HST, while FSDP was flat.
- Operating cash flow increased 16% for the nine-month period, supported by higher earnings and favorable working capital. Investing outflows rose, principally due to the Velcora acquisition; financing outflows increased with debt repayment, dividends and share repurchases.
Outlook, management commentary and notable items
- Management projected Q4 2019 EPS of $1.33–$1.35, full-year adjusted EPS of $5.80–$5.82, flat Q4 organic revenue growth, and full-year organic revenue growth of 2%. Adjusted EPS is non-GAAP.
- In July, IDEX acquired Velcora, parent of Roplan and Steridose, for $87.2M cash and assumed $51.1M of debt. The acquired businesses had about $40M of recent annual revenue. IDEX subsequently repaid the assumed debt and recorded a $0.7M early-retirement loss.
- After its largest customer was lost, an HST business was slated to wind down over time. IDEX recorded $9.7M of asset impairments and total Q3 restructuring expense of $12.0M; nine-month restructuring expense was $14.1M. The company expects severance payments by year-end.
- IDEX adopted lease accounting in January 2019, recognizing approximately $68M of right-of-use assets and lease liabilities at adoption. At quarter-end, lease liabilities totaled $67.2M; adoption did not materially affect reported earnings or cash flows.
- Management cited exposure to industrial activity, capital spending, pricing and competition, foreign exchange, trade policy and tariffs, interest rates, labor and material costs, acquisition integration, and litigation and environmental contingencies. It noted the company typically maintains low order backlogs.
- Routine legal matters were not expected to have a material adverse effect. The filing also describes asbestos-related lawsuits; most resolved claims were dismissed or settled for immaterial amounts, historically with substantial insurance coverage, but future coverage is uncertain. No material provision was recorded beyond ordinary-course insurance deductibles.
Investor verification points
- Verify the assumptions behind the Q4 and full-year outlook, particularly the expected flat Q4 organic growth and adjusted EPS range.
- Track the HST business wind-down, customer-loss impact, remaining restructuring costs and potential effect on segment profitability.
- Assess Velcora’s post-acquisition contribution, integration progress, purchase-price allocation and realized returns.
- Review the reconciliation and recurring nature of management’s non-GAAP adjustments, including restructuring and inventory step-up charges.
- Monitor foreign-exchange exposure, overseas cash balances, debt maturities and covenant headroom; $373.2M of cash was held outside the U.S.
- Follow the availability of insurance for asbestos-related claims and any change in the company’s legal-contingency assessment.