IDEX Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited results compare with the three months ended March 31, 2018. IDEX operates in Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $622.2 million | $612.3 million | Up 2%; organic sales up 4%, with a 2% unfavorable currency impact |
| Gross profit / margin | $283.8 million / 45.6% | $276.7 million / 45.2% | Margin up 40 basis points |
| Operating income / margin | $147.8 million / 23.8% | $136.7 million / 22.3% | Income up 8%; margin up 150 basis points |
| Net income | $110.3 million | $99.0 million | Up 11% |
| Diluted EPS | $1.44 | $1.27 | Up $0.17, or 13% |
| Operating cash flow | $88.7 million | $71.7 million | Up 24% |
| Free cash flow (non-GAAP) | $75.8 million | $61.7 million | Up $14.1 million |
Gross margin improvement reflected pricing, productivity initiatives, and volume leverage, partly offset by higher engineering costs. SG&A fell to $136.1 million from $138.3 million, mainly from lower amortization and variable compensation. No restructuring expense was recorded in Q1 2019, versus $1.6 million in the prior-year quarter. EBITDA, a non-GAAP measure, was $166.6 million, or 26.8% of sales, versus $162.2 million, or 26.5%.
Segments
- FMT: Sales of $242.5 million, up 4%; organic sales rose 6%. Operating income was $71.9 million and margin 29.6%, compared with $66.2 million and 28.5%. Pumps, Valves, Water, and Energy grew; Agriculture declined.
- HST: Sales of $225.3 million, up 2%; organic sales rose 3%, with 1% from the FLI acquisition and a 2% unfavorable currency effect. Operating income was $54.2 million and margin 24.0%, compared with $51.8 million and 23.4%. Scientific Fluidics & Optics and Gast grew; Material Processing Technologies, Sealing Solutions, and Micropump declined.
- FSDP: Sales of $156.2 million, down 2%; organic sales rose 1%, offset by a 3% unfavorable currency effect. Operating income was $40.3 million and margin 25.8%, compared with $39.6 million and 24.8%. Fire & Safety and BAND-IT grew; Dispensing declined.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $456.1 million at March 31, 2019, including $338.7 million held outside the U.S. Total borrowings were $850.9 million, primarily fixed-rate senior notes; the revolving facility had no borrowings.
- Working capital was $790.0 million and the current ratio was 3.3 to 1. Available capacity under the $700 million revolving facility was approximately $691.3 million, net of letters of credit.
- Leverage was 1.26 to 1 and interest coverage was 15.76 to 1, within covenant limits of a maximum 3.50-to-1 leverage ratio and minimum 3.0-to-1 interest coverage. The revolving facility matures June 2020; senior notes mature from 2020 through 2025.
- Operating cash flow funded $12.9 million of capital expenditures. Financing outflows included $33.4 million of dividends and $50.8 million of share repurchases. Cash declined $10.3 million during the quarter.
Guidance, commentary, and notable items
- Management projected Q2 2019 EPS of $1.47–$1.50 and full-year 2019 EPS of $5.70–$5.85. Organic revenue growth was projected at 4%–5% for both Q2 and full-year 2019.
- Management said cash, operating cash flow, and available revolver capacity should meet 2019 operating needs, planned capital expenditures, debt service, benefit funding, dividends, and authorized repurchases; acquisitions could require additional borrowing.
- The effective tax rate fell to 19.5% from 24.0%, primarily reflecting increased foreign tax credits related to proposed GILTI regulations, prior-year discrete tax expense, and geographic earnings mix. Other income was only $0.1 million in Q1 2019 versus $4.4 million in Q1 2018, partly because prior-year foreign-currency gains did not recur.
- Adoption of the lease accounting standard on January 1, 2019 added approximately $68 million of right-of-use assets and lease liabilities. The company stated adoption materially affected the balance sheet but did not materially affect earnings or cash flows.
- Risks identified include industrial and global economic conditions, pricing and competition, low order backlogs, foreign exchange, trade policy and tariffs, interest rates, labor and material costs, acquisition integration, and legal or environmental contingencies.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. Asbestos-related lawsuits remain pending; most resolved claims were dismissed without payment or settled for immaterial amounts, but future insurance coverage is uncertain. No provision was recorded beyond ordinary-course insurance deductibles.
Important facts for investors to verify
- Whether the 4%–5% organic growth outlook and EPS guidance are achieved, and how foreign exchange and end-market softness affect results.
- Whether cash conversion remains strong as receivables and inventory increased during the quarter, and whether repurchases and dividends remain supported by cash generation.
- Debt maturities, covenant headroom, and refinancing plans ahead of the 2020 note and revolving-facility maturities.
- The durability of margin gains, including productivity and pricing benefits versus engineering costs and segment-level declines.
- Potential changes in asbestos-related claims, insurance recoveries, or other legal and tax contingencies.