IDEX Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results. Unless stated otherwise, amounts are in millions.
Business context
IDEX designs and sells engineered products across three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Sales are exposed to industrial activity, end-market capital spending, competition, foreign exchange, and conditions in the countries where it operates.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $574.5 | $530.4 | $1,701.4 | $1,582.6 |
| Gross margin | 44.9% | 43.5% | 45.0% | 44.1% |
| Operating income | $126.5 | $109.7 | $367.3 | $326.9 |
| Operating margin | 22.0% | 20.7% | 21.6% | 20.7% |
| Net income | $83.8 | $69.9 | $243.5 | $213.8 |
| Diluted EPS | $1.08 | $0.91 | $3.15 | $2.78 |
| Operating cash flow | $124.0 | $125.5 | $296.6 | $284.3 |
| Free cash flow | $115.5 | $113.9 | $268.5 | $255.7 |
Q3 sales rose 8% (7% organic); nine-month sales rose 8% (5% organic). Q3 operating income increased 15%, net income 20%, and diluted EPS 19%. For the first nine months, operating income increased 12%, net income 14%, and diluted EPS 13%. Nine-month adjusted diluted EPS was $3.19, excluding restructuring costs and prior-year divestiture loss.
At September 30, cash and cash equivalents were $303.3; working capital was $618.6 and the current ratio was 2.8:1. Total borrowings were $879.8, implying net debt of approximately $576.5. Long-term borrowings were $874.9. The company had $662.3 of available borrowing capacity under its revolving facility. It held $209.3 of cash outside the U.S.
Segment sales and operating income in Q3 were: FMT $221.0 and $62.0; HST $207.1 and $46.1; FSDP $146.6 and $36.2. All three segments reported higher operating income and margins year over year. Nine-month organic growth was strongest in HST (7%), followed by FMT (5%) and FSDP (1%).
Material changes and notable items
- Q3 gross margin improved 140 basis points, supported by higher volume and the absence of $4.6 of prior-year acquisition inventory step-up charges. Nine-month gross margin rose 90 basis points; the prior-year period included $10.4 of such charges.
- Operating income benefited from volume leverage and prior restructuring savings. The 2016 comparison also included a $2.1 net divestiture loss. IDEX recorded $4.8 of restructuring expense in the first quarter of 2017, primarily for employee reductions and facility rationalization.
- Cash from operations increased 4% for the first nine months, while working-capital needs rose with growth. Capital expenditures were $28.1. There were no business acquisitions in the 2017 period, compared with $510.0 of acquisition spending in the first nine months of 2016.
- Debt declined to $879.8 from $1,020.9 at year-end 2016, primarily reflecting repayment of revolving borrowings. The company reported compliance with its financial covenants: leverage ratio 1.58:1 versus a 3.50:1 maximum, and interest coverage 12.46:1 versus a 3.0:1 minimum.
- Foreign-currency translation contributed $97.2 to nine-month other comprehensive income. Non-hedge FX contracts and related intercompany loans had offsetting Q3 and nine-month gains/losses; their net earnings effect was not clearly stated.
Outlook, risks, and contingencies
Management forecast Q4 2017 EPS of $1.06–$1.08, full-year adjusted EPS of $4.25–$4.27, full-year organic revenue growth of 5%, and Q4 organic growth of 6%. Management said cash, operating cash generation, and available revolver capacity should cover remaining-2017 operating needs, capital spending, debt interest, benefit-plan funding, expected repurchases, and dividends. Results may differ because of economic and industrial conditions, order levels and typically low backlogs, pricing and input costs, foreign exchange, interest rates, acquisition execution, and other risks described in the filing.
Pending asbestos-related claims are largely associated with components supplied by third parties. Most resolved claims were dismissed without payment, and settlements and legal costs have generally been covered by insurance, subject to deductibles; future insurance coverage is uncertain. The company believes these and other ordinary-course proceedings are not expected to have a material adverse effect. No interim goodwill impairment test was required. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the projected organic growth and EPS ranges were achieved, and how adjusted EPS reconciles to GAAP EPS.
- Whether organic growth and margin improvement continued across all three segments, particularly the low nine-month organic growth in FSDP.
- Cash conversion and working-capital trends, including receivables and inventory, alongside the company’s capital returns and acquisition plans.
- Debt, covenant headroom, and the effect of foreign exchange on earnings and cash flows, including the related intercompany-loan hedges.
- Developments in asbestos claims, insurance recoveries, and other legal or tax contingencies.