IDEX Corporation — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. IDEX manufactures and sells products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $622.9m | $574.5m | $1,869.6m | $1,701.4m |
| Gross margin | 45.0% | 44.9% | 45.2% | 45.0% |
| Operating income | $145.1m | $126.5m | $429.6m | $367.3m |
| Operating margin | 23.3% | 22.0% | 23.0% | 21.6% |
| Net income | $106.4m | $83.8m | $312.4m | $243.5m |
| Diluted EPS | $1.37 | $1.08 | $4.02 | $3.15 |
| Interest expense | $11.0m | $11.1m | $33.1m | $33.9m |
- Q3 sales rose 8%; organic sales increased 9%, while foreign currency translation reduced growth by 1%. For the first nine months, sales rose 10%, including 8% organic growth and a 2% favorable currency effect.
- Q3 operating income increased 15% and net income increased 27%. Nine-month operating income increased 17% and net income increased 28%. Management attributed margin improvement principally to higher volume and productivity initiatives.
- Q3 adjusted operating income was $149.8m and adjusted diluted EPS was $1.41, excluding restructuring expenses and related tax effects. Nine-month adjusted operating income was $437.9m and adjusted diluted EPS was $4.10. These are non-GAAP measures.
- Q3 segment results: FMT sales of $239.2m and operating margin of 29.2%; HST sales of $222.4m and margin of 22.1%; FSDP sales of $161.8m and margin of 27.6%. FMT and FSDP margins improved year over year; HST margin edged down from 22.2%, reflecting restructuring and acquisition dilution, partly offset by volume leverage.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $325.8m, up from $296.6m. Capital expenditures were $39.9m versus $28.1m; reported free cash flow, defined as operating cash flow less capital expenditures, was $285.9m versus $268.5m.
- Cash and cash equivalents were $491.8m at September 30, 2018, including $299.0m held outside the U.S. Working capital was $795.0m and the current ratio was 3.2 to 1. Cash increased $115.8m from year-end 2017.
- Total borrowings were $851.3m, primarily fixed-rate senior notes; cash less borrowings was approximately $359.5m. No amount was outstanding under the $700m revolving facility, with approximately $691m available after letters of credit.
- IDEX reported compliance with its financial covenants: leverage ratio 1.29 to 1 against a maximum of 3.50 to 1, and interest coverage of 15.38 to 1 against a minimum of 3.0 to 1. Management said available cash, operating cash flow and facility capacity should cover expected operating needs, capital spending, debt service, pension funding, dividends and authorized repurchases for the rest of 2018.
- Nine-month financing cash outflow was $134.6m, including $94.9m of dividends paid and $50.7m of common-stock purchases. The company declared $1.29 per share in dividends during the period and repurchased 357,000 shares for $51.7m.
Material changes and notable items
- In July, IDEX acquired Finger Lakes Instrumentation for $23.6m, comprising $20.2m cash and $3.4m estimated contingent consideration. The business joined HST; the acquisition contributed to HST sales growth alongside the 2017 thinXXS acquisition.
- Q3 restructuring expense was $4.6m; nine-month expense was $8.3m, versus $4.8m in the prior-year nine-month period. Actions primarily involved employee reductions and facility rationalization. The September 30 restructuring accrual was $6.4m.
- The effective tax rate fell to 20.2% in Q3 from 26.4%, and to 21.9% for nine months from 26.6%, mainly reflecting the U.S. Tax Act, including the lower federal corporate rate and FDII deduction, with offsets from other tax provisions and income mix. Some Tax Act accounting remained provisional; the company noted that removing permanent-reinvestment treatment for remaining subsidiaries could increase deferred tax liabilities by an estimated $10.8m.
- Other income/expense included currency-related effects. The company settled foreign currency contracts and related intercompany loans in April 2018 and did not maintain those contracts at quarter-end. Nine-month results also included a $2.2m Swiss stamp duty recorded in SG&A.
- Management expects adoption of the new lease standard in 2019 to create a significant right-of-use asset and lease liability; the impact had not yet been quantified.
Outlook, commentary and risks
- Management projected Q4 2018 EPS of $1.25–$1.27, full-year adjusted EPS of $5.35–$5.37, full-year organic revenue growth of approximately 8%, and Q4 organic revenue growth of 5%–6%.
- Management cited broad-based demand and strength in several end markets, including industrial distribution, oil and gas, chemical, life sciences, fire and rescue, and dispensing. It also noted weaker or uneven areas, including Q3 HST Material Processing Technologies sales versus prior-year project shipments and FMT Energy sales affected by the Faure Herman divestiture.
- Risks identified include industrial activity and capital spending, pricing and competition, low order backlogs, acquisition execution and integration, foreign exchange, trade policy and tariffs, interest rates, labor and material costs, and litigation or environmental contingencies.
- The company reported ordinary-course legal matters and asbestos-related personal-injury claims. It said most resolved claims were dismissed without payment and settlements to date were immaterial, but future insurance availability is uncertain; no provision was recorded beyond ordinary-course insurance deductibles. Management did not expect the matters to have a material adverse effect.
Important facts for investors to verify
- Whether Q4 organic growth and EPS guidance, and the full-year adjusted EPS range, were achieved; adjusted results are non-GAAP.
- How much reported growth came from organic performance, acquisitions, divestitures and currency, especially in HST and FMT.
- Whether restructuring actions deliver sustained savings and how recurring restructuring costs affect reported margins.
- The final accounting for Tax Act provisions and the potential additional deferred tax liability associated with foreign subsidiaries.
- Cash conversion and working-capital trends, as receivables and inventory increased during the nine-month period.
- Acquisition performance and contingent consideration for FLI, along with available insurance coverage and developments in asbestos-related claims.