IDEX Corporation — Q3 2015 Form 10-Q
Business and period: IDEX designs and sells specialized fluid and metering, health and science, and fire, safety and diversified products. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $503.8 million | $533.2 million | $1,520.9 million | $1,623.9 million |
| Gross margin | 44.3% | 44.0% | 44.8% | 44.4% |
| Operating income, GAAP | $121.8 million | $110.8 million | $333.5 million | $336.8 million |
| Net income | $79.5 million | $71.4 million | $215.0 million | $217.8 million |
| Diluted EPS | $1.02 | $0.88 | $2.75 | $2.68 |
| Operating cash flow | Not separately stated | Not separately stated | $261.8 million | $266.6 million |
Q3 sales fell 6% year over year: organic sales declined 4%, acquisitions contributed 2%, and foreign exchange reduced sales 4%. Nine-month sales also declined 6%, reflecting a 3% organic decline, a 1% favorable acquisition impact, and 4% unfavorable currency translation. Q3 GAAP operating income included an $18.1 million gain from selling the Ismatec product line and $4.7 million of restructuring expense. Excluding these items, adjusted operating income was $108.5 million, down 2%, and adjusted EPS was $0.89, up 1%. For the first nine months, adjusted operating income was $320.1 million, down 5%, and adjusted EPS was $2.62, down 2%.
Q3 gross margin improved 30 basis points, primarily from productivity and restructuring benefits, partly offset by acquisition-related inventory fair-value charges. GAAP operating margin was 24.2% in Q3 and 21.9% for the nine-month period; management reported adjusted margins of 21.5% and 21.0%, respectively, after excluding the gain and restructuring costs.
Segment results
| Segment | Q3 sales change | Q3 operating income | Nine-month sales change | Nine-month operating income |
|---|---|---|---|---|
| Fluid & Metering Technologies | Down 5% | $46.9 million, down from $54.8 million | Down 4% | $154.7 million, down from $166.8 million |
| Health & Science Technologies | Down 3% | $38.4 million, down from $42.2 million | Down 2% | $117.9 million, up from $114.6 million |
| Fire & Safety/Diversified Products | Down 11% | $32.5 million, up from $31.4 million | Down 17% | $91.2 million, down from $107.0 million |
Management cited weakness in energy and oil-and-gas markets, lower industrial activity, depressed agricultural conditions, softer Asian markets, and reduced large-project sales. Strength included scientific fluidics demand, municipal water spending, and productivity and favorable product mix in parts of Fire & Safety/Diversified Products.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $306.5 million at September 30, 2015, including $270.0 million held outside the United States. Working capital was $582.2 million and the current ratio was 2.8 to 1.
- Operating cash flow was $261.8 million for the first nine months, down $4.8 million year over year. Capital expenditures were $32.6 million. Investing cash outflow was $197.5 million, mainly reflecting acquisitions; financing cash outflow was $235.6 million.
- Total borrowings were $853.3 million, versus $864.0 million at year-end 2014. The company repaid $88.4 million of 2.58% Senior Euro Notes at maturity and had $203.0 million outstanding under its revolving facility.
- The $700 million revolving facility matures in June 2020. Available borrowing capacity, net of letters of credit, was approximately $489.7 million. IDEX reported compliance with its financial covenants; leverage was 1.58 to 1 against a 3.50-to-1 maximum, and interest coverage was 13.01 to 1 against a 3.0-to-1 minimum.
- IDEX repurchased 2.4 million shares for $179.4 million during the nine months and declared $0.96 per share in dividends. Remaining repurchase authorization was approximately $366.0 million.
Outlook, risks and notable items
- Management forecast Q4 2015 adjusted EPS of $0.88–$0.91 and full-year adjusted EPS of $3.50–$3.53. Guidance assumed Q4 organic sales down 1%–2% and full-year organic sales down 2%–3%.
- In 2015, IDEX acquired Novotema, Alfa Valvole and CiDRA Precision Services for aggregate net assets acquired of approximately $197.9 million. The CPS acquisition includes contingent consideration estimated at $4.7 million, potentially ranging from zero to $5.5 million, based on operating results through June 2016.
- The Ismatec product line sale generated $27.7 million cash proceeds and an $18.1 million pretax gain; associated income tax expense was $4.8 million.
- A restructuring initiative covered 90 employees and resulted in $4.7 million of Q3 expense. Total expense for the initiative was not expected to exceed $10 million; completion was expected by year-end, with severance payments expected by the end of 2016.
- Key exposures include economic and industrial demand, energy prices, foreign currency movements, and interest rates. Approximately 24% of debt was floating rate; management estimated a 50-basis-point rate change would affect annualized interest expense and cash flows by about $1.0 million.
- IDEX disclosed asbestos-related lawsuits. Most resolved claims were dismissed without payment, and historical settlements and legal costs were largely insurance-covered, but future insurance availability is uncertain. The company did not expect these claims or other ordinary-course litigation to have a material adverse effect.
- Management said cash, operating cash flow and revolver availability were sufficient for expected operating needs, capital expenditures, debt service, pension funding, repurchases and dividends through the rest of 2015. Forward-looking statements remain subject to risks described in the company’s filings.
Important facts for investors to verify
- Whether organic demand stabilizes, particularly in energy, industrial, agricultural and large-project markets, and whether foreign exchange continues to weigh on reported sales.
- How much of reported earnings and margins reflects the Ismatec gain, restructuring costs and acquisition inventory charges; compare GAAP results with management’s adjusted measures.
- Acquisition performance and final purchase-price allocations, including CPS earn-out outcomes and the contribution of the three 2015 acquisitions.
- Cash conversion, debt levels, covenant headroom and the funding implications of planned repurchases, dividends and acquisitions.
- Progress against the Q4 and full-year 2015 adjusted EPS and organic-sales guidance, which is management’s outlook rather than a guarantee.
- Any change in asbestos-claim insurance coverage or other legal contingencies; the filing provides no quantified estimate of potential future asbestos costs.