IDEX Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. IDEX is a diversified manufacturer of pumps, flow meters, precision fluidics and photonics, fire and rescue equipment, and other engineered products. It reports three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). About half of 2014 sales were outside the United States.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $2,147.8 million | $2,024.1 million |
| Gross profit / margin | $949.3 million / 44.2% | $873.4 million / 43.1% |
| Operating income / margin | $431.2 million / 20.1% | $395.5 million / 19.5% |
| Net income | $279.4 million | $255.2 million |
| Diluted EPS | $3.45 | $3.09 |
| Operating cash flow | $368.0 million | $401.5 million |
| Capital expenditures | $48.0 million | $31.5 million |
| Cash and cash equivalents, year-end | $509.1 million | $439.6 million |
| Total borrowings, year-end | $864.0 million | $773.9 million |
| Current ratio, year-end | 2.61 | 3.25 |
Sales rose 6%, comprising 5% organic growth and 1% contribution from acquisitions. GAAP diluted EPS increased 12%. Adjusted operating income was $444.9 million, adjusted operating margin 20.7%, adjusted net income $288.8 million, and adjusted diluted EPS $3.57; these non-GAAP measures exclude restructuring costs.
Operating cash flow declined 8.4%, mainly because of higher working-capital investment. Cash from operations exceeded capital expenditures. Cash used in investing activities was $72.3 million and cash used in financing activities was $184.1 million. The company paid $85.7 million in dividends and repurchased about 3.0 million shares for $222.5 million during 2014.
Segments and changes versus prior year
- FMT: Sales of $899.6 million, up 3%; operating income of $216.9 million, up 3%; margin was 24.1% versus 24.2%. Organic growth was 2%, with growth across platforms, partly offset by weakness and project delays in some overseas markets.
- HST: Sales of $752.0 million, up 5%; operating income of $153.0 million, up 12%; margin rose to 20.3% from 19.1%. Organic sales increased 4%; productivity and volume leverage supported profitability.
- FSDP: Sales of $502.7 million, up 13%; operating income of $130.5 million, up 27%; margin rose to 26.0% from 23.1%. Growth was organic and strongest in dispensing, banding, and fire suppression.
Consolidated gross margin improved 1.1 percentage points, attributed mainly to volume, favorable net material costs, and productivity. SG&A was 23.5% of sales, compared with 23.6% in 2013. Interest expense was nearly unchanged at $41.9 million; the effective tax rate increased to 28.8% from 27.7%.
In the fourth quarter, sales were $523.9 million versus $520.6 million a year earlier; operating income was $94.5 million versus $103.9 million, net income was $61.6 million versus $67.6 million, and diluted EPS was $0.77 versus $0.82. The quarter included most of the year’s restructuring costs.
Liquidity, debt, and capital resources
At year-end, IDEX had $509.1 million of cash, including $403.5 million held outside the United States, and $863.95 million of total borrowings. Its $700 million revolving credit facility had $115 million drawn and approximately $577.6 million of net available capacity. The company reported compliance with its debt covenants: leverage ratio of 1.69 to 1 against a maximum of 3.25 to 1, and interest coverage of 12.72 to 1 against a minimum of 3.0 to 1. Management expected cash, operating cash flow, and facility availability to meet planned needs for the next 12 months.
Approximately $98.5 million of 2.58% Senior Euro Notes matured in June 2015 and was classified as current; management expected to repay the principal using balance-sheet cash. The company’s 2020 and 2021 senior notes carried fixed rates of 4.5% and 4.2%. About 13% of debt was floating rate.
Outlook, commentary, and risks
- For 2015, management forecast 1% to 2% organic revenue growth and EPS of $3.65 to $3.75. It expected solid North American demand, continued softness in Europe, and volatility in Asia, describing the overall market environment as challenging.
- In April 2014, IDEX acquired Aegis Flow Technologies for approximately $25.4 million in cash. The acquisition contributed about 1% to annual sales growth alongside the prior-year FTL acquisition.
- The company recorded $13.7 million of restructuring expense in 2014, primarily severance and exit costs, covering 217 employees; severance payments were expected to be completed by year-end 2015. It also disclosed $2.5 million of long-lived asset impairment charges. No goodwill impairment was recorded in 2014.
- Goodwill and intangible assets were substantial: $1.321 billion and $271.2 million, respectively. The annual test found reporting-unit fair values above carrying amounts; IDEX Optics and Photonics had the narrowest disclosed cushion, at more than 15%.
- Key risks include economic and end-market weakness, foreign exchange movements, competition and pricing pressure, execution and integration of acquisitions, supply and material costs, and litigation or regulatory outcomes. Asbestos-related claims were mostly dismissed or settled for insignificant amounts; the company said it did not expect a material adverse effect and had not accrued for those claims beyond ordinary insurance deductibles.
- Approximately $683 million of foreign subsidiary earnings were considered indefinitely reinvested or to be repatriated when tax-effective; additional U.S. tax on distribution could be material. New revenue-recognition guidance was under evaluation for adoption in 2017.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Important facts for investors to verify
- Whether 2015 organic growth and EPS guidance were achieved, particularly given the stated softness in Europe and volatility in Asia.
- How operating cash flow and working capital trend after the 2014 cash-flow decline, and whether higher capital spending produces expected productivity benefits.
- Repayment or refinancing of the $98.5 million Euro-note maturity and the company’s debt, liquidity, and covenant position.
- Whether acquisitions and the remaining share-repurchase authorization support per-share growth without weakening balance-sheet flexibility.
- Changes in the IOP reporting unit’s performance and impairment headroom, along with pension funding effects from updated mortality assumptions and foreign-currency exposure.