IDEX Corporation — Q3 2013 Form 10-Q
Business context and period. IDEX designs and sells specialized products across Fluid & Metering Technologies, Health & Science Technologies, and Fire & Safety/Diversified Products. This unaudited filing covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $490.6 million | $479.9 million | $1,503.5 million | $1,463.4 million |
| Gross margin | 43.1% | 40.6% | 43.0% | 41.1% |
| Operating income / margin | $97.4 million / 19.8% | $80.6 million / 16.8% | $291.6 million / 19.4% | $253.8 million / 17.3% |
| Net income | $63.8 million | $50.1 million | $187.7 million | $156.6 million |
| Diluted EPS | $0.78 | $0.60 | $2.27 | $1.87 |
| Operating cash flow | Not separately provided | Not separately provided | $299.9 million | $240.5 million |
For the first nine months, capital expenditures were $23.1 million; operating cash flow less capital expenditures was approximately $276.8 million. Cash was $399.8 million at September 30, 2013, up from $318.9 million at year-end 2012. Total borrowings were $784.4 million, leaving approximately $384.6 million of net debt. Working capital was $641.7 million and the current ratio was 3.1 to 1. The $700 million revolving facility had $670.9 million of net available capacity. IDEX reported compliance with its debt covenants; leverage was 1.75 to 1 against a maximum of 3.25 to 1.
Changes versus prior periods
- Q3 sales rose 2%; organic sales increased 1%, with acquisitions contributing 1%. Nine-month sales increased 3%, including 1% organic growth and 2% from acquisitions.
- Q3 operating income increased 21% and net income 27%; nine-month operating income increased 15% and net income 20%. Higher volume, productivity and prior cost actions supported results.
- Comparisons benefited from the absence of restructuring expenses recorded in 2012: $7.1 million in Q3 and $14.6 million in the first nine months.
- Q3 segment results were mixed: Fluid & Metering sales rose 7% with a 24.4% operating margin; Health & Science sales rose 1% but organic sales fell 2%, with a 20.6% margin; Fire & Safety/Diversified sales fell 6%, with a 21.9% margin.
- Health & Science’s nine-month sales included acquisition growth, while organic sales declined 4%. Fire & Safety/Diversified nine-month sales declined slightly and operating income was broadly flat.
- Share repurchases totaled 2.5 million shares for $139.9 million in the first nine months. Remaining authorization at September 30 was $95.4 million.
Outlook, commentary and risks
Management projected Q4 2013 diluted EPS of $0.78–$0.80 and raised full-year diluted EPS guidance to $3.05–$3.07, assuming approximately 2% organic revenue growth for 2013. Management said available cash, operating cash flow and revolver capacity should cover operating needs, planned capital spending, debt service, benefit contributions, authorized repurchases and dividends through 2014.
The company cited economic and industrial activity, customer capacity utilization and capital spending, foreign-exchange movements, and end-market demand as factors that could affect results. Q3 weakness included lower organic sales in Health & Science and lower volume and unfavorable mix in Fire & Safety/Diversified. The company also noted foreign-currency exposure; approximately 3% of debt was floating-rate at quarter-end.
IDEX acquired FTL Seals Technology in March 2013 for approximately $34.5 million in cash, adding about $22.5 million in annual revenue. Goodwill and intangible assets recognized were approximately $18.0 million and $13.0 million, respectively. The initial purchase-price allocation remained subject to evaluation.
The company is named in asbestos-related injury lawsuits involving components obtained from third-party suppliers. It reported that most resolved claims were dismissed without payment and others settled for insignificant amounts, but said future insurance coverage is uncertain. Management did not expect these claims or other ordinary-course legal proceedings to have a material adverse effect. A $4.9 million contingent payment related to the Matcon acquisition was accrued and expected to be paid in the first half of 2014.
Investor verification priorities
- Confirm whether the raised EPS and 2% organic-growth outlook was achieved; it is management guidance, not a reported result.
- Assess the sustainability of margin improvement, including how much reflects operating improvements versus the absence of 2012 restructuring charges.
- Track organic demand in Health & Science and Fire & Safety/Diversified, and the contribution and integration of acquisitions.
- Review cash deployment, including the substantial share repurchases, dividends, acquisition spending and remaining repurchase authorization.
- Monitor debt maturities and covenant headroom, especially the €109.5 million equivalent Senior Euro Notes due June 2015.
- Check developments in asbestos litigation and the availability of insurance coverage.