IDEX CORP annual report, FY2013

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IDEX Corporation — FY2013 Form 10-K

Business context and reporting period

Annual report for the fiscal year ended December 31, 2013. IDEX sells specialized pumps, fluid-handling and metering systems, precision health and science technologies, and fire, rescue and diversified products through three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSD). Approximately 51% of 2013 sales were to customers outside the United States.

Financial results and position

  • Revenue: $2.024 billion, up 4% from 2012; organic sales grew 2%, with acquisitions contributing 2%.
  • Profitability: Gross profit was $873.4 million and gross margin was 43.1%, versus 41.1% in 2012. Operating income was $395.5 million, with a 19.5% margin, versus $128.2 million and 6.6% in 2012. Net income was $255.2 million versus $37.6 million; diluted EPS was $3.09 versus $0.45.
  • Cash flow and investment: Operating cash flow was $401.5 million, up 23.1%. Capital expenditures were $31.5 million, leaving operating cash flow less capital expenditures of approximately $370.0 million. Cash and cash equivalents increased to $439.6 million.
  • Liquidity: Working capital was $686.3 million and the current ratio was 3.3. Cash included $309.1 million held outside the United States.
  • Debt: Total borrowings were $773.9 million, down from $786.6 million. The company reported a 1.63:1 leverage ratio and 11.73:1 interest coverage ratio and was in compliance with its financial covenants. Its $700 million revolving facility had approximately $681.3 million of net borrowing capacity.
  • Segments: FMT sales were $871.8 million, operating income $211.3 million, and margin 24.2%; HST sales were $714.7 million, operating income $136.7 million, and margin 19.1%; FSD sales were $445.0 million, operating income $102.7 million, and margin 23.1%.

Material changes versus prior periods

  • Reported 2013 earnings rebounded sharply from 2012, when IDEX recorded $198.5 million of impairment charges and $32.5 million of restructuring expenses. The comparison therefore overstates the improvement in underlying operations; adjusted EBITDA rose 8% to $474.7 million, and its margin increased from 22.4% to 23.5%.
  • 2013 sales growth included acquisitions, including FTL, acquired in March for $34.5 million. HST sales rose 3%, but organic sales declined 2%; FMT sales rose 5% with 4% organic growth, and FSD sales rose 2% with 1% organic growth.
  • Fourth-quarter 2013 sales were $520.6 million, operating income $103.9 million, net income $67.6 million, and diluted EPS $0.82. Fourth-quarter 2012 included the major impairment charge and reported an operating loss of $125.6 million and net loss of $119.0 million.
  • IDEX repurchased 2.9 million shares for $167.5 million in 2013 and declared dividends of $0.89 per share, up from $0.80 in 2012. A further $300 million of repurchase authorization was approved in November.

Outlook, commentary, risks and unusual items

  • Guidance: Management forecast 3%–5% organic revenue growth and EPS of $3.33–$3.43 for 2014. Management described conditions as marginally better than a year earlier but uneven: North American demand was strong, Europe was stabilizing, emerging markets were growing, and Asia remained uneven.
  • Key risks: Economic or end-market slowdowns, competition and pricing pressure, foreign currency movements, international operating risks, supplier and material costs, and the ability to develop products and integrate acquisitions. Order backlogs are typically only one to one-and-a-half months of production.
  • Assets and impairment: Goodwill and intangible assets totaled approximately $1.66 billion at year-end. IDEX reported no goodwill impairment in its 2013 annual test; the IOP reporting unit’s fair value was more than 10% above carrying value, but remained relatively close after its 2012 write-down. The company also reported $2.7 million of long-lived asset impairment charges in 2013.
  • Legal and tax matters: Asbestos-related claims remain outstanding; the company said most resolved claims were dismissed without payment and insurance had generally covered settlements and legal costs, but future insurance availability is uncertain. No material adverse effect was currently expected and no provision was recorded beyond ordinary insurance deductibles. IDEX considers $597 million of undistributed foreign earnings permanently invested; additional U.S. taxes on repatriation could be material.
  • Other items: A $4.1 million benefit from settling Matcon contingent consideration reduced 2013 SG&A. The company’s independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.

Investor facts to verify

  • How much of future growth and earnings depends on acquisitions versus organic demand, particularly given HST’s 2013 organic sales decline?
  • Whether margins and cash conversion remain strong as the comparison with 2012 impairment and restructuring charges fades.
  • Whether IOP’s relatively limited impairment cushion is maintained, and whether assumptions supporting goodwill and intangible asset values remain reasonable.
  • How share repurchases, dividends, acquisitions and the 2015 maturity of the senior Euro notes affect cash, debt and capital allocation.
  • Potential exposure from asbestos claims, uncertain tax positions, and taxes that may arise if foreign earnings are repatriated.