IDEX Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with the three months ended March 31, 2010 unless stated otherwise. IDEX designs and manufactures products across fluid and metering technologies, health and science technologies, dispensing equipment, and fire, safety and diversified products. Financial amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $427.1 million, up 20%; management attributed the increase to 12% organic growth, 7% acquisitions and 1% favorable currency translation.
- Profitability: Gross profit was $178.7 million, up 21%; gross margin improved to 41.8% from 41.5%. Operating income rose to $77.7 million from $57.9 million, and operating margin increased to 18.2% from 16.3%. Net income was $48.0 million versus $36.6 million. Diluted EPS was $0.57 versus $0.45.
- Cash flow: Operating cash flow was $29.1 million, compared with $27.1 million. Cash purchases of property, plant and equipment were $11.4 million. Investing activities used $63.9 million, including $50.4 million for acquisitions. Financing activities used $11.9 million. Cash declined $39.6 million to $195.5 million.
- Liquidity: Working capital was $375.3 million and the current ratio was 2.1 to 1. Current assets were $704.0 million and current liabilities $328.7 million.
- Debt: Total borrowings were $518.2 million, including $102.8 million classified as current. Interest expense increased to $6.5 million from $3.4 million, principally due to higher debt levels. IDEX reported compliance with its financial covenants at March 31.
- Other balance-sheet items: Total assets were $2.465 billion, total liabilities $992.4 million, and shareholders’ equity $1.473 billion. Goodwill was $1.246 billion.
Changes versus prior period and segment results
- Fluid & Metering Technologies: Sales increased 17% to $195.3 million, with 15% organic growth and 2% acquisition growth. Operating margin rose to 20.6% from 18.5%.
- Health & Science Technologies: Sales increased 43% to $133.6 million, reflecting 19% organic growth and 24% acquisition growth. Operating margin rose to 23.3% from 21.1%.
- Dispensing Equipment: Sales decreased 4% to $32.2 million, including a 5% organic decline. Operating margin declined to 17.5% from 19.8%; management cited lower volume and North American market softness.
- Fire & Safety/Diversified Products: Sales increased 5% to $66.7 million; operating margin increased to 23.2% from 20.6%.
- SG&A increased to $101.0 million from $87.8 million, but declined as a share of sales to 23.6% from 24.7%. The 2011 quarter included $2.6 million of acquisition-related transaction costs and fair-value inventory charges; $1.6 million was recorded in SG&A and $1.0 million in cost of sales. The prior-year quarter included $1.9 million of restructuring expense; none was recorded in Q1 2011.
- The effective tax rate fell to 31.8% from 33.1%. Other expense was $0.9 million, versus other income of $0.3 million, primarily reflecting foreign-currency transaction losses.
Outlook, risks and unusual items
- Management said current cash and expected 2011 operating cash generation should be sufficient for operating needs, capital expenditures, interest, required debt repayments, benefit-plan funding and dividends. No specific earnings or revenue guidance is provided in the filing text.
- The $600 million revolving credit facility and $82 million term loan mature in December 2011. Management intended to enter a new revolving facility during 2011 if acceptable terms were available; otherwise, it expected cash and operating cash flow to be adequate to repay the balances.
- Two acquisitions closed during the quarter: Advanced Thin Films for $34.5 million, including contingent consideration, and Microfluidics for $18.6 million in cash. Purchase-price allocations remained subject to finalization. Management identified the ability to integrate and operate acquired businesses profitably as a risk.
- The company cited exposure to foreign-exchange and interest-rate movements and dependence on industrial activity, capacity utilization and customer capital spending. Its existing revolving facility expires in 2011, though substantial availability remained at quarter-end.
- IDEX and eight subsidiaries faced asbestos-related personal-injury claims. The company said most resolved claims had been dismissed without payment, settlements and legal costs had generally been covered by insurance subject to deductibles, and it did not expect a material adverse effect; however, future insurance coverage could not be assured. Other ordinary-course legal proceedings were not expected to be material.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and margin growth is sustainable organic growth versus acquisition contribution, particularly in Health & Science Technologies.
- Whether the 2011 credit-facility refinancing is completed on acceptable terms and how the current portion of debt is repaid or refinanced.
- Whether working-capital investment and acquisition spending affect cash generation in subsequent quarters.
- How the acquired businesses perform and whether final purchase-price allocations or contingent consideration change reported results.
- Whether Dispensing Equipment’s weakness persists and whether asbestos claims remain covered by insurance.