IDEX Corporation — Q2 2010 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2010; financial statements are unaudited. IDEX operates in Fluid & Metering Technologies, Health & Science Technologies, Dispensing Equipment, and Fire & Safety/Diversified Products. The company serves global industrial and other niche markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $378.5 | $336.5 | $734.1 | $663.1 |
| Gross profit | $154.8 | $131.1 | $302.4 | $254.3 |
| Gross margin | 40.9% | 39.0% | 41.2% | 38.4% |
| Operating income | $62.8 | $46.7 | $120.7 | $85.9 |
| Operating margin | 16.6% | 13.9% | 16.4% | 13.0% |
| Net income | $40.4 | $27.9 | $77.0 | $50.5 |
| Diluted EPS | $0.49 | $0.34 | $0.94 | $0.62 |
Second-quarter sales increased 13% year over year: 11% organic growth, 3% from Seals, and a 1% unfavorable foreign-currency effect. First-half sales rose 11%: 9% organic growth, 1% from Seals, and 1% favorable currency translation. Management attributed margin improvement principally to higher volume, product mix, and restructuring-related cost reductions. Q2 SG&A was $91.0 million (24.0% of sales), versus $81.1 million (24.1%) a year earlier.
Q2 segment sales and operating income were: Fluid & Metering Technologies $174.5 million and $30.2 million; Health & Science Technologies $100.5 million and $20.4 million; Dispensing Equipment $41.1 million and $9.7 million; and Fire & Safety/Diversified Products $64.0 million and $13.9 million. Dispensing sales fell 10% year over year amid continued North American and European softness; other segments reported sales growth.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $95.7 million, up from $72.9 million. Capital expenditures were $17.5 million, versus $11.0 million; investing cash flow included $51.3 million for the Seals acquisition. Cash at June 30 was $159.1 million, compared with $73.5 million at year-end.
- At June 30, working capital was $339.9 million and the current ratio was 2.4 to 1. Total borrowings were $470.4 million, up from $400.1 million at December 31, 2009. The $600 million revolving facility had $275.6 million drawn and approximately $317.3 million of net availability; it expires December 21, 2011. The Term Loan had $90.0 million outstanding, including $7.5 million classified as short-term.
- IDEX issued €81.0 million ($96.8 million) of 2.58% senior notes due June 9, 2015. Management said proceeds partly repaid euro-denominated facility debt, with the remainder for ongoing business activities. A $300 million forward-starting interest-rate contract was entered into in anticipation of expected fourth-quarter 2010 debt issuance.
- Management stated that operating cash flow and available credit were expected to cover the next 12 months’ operating needs, interest, required repayments, planned capital expenditures, dividends, and any authorized share repurchases.
Material changes, outlook, and risks
- Seals was acquired on April 15 for $54.0 million total consideration, including $51.3 million cash and assumed debt-related items. The preliminary allocation included $29.4 million goodwill and $17.6 million intangible assets. Seals contributed to Health & Science Technologies; its results were included from the acquisition date.
- On July 21, 2010, after quarter-end, IDEX acquired OBL for approximately $16.8 million cash. OBL will operate in Fluid & Metering Technologies.
- The 2009 restructuring initiative had recorded costs of $2.9 million in the first half, versus $5.5 million in the prior-year period. It had covered reductions involving more than 600 employees. Management expected completion by year-end 2010 and approximately $3.0 million of additional costs for the remainder of 2010.
- The forward-starting rate contract had a $26.4 million fair-value liability at June 30, recorded in accrued expenses. IDEX reported a $26.8 million quarterly loss recognized in other comprehensive income on interest-rate agreements; approximately $7.0 million in accumulated other comprehensive income was expected to be reclassified to earnings over the next 12 months as hedged transactions occurred. Management estimated that a 50-basis-point move on the remaining $130.4 million of floating-rate debt would change annual interest expense and cash flows by about $0.7 million.
- Asbestos-related lawsuits remain pending against IDEX and six subsidiaries. Most resolved claims were dismissed without payment or settled for insignificant amounts, and insurance historically covered most settlements and legal costs; the company cautioned that future insurance coverage cannot be predicted. No provision was recorded beyond ordinary insurance deductibles, and management did not expect a material adverse effect. Other ordinary-course proceedings were also not expected to be material.
- Management identified economic and industrial activity, currency movements, and the ability to integrate acquisitions profitably as factors that could affect results. It gave no specific earnings or revenue guidance in the supplied filing text. The quarter’s results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether organic growth and margin gains persist, particularly in Dispensing Equipment and in domestic markets.
- Seals and OBL integration, acquisition-related returns, and the final Seals purchase-price allocation.
- Debt maturities, covenant compliance, refinancing plans, and the expected fourth-quarter 2010 debt issuance associated with the forward rate contract.
- Remaining restructuring costs and whether the initiative reaches expected completion by year-end 2010.
- Potential asbestos-claim exposure and continued availability of insurance coverage.