IDEX Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited results. IDEX manufactures fluid and metering technologies, health and science technologies, and fire, safety and diversified products.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $594.5 million | $622.2 million | Down 4%; organic sales down 5% |
| Gross profit / margin | $272.0 million / 45.7% | $283.8 million / 45.6% | Profit down 4%; margin up 10 bps |
| Operating income / margin | $139.9 million / 23.5% | $147.8 million / 23.8% | Income down 5% |
| Net income | $102.0 million | $110.3 million | Down 7% |
| Diluted EPS | $1.33 | $1.44 | Down 8% |
| EBITDA / EBITDA margin | $158.4 million / 26.6% | $166.6 million / 26.8% | Down approximately 5% |
| Operating cash flow | $84.8 million | $88.7 million | Down $3.9 million |
| Free cash flow | $72.0 million | $75.8 million | Down $3.8 million |
Gross margin improvement reflected price, productivity and cost controls, offset by lower volume. Operating margin declined mainly because of lower volume and the dilutive impact of the Velcora acquisition.
Segments: Fluid & Metering Technologies sales were $226.9 million, down 6%, with a 29.4% operating margin versus 29.6%. Health & Science Technologies sales were $224.1 million, down 1%, with a 23.5% margin versus 24.0%. Fire & Safety/Diversified Products sales were $144.3 million, down 8%, with a 26.4% margin versus 25.8%.
Cash, debt and liquidity: Cash and cash equivalents were $569.2 million at quarter-end, versus $632.6 million at year-end 2019. Total borrowings were approximately $1.000 billion, including $150 million drawn on the revolving facility; the company had $642.2 million of net available revolving capacity. Management reported over $1.2 billion of liquidity, gross leverage of 1.44x and interest coverage of 16.20x. The current ratio was 3.5x and working capital was $922.2 million. The $300 million of 4.5% notes due December 2020 remained classified as long-term because IDEX stated it had the ability and intent to refinance or repay them using revolving capacity. Capital expenditures were $12.8 million; the $120.8 million Flow MD acquisition was funded with cash on hand.
Material changes and notable items
- Sales declined across all three segments. The company cited industrial and energy softness, lower oil prices, weaker project activity and, in some markets, COVID-19-related customer shutdowns. Acquisitions contributed 2% to consolidated sales growth, while foreign currency translation reduced sales by 1%.
- On February 28, 2020, IDEX acquired Flow Management Devices for $120.8 million in cash. The preliminary allocation included $63.4 million of goodwill and $49.5 million of intangible assets.
- Q1 investing cash outflow rose to $133.7 million, primarily due to the Flow MD purchase. Financing cash outflow was $7.8 million; it included $108.9 million of share repurchases and $38.7 million of dividends, offset in part by $150 million of revolving-facility borrowings.
- The board authorized an additional $500 million of share repurchases in March. Remaining authorization at March 31 was $713.4 million.
- Currency translation reduced other comprehensive income by $26.5 million. A $1.6 million net other expense included a loss on available-for-sale securities and a pension settlement charge. COVID-related interim testing of definite-lived intangibles at one business found no impairment.
Outlook, risks and contingencies
- Management expected Q2 2020 sales to be down 15%–25%, based on information available when the filing was issued. This is an expectation, not a full-year forecast; the filing provides no clear full-year earnings guidance.
- COVID-19 had caused temporary facility closures and reduced operating capacity in some locations, though most sites were considered essential and some closed facilities had reopened. Management cited potential further effects on demand, customers’ ability to pay, suppliers, production, shipments, cash flow and access or cost of financing.
- Management believed cash, operating cash flow and revolving capacity would fund operations, planned capital expenditures, debt service, pension funding and dividends for the remainder of 2020, while cautioning that the pandemic’s effects and future financing availability were uncertain.
- The $800 million revolving facility matures May 31, 2024. IDEX was in compliance with its financial covenants at quarter-end; the stated minimum interest coverage ratio is 3.00x and maximum leverage ratio is 3.50x, with a conditional acquisition-related step-up option.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company also disclosed asbestos-related lawsuits; most resolved claims had been dismissed or settled for immaterial amounts, and insurance had historically covered most settlements and legal costs, subject to deductibles. Future insurance coverage is uncertain.
Important facts for investors to verify
- Whether Q2 sales tracked the disclosed 15%–25% decline expectation and how operating conditions, facility capacity and supply chains evolved.
- Progress on refinancing or repaying the $300 million notes due December 2020, and changes in borrowing, liquidity and covenant headroom.
- Whether lower volumes, acquisition-related amortization and currency movements affected margins, earnings and cash conversion in subsequent quarters.
- Flow MD’s performance and the final purchase-price allocation, which was preliminary at quarter-end.
- Subsequent share repurchases, dividend commitments and any material developments in legal, insurance or impairment matters.