IDEX Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. IDEX designs and sells engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $514.9M | $546.7M | $1,017.1M | $1,090.7M |
| Gross margin | 45.0% | 44.1% | 45.0% | 44.5% |
| Operating income | $109.9M | $112.1M | $211.7M | $225.9M |
| Operating margin | 21.3% | 20.5% | 20.8% | 20.7% |
| Net income | $69.6M | $71.8M | $135.5M | $146.3M |
| Diluted EPS | $0.89 | $0.88 | $1.72 | $1.79 |
| EBITDA (non-GAAP) | $128.2M | $131.4M | $250.2M | $265.3M |
| EBITDA margin (non-GAAP) | 24.9% | 24.0% | 24.6% | 24.3% |
Q2 sales declined 6%: organic sales fell 2%, acquisitions contributed 1%, and foreign currency translation reduced sales 5%. For the first half, sales declined 7%, with organic sales down 3%, acquisitions adding 1%, and currency reducing sales 5%. Management attributed improved gross and operating margins primarily to productivity and benefits from prior-year restructuring, offset in part by lower sales volume. H1 operating cash flow was $148.4M, down 11% year over year; capital expenditures were $23.8M.
Segment results
- FMT: Q2 sales $215.3M, down 5%; operating income $51.9M versus $55.6M. Six-month sales $433.5M, down 4%; operating income $107.8M versus $112.0M. Energy, agriculture, and North American oil and gas/petrochemical demand were weak; water-related sales improved.
- HST: Q2 sales $188.4M, up 2%; operating income $42.1M versus $36.1M. Six-month sales $367.5M, down 1%; operating income $79.5M versus $72.4M. Growth in scientific fluidics and sealing solutions was partly offset by weakness in optics, industrial distribution, and China.
- FSDP: Q2 sales $111.9M, down 18%; operating income $31.5M versus $36.0M. Six-month sales $218.6M, down 20%; operating income $58.6M versus $75.6M. Comparisons were affected by prior-year project fulfillment, weaker energy-related demand, and lower municipal and power-related activity.
Balance sheet, liquidity, and capital allocation
At June 30, 2015, cash and cash equivalents were $311.5M, including $254.2M held outside the U.S.; working capital was $625.9M and the current ratio was 3.0 to 1. Total borrowings were $875.2M, comprising $225.0M drawn on the revolving facility and fixed-rate senior notes; cash was $197.6M lower than at year-end, principally reflecting acquisitions, debt repayment, repurchases, and exchange-rate effects. The company reported $467.4M of net available capacity on its $700M revolving facility and was compliant with its financial covenants: leverage ratio 1.64 to 1 versus a 3.50 maximum, and interest coverage 12.56 to 1 versus a 3.0 minimum.
H1 investing cash outflow was $197.3M, including $173.3M for acquisitions. Financing cash outflow was $126.1M, including $113.6M of common-stock purchases and repayment of the $88.4M-equivalent 2.58% Senior Euro Notes at maturity. IDEX repurchased 1.5M shares for $113.3M in H1; $432.2M remained authorized. Dividends declared were $0.32 per share. Management said cash, operating cash flow, and facility capacity should cover expected 2015 operating needs, capital spending, debt interest, benefit funding, repurchases, and dividends.
Material developments, outlook, and risks
- In May and June, IDEX acquired Novotema and Alfa for approximately $60.7M and $112.6M, respectively, funded with cash on hand. The businesses have approximately $33M each in annual revenue. Purchase-price allocations remained preliminary; the acquisitions added $94.5M of goodwill and $64.7M of intangible assets.
- After quarter-end, IDEX announced the acquisition of CiDRA Precision Services for approximately $19.5M, plus an earn-out of up to $5.5M. Its annual revenue is approximately $9M.
- Management forecast Q3 2015 diluted EPS of $0.88–$0.90 and full-year 2015 diluted EPS of $3.50–$3.60. This outlook is forward-looking and subject to the risks described in the filing.
- On July 22, IDEX announced additional restructuring actions for Q3 and Q4, with expected expense not to exceed $8M and completion by year-end.
- Demand risks cited include depressed oil and energy prices, soft agricultural markets, weaker industrial activity in North America and China, reduced municipal spending in some markets, and foreign-exchange headwinds. A 50-basis-point change in floating rates was estimated to affect annual interest expense and cash flows by approximately $1.1M.
- The company is involved in asbestos-related lawsuits. Most resolved claims were dismissed without payment or settled for insignificant amounts, and insurance has covered most historical settlement and legal costs; future insurance coverage cannot be assured. IDEX reported no expected material effect from these or other ordinary-course legal proceedings.
- H1 other comprehensive loss was $29.0M, principally reflecting a $32.9M unfavorable cumulative currency translation adjustment. The filing reports effective tax rates of 29.4% for Q2 and 29.2% for H1.
Important facts for investors to verify
- Whether the EPS outlook is achieved, and how sales, margins, and organic demand evolve, particularly in FSDP, energy-related markets, agriculture, and China.
- Integration performance and final purchase-price allocations for Novotema and Alfa, and the closing terms and results of the CiDRA acquisition.
- Execution, timing, and actual costs of the announced restructuring, compared with the stated maximum of $8M.
- Cash generation, use of the revolving facility, continued covenant compliance, and the effects of currency and floating interest rates.
- Share repurchases and dividends relative to acquisition spending and available liquidity; also monitor the uncertain availability of insurance for asbestos claims.