IDEX CORP quarterly report, Q2 FY2014

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IDEX Corporation — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. IDEX designs and sells fluid and metering, health and science, and fire, safety and diversified products. Figures below are in U.S. dollars; financial statement amounts are unaudited.

Financial performance

  • Q2 revenue: $546.7 million, up 5% year over year; organic sales increased 4%, with a 1% benefit from currency translation.
  • Q2 earnings: Operating income was $112.1 million, up 13%; net income was $71.8 million, up 15%; diluted EPS was $0.88 versus $0.76, up 16%.
  • Q2 margins: Gross margin rose to 44.1% from 43.0%; operating margin rose to 20.5% from 19.2%. EBITDA, a non-GAAP measure, was $131.4 million, or 24.0% of sales, versus $119.1 million, or 23.0%.
  • First-half revenue and earnings: Sales were $1.091 billion, up 8% (6% organic); operating income was $225.9 million, up 16%; net income was $146.3 million, up 18%; diluted EPS was $1.79 versus $1.49, up 20%.
  • First-half margins: Gross margin increased to 44.5% from 42.9%, and operating margin to 20.7% from 19.2%. EBITDA was $265.3 million, or 24.3% of sales, versus $234.9 million, or 23.2%.
  • Cash flow: First-half operating cash flow was $166.2 million, down from $181.5 million. The company attributed the decline primarily to higher federal tax payments and weaker working-capital performance, partly offset by higher earnings. Capital expenditures were $23.3 million, compared with $15.8 million.
  • Liquidity and debt: Cash was $485.3 million, including $362.6 million held outside the U.S. Working capital was $658.2 million and the current ratio was 2.5. Total borrowings were $816.9 million; the $110.5 million 2.58% Senior Euro Notes are classified as current and mature in June 2015. The $700 million revolving facility had $637.2 million of net available capacity. The company reported compliance with debt covenants.

Changes and business drivers

  • Fire & Safety/Diversified Products led Q2 growth: segment sales rose 19% (17% organic), and operating margin increased to 26.4% from 20.7%. Results benefited from volume leverage, productivity, strong demand in several businesses, and a prior-year facility-disposal charge.
  • Health & Science Technologies Q2 sales increased 3% (1% organic), with operating margin improving to 19.5% from 19.1%. Fluid & Metering Technologies sales were nearly flat, with organic sales down 2%; operating margin declined to 24.6% from 24.9%, partly due to acquisition-related charges.
  • Management cited volume leverage and productivity as drivers of consolidated margin improvement. Q2 gross margin also benefited from productivity; first-half margin gains reflected higher volume and prior structural cost actions.
  • IDEX acquired Aegis Flow Technologies on April 28 for approximately $26 million in cash, funded through the revolving facility. Aegis had approximately $15 million in annual revenue. The acquisition contributed to goodwill and intangible assets; purchase-price allocation remained subject to evaluation.
  • During the first half, IDEX repurchased approximately 1.2 million shares for $85.7 million and declared dividends of $0.56 per share. Remaining repurchase authorization was approximately $282.2 million at June 30.

Outlook, risks and contingencies

  • Guidance: Management projected Q3 2014 diluted EPS of $0.83–$0.85 and raised full-year 2014 diluted EPS guidance to $3.50–$3.55, with expected full-year organic revenue growth of 5%–6%.
  • Management expected cash, operating cash flow and available revolver capacity to cover operating needs, planned capital expenditures, debt service, pension funding, repurchases and dividends for the remainder of 2014. It also retained the option to borrow for suitable acquisitions.
  • Key business sensitivities include industrial activity and customer capital spending, foreign exchange, and project timing. The filing describes delays in chemical and pump projects, slower North American end markets for Sealing Solutions, and prolonged project decisions affecting Rescue.
  • Market risks include currency movements and interest rates. Approximately 7% of debt had floating rates; management estimated a 50-basis-point rate move would change annual interest expense and cash flow by about $0.1 million.
  • The company faced asbestos-related personal-injury lawsuits involving components supplied by third parties. Most resolved claims had been dismissed without payment or settled for insignificant amounts, and insurance had covered most settlements and legal costs to date, subject to deductibles. The company stated it could not predict future insurance availability and did not expect a material adverse effect. Other ordinary-course legal proceedings were also not expected to be material.
  • Expected 2014 contributions were $4.1 million to defined benefit plans and $0.9 million to other postretirement plans; $2.7 million had been contributed by June 30. No interim goodwill impairment trigger was identified, although the IDEX Optics and Photonics reporting unit’s fair value was only about 10% above carrying value at the latest annual test.

Important facts for investors to verify

  • Whether the 5%–6% organic growth and $3.50–$3.55 full-year EPS outlook was achieved, and the assumptions underlying the guidance.
  • The durability of Fire & Safety/Diversified Products’ exceptional growth and margin gains, including the contribution from large orders and the prior-year facility charge.
  • Cash conversion and working-capital trends, given operating cash flow declined despite higher earnings.
  • Refinancing or repayment plans for the $110.5 million Senior Euro Notes due June 2015, and continued covenant compliance.
  • Progress integrating Aegis and the final acquisition purchase-price allocation; also monitor the Optics and Photonics unit’s headroom against impairment.
  • Developments in asbestos claims and insurance coverage, as well as pension funding and foreign-currency exposure.