IDEX Corporation — Q2 2012 Form 10-Q
Business context and reporting period. IDEX designs and sells engineered products across Fluid & Metering Technologies, Health & Science Technologies, and Fire & Safety/Diversified Products. This unaudited filing covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $494.1m | $453.8m | $983.6m | $880.9m |
| Gross profit | $203.1m | $184.8m | $406.0m | $363.5m |
| Operating income | $88.7m | $79.6m | $173.2m | $157.4m |
| Operating margin | 17.9% | 17.5% | 17.6% | 17.9% |
| Net income | $54.4m | $50.2m | $106.5m | $98.1m |
| Diluted EPS | $0.65 | $0.60 | $1.27 | $1.17 |
| Operating cash flow | Not separately reported | Not separately reported | $139.5m | $80.8m |
- Q2 sales rose 9%: organic growth of 6% and acquisitions contributed 6%, partly offset by 3% unfavorable currency translation. Six-month sales rose 12%, with 6% organic growth, 8% from acquisitions and 2% unfavorable currency translation.
- Q2 gross margin improved to 41.1% from 40.7%; six-month gross margin was 41.3% in both years. Q2 operating margin improved, while the six-month margin declined, reflecting restructuring costs and acquisition dilution.
- Interest expense increased to $10.5m in Q2 and $21.2m for six months, primarily due to debt associated with the CVI MG acquisition and higher interest costs. Effective tax rates were 30.2% for Q2 and 29.9% year to date, below 31.5% and 31.7%, respectively, in 2011.
- Six-month cash from operations of $139.5m funded $18.7m of capital expenditures. Cash declined $9.1m from year-end to $221.1m.
- At June 30, cash was $221.1m, total borrowings were $759.3m and long-term borrowings were $753.7m. Working capital was $537.2m and the current ratio was 3.1. The $700m revolving facility had no borrowings, $7m in letters of credit and approximately $693m of available capacity. Leverage was 1.9x and interest coverage 11.0x; the company reported compliance with applicable covenants.
Material changes and segment results
- Fluid & Metering Technologies: Q2 sales increased 1% to $210.7m; operating margin rose to 22.0% from 19.9%. Six-month sales increased 4% to $423.4m and margin rose to 21.5% from 20.4%. Energy, chemical/process and agricultural demand contributed; municipal water and wastewater remained weak.
- Health & Science Technologies: Q2 sales increased 21% to $170.6m, largely from acquisitions, while operating margin fell to 15.9% from 19.1%. Six-month sales rose 28% to $344.3m, but margin declined to 16.7% from 20.9%. Acquisition dilution and restructuring charges weighed on margins; optics demand was below expectations.
- Fire & Safety/Diversified Products: Q2 sales increased 10% to $115.9m, while margin fell to 22.5% from 25.5%. Six-month sales increased 8% to $220.0m and margin declined to 22.6% from 23.5%. The comparison included a $2.8m facility-sale gain in 2011; current restructuring charges also affected results.
- Restructuring expenses were $2.6m in Q2 and $7.5m for six months, related to employee reductions, facility rationalization and termination of a defined-benefit pension plan. The initiative covered 114 employees in the first half of 2012, following 292 in 2011.
- Acquisitions included Precision Photonics and ERC in April 2012, with $34.2m of net assets acquired. ERC debt assumed was approximately $4.7m. Matcon was acquired after quarter-end, on July 20, for approximately $37.5m upfront, with additional contingent consideration possible.
Outlook, risks and unusual items
- Management lowered its full-year 2012 diluted EPS outlook to $2.65–$2.70, excluding future restructuring charges and the Matcon acquisition’s impact. Q3 EPS guidance was $0.62–$0.64. Results above the annual range depended on continued strength in the U.S. and emerging markets and stabilization in Europe.
- Management cited a challenging economic environment. End-market risks included European weakness, municipal water funding softness, subdued defense, biotech and electronics demand, and inconsistent North American instrumentation orders. The filing cautions that actual results may differ from forward-looking statements, including due to risks integrating acquired businesses.
- Goodwill was $1.45bn. Management said the Water and Optics & Photonics reporting units and CVI/Melles Griot trade names could be at risk of impairment if market conditions deteriorated.
- Asbestos-related lawsuits remain pending against the company and subsidiaries. Most resolved claims were dismissed without payment or settled for insignificant amounts, and insurance historically covered most settlements and legal costs; future insurance availability is uncertain. The company reported no expected material adverse effect and recorded no provision beyond ordinary insurance deductibles.
- The company repurchased $36.0m of shares during the first half. It expected cash and operating cash generation to cover operating needs, planned capital spending, debt interest, benefit funding, authorized repurchases and dividends through the remainder of 2012 and 2013.
- Disclosure controls were assessed as effective, with no reported material change in internal controls during the quarter. Other ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether full-year EPS guidance remains achievable given the challenging outlook and the stated dependence on U.S. and emerging-market strength and European stabilization.
- How the acquired businesses, particularly CVI MG and ERC, affect Health & Science margins, cash generation and debt costs; and the eventual Matcon contribution and contingent consideration.
- Whether weakness in water, optics/photonics and other exposed markets worsens enough to trigger goodwill or indefinite-lived intangible impairment.
- Cash-flow sustainability, debt reduction, covenant headroom and planned capital returns, including the remaining share-repurchase authorization.
- Progress and remaining costs of restructuring, and developments in asbestos claims and insurance coverage.