IDEX Corporation — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; comparisons are with the corresponding 2010 periods. IDEX operates in Fluid & Metering Technologies, Health & Science Technologies, Dispensing Equipment, and Fire & Safety/Diversified Products. Unless noted, amounts below are in millions.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $453.8 | $378.5 | $880.9 | $734.1 |
| Gross profit / margin | $184.8 / 40.7% | $154.8 / 40.9% | $363.5 / 41.3% | $302.4 / 41.2% |
| Operating income / margin | $79.6 / 17.5% | $62.8 / 16.6% | $157.4 / 17.9% | $120.7 / 16.4% |
| Net income | $50.2 | $40.4 | $98.1 | $77.0 |
| Diluted EPS | $0.60 | $0.49 | $1.17 | $0.94 |
- Q2 sales increased 20%: 8% organic growth, 8% acquisitions, and 4% favorable currency translation. Six-month sales also rose 20%: 10% organic growth, 8% acquisitions, and 2% favorable currency translation.
- Q2 segment sales increased 22% in Fluid & Metering, 36% in Health & Science, and 8% in Fire & Safety/Diversified; Dispensing Equipment fell 12%. Dispensing’s decline reflected North American weakness, while Fire & Safety growth was partly offset by softness in fire suppression.
- Six-month operating cash flow was $80.8, down from $95.7, mainly due to higher working-capital needs. Capital expenditures were $18.6; operating cash flow less capital expenditures was $62.2. Cash ended at $203.0.
- At June 30, current assets were $814.0 and current liabilities $350.1; working capital was $463.9 and the current ratio 2.3:1. Total debt was $878.1, including $85.0 current debt; reported cash less total debt was approximately $675.2 net debt.
- The $700 revolving facility had $374.2 outstanding, about $7.0 of letters of credit, and approximately $318.8 of net availability. The company reported compliance with its maximum 3.25:1 leverage and minimum 3.0:1 interest coverage covenants.
Material changes and unusual items
- Three acquisitions were completed: Advanced Thin Films for approximately $34.5, Microfluidics for $18.5, and CVI Melles Griot for approximately $397.1. The acquisitions added substantial goodwill and intangible assets; purchase-price allocations remained subject to final appraisal and adjustment.
- Acquisition-related transaction costs and inventory fair-value charges totaled $6.7 in Q2 and $9.3 for the first half. These items, along with higher acquisition-related expenses, partially offset volume and productivity gains. A $2.8 gain on sale of an Italian facility also benefited operating results.
- Interest expense increased to $6.7 in Q2 from $3.6 and to $13.2 for the first half from $7.0, primarily due to higher debt following acquisitions. The company replaced its prior credit facility with a $700 revolving facility maturing in 2016.
- Q2 gross margin edged down 0.2 percentage points year over year, primarily reflecting the CVI Melles Griot inventory fair-value charge; six-month gross margin improved 0.1 percentage points.
Outlook, management commentary, and risks
- No specific revenue or earnings guidance is provided. Management said cash on hand and expected 2011 operating cash generation should cover operating needs, capital spending, interest, required debt payments, benefit-plan funding, and dividends. It may use additional borrowing for suitable acquisitions.
- Management cited strength in energy, chemical, agriculture, pharma, life sciences, and optics, but noted North American softness in Dispensing Equipment and weakness in fire suppression. Results remain exposed to industrial activity, customer capital spending, currency movements, and the ability to integrate acquisitions profitably.
- Approximately 43% of debt was floating rate; a 50-basis-point rate change would affect annualized interest expense and cash flows by about $1.9. A July 2011 forward interest-rate contract was entered in anticipation of expected third-quarter debt issuance.
- Asbestos-related lawsuits remain pending. The company said most resolved claims were dismissed without payment and historical settlements and costs were largely insurance-covered, but future insurance coverage cannot be assured. Management did not expect these or other ordinary-course proceedings to have a material adverse effect.
- After quarter-end, Andrew K. Silvernail was announced as CEO effective August 10, 2011, replacing Lawrence D. Kingsley. Management reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether the acquired businesses deliver expected growth and profitability, and the final purchase-price allocations and integration costs.
- Whether working-capital consumption moderates and operating cash flow supports planned investment, dividends, and debt service.
- Debt levels, available revolver capacity, covenant headroom, and the expected third-quarter debt issuance and related interest-rate hedge.
- Whether Dispensing Equipment’s North American weakness and Fire & Safety’s fire-suppression softness persist, and whether margin trends reflect recurring operations or one-time items.
- Developments in asbestos litigation and the availability of insurance coverage for future claims.