IDEX Corporation — Q3 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2010, compared with the same 2009 periods. IDEX operates across Fluid & Metering Technologies, Health & Science Technologies, Dispensing Equipment, and Fire & Safety/Diversified Products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $373.7 | $323.2 | $1,107.9 | $986.3 |
| Gross profit | $154.1 | $129.1 | $456.5 | $383.4 |
| Gross margin | 41.2% | 39.9% | 41.2% | 38.9% |
| Operating income | $62.4 | $46.5 | $183.1 | $132.4 |
| Operating margin | 16.7% | 14.4% | 16.5% | 13.4% |
| Net income | $38.6 | $29.8 | $115.6 | $80.3 |
| Diluted EPS | $0.47 | $0.37 | $1.40 | $0.99 |
- Q3 sales grew 16%: organic growth of 14% and acquisitions contributed 4%, partly offset by 2% unfavorable currency translation. Nine-month sales grew 12%, including 10% organic growth and 2% from acquisitions.
- Management attributed improved gross and operating margins primarily to higher volume, product mix, and restructuring-related cost reductions. Q3 SG&A was 23.6% of sales versus 24.7%; nine-month SG&A was 24.1% versus 24.6%.
- Q3 segment trends: Health & Science sales rose 37% and operating margin increased to 20.8%; Fluid & Metering sales rose 13% and margin to 17.8%; Dispensing sales rose 4% and returned to a 10.2% margin from a prior-year loss; Fire & Safety/Diversified sales rose 2% and margin reached 25.4%.
- For the first nine months, Dispensing sales declined 3%, with organic sales down 2%, chiefly reflecting North American softness. Fire & Safety/Diversified sales increased 1%; weakness in fire suppression partly offset strength in engineered band clamping.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $157.3, essentially unchanged from $157.7 a year earlier. Capital expenditures were $26.0 versus $18.3, leaving operating cash flow less capital expenditures of approximately $131.3 versus $139.4.
- Investing cash outflow was $94.3, including $68.3 for acquisitions. Financing provided $62.3; cash increased $132.5 to $206.1 at September 30.
- Working capital was $380.1 and the current ratio was 2.4 to 1. Total borrowings were $491.6, up from $400.1 at year-end 2009; cash was $206.1. The $600 million revolving credit facility had $284.9 outstanding and approximately $315.1 available. The facility expires December 21, 2011.
- Debt included $96.8 of euro-denominated 2.58% senior notes issued in June 2010, maturing June 2015, and a $90.0 term loan with $7.5 due in April 2011 and the remaining balance due December 2011. Management said operating cash flow and available credit should cover expected needs for the next 12 months.
Material changes, outlook, and risks
- Acquisitions during the period included Seals for $54.0 aggregate consideration, OBL for $15.4, and Periflo for $4.2. Their results were included from their acquisition dates; the company said the acquisitions were not material to reported results. On November 1, after quarter-end, IDEX acquired Fitzpatrick for approximately $21.0 in cash.
- The 2009 restructuring initiative generated $6.4 of expense in the first nine months, including $3.5 in Q3. It covered severance and facility closures, involved more than 600 employee separations, and was expected to conclude by year-end 2010, with another $1.0–$2.0 of costs anticipated.
- A $300 million forward-starting interest-rate contract was entered into ahead of an expected issuance of at least $300 million of new debt in Q4 2010. Its September 30 fair-value liability was $42.2. The filing states that a 25-basis-point move in the 10-year U.S. Treasury yield would change the contract’s value by approximately $7.0.
- Approximately 8% of total debt was floating-rate; a 50-basis-point rate move was estimated to change annual interest expense and cash flows by about $0.2. Currency exposure, industrial activity, demand in end markets, and the ability to integrate acquired businesses are also relevant risks.
- IDEX reported asbestos-related lawsuits involving products with components supplied by third parties. Most resolved claims were dismissed without payment; the company said it did not expect a material adverse effect, while noting uncertainty about continued insurance coverage. Other ordinary-course legal matters were also reported as not expected to be material.
- No specific earnings or sales guidance was provided. Management cited strong growth in several end markets, but noted softness in Dispensing markets in North America and Western Europe and weakness in fire suppression. The company said healthcare reform was not expected to have a material financial impact.
Key facts for investors to verify
- Whether organic growth and margin improvements persist, particularly in Health & Science and Fluid & Metering, and whether Dispensing’s recovery continues.
- Completion and integration of the Seals, OBL, Periflo, and post-quarter Fitzpatrick acquisitions, including final purchase-price allocations and expected financing needs.
- Timing and terms of the anticipated Q4 debt issuance, the forward interest-rate contract’s impact, and refinancing or repayment requirements in 2011.
- Working-capital movements: receivables and inventories increased, and the filing reports $27.7 of inventory cash use in the first nine months.
- Remaining restructuring charges, asbestos-related claims and insurance coverage, and any changes in legal or tax contingencies.