IDEX Corporation (NYSE: IEX) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts below are in U.S. dollars. IDEX operates in Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Key financial results
| Metric | Q2 2019 | Change vs. Q2 2018 | Six months 2019 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $642.1 million | +1%; organic sales +3% | $1,264.3 million | +1%; organic sales +3% |
| Gross margin | 45.5% | +0.2 percentage points | 45.6% | +0.4 percentage points |
| Operating income / margin | $155.3 million / 24.2% | +5%; margin +0.9 points | $303.1 million / 24.0% | +7%; margin +1.2 points |
| Net income | $113.2 million | +6% | $223.5 million | +8% |
| Diluted EPS | $1.48 | +$0.10, or +7% | $2.92 | +$0.27, or +10% |
| Operating cash flow | $131.2 million | vs. $120.7 million | $219.8 million | vs. $192.4 million |
| Free cash flow (non-GAAP) | $118.3 million | vs. $109.7 million | $194.1 million | vs. $171.5 million |
Management attributed higher gross profit and margins mainly to pricing, volume leverage and productivity, partly offset by higher engineering investment. SG&A declined, reflecting lower amortization and variable compensation and the absence of a prior-year Swiss stamp-duty charge. Q2 adjusted EPS was $1.50, excluding restructuring costs; adjusted measures are non-GAAP.
Segments and material changes
- FMT: Q2 sales rose 1% and operating margin improved to 30.1% from 29.3%, supported by volume, price and productivity. Pumps and valves strengthened; agriculture demand weakened.
- HST: Q2 sales rose 2%, including 1% from the FLI acquisition, and operating margin rose to 24.4% from 23.1%. Scientific Fluidics & Optics and Gast grew; sealing and Micropump faced end-market weakness.
- FSDP: Q2 sales were essentially flat, while operating margin declined to 26.6% from 27.9%, mainly on product mix and engineering investment. Dispensing was weaker; Fire & Safety and BAND-IT grew.
- Reported sales growth was reduced by approximately 2% from foreign-currency translation in Q2 and the first half. Q2 sales outside the U.S. were approximately 49% of total.
Liquidity, debt and capital allocation
- At June 30, cash and equivalents were $543.2 million; working capital was $855.1 million and the current ratio was 3.4 to 1. Cash included $341.2 million held outside the U.S.
- Total borrowings were approximately $850.8 million, predominantly fixed-rate senior notes; no revolving-facility borrowings were outstanding. The new $800 million revolving facility matures in May 2024, with approximately $790.9 million available after letters of credit.
- Debt covenants were met: leverage ratio 1.25 to 1 against a 3.50 maximum, and interest coverage 15.98 to 1 against a 3.00 minimum. Interest expense for the first half was $21.9 million.
- First-half capital expenditures were $25.7 million. Dividends paid were $71.3 million and share repurchases were $54.7 million. The company reported $322.3 million remaining under its repurchase authorization.
Outlook, risks and unusual items
- Management projected Q3 2019 EPS of $1.45–$1.47 and full-year EPS of $5.78–$5.85; expected organic revenue growth was approximately 3% in Q3 and 3%–4% for full year.
- Management said existing cash, operating cash flow and revolver capacity should fund operating needs, planned capital spending, debt service, dividends and authorized repurchases through the remainder of 2019; acquisitions could require additional borrowing.
- Key stated risks include industrial and economic conditions, capital spending and order rates, pricing and competition, tariffs and trade policy, foreign exchange, interest rates, labor and material costs, and the ability to acquire and integrate businesses. IDEX noted its typically low order backlogs.
- Lease accounting adoption added about $68 million of right-of-use assets and lease liabilities to the balance sheet, without material impact on reported earnings or cash flow. Restructuring expense was $2.1 million in the first half.
- After quarter-end, IDEX acquired Sweden-based Roplan and Steridose for $87.3 million cash and assumed $49.9 million debt; the businesses have approximately $40 million in annual revenue and join HST.
- Ordinary-course legal matters and asbestos-related lawsuits are disclosed. The company said it did not expect a material adverse effect; asbestos-related costs have largely been insured to date, but future insurance coverage is uncertain.
Most important facts for investors to verify
- Whether the stated full-year EPS and organic-growth outlook was achieved, and how foreign exchange and end-market conditions affected results.
- Whether FSDP margin pressure and weakness in agriculture, semiconductor, automotive, Micropump and dispensing markets persisted.
- Cash conversion, working-capital needs, capital spending, and the use of cash for dividends, buybacks and acquisitions.
- Debt covenant headroom and integration, financing and performance of the Roplan/Steridose acquisition.
- Potential changes in asbestos insurance coverage, other legal contingencies, and restructuring costs.