IDEX Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; the filing also presents unaudited fourth-quarter results. IDEX is a diversified manufacturer of pumps, valves, flow meters, precision fluidics and optics, fire and rescue equipment, and other engineered products, organized into Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Approximately half of sales were to customers outside the United States.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $2,494.6 million | $2,483.7 million | Flat reported; organic sales +1% |
| Gross profit / margin | $1,125.0 million / 45.1% | $1,117.9 million / 45.0% | Margin +10 bps |
| Operating income / margin | $579.0 million / 23.2% | $569.1 million / 22.9% | Income +2%; margin +30 bps |
| Net income | $425.5 million | $410.6 million | +4% |
| Diluted EPS | $5.56 | $5.29 | +5% |
| Operating cash flow | $528.1 million | $479.3 million | +10.2% |
| Capital expenditures | $50.9 million | $56.1 million | Lower |
| Cash and cash equivalents | $632.6 million | $466.4 million | +$166.2 million |
| Total borrowings | $850.6 million | $851.1 million | Broadly unchanged |
Operating cash flow less capital expenditures was approximately $477.2 million. Current assets were $1,261.4 million and current liabilities were $357.9 million; the current ratio was 3.5, versus 3.0 in 2018. The $800 million revolving facility had no borrowings outstanding and approximately $791.5 million of net availability at year-end. The company reported covenant compliance, with a 1.23-to-1 leverage ratio and 16.04-to-1 interest coverage ratio. Most outstanding debt was fixed rate.
Reported results include $21.0 million of restructuring expense and a $3.3 million fair-value inventory step-up charge. Management’s non-GAAP adjusted operating income was $603.4 million, adjusted operating margin 24.2%, adjusted net income $444.2 million and adjusted EPS $5.80. These measures exclude specified items and are not substitutes for GAAP results.
Segment performance
| Segment | Sales | Sales change | Operating income | Operating margin |
|---|---|---|---|---|
| FMT | $957.0 million | +1% | $285.3 million | 29.8%, up 90 bps |
| HST | $914.4 million | +2% | $200.2 million | 21.9%, down 100 bps |
| FSDP | $626.8 million | -2% | $165.3 million | 26.4%, down 10 bps |
Material changes versus 2018
- Flat consolidated sales reflected +1% organic growth and +1% from acquisitions, offset by a 2% adverse foreign-currency impact. Velcora and Finger Lakes Instrumentation (FLI) contributed to acquisition-related growth.
- Gross and operating margins improved, supported by price capture, productivity initiatives and cost controls. Lower variable compensation and tighter cost management reduced SG&A.
- HST sales grew, but operating income and margin declined, principally due to impairment and the inventory step-up charge. FMT improved on volume, pricing and productivity. FSDP sales and operating income declined, with Dispensing affected by the nonrecurrence of large prior-year projects.
- Net income and diluted EPS increased. The effective tax rate fell to 20.2% from 22.4%, primarily reflecting share-based compensation tax benefits and other tax and geographic income mix effects.
- Operating cash flow rose, while investing cash use increased to $137.0 million, mainly reflecting the Velcora acquisition. Share repurchases fell to $54.7 million from $173.9 million; dividends declared increased to $2.00 per share from $1.72.
Outlook, commentary, risks and unusual items
- The filing provides no quantified full-year 2020 earnings or revenue guidance. Management stated that cash, operating cash flow and available revolver capacity were expected to cover operating needs, planned capital expenditures, debt service, benefit funding, authorized repurchases and dividends for the next 12 months. It also said existing facilities could support near-term demand growth.
- In July 2019, IDEX acquired Velcora for $87.2 million cash and assumed $51.1 million of debt, which it repaid in September. A $0.7 million early-retirement loss was recorded. On January 29, 2020, IDEX agreed to acquire Flow Management Devices for $125 million cash, with closing expected by the end of Q1 2020, subject to approvals and customary conditions.
- After an HST business lost its largest customer, IDEX decided to wind it down over time. The event drove a $9.7 million impairment; total 2019 restructuring expense was $21.0 million, including severance, exit costs and impairments. Severance payments were expected to be substantially completed by the end of 2020.
- Principal risks include sensitivity to industrial activity and end-market capital spending, international and currency exposure, trade and tariff changes, competition and pricing pressure, acquisition integration, raw-material availability, interest rates, litigation and environmental matters, cybersecurity, labor availability, and potential goodwill or intangible-asset impairment. Goodwill and intangible assets were $1,779.7 million and $388.0 million, respectively, at year-end.
- The company disclosed asbestos-related lawsuits; most resolved claims had been dismissed or settled for insignificant amounts, and insurance had historically covered most settlements and legal costs. IDEX said it did not currently expect these claims to have a material adverse effect. Other ordinary-course proceedings were also disclosed.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Revenue disaggregation was identified as a critical audit matter because of the volume and diversity of business-unit transactions.
Important facts for investors to verify
- Whether organic growth and margin improvements persist, particularly given FMT and HST end-market variability and FSDP’s weaker reported sales.
- The financial and operational consequences of winding down the HST business, including remaining restructuring cash costs and any further impairment.
- Completion, financing and expected returns of the Flow MD acquisition, and continued integration of Velcora and FLI.
- Liquidity and refinancing plans for the $300 million 4.5% senior notes due December 2020; the filing states IDEX intended and was able to refinance or repay them using revolver capacity.
- Exposure to foreign-exchange movements, global trade conditions, customer capital spending and potential impairment of the substantial goodwill and intangible-asset balances.
- Fourth-quarter results were unaudited: sales were $606.0 million, operating income $134.2 million, net income $96.9 million and diluted EPS $1.26; compare with Q4 2018 sales of $614.1 million and diluted EPS of $1.27.