IDEX Corporation: FY2018 Form 10-K Summary
Business context and reporting period. IDEX designs and manufactures specialized pumps, valves, flow meters, precision fluidics and optics, fire and rescue equipment, and other engineered products. Its three segments are Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). This 10-K covers the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter separately. About 51% of annual sales were to customers outside the U.S.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,483.7 million | $2,287.3 million |
| Organic sales growth | 8% | 6% |
| Gross profit / margin | $1,117.9 million / 45.0% | $1,026.7 million / 44.9% |
| Operating income / margin | $569.1 million / 22.9% | $502.6 million / 22.0% |
| Net income | $410.6 million | $337.3 million |
| Diluted EPS | $5.29 | $4.36 |
| Operating cash flow | $479.3 million | $432.8 million |
| Capital expenditures | $56.1 million | $43.9 million |
Fourth-quarter 2018 net sales were $614.1 million, operating income $139.4 million, net income $98.1 million, and diluted EPS $1.27. The corresponding fourth-quarter 2017 figures were $585.9 million, $135.2 million, $93.7 million, and $1.21.
Liquidity and debt. Year-end cash and equivalents were $466.4 million; current assets were $1,092.5 million and current liabilities $364.7 million, for a 3.0 current ratio. Total borrowings were $851.1 million, including $848.3 million of long-term borrowings net of issuance costs and discounts. The $700 million revolving facility had no balance outstanding and approximately $691.2 million of available capacity. IDEX reported covenant compliance: 15.65x interest coverage and 1.27x leverage, against minimum and maximum requirements of 3.0x and 3.50x, respectively.
Annual dividends were $1.72 per share, up from $1.48. The company repurchased 1.27 million shares for $173.9 million during 2018. Non-GAAP adjusted operating income was $581.2 million, adjusted operating margin 23.4%, adjusted net income $419.6 million, and adjusted diluted EPS $5.41; these measures exclude specified items and are not GAAP substitutes.
Material changes and segment results
- Sales increased 9% year over year, comprising 8% organic growth and a 1% favorable foreign-currency effect. Operating income rose 13%; operating margin expanded 90 basis points. Net income increased 22% and diluted EPS 21%.
- All three segments grew sales and operating income. FMT sales were $951.6 million (+8%) and operating income $275.1 million (+14%); HST sales were $896.4 million (+9%) and operating income $205.7 million (+15%); FSDP sales were $637.0 million (+8%) and operating income $168.6 million (+15%). Segment margins rose in each segment.
- Management attributed improved gross profit and margins mainly to productivity initiatives and volume leverage, partly offset by higher engineering costs. SG&A rose to $536.7 million, including higher stock compensation and a Swiss stamp-duty tax associated with intercompany-loan restructuring.
- The effective tax rate fell to 22.4% from 25.9%, principally reflecting U.S. tax reform, including the lower U.S. corporate rate and the prior-year transition tax effects, alongside other tax items.
Outlook, risks and unusual items
- For 2019, management projected 4%–5% organic revenue growth and full-year EPS of $5.60–$5.80, while noting persistent trade tensions and geopolitical uncertainty.
- Restructuring costs were $12.1 million in 2018, mainly employee reductions, facility rationalization and contract termination costs. The 2017 comparison included an $9.3 million gain on sale of Faure Herman; no business-sale gain or loss was recorded in 2018.
- IDEX acquired Finger Lakes Instrumentation for $23.6 million, including contingent consideration, and purchased Phantom Controls intellectual property for $4.0 million. The filing reports no goodwill or intangible-asset impairment charges in 2018.
- Key exposures include economic and industrial-market downturns, tariffs and trade restrictions, foreign currency movements, interest rates, commodity-price-driven customer spending, competition and pricing pressure, acquisition integration, labor availability, cybersecurity, tax matters, litigation and environmental contingencies. Goodwill and intangible assets totaled approximately $2.08 billion at year-end.
- Asbestos-related lawsuits remained pending; the company said most resolved claims had been dismissed without payment or settled for insignificant amounts, and did not believe the claims would materially affect results. Insurance coverage for future claims is uncertain. The company also disclosed ordinary-course legal and regulatory proceedings and stated it did not expect their disposition to have a material adverse effect.
- Management expected the 2019 adoption of lease accounting to add approximately $70 million of right-of-use assets and lease liabilities, without a material effect on earnings or cash flows. The financial-statement audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2019 organic growth and EPS guidance are supported by order trends, end-market demand and subsequent quarterly results.
- How much of reported growth and margin expansion is sustainable productivity and organic demand versus currency, acquisitions, mix or timing of large projects.
- Debt maturities, refinancing needs and covenant headroom, particularly the $300 million of notes due in 2020 and $350 million due in 2021.
- Cash deployment among share repurchases, dividends, acquisitions and investment, and the effect of repurchases on per-share growth.
- Potential changes in tax estimates, pension assumptions, goodwill valuations, contingent consideration and legal or insurance exposures.