IDEX Corporation — Q2 2018 Form 10-Q Summary
Business context and reporting period
IDEX designs and manufactures products across three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same periods in 2017.
Financial performance
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net sales | $634.4 million, +11% year over year | $1,246.7 million, +11% |
| Organic sales growth | 9% | 8% |
| Gross margin | 45.3%, up 0.5 percentage points | 45.2%, up 0.1 percentage points |
| Operating income / margin | $147.8 million / 23.3%; margin up 1.5 points | $284.5 million / 22.8%; margin up 1.4 points |
| Net income | $107.1 million, +28% | $206.1 million, +29% |
| Diluted EPS | $1.38, +28% | $2.65, +28% |
| Adjusted diluted EPS | $1.40, +30% | $2.69, +27% |
| EBITDA | $167.5 million; 26% of sales | $329.6 million; 26% of sales |
| Operating cash flow | $120.7 million | $192.4 million |
| Free cash flow | $109.7 million | $171.5 million |
Q2 sales growth included a 2% favorable currency effect; first-half growth included a 3% favorable currency effect. Management attributed stronger profitability chiefly to sales volume and productivity initiatives. Q2 gross margin also benefited from volume leverage, partly offset by higher engineering costs. Adjusted results exclude restructuring expenses and are non-GAAP measures.
Segments and material changes
- FMT: Q2 sales increased 10% and operating margin rose to 29.3% from 27.1%. Growth included strong demand in pumps, agriculture, valves and water; the Faure Herman divestiture reduced reported sales.
- HST: Q2 sales increased 11% and operating margin rose to 23.1% from 22.6%. Growth reflected market demand, project shipments, currency and the thinXXS acquisition.
- FSDP: Q2 sales increased 11% and operating margin rose to 27.9% from 25.1%, supported by higher volume and productivity.
For the first half, operating income increased 18%; SG&A rose in dollars but declined as a share of sales to 22.1% from 23.3%. The effective tax rate fell to 22.8% from 26.7%, primarily reflecting the U.S. Tax Cuts and Jobs Act and share-based compensation tax benefits, partly offset by other tax-law changes and geographic income mix.
Cash, debt and liquidity
At June 30, 2018, cash and equivalents were $458.8 million, compared with $376.0 million at year-end 2017. Working capital was $766.7 million and the current ratio was 3.2. Cash from operations increased 11% year over year for the first half; management cited higher earnings, partly offset by working-capital needs, variable compensation payments and lower tax payments. Capital expenditures were $21.0 million.
Total borrowings were approximately $861.9 million, including $10.4 million drawn on the $700 million revolving facility. Approximately $681.5 million of revolving capacity remained available after letters of credit. The company reported compliance with its debt covenants: leverage ratio 1.34 to 1 against a maximum of 3.50 to 1, and interest coverage 14.96 to 1 against a minimum of 3.0 to 1. Management said cash, operating cash flow and available facility capacity should cover anticipated 2018 requirements, including capital spending, debt service, pensions, dividends and authorized repurchases.
Dividends paid were $61.9 million in the first half; the company repurchased 147,490 shares for approximately $20.5 million. Cash held outside the U.S. was $271.1 million. Most debt carried fixed interest rates; a 50-basis-point rate change on the floating-rate portion was estimated to change annual interest expense by about $0.1 million.
Outlook, commentary and risks
- Management projected Q3 2018 EPS of $1.29–$1.32, full-year adjusted EPS of $5.27–$5.35, full-year organic revenue growth of approximately 7%, and Q3 organic growth of 6%–7%.
- Restructuring charges were $2.0 million in Q2 and $3.6 million in the first half, primarily associated with employee reductions and facility rationalization.
- The company recorded a $2.2 million Swiss stamp duty in SG&A related to repayment of intercompany loans and a capital contribution. Foreign-currency transaction and contract effects also influenced other income and expense.
- Tax accounting under the Tax Act remained provisional in certain areas. The company cited uncertainty around the final transition-tax calculation, possible future repatriation-related deferred taxes, and its accounting approach for GILTI.
- On July 23, 2018, after quarter-end, IDEX acquired Finger Lakes Instrumentation for $20 million cash plus a potential earn-out of up to $5 million.
- Risks identified include industrial and economic conditions, competitive and pricing pressures, capital spending and order rates, acquisition execution, currency movements, interest rates, labor and material costs, and litigation or environmental matters. The company reported ordinary-course legal proceedings and asbestos-related claims; it stated it did not expect these matters to have a material adverse effect.
Important facts for investors to verify
- Whether organic growth and margin gains persist, including the contribution from currency, acquisitions and market-specific demand.
- Whether working-capital consumption—particularly receivables and inventories—affects cash conversion as sales expand.
- Progress toward full-year EPS and organic-growth guidance, and the assumptions behind adjusted, non-GAAP measures.
- Final Tax Act accounting, including transition-tax and potential repatriation-related liabilities.
- Debt covenant headroom, acquisition integration and the subsequent FLI acquisition’s performance.