IDEX Corporation — Q1 2018 Form 10-Q
Business context and period. IDEX is a global applied-solutions manufacturer operating in Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2018 | Q1 2017 / change |
|---|---|---|
| Net sales | $612.3 | $553.6; up 11% (organic growth 7%) |
| Gross profit / margin | $276.7 / 45.2% | $250.9 / 45.3% |
| Operating income / margin | $136.7 / 22.3% | $115.7 / 20.9% |
| Net income | $99.0 | $75.9; up 30% |
| Diluted EPS | $1.27 | $0.99; up 28% |
| Operating cash flow | $71.7 | $85.0 |
| Capital expenditures / free cash flow | $10.0 / $61.7 | $10.2 / $74.8 |
Adjusted figures are non-GAAP: adjusted operating income was $138.3 million, adjusted net income $100.2 million, adjusted EPS $1.29, and adjusted EBITDA $163.8 million. The company reported EBITDA of $162.2 million, or 26.5% of sales. Reported figures include restructuring costs; investors should review the filing’s reconciliations.
Segments: FMT sales were $232.3 million, up 7%; HST sales were $221.1 million, up 11%; and FSDP sales were $159.2 million, up 16%. Segment operating margins were 28.5%, 23.4%, and 24.8%, respectively; each improved year over year.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $413.0 million at March 31, 2018, including $253.1 million held outside the U.S.
- Total borrowings were $863.5 million before debt issuance costs and discounts; approximate net debt was $450.5 million. The balance sheet reported $859.7 million of long-term borrowings and $0.8 million of short-term borrowings.
- Working capital was $753.0 million and the current ratio was 3.4:1. The $700 million revolving facility had $680.9 million of net available capacity, including the effect of outstanding letters of credit.
- Debt covenants require minimum interest coverage of 3.0:1 and maximum leverage of 3.50:1. IDEX reported ratios of 14.42:1 and 1.39:1, respectively, and compliance at quarter-end.
Material changes and management commentary
- Sales growth comprised 7% organic growth and a 4% favorable currency effect. HST also benefited from the thinXXS acquisition; FMT sales reflected the 2017 Faure Herman divestiture.
- Operating margin expanded 140 basis points. Higher volume and productivity supported results; gross margin edged down 10 basis points, which management attributed primarily to continued engineering investment. SG&A as a share of sales declined to 22.6% from 23.5%.
- Operating cash flow fell $13.3 million year over year, mainly from working-capital timing amid stronger demand and higher variable-compensation payments, partly offset by higher earnings.
- The effective tax rate declined to 24.0% from 27.3%, reflecting the Tax Act and excess share-based compensation tax benefits, partly offset by GILTI, discrete tax items, and geographic income mix.
Outlook, risks and unusual items
Management projected Q2 2018 EPS of $1.30–$1.32, full-year adjusted EPS of $5.05–$5.20, and organic revenue growth of 5%–6% for both Q2 and full-year 2018. Full-year EPS guidance is adjusted and non-GAAP.
- Q1 restructuring expense was $1.6 million, primarily severance and facility-related costs; remaining severance payments were expected by year-end.
- Tax Act accounting remained provisional in certain areas, including the transition tax and GILTI treatment. The company had recorded a provisional transition-tax obligation of $30.4 million and continued evaluating the final tax effects.
- Foreign-exchange movements affect results. At quarter-end, approximately 1% of debt was floating rate; management estimated a 50-basis-point rate move would change annual interest expense and cash flows by about $0.1 million.
- Ordinary-course legal matters include product liability and other proceedings. IDEX also disclosed asbestos-related suits; most resolved claims had been dismissed or settled for immaterial amounts, with historical coverage generally provided by insurance, but future insurance availability is uncertain. Management did not expect these matters to have a material adverse effect.
- Key stated business risks include industrial and economic conditions, pricing and competition, capital spending and typically low order backlogs, acquisition integration, currency movements, interest rates, labor and material costs, and contingencies.
- Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Check whether organic growth and segment momentum persisted, particularly given the favorable currency contribution and acquisition/divestiture effects.
- Track working capital, operating cash conversion, and free cash flow against earnings growth.
- Review delivery against the stated 2018 adjusted EPS and organic-growth outlook, including the non-GAAP reconciliations.
- Monitor debt, covenant headroom, and cash location, including the substantial cash held outside the U.S.
- Follow final Tax Act accounting and any changes in legal or asbestos-related exposure or insurance coverage.