IDEX Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Amounts are in U.S. dollars.
Business context and results
IDEX designs and sells products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). The quarter included the March 16 acquisition of Akron Brass, a fire and life-safety products business, for $221.6 million in cash.
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net sales | $502.6 million | $502.2 million | Flat; organic sales down 3% |
| Gross profit / margin | $223.3 million / 44.4% | $226.0 million / 45.0% | Margin down 60 basis points |
| Operating income / margin | $102.6 million / 20.4% | $101.8 million / 20.3% | Income up 1% |
| Net income | $68.1 million | $66.0 million | Up 3% |
| Diluted EPS | $0.89 | $0.84 | Up 6% |
| EBITDA / margin (non-GAAP) | $123.3 million / 24.5% | $122.0 million / 24.3% | Company-reported measure |
| Operating cash flow | $70.4 million | $49.4 million | Up $21.0 million |
| Cash and cash equivalents | $358.4 million | $328.0 million at Dec. 31, 2015 | $317.0 million held outside the U.S. |
| Total borrowings | $1.102 billion | $847.4 million at Dec. 31, 2015 | Increase principally funded Akron Brass |
Segments and material changes
- FMT: Sales fell 3% to $211.8 million; organic sales declined 5%. Operating income decreased to $51.4 million and margin to 24.3%, mainly on lower energy and agriculture volumes. Management cited continued depressed energy prices, soft mobile and North American industrial markets, and weaker agricultural OEM demand.
- HST: Sales rose 4% to $186.3 million; organic sales increased 2%. Operating income grew to $40.7 million and margin improved to 21.8%, primarily from higher volume and productivity. Demand was mixed across platforms and markets.
- FSDP: Sales decreased 2% to $104.6 million; organic sales fell 6%. Operating income declined to $25.4 million and margin to 24.3%. The segment cited weaker Band-It energy-related sales and non-recurring prior-year trailer sales; Akron Brass partly offset declines.
Company sales reflected a 4% favorable acquisition contribution and a 1% unfavorable foreign-currency impact. Gross margin was pressured chiefly by a $2.2 million Akron Brass inventory step-up charge in Q1. SG&A fell to $120.8 million, including the benefit of a $3.7 million reversal of contingent consideration for a 2015 acquisition, restructuring benefits, and cost controls; acquisition-related costs partly offset these benefits.
Cash, debt, liquidity, and capital allocation
- Operating cash flow was $70.4 million; capital expenditures were $8.7 million. Investing cash outflow totaled $230.1 million, mainly due to the Akron Brass purchase. Financing provided $186.4 million, including $275.4 million of revolving-facility borrowings and $46.9 million of share repurchases.
- Working capital was $684.2 million and the current ratio was 3.3:1. The $700 million revolving facility had $450.0 million drawn, $7.6 million of letters of credit, and approximately $242.4 million of available capacity.
- IDEX reported compliance with its revolving-facility covenants: leverage ratio 2.04:1 versus a maximum 3.50:1; interest coverage 12.38:1 versus a minimum 3.0:1. Approximately 41% of debt was floating rate; management estimated a 50-basis-point rate move would change annual interest expense and cash flows by about $2.3 million.
- The company repurchased 628,493 shares for $45.8 million during the quarter; $589.2 million remained authorized. Dividends paid were $24.7 million.
Outlook, risks, and unusual items
- Management projected Q2 2016 EPS of $0.91–$0.93 and full-year 2016 EPS of $3.70–$3.75. Q2 guidance assumed flat organic sales and included a $5.4 million pre-tax Akron Brass inventory step-up charge. Management said current cash, operating cash flow, and available revolver capacity should cover expected 2016 operating needs, capital spending, debt interest, benefit-plan funding, repurchases, and dividends.
- IDEX early adopted ASU 2016-09, recording a $2.6 million tax benefit in Q1 and changing cash-flow presentation prospectively. The effective tax rate was 26.6%, versus 29.0% in Q1 2015; management cited the accounting change and extended U.S. R&D credit, partly offset by jurisdictional income mix. The change may add volatility to the effective tax rate.
- Q1 comprehensive income was $86.1 million, including a $16.2 million favorable currency translation adjustment, versus $11.2 million in Q1 2015, which included a $56.6 million unfavorable translation adjustment.
- Key risks identified include industrial activity and capital spending, pricing and competition, energy-market weakness, foreign exchange, interest rates, acquisition integration, and contingencies. IDEX reported asbestos-related lawsuits; it said most resolved claims had been dismissed or settled for insignificant amounts and insurance had generally covered settlements and most legal costs, but future insurance coverage is uncertain. The company did not expect these or other ordinary-course proceedings to materially affect results.
Important facts for investors to verify
- Whether organic demand stabilizes, particularly in energy, industrial distribution, agriculture, and FSDP, and whether Q2 and full-year EPS guidance is achieved.
- Akron Brass integration, purchase-price allocation, expected synergies, and the effect of the $5.4 million Q2 inventory step-up charge.
- Debt and liquidity after the acquisition, covenant headroom, and sensitivity to floating interest rates.
- Durability of margin and tax-rate trends, including the contingent-consideration benefit and effects of early adoption of ASU 2016-09.
- Foreign-currency exposure and potential changes in insurance coverage or outcomes for asbestos-related claims.