IDEX Corporation — Q1 2015 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. IDEX sells engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Approximately half of Q1 sales were to customers outside the U.S.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $502.2 million | $544.0 million | Down 8%; organic sales down 4%, foreign currency translation down 4% |
| Gross profit / margin | $226.0 million / 45.0% | $244.4 million / 44.9% | Profit down 8%; margin up 0.1 percentage point |
| Operating income / margin | $101.8 million / 20.3% | $113.8 million / 20.9% | Income down 11% |
| Net income | $66.0 million | $74.5 million | Down 12% |
| Diluted EPS | $0.84 | $0.91 | Down $0.07, or 8% |
| EBITDA (non-GAAP) | $122.0 million; 24.3% of sales | $133.9 million; 24.6% of sales | Down approximately 9% |
| Operating cash flow | $49.4 million | $74.2 million | Down 33% |
| Capital expenditures | $10.1 million | $10.8 million | Down $0.7 million |
Operating cash flow less capital expenditures was $39.3 million, versus $63.4 million in Q1 2014. Management attributed lower operating cash flow mainly to severance payments, timing of defined-contribution pension payments, and lower earnings.
Segments
| Segment | Sales | Operating income | Operating margin | Year-over-year highlights |
|---|---|---|---|---|
| FMT | $218.2 million, down 2% | $55.9 million, down slightly | 25.6% vs. 25.3% | Organic sales up 1%; energy and agriculture were weak, while Chemical, Food & Process grew. |
| HST | $179.1 million, down 4% | $37.5 million, up 3% | 20.9% vs. 19.4% | Organic sales flat; productivity and restructuring benefits supported margin. |
| FSDP | $106.6 million, down 22% | $27.2 million, down 31% | 25.5% vs. 28.9% | Organic sales down 16%, primarily reflecting a large prior-year Dispensing project. |
Liquidity, debt and balance sheet
- Cash and equivalents were $494.5 million at March 31, 2015, down from $509.1 million at year-end; $391.2 million was held outside the U.S. The cash decline included a $33.9 million adverse exchange-rate effect.
- Working capital was $721.4 million and the current ratio was 3.0 to 1.
- Total borrowings were $908.2 million, compared with $864.0 million at December 31, 2014. This included $170.0 million drawn on the $700 million revolving facility and $87.9 million of Euro Notes classified as current and expected to be repaid with balance-sheet cash.
- Revolver availability, net of letters of credit, was approximately $522.9 million. IDEX reported compliance with its debt covenants: interest coverage of 12.39 to 1 against a 3.0 minimum and leverage of 1.82 to 1 against a 3.25 maximum.
- Share repurchases totaled $62.1 million for 829,744 shares; remaining authorization was $483.3 million. Dividends paid were $22.2 million.
Changes, outlook and risks
- Management forecast Q2 2015 diluted EPS of $0.88–$0.90 and full-year 2015 diluted EPS of $3.50–$3.60. These are forward-looking estimates, not guarantees.
- Management cited lower volume and unfavorable foreign exchange as pressures, partly offset by productivity and benefits from 2014 restructuring. The strong U.S. dollar affected all three segments; lower oil prices and delayed capital projects weighed on Energy, and the agricultural aftermarket softened.
- On April 20, 2015, IDEX agreed to acquire Italian sealing-solutions maker Novotema for approximately $61 million (€57 million), subject to customary closing conditions and regulatory approvals. Novotema reported $32 million of revenue in its most recent completed fiscal year.
- Restructuring accruals declined to $1.6 million from $6.1 million at year-end; remaining severance payments were expected by the end of 2015. Expected 2015 defined-benefit plan contributions increased to $5.7 million from the previously estimated $1.6 million.
- Foreign exchange is a material exposure. About 19% of debt was floating rate; IDEX estimated that a 50-basis-point rate change would affect annualized interest expense and cash flows by about $0.9 million.
- IDEX disclosed asbestos-related lawsuits involving products with components supplied by third parties. Most resolved claims were dismissed without payment, and most settlements and legal costs to date were covered by insurance, subject to deductibles. The company said it did not expect a material adverse effect, but noted uncertainty about continued insurance coverage. Other ordinary-course legal proceedings were not expected to be material.
- No interim goodwill impairment test was considered necessary. At the October 2014 annual test, the IDEX Optics and Photonics reporting unit’s fair value exceeded carrying value by approximately 15%; other reporting units exceeded carrying value by more than 100%.
Important facts for investors to verify
- Whether full-year EPS guidance remains achievable given weaker organic sales, foreign-exchange pressure, and end-market softness.
- Whether operating cash generation and margins recover, particularly in FSDP after the prior-year Dispensing project comparison.
- The timing, financing, and integration outcome of the Novotema acquisition, including its contribution to HST.
- Repayment of the $87.9 million Euro Notes, refinancing or renewal of the revolving facility maturing June 27, 2016, and continued covenant compliance.
- Changes in asbestos claims, insurance coverage, and any other litigation or contingencies.
- Performance and impairment assumptions for IDEX Optics and Photonics, given its comparatively limited reported fair-value cushion.