IDEX Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report; the filing also provides unaudited fourth-quarter results. IDEX sells specialized pumps, flow meters, precision fluidics and optical products, fire and rescue equipment, and other engineered products through three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2.021 billion | $2.148 billion |
| Gross profit / margin | $904.3 million / 44.8% | $949.3 million / 44.2% |
| Operating income / margin | $431.7 million / 21.4% | $431.2 million / 20.1% |
| Net income | $282.8 million | $279.4 million |
| Diluted EPS | $3.62 | $3.45 |
| Operating cash flow | $360.3 million | $368.0 million |
| Capital expenditures | $43.8 million | $48.0 million |
| Cash and cash equivalents | $328.0 million | $509.1 million |
| Total borrowings | $847.4 million | $865.6 million |
| Current ratio | 2.8 | 2.6 |
Operating cash flow less capital expenditures was approximately $316.5 million. Adjusted operating income was $424.9 million and adjusted diluted EPS was $3.55, versus $444.9 million and $3.57 in 2014; these non-GAAP measures exclude restructuring costs and the gain on sale of a business. Cash dividends were $1.28 per share, up from $1.12.
Segment results
- FMT: Sales fell 4% to $860.8 million; operating income fell 6% to $204.5 million and margin was 23.8%. Energy, industrial and agricultural demand weakened, including from lower oil and commodity prices.
- HST: Sales fell 2% to $739.0 million; operating income rose 3% to $157.9 million and margin increased to 21.4%. Productivity gains and stronger scientific fluidics and sealing activity supported results.
- FSDP: Sales fell 16% to $423.9 million; operating income fell 11% to $115.7 million, while margin increased to 27.3%. Lower dispensing, oil-and-gas-related Band-It, fire suppression, and rescue sales were partly offset by productivity and favorable mix.
Material changes versus prior periods
- Sales declined 6% year over year: organic sales decreased 4%, currency translation reduced sales 4%, and acquisitions added 2%. International customers accounted for about 50% of sales.
- Reported operating income was essentially flat, but operating margin rose 130 basis points, aided by productivity and an $18.1 million gain on the Ismatec product-line sale. Adjusted operating income declined 4% and adjusted EPS declined 1%.
- Net income increased 1% and diluted EPS increased 5%, helped by the sale gain and lower average share count following repurchases. The effective tax rate declined to 27.9% from 28.8%.
- Operating cash flow decreased 2.1%. Investing cash use rose to $210.5 million, principally due to $195.0 million of net cash paid for acquisitions; financing cash use was $295.5 million, including debt repayment, dividends and share repurchases.
- FY2015 acquisitions included Novotema, Alfa Valvole and CiDRA Precision Services. The Ismatec product line was sold for $27.7 million cash, producing the $18.1 million pretax gain.
Fourth quarter: Sales were $499.8 million versus $523.9 million in Q4 2014; operating income was $98.3 million versus $94.5 million; net income was $67.8 million versus $61.6 million; diluted EPS was $0.88 versus $0.77.
Liquidity, debt and capital allocation
- Year-end cash was $328.0 million, including $298.8 million held outside the United States. Working capital was $553.1 million; the current ratio was 2.79 to 1.
- The $700 million revolving credit facility matures in 2020. At year-end, $195.0 million was drawn and approximately $497.8 million of capacity remained available after letters of credit.
- Debt covenants require minimum interest coverage of 3.0x and maximum leverage of 3.50x; reported year-end ratios were 12.73x and 1.63x, respectively. Approximately 23% of debt had floating rates.
- IDEX repurchased 2.8 million shares for $210.5 million in 2015 and had $635 million of authorized repurchase capacity remaining at year-end. Management said available cash, operating cash flow and revolver capacity should meet expected operating needs, capital expenditures, debt service, pension funding, repurchases and dividends for the next 12 months.
Outlook, risks and unusual items
- Management expected continued global economic contraction to pressure end markets and described 2016 as an unstable growth environment. Its outlook was flat organic growth and full-year EPS of $3.60–$3.70.
- On February 4, 2016, IDEX agreed to acquire Akron Brass for $224.2 million in cash, subject to customary adjustments, shareholder and regulatory approvals, and other closing conditions. The business had approximately $120 million in trailing-12-month revenue and was expected to join FSDP.
- 2015 restructuring costs were $11.2 million, primarily severance for 208 employees; most related payments were expected by the end of 2016. A $4.7 million contingent acquisition payment for CiDRA was recorded, dependent on EBITDA targets.
- Goodwill was $1.397 billion and intangible assets were $287.8 million. The annual impairment test found most reporting units with fair value at least 70% above carrying value, but IDEX Optics & Photonics had about 20% headroom and the newly formed Valves unit was near carrying value.
- Key risks include economic and end-market weakness, commodity-price declines, foreign exchange exposure, competition and pricing pressure, acquisition execution, cybersecurity, raw-material availability, litigation, and potential impairment of goodwill or intangibles. Asbestos claims were described as predominantly dismissed or settled for insignificant amounts, generally with insurance coverage; no material adverse effect was expected.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. The auditor’s control assessment excluded the three 2015 acquisitions, representing 8.5% of total assets and 1.8% of sales.
Important facts for investors to verify
- Whether the 2016 flat-organic-growth and $3.60–$3.70 EPS outlook was achieved, and how much results depended on productivity versus demand recovery.
- Acquisition closing, financing, integration and performance for Akron Brass, and final purchase-price allocations and contingent consideration for 2015 acquisitions.
- Trends in FSDP and FMT end markets, especially oil and gas, agriculture, municipal rescue projects and industrial demand.
- Cash generation, offshore cash availability and repatriation tax implications, and use of the remaining share-repurchase authorization.
- Valuation headroom at the Valves and IDEX Optics & Photonics reporting units and sensitivity to forecast, discount-rate and market-multiple assumptions.