IDEX Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise.
Business context and performance
IDEX operates across Fluid & Metering Technologies, Health & Science Technologies, Dispensing Equipment, and Fire & Safety/Diversified Products. Third-quarter sales growth reflected organic expansion, acquisitions, and favorable currency translation. The company completed three acquisitions in 2011, including CVI Melles Griot (CVI MG), its largest acquisition.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $476.9 | $373.7 | $1,357.8 | $1,107.9 |
| Gross profit | $181.5 | $154.1 | $545.1 | $456.5 |
| Gross margin | 38.1% | 41.2% | 40.1% | 41.2% |
| Operating income | $71.3 | $62.4 | $228.7 | $183.1 |
| Operating margin | 15.0% | 16.7% | 16.8% | 16.5% |
| Net income | $48.3 | $38.6 | $146.5 | $115.6 |
| Diluted EPS | $0.58 | $0.47 | $1.75 | $1.40 |
| Operating cash flow | — | $175.6 | $157.3 |
Q3 sales rose 28%: 9% organic growth, 16% acquisition contribution, and 3% favorable currency. Nine-month sales increased 23%: 10% organic growth, 10% acquisitions, and 3% favorable currency. Q3 net income increased about 25% and diluted EPS 23%; nine-month net income increased about 27% and diluted EPS 25%.
Margins, segments, and material changes
- Q3 gross margin fell to 38.1%, primarily due to a $12.8 million CVI MG acquired-inventory fair-value charge. Nine-month gross margin was 40.1%, with acquisition inventory charges cited as a principal drag.
- Fluid & Metering Technologies Q3 sales grew 19% and operating margin improved to 19.6% from 17.6%, supported by productivity and cost reductions.
- Health & Science Technologies Q3 sales grew 59%, largely through acquisitions, but operating margin declined to 11.7% from 20.9%, primarily due to the CVI MG inventory charge.
- Dispensing Equipment Q3 sales declined 5% and operating margin fell to 3.8% from 10.2%, reflecting market softness and lower volume.
- Fire & Safety/Diversified Products Q3 sales grew 10%; operating margin was 24.9% versus 25.4%.
- Interest expense increased to $7.8 million in Q3 from $4.2 million, and to $20.9 million for nine months from $11.2 million, principally because of acquisition-related borrowing.
Liquidity, debt, and cash flow
At September 30, cash was $220.5 million; total borrowings were $818.6 million, implying net debt of approximately $598.1 million. Working capital was $412.1 million and the current ratio was 2.0 to 1. Operating cash flow of $175.6 million funded $28.0 million of capital expenditures; cash declined by $14.7 million from year-end to $220.5 million.
The company spent $446.1 million, net of cash acquired, on business acquisitions during the first nine months. Its new $700 million unsecured revolving facility matures in June 2016; $320.9 million was drawn at quarter-end, with stated net available capacity of approximately $371.8 million. The $82.0 million term loan was due December 2011 and classified as current. IDEX reported compliance with its debt covenants, including maximum leverage of 3.25 to 1 and minimum interest coverage of 3.0 to 1.
Outlook, risks, and unusual items
- Management expected 2011 capital expenditures of $36–$38 million and stated that cash and expected operating cash flow would be sufficient for operating needs, debt interest, planned investment, pension funding, and dividends through 2011 and 2012. The filing provides no specific sales or earnings guidance.
- The company began a restructuring initiative in Q3, recording $2.9 million of expense for employee reductions and facility rationalization; it covered more than 100 employees.
- Acquisition-related transaction costs and fair-value inventory charges totaled $22.5 million for the first nine months. Purchase-price allocations for the 2011 acquisitions remained preliminary.
- A $350 million forward-starting interest-rate hedge was intended to hedge anticipated new debt. Interest-rate exposure was material: the filing estimates that a 25-basis-point move in the 10-year Treasury yield could change that hedge’s value by about $8.2 million. A 50-basis-point move on floating-rate debt was estimated to change annual interest expense by about $1.6 million.
- Management identified acquisition integration, industrial and economic activity, and foreign-exchange movements as risks. Asbestos-related lawsuits remain outstanding; the company said most resolved claims had been dismissed or settled for insignificant amounts and did not expect a material adverse effect, while noting uncertainty about future insurance coverage.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter. The filing notes a CEO transition in August 2011; related option and share forfeitures affected compensation expense.
Important facts for investors to verify
- Whether the acquired businesses, particularly CVI MG, deliver the expected growth and profitability after integration.
- How acquisition-related inventory charges, amortization, and transaction costs affect margins and earnings in subsequent periods.
- Repayment or refinancing of the December 2011 term-loan maturity and the amount of debt issued or hedged as anticipated.
- Available revolver capacity, covenant headroom, and the sensitivity of interest expense to rates as borrowing levels change.
- Whether Dispensing Equipment’s market softness persists and whether restructuring actions generate expected savings.
- Future insurance coverage and costs associated with asbestos claims, and any material change in tax exposures or acquisition purchase-price allocations.