IDEX Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Business context and reporting period
IDEX manufactures specialized fluid and metering, health and science, fire and safety, and diversified products. Its three reportable segments are Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). The company said COVID-19-related economic disruption reduced customer demand; most facilities remained open, although some temporarily closed for cleaning.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $561.2 | $642.1 | $1,155.7 | $1,264.3 |
| Gross profit / margin | $234.8 / 41.8% | $292.3 / 45.5% | $506.8 / 43.8% | $576.2 / 45.6% |
| Operating income / margin | $110.6 / 19.7% | $155.3 / 24.2% | $250.5 / 21.7% | $303.1 / 24.0% |
| Net income | $70.9 | $113.2 | $172.9 | $223.5 |
| Diluted EPS | $0.93 | $1.48 | $2.27 | $2.92 |
| Operating cash flow | Not separately reported here | Not separately reported here | $254.2 | $219.8 |
| Free cash flow (non-GAAP) | Not separately reported here | Not separately reported here | $233.1 | $194.1 |
Q2 sales fell 13%, including a 17% decline in organic sales; acquisitions added 5% and foreign exchange reduced sales by 1%. For the first half, sales declined 9%, with organic sales down 11%, acquisitions contributing 3%, and foreign exchange reducing sales by 1%. Lower volume, mix, acquisition-related margin dilution, and a $4.1 million inventory step-up charge weighed on gross margin. SG&A fell, reflecting restructuring savings and lower variable costs, but rose as a percentage of sales.
Management’s non-GAAP adjusted results: Q2 adjusted operating income was $118.5 million and adjusted EPS was $1.10, down 25% and 27%, respectively, from the prior year. First-half adjusted operating income was $258.5 million and adjusted EPS was $2.44, down 15% and 17%. Adjustments included restructuring, inventory step-up, and— for adjusted net income and EPS—early debt redemption costs. These measures are not substitutes for GAAP results.
Q2 segment sales declined 11% at FMT, 7% at HST, and 23% at FSDP. Segment operating margins were 23.2%, 22.3%, and 22.7%, respectively, compared with 30.1%, 24.4%, and 26.6% a year earlier. FSDP was particularly affected by disruption in paint and transportation markets and weaker fire and rescue demand.
Liquidity, debt, and capital allocation
At June 30, cash and cash equivalents were $746.3 million; current assets were $1,397.3 million and current liabilities $401.3 million, with a reported current ratio of 3.5 to 1. Cash included $411.2 million held outside the United States. The company reported $1,050.4 million of total borrowings, including $1,044.4 million long-term, and no revolving-facility balance. Net available revolver capacity was approximately $792.9 million, for more than $1.5 billion of cash and available borrowing capacity combined.
Management reported gross leverage of 1.62 times and interest coverage of 14.64 times at quarter-end, in compliance with debt covenants. It issued $500 million of 3.0% notes due 2030 and used proceeds in part to redeem $300 million of 4.5% notes due 2020. The refinancing generated an $8.4 million loss on early redemption. First-half capital expenditures were $21.1 million; the company paid $76.5 million in dividends and repurchased $110.3 million of shares.
Outlook, risks, and unusual items
- Management expected organic sales to decline approximately 12%–17% in Q3 2020. It said cash, operating cash flow, and available credit should fund operations and planned obligations for the foreseeable future, while warning that pandemic impacts and access to financing remain uncertain.
- COVID-19 could further affect demand, customer solvency and collections, suppliers, facilities, workforce productivity, and global markets. Management reported no material supply-chain disruption to date, but could not predict the pandemic’s duration or effects.
- Q2 and first-half results included $3.8 million of restructuring expense and a $4.1 million fair-value inventory step-up charge. The debt redemption loss was $8.4 million. Restructuring actions primarily involved employee reductions.
- The company acquired Flow Management Devices for $120.8 million in February 2020. It also formed a Saudi Arabia joint venture, which had not yet been funded or begun operations by June 30; commencement was expected in Q3.
- The filing describes ordinary-course legal matters and asbestos-related claims; management did not believe these would have a material adverse effect. The company stated that disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Q3 organic sales tracked management’s projected 12%–17% decline, and how demand developed across segments and end markets.
- Whether margins and cash generation stabilized as volume, mix, restructuring savings, and acquisition effects changed.
- Cash availability, including funds held outside the U.S., revolver capacity, debt levels, covenant headroom, and the effect of continued share repurchases and dividends.
- The comparability and exclusions in management’s adjusted, EBITDA, organic-sales, and free-cash-flow measures against GAAP results.
- Whether COVID-19, customer or supplier distress, facility disruptions, or legal and insurance developments created material effects beyond those disclosed.