IDEX Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with the same period in 2016. IDEX sells engineered products through Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Results include acquisitions and divestitures completed in 2016.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / note |
|---|---|---|---|
| Net sales | $553.6 million | $502.6 million | Up 10%; organic sales up 5% |
| Gross profit / margin | $250.9 million / 45.3% | $223.3 million / 44.4% | Margin up 0.9 percentage point |
| Operating income / margin | $115.7 million / 20.9% | $103.3 million / 20.6% | Up 12%; includes $4.8 million restructuring expense |
| Net income | $75.9 million | $68.1 million | Up 11% |
| Diluted EPS | $0.99 | $0.89 | Up $0.10 |
| EBITDA (company-reported non-GAAP) | $136.7 million | $123.3 million | 24.7% of sales; nearly 12 times interest expense |
| Operating cash flow | $85.0 million | $70.4 million | Up 21% |
| Free cash flow (company-reported non-GAAP) | $74.8 million | $61.7 million | Operating cash flow less capital expenditures |
Adjusted operating income was $120.5 million and adjusted EPS was $1.03, excluding restructuring charges; these are non-GAAP measures, not reported GAAP results. Capital expenditures were $10.2 million. Cash declined $19.9 million during the quarter to $216.1 million.
Segment results: FMT sales were $216.8 million, up 2%, with a 26.7% operating margin versus 24.4%. HST sales were $199.7 million, up 7%, with a 21.2% margin versus 21.8%. FSDP sales were $137.4 million, up 31%, with a 23.7% margin versus 24.5%. FSDP’s sales growth chiefly reflected acquisitions; its margin was pressured by acquired businesses’ lower margins and higher amortization.
Liquidity, debt, and material changes
At March 31, 2017, cash was $216.1 million, including $186.8 million held outside the U.S.; working capital was $545.2 million and the current ratio was 3.0:1. Total borrowings were $955.9 million, including $105.3 million drawn on the revolving facility. Net available revolver capacity was approximately $585.6 million. The company reported compliance with its 3.0:1 minimum interest coverage and 3.50:1 maximum leverage covenants; actual ratios were 11.65:1 and 1.78:1, respectively.
Compared with Q1 2016, sales growth reflected 5% organic growth, a 7% net favorable acquisition/divestiture impact, and 2% unfavorable foreign currency translation. Acquisitions notably boosted FSDP; current-period restructuring charges and prior-year acquisition effects also affect comparisons. The prior-year period included $221.6 million of acquisition spending for Akron Brass, while no business acquisition spending was reported in Q1 2017. Interest expense rose to $11.6 million from $10.5 million, primarily due to notes issued in 2016.
Outlook, commentary, and risks
Management projected Q2 2017 EPS of $1.04–$1.06, full-year 2017 adjusted EPS of $4.00–$4.10, full-year organic revenue growth of 3%–4%, and Q2 organic growth of 2%–3%. Management stated that cash, operating cash flow, and available revolver capacity should be sufficient for expected 2017 operating needs, capital expenditures, debt interest, benefit funding, repurchases, and dividends.
Key risks identified include changes in industrial activity and global economic conditions, customer capital spending and pricing pressure, typically low order backlogs, acquisition execution and integration, foreign exchange, interest rates, capacity utilization, labor and material costs, and litigation or environmental contingencies. The company reported ordinary-course legal proceedings not expected to have a material financial impact. Asbestos-related claims have generally been dismissed or settled for insignificant amounts, and historical costs have largely been insured; future insurance coverage is uncertain. The filing states no Q1 event required an interim goodwill impairment test, while the Akron Brass trade name’s prior-year fair value was near its carrying value.
Unusual items and accounting: Q1 included $4.8 million of restructuring charges related to cost-reduction initiatives, including employee reductions and facility rationalization; severance benefits covered 97 employees. IDEX early adopted pension-cost presentation guidance and reclassified $0.8 million of prior-year expenses. It said expected revenue recognition under the new standard would remain substantially unchanged, while implementation assessment continued.
Most important facts for investors to verify
- Whether organic growth and the 2017 outlook are being achieved, distinguishing underlying growth from acquisition, divestiture, and currency effects.
- Whether margin trends—particularly HST and FSDP—improve as restructuring actions proceed and acquired businesses are integrated.
- Debt, cash availability, covenant headroom, and the concentration of cash held outside the U.S.
- The assumptions behind adjusted EPS and EBITDA, which are non-GAAP measures, and the reconciliation to GAAP results.
- Developments in asbestos-related claims and the availability of insurance coverage.
- The completion and financial effects of revenue-standard implementation and any subsequent goodwill or intangible-asset impairment indicators.