IDEX Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context and results
IDEX makes engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). Growth in reported sales was driven mainly by acquisitions; organic sales declined.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $530.4 | $503.8 | $1,582.6 | $1,520.9 |
| Gross margin | 43.5% | 44.3% | 44.1% | 44.8% |
| Operating income | $108.9 | $121.8 | $324.4 | $333.5 |
| Operating margin | 20.5% | 24.2% | 20.5% | 21.9% |
| Net income | $69.9 | $79.5 | $213.8 | $215.0 |
| Diluted EPS | $0.91 | $1.02 | $2.78 | $2.75 |
| Adjusted diluted EPS | $0.92 | $0.89 | $2.79 | $2.62 |
Q3 sales rose 5%, but organic sales fell 2%; acquisitions and divestitures contributed a net 8% increase and foreign exchange reduced sales 1%. For the nine-month period, sales rose 4%, with organic sales down 2%, a net acquisition/divestiture contribution of 7%, and a 1% foreign-exchange headwind. Q3 adjusted operating income was $110.9 million versus $108.5 million; nine-month adjusted operating income was $326.5 million versus $320.1 million.
Segments and material changes
- FMT: Q3 sales declined 2%, while operating income increased to $55.6 million from $46.9 million and margin rose to 26.7% from 22.1%, reflecting prior-year restructuring benefits and comparison with an earlier Alfa inventory step-up charge. Nine-month sales fell 1%; operating income rose to $160.9 million.
- HST: Q3 sales declined 1% and operating income fell to $37.2 million from $38.4 million. Nine-month sales increased 1% and operating income was $119.0 million. Management cited strength in scientific fluidics and semiconductor-related sealing, offset by softness in industrial, oil and gas, and certain optics markets.
- FSDP: Q3 sales increased 30%, largely from Akron Brass and AWG Fittings, but organic sales fell 6%; operating income was $32.2 million versus $32.5 million and margin fell to 23.2% from 30.4%. Nine-month sales increased 18% while organic sales fell 5%; operating income was $91.7 million.
Gross margin pressure reflected acquisition-related inventory step-up charges of $4.6 million in Q3 and $10.4 million year to date. Reported operating income comparisons were also affected by a $18.1 million gain on the 2015 Ismatec divestiture versus a $2.1 million net loss on business sales in 2016. The 2016 net included a $5.8 million gain on Hydra-Stop and a $7.9 million loss on Melles Griot KK. A $4.7 million reversal of contingent consideration from a 2015 acquisition benefited year-to-date SG&A.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $284.3 million, up from $261.8 million. Capital expenditures were $28.6 million, compared with $32.6 million; operating cash flow exceeded capital spending.
- Investing cash outflow was $506.2 million, including $510.0 million for acquisitions. Financing cash inflow was $141.7 million. Cash declined $88.6 million from year-end to $239.4 million; $216.0 million was held outside the U.S.
- Total borrowings were $1,106.7 million, versus $847.4 million at December 31, 2015. Cash and cash equivalents were $239.4 million. The $700 million revolving facility had $255.1 million drawn, $8.2 million in letters of credit, and approximately $436.7 million of available capacity.
- Working capital was $552.0 million and the current ratio was 2.8 to 1. IDEX reported compliance with its financial covenants: leverage ratio 1.98 to 1 against a maximum of 3.50 to 1, and interest coverage 12.25 to 1 against a minimum of 3.0 to 1.
- The company issued $100 million of 3.20% senior notes due 2023 and $100 million of 3.37% senior notes due 2025. Approximately 23% of debt was floating-rate; management estimated a 50-basis-point rate move would change annual interest expense and cash flow by about $1.3 million.
Outlook, risks and other items
Management projected Q4 2016 adjusted EPS of $0.92 to $0.94, full-year adjusted EPS of $3.72 to $3.74, full-year revenue growth of 5%, and full-year organic revenue growth of negative 1%. These are forward-looking estimates, not guarantees. Management said cash, operating cash flow, and available revolver capacity should cover operating needs, planned capital expenditures, debt interest, benefit-plan funding, anticipated repurchases, and dividends for the remainder of 2016.
- Management highlighted economic and industrial activity, customer capital spending, pricing and competition, currency movements, interest rates, material costs, and the ability to integrate acquisitions as risks. It noted that typically low order backlogs can make results sensitive to changes in orders.
- A pension lump-sum offer was expected to generate $8 million to $10 million of plan payments and a $3 million to $6 million pretax settlement loss in Q4; final amounts remained uncertain.
- Asbestos-related claims are generally insured, subject to deductibles, but future insurance coverage is uncertain. The company said it did not expect these or other ordinary-course legal proceedings to have a material impact.
- On October 10, 2016, IDEX completed the sale of its IETG and 40Seven subsidiaries for $2.8 million, subject to customary adjustments.
- Disclosure controls were reported effective at September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether organic demand stabilizes, particularly in FSDP and end markets exposed to oil and gas, industrial distribution, and project timing.
- Whether acquired businesses deliver expected growth and synergies, and how acquisition-related inventory charges, amortization, and integration costs affect margins.
- Progress against the Q4 and full-year adjusted EPS and revenue outlook, including the gap between reported and adjusted performance.
- Debt levels, floating-rate exposure, covenant headroom, and the use of cash and borrowing capacity for acquisitions, dividends, and share repurchases.
- The final cost and accounting impact of the pension settlement offer, and any material change in asbestos-related claims or insurance coverage.