IDEX Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited results. IDEX operates in Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $573.4M | $549.7M | $1,126.9M | $1,052.3M |
| Gross margin | 44.8% | 44.4% | 45.1% | 44.4% |
| Operating income / margin | $125.1M / 21.8% | $113.8M / 20.7% | $240.8M / 21.4% | $217.2M / 20.6% |
| Net income | $83.8M | $75.8M | $159.7M | $143.9M |
| Diluted EPS | $1.08 | $0.99 | $2.07 | $1.87 |
| Operating cash flow | $87.6M | $88.5M | $172.6M | $158.8M |
| Free cash flow | $78.2M | $80.1M | $153.0M | $141.8M |
Q2 sales rose 4% year over year, including 3% organic growth, a 3% net contribution from acquisitions and divestitures, and a 2% foreign-currency headwind. Six-month sales grew 7%, including 4% organic growth, a 5% net acquisition/divestiture contribution, and a 2% currency headwind. Q2 net income increased 11% and diluted EPS increased 9%; six-month net income and diluted EPS each increased 11%.
Q2 performance benefited from higher volume, productivity, prior restructuring savings, and the absence of prior-year Akron Brass inventory step-up charges. Six-month results also included $4.8M of 2017 restructuring expense; adjusted operating income was $245.6M and adjusted diluted EPS was $2.11, versus reported values of $240.8M and $2.07.
Segments
- FMT: Q2 sales were approximately flat at $221.2M, while organic sales grew 4%; operating margin improved to 27.1% from 24.4%. Six-month organic sales rose 5%.
- HST: Q2 sales increased 10% to $204.4M, including 6% organic growth; operating margin rose to 22.6% from 22.0%. Six-month organic sales rose 5%.
- FSDP: Q2 sales increased 4% to $148.0M, although organic sales declined 1%; operating margin rose to 25.1% from 24.3%. Six-month sales rose 16%, primarily from acquisitions, with flat organic sales.
Balance sheet, debt and liquidity
At June 30, cash and cash equivalents were $218.4M, total borrowings were $893.8M, and long-term borrowings net of current maturities and related adjustments were $888.5M. Debt declined from $1,020.9M at December 31, 2016. Cash less total borrowings implies approximate net debt of $675.4M. Working capital was $547.5M and the current ratio was 2.7:1; $171.8M of cash was held outside the U.S.
The $700M revolving facility had $43.4M drawn and $8.2M of letters of credit, leaving approximately $648.4M available. The company was in compliance with its covenants: leverage ratio 1.64:1 against a 3.50:1 maximum, and interest coverage 11.84:1 against a 3.0:1 minimum. Six-month operating cash flow funded $19.5M of capital expenditures; dividends paid were $54.6M and share repurchases were $9.8M.
Outlook, commentary and risks
- Management forecast Q3 2017 EPS of $1.04–$1.06, full-year adjusted EPS of $4.18–$4.23, full-year organic revenue growth of 5%, and Q3 organic growth of 6%.
- Management said available cash, operating cash flow and revolving-facility capacity should cover expected 2017 operating needs, capital spending, debt interest, pension funding, repurchases and dividends. Acquisitions could be funded partly with additional borrowing.
- Key exposures include industrial activity and capital spending, pricing and competition, low order backlogs, acquisition integration, foreign exchange, interest rates, capacity utilization, labor and material costs, and litigation or environmental contingencies. Approximately 5% of debt was floating-rate; a 50-basis-point rate change was estimated to affect annual interest expense and cash flow by about $0.2M.
- Asbestos-related lawsuits remain pending. Most resolved claims were dismissed without payment, and the company reported insurance coverage for most settlements and legal costs to date, but future coverage is uncertain. The company did not expect these matters or other ordinary-course proceedings to have a material impact.
Unusual items and accounting
The company recorded $4.8M in restructuring costs in the first half, principally severance and facility actions; severance payments were expected by year-end. It recorded a $5.5M six-month gain on non-designated foreign-currency forward contracts, largely offset by changes in related intercompany-loan values. Foreign-currency translation increased other comprehensive income by $68.4M in the first half. The company early adopted pension-cost presentation and goodwill-impairment accounting updates; adoption had no material overall financial-statement impact. The company expected substantially unchanged revenue recognition under the new standard, while continuing to assess customized-product contracts.
Important facts for investors to verify
- Whether the projected organic growth and adjusted EPS targets were achieved, and how adjusted measures reconcile to GAAP results.
- Organic demand trends by segment, especially FSDP’s flat first-half organic sales and FMT’s softness in certain energy markets.
- Debt repayment, cash availability—including cash held outside the U.S.—and continued covenant headroom.
- Acquisition-related performance and the carrying value of goodwill and acquired intangibles; goodwill was $1.67B at June 30.
- Foreign-currency effects, restructuring execution, and the availability of insurance for asbestos-related claims.