IDEX Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. IDEX is a diversified industrial and applied-solutions company operating through Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). The filing also presents unaudited fourth-quarter results.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2.287 billion | $2.113 billion |
| Gross profit / margin | $1.027 billion / 44.9% | $930.8 million / 44.0% |
| Operating income / margin | $502.6 million / 22.0% | $412.4 million / 19.5% |
| Net income | $337.3 million | $271.1 million |
| Diluted EPS | $4.36 | $3.53 |
| Cash from operations | $432.8 million | $399.9 million |
| Capital expenditures | $43.9 million | $38.2 million |
| Cash and cash equivalents at year-end | $376.0 million | $236.0 million |
| Total borrowings at year-end | $862.2 million | $1.021 billion |
| Current ratio | 2.78 | 2.7 |
Organic sales grew 6%; acquisitions and divestitures contributed a net 2% to reported sales growth. Adjusted operating income was $501.7 million, adjusted operating margin 21.9%, adjusted net income $333.7 million, adjusted EPS $4.31, and adjusted EBITDA $583.6 million. These are non-GAAP measures.
Fourth-quarter 2017 sales were $585.9 million, operating income $135.2 million, net income $93.7 million, and diluted EPS $1.21. The corresponding fourth-quarter 2016 figures were $530.4 million, $85.5 million, $57.3 million, and $0.75.
Segments and changes versus prior year
- FMT: Sales rose 4% to $881.0 million; operating income increased 11% to $241.0 million and margin improved 180 basis points to 27.4%. Organic sales rose 6%; divestitures reduced reported growth.
- HST: Sales grew 10% to $820.1 million; operating income rose 17% to $179.6 million and margin improved 130 basis points to 21.9%. Organic sales increased 8%.
- FSDP: Sales rose 13% to $587.5 million; operating income increased 19% to $147.0 million and margin improved 120 basis points to 25.0%. Organic sales grew 4%, with acquisitions contributing 9%.
Management attributed improved consolidated margins to higher volume, productivity, and the prior-year impact of $14.7 million in acquisition-related inventory step-up charges. Reported operating income also benefited from a $9.3 million gain on the Faure Herman sale; FY2016 included a $22.3 million net loss on business sales. Restructuring expense was $8.5 million in 2017 versus $3.7 million in 2016.
Cash, debt, liquidity, and capital allocation
Operating cash flow increased 8.2% to $432.8 million. Investing activities used $54.7 million, including $43.9 million of capital expenditure and $38.2 million for the thinXXS acquisition; financing activities used $277.4 million. Cash was $376.0 million, including $219.6 million held outside the U.S. The $700 million revolving facility had $10.7 million drawn and $682.1 million of net available capacity at year-end. The company reported compliance with its financial covenants: leverage ratio 1.45 versus a 3.50 maximum, and interest coverage 13.64 versus a 3.0 minimum.
Dividends were $1.48 per share for 2017, up from $1.36. IDEX repurchased 266,000 shares for $29.1 million during the year, with $551 million of authorization remaining. Management stated that cash, operating cash flow, and available borrowing capacity should be sufficient for expected needs over the following 12 months.
Outlook, management commentary, risks, and unusual items
- Management projected approximately 5% organic revenue growth and diluted EPS of $4.90–$5.10 for 2018, citing fourth-quarter order strength and growth initiatives.
- The Tax Cuts and Jobs Act produced a net $0.1 million tax benefit in 2017, with provisional components including a $40.6 million deferred-tax benefit, $30.3 million transition-tax expense on deemed repatriation, and tax expense associated with changes to reinvestment assertions. Accounting remained incomplete; the company expected to finalize it during 2018. The new U.S. federal corporate rate of 21% took effect in 2018.
- Currency was a notable earnings item: 2017 included a $19.8 million gain on foreign-exchange contracts and a $20.2 million loss on related intercompany loans. The filing reports total foreign-currency transaction losses of $20.5 million.
- Principal risks include economic or political deterioration in domestic and international markets, competitive and pricing pressure, acquisition execution and integration, foreign-exchange and interest-rate movements, commodity-sensitive customer spending, raw-material availability, cybersecurity, key-personnel retention, tax uncertainty, and litigation or regulatory matters. International customers generated about 49% of sales.
- IDEX reported asbestos-related claims and other ordinary-course proceedings. Most resolved asbestos claims were dismissed without payment or settled for insignificant amounts; insurance coverage may not remain available. Management did not expect these matters to have a material adverse effect.
- thinXXS was acquired in December 2017 for $38.2 million cash plus $1.2 million of assumed debt. Goodwill and intangible assets included in the acquisition allocation were $23.9 million and $11.8 million, respectively.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at year-end.
Most important facts for investors to verify
- Whether 2018 organic growth and EPS guidance was achieved, and how much growth came from acquisitions versus underlying demand.
- The final Tax Act accounting, including transition-tax calculations, GILTI treatment, and any remaining changes to foreign-earnings reinvestment assumptions.
- Whether improved operating margins persist after excluding divestiture gains, restructuring costs, and acquisition-related effects.
- Debt maturities, revolving-facility availability, covenant headroom, and cash deployment among acquisitions, dividends, and share repurchases.
- Foreign-exchange exposure and the continuing earnings and cash-flow effects of hedging and intercompany loans.
- Developments in asbestos insurance coverage, other contingencies, and goodwill or intangible-asset impairment assumptions.