IDEX Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. IDEX sells engineered products across fluid and metering technologies, health and science technologies, and fire, safety and diversified products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $479.9 million | $476.9 million | $1,463.4 million | $1,357.8 million |
| Gross profit | $194.8 million | $181.5 million | $600.8 million | $545.1 million |
| Operating income | $80.6 million | $71.3 million | $253.8 million | $228.7 million |
| Operating margin | 16.8% | 15.0% | 17.4%* | 16.8% |
| Net income | $50.1 million | $48.3 million | $156.6 million | $146.5 million |
| Diluted EPS | $0.60 | $0.58 | $1.87 | $1.75 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $240.5 million | $175.6 million |
*The segment-results table reports 17.4% for the nine-month 2012 operating margin; MD&A prose gives 17.3%.
- Q3 sales increased 1%, reflecting 1% organic growth, 2% contribution from acquisitions, and 2% unfavorable currency translation. Gross margin rose to 40.6% from 38.1%.
- For the first nine months, sales rose 8%: 4% organic growth and 6% acquisition contribution, partly offset by 2% unfavorable currency translation. Gross margin was 41.1%, versus 40.1%.
- Nine-month diluted EPS increased 7%; the filing’s overview describes the increase as 12 cents. Q3 diluted EPS increased 3%.
- Nine-month operating cash flow increased 37%, principally on higher earnings and improved working capital. Capital expenditures were $28.1 million; operating cash flow less capital expenditures was approximately $212.4 million.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $260.5 million; working capital was $549.8 million and the current ratio was 2.9 to 1.
- Total borrowings were $787.9 million, compared with $808.8 million at year-end 2011. Cash less total borrowings implies net debt of approximately $527.4 million.
- The $700 million revolving facility had $27.0 million drawn and $7.1 million of letters of credit; net available capacity was approximately $665.9 million. IDEX reported compliance with debt covenants: leverage ratio 1.9 to 1 versus a 3.25 maximum, and interest coverage 10.6 to 1 versus a 3.0 minimum.
- Nine-month financing included $75.2 million spent repurchasing 1.9 million shares and $47.6 million of dividends paid. On October 22, the board authorized an additional $200 million for repurchases, taking the remaining authorization to approximately $250 million.
Changes, acquisitions and segment trends
- Q3 segment sales and operating income: Fluid & Metering Technologies $198.0 million and $41.6 million; Health & Science Technologies $176.2 million and $27.3 million; Fire & Safety/Diversified Products $108.2 million and $24.7 million.
- For the first nine months, Health & Science sales grew 18%, largely due to acquisitions, while its margin fell to 16.3% from 17.1%, reflecting acquisition dilution and restructuring. Fluid & Metering sales grew 1% and margin improved to 21.3%; Fire & Safety/Diversified sales grew 8% and margin improved to 22.7%.
- 2012 acquisitions were Precision Photonics, ERC and Matcon, with net assets acquired of $79.8 million. The filing reports $69.0 million of acquisition cash outflow for the nine-month period. Matcon’s contingent consideration had an estimated fair value of $8.4 million, with potential undiscounted future payments of $0–$15 million.
- Restructuring charges were $7.1 million in Q3 and $14.6 million year to date, versus $2.9 million in each comparable 2011 period. Actions included employee reductions, facility rationalization and termination of a defined benefit pension plan.
Outlook, risks and unusual items
- Management expected challenging conditions, particularly outside the U.S., and forecast flat Q4 organic revenue versus Q4 2011. It maintained full-year 2012 adjusted EPS guidance of $2.65–$2.70.
- Interest expense rose to $10.5 million in Q3 and $31.7 million year to date, mainly due to debt associated with the CVI MG acquisition and financing costs. The effective tax rate rose to 28.6% in Q3 from 23.4%, and to 29.5% year to date from 29.1%.
- Reported operating-income comparisons benefited from a $12.8 million CVI MG acquisition inventory fair-value charge recorded in 2011. Current-period results include higher restructuring costs; acquisition-related transaction costs were $2.4 million year to date.
- Management said goodwill and indefinite-lived intangibles were not tested for impairment in Q3 because no triggering event was identified. It warned that Water, Optics and Photonics, and the CVI/Melles Griot trade names could be at risk if market conditions deteriorate.
- Market risks include foreign-exchange movements and interest rates. About 5% of debt was floating-rate; a 50-basis-point rate change would affect annual interest expense and cash flow by approximately $0.2 million.
- The company and subsidiaries face asbestos-related personal-injury claims. Most resolved claims were dismissed without payment or settled for insignificant amounts; insurance has covered most settlements and legal costs to date, but future insurance availability is uncertain. IDEX did not expect the claims or other ordinary-course litigation to have a material adverse effect.
- Management stated that cash and expected operating cash flow should cover operating needs, planned capital spending, debt service, benefit funding, authorized repurchases and dividends through 2013. This is forward-looking and subject to the risks described in the filing.
Most important facts for investors to verify
- Whether Q4 organic revenue and full-year adjusted EPS track management’s stated outlook.
- How much reported growth and earnings improvement reflect acquisitions, prior-year inventory charges, restructuring, and organic performance.
- Integration and returns from the 2012 acquisitions, including Matcon’s contingent payments and the related goodwill and intangible asset valuations.
- Cash generation, debt levels, covenant headroom, and the funding and pace of the expanded share repurchase authorization.
- Exposure to weak international markets and potential impairment risk in the identified reporting units and trade names.
- Developments in asbestos claims and the availability of insurance coverage.