IDEX Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. IDEX makes engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP).
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $712.0M | $581.1M | $2,050.0M | $1,736.8M |
| Gross profit / margin | $311.6M / 43.8% | $251.5M / 43.3% | $910.3M / 44.4% | $758.3M / 43.7% |
| Operating income / margin | $161.2M / 22.6% | $131.2M / 22.6% | $475.0M / 23.2% | $381.7M / 22.0% |
| Net income attributable to IDEX | $115.7M | $103.8M | $330.6M | $276.7M |
| Diluted EPS | $1.51 | $1.37 | $4.33 | $3.64 |
| Operating cash flow | $156.6M | $153.7M | $402.2M | $407.9M |
| Free cash flow (non-GAAP) | $141.7M | $135.3M | $356.7M | $368.5M |
Q3 sales grew 23%, including 15% organic growth, a net 7% acquisition contribution, and 1% favorable currency impact. Nine-month sales rose 18%, including 12% organic growth, 3% acquisition contribution, and 3% favorable currency impact. Adjusted figures are non-GAAP: Q3 adjusted operating income was $173.1M, adjusted net income $125.0M, and adjusted EPS $1.63; nine-month amounts were $498.6M, $363.1M, and $4.75, respectively.
Segment trends: Q3 HST sales rose 37% and operating margin increased to 23.3%; FMT sales rose 14% and margin to 27.5%; FSDP sales rose 13%, but margin declined to 24.6% from 26.3%. For the nine months, HST sales increased 25% and margin reached 25.7%; FMT sales increased 12% with margin at 26.2%; FSDP sales increased 16% with margin at 26.4%.
Cash, debt, and liquidity
- Cash and equivalents were $806.5M at September 30, down from $1,025.9M at year-end 2020. Nine-month operating cash flow was $402.2M; investing cash outflow was $624.2M, including $575.6M for acquisitions and $45.5M of capital expenditures.
- Total borrowings were $1,200.1M, versus $1,050.2M at year-end 2020. The company issued $500M of 2.625% notes due 2031 and used proceeds in part to redeem $350M of 4.20% notes due 2021. All debt outstanding was fixed-rate; no derivatives were outstanding.
- The $800M revolving facility had no borrowings and approximately $792.8M available after letters of credit. IDEX reported covenant compliance. Working capital was $1,114.3M and the current ratio was 3.4:1.
- Management said cash, operating cash generation, and available borrowing capacity should fund foreseeable requirements and that liquidity was expected to be sufficient for at least the next 12 months.
Changes, commentary, and risks
- 2021 acquisitions: ABEL Pumps, acquired in March for $106.3M, and Airtech, acquired in June for $471.0M. Acquisition-related goodwill and intangible assets totaled approximately $330.7M and $247.3M, respectively. Purchase price allocations were preliminary. The acquisitions contributed to sales growth and increased amortization; inventory fair-value step-up charges totaled $11.6M for the nine months.
- Higher volume and pricing supported margins, partly offset by inflation, supply-chain constraints, acquisition-related costs, and inventory step-up charges. Q3 operating margin was flat year over year despite higher sales.
- Nine-month other expense included an $8.6M loss on early debt redemption and a $9.7M noncash loss from termination and settlement of the U.S. pension plan. The company also recorded restructuring and asset-impairment costs of $8.6M for the nine months.
- The effective tax rate rose to 23.4% in Q3 from 14.4%, and to 22.5% for the nine months from 18.7%, mainly reflecting finalized GILTI regulations and lower excess tax benefits from share-based compensation.
- Management cited COVID-19 and variants, supply-chain backlogs and component availability, labor and freight challenges, material-cost inflation, industrial demand and capital spending, foreign exchange, tariffs, acquisition integration, and litigation or other contingencies as risks to results. It provided no specific numerical forward guidance in the supplied filing text.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. IDEX disclosed asbestos-related lawsuits and stated that insurance had covered most historical settlements and costs, but future insurance coverage is uncertain. A $3.5M settlement of a prior-divestiture transaction indemnity was paid in Q3.
Important facts for investors to verify
- How much reported growth and future earnings depend on the ABEL and Airtech acquisitions, and the final purchase-price allocations and integration results.
- Whether pricing can continue to offset inflation, supply-chain limitations, freight costs, and labor constraints, particularly given FSDP’s Q3 margin decline.
- Working-capital and cash-conversion trends: nine-month operating cash flow and free cash flow were below the prior-year period despite higher earnings.
- The persistence of the higher effective tax rate and the impact of acquisition amortization and other adjustment items on GAAP results.
- Potential developments in asbestos litigation and the availability of insurance, as well as any changes in other legal or indemnity exposures.
- Reconcile non-GAAP adjusted measures to GAAP results and assess whether the excluded charges are genuinely nonrecurring.