IDEX Corporation — Q2 2016 Form 10-Q
Business context and period: IDEX designs and sells engineered products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSDP). This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $549.7 million | $514.9 million | $1,052.3 million | $1,017.1 million |
| Operating income | $113.0 million | $109.9 million | $215.5 million | $211.7 million |
| Operating margin | 20.6% | 21.3% | 20.5% | 20.8% |
| Net income | $75.8 million | $69.6 million | $143.9 million | $135.5 million |
| Diluted EPS | $0.99 | $0.89 | $1.87 | $1.72 |
- Q2 sales increased 7%, while organic sales declined 1%; acquisitions contributed 8%. For the first half, sales increased 3%, with organic sales down 2%, acquisitions contributing 6%, and currency reducing sales by 1%.
- Q2 gross margin was 44.4%, down 60 basis points from 45.0%. SG&A was 23.8% of sales, versus 23.7%. First-half gross margin also declined 60 basis points to 44.4%, while SG&A improved to 23.9% from 24.2% of sales.
- Management-reported EBITDA was $137.0 million in Q2 and $260.3 million for the first half; EBITDA margin was approximately 25% in both periods. EBITDA is a non-GAAP measure.
- Operating cash flow for the first half was $158.8 million, up from $148.4 million. Capital expenditures were $17.1 million, implying operating cash flow less capital expenditures of approximately $141.8 million. Investing cash outflow was $238.6 million, including $221.6 million for Akron Brass.
Segments and material changes
- FMT: Q2 sales rose 3% and operating margin was 24.3%, versus 24.1%. First-half sales were essentially flat; operating income declined to $105.3 million from $107.8 million, and margin fell to 24.3% from 24.9%. Weakness included North American industrial, oil and gas, mining, and agricultural markets.
- HST: Q2 sales declined 1% and margin fell to 22.0% from 22.3%. First-half sales rose 2% and margin improved to 21.9% from 21.6%. Industrially exposed businesses, optics, and printing-related demand were weak; pharmaceutical projects and selected life-science and semiconductor markets were stronger.
- FSDP: Q2 sales rose 27%, primarily from Akron Brass; organic sales declined 1%. Margin fell to 24.1% from 28.1%. First-half sales rose 13%, but organic sales declined 3%; margin fell to 24.2% from 26.8%.
- Akron Brass was acquired in March for $221.6 million, funded with revolving borrowings. The acquisition added $5.8 million of first-half inventory fair-value step-up charges ($3.6 million in Q2), weighing on gross and operating margins.
- SG&A included a $4.7 million first-half benefit from reversing contingent consideration for the 2015 CPS acquisition ($1.0 million of the benefit was in Q2). The company also incurred acquisition-related costs.
Financial position, outlook, and risks
- At June 30, cash was $361.5 million, including $329.2 million held outside the U.S. Working capital was $671.6 million and the current ratio was 3.3:1.
- Total borrowings were approximately $1.062 billion, up from $847.4 million at year-end 2015. This includes $210 million drawn on the $700 million revolving facility; available capacity, net of letters of credit, was approximately $482.1 million. The company issued $200 million of senior notes: $100 million at 3.20% due 2023 and $100 million at 3.37% due 2025.
- IDEX reported compliance with its financial covenants: leverage ratio 1.97:1 against a maximum 3.50:1, and interest coverage 12.49:1 against a minimum 3.0:1. Approximately 20% of debt was floating-rate; a 50-basis-point rate change would affect annualized interest expense and cash flows by about $1.1 million.
- Management expected Q3 2016 EPS of $0.90–$0.92 and full-year EPS of $3.70–$3.75, assuming flat organic growth for the year and operating margin of 20.5%–21.0%. Management said cash, operating cash flow, and revolver capacity should cover anticipated 2016 requirements.
- Subsequent events: IDEX announced the approximately $51 million AWG acquisition; agreed to acquire SFC for approximately $240 million, subject to closing conditions; agreed to sell Melles Griot KK for approximately $19 million; and completed the sale of Hydra-Stop for $15 million plus possible contingent consideration.
- Risks highlighted include industrial and end-market weakness, low order backlogs, pricing and competitive pressure, currency and interest-rate changes, acquisition integration and execution, and litigation or other contingencies. The company reported ordinary-course legal matters and asbestos-related claims; it said these were not expected to have a material adverse effect, while noting uncertainty about continued insurance coverage.
- Early adoption of share-based payment accounting guidance increased reported tax benefits and may cause effective-tax-rate volatility. The Q2 effective tax rate was 26.9%, compared with 29.4% a year earlier.
Most important facts for investors to verify
- Whether organic sales stabilize or weaken further, especially in industrial, oil and gas, agriculture, optics, and other cyclical end markets.
- Whether Akron Brass integration and subsequent acquisitions deliver growth and margins sufficient to offset acquisition-related costs and purchase-accounting charges.
- Progress against EPS and margin guidance, and the extent to which reported earnings depend on tax benefits and the CPS contingent-consideration reversal.
- Debt and liquidity after the announced acquisitions, including covenant headroom, borrowing costs, and the use of cash held outside the U.S.
- Potential outcomes and insurance coverage for asbestos-related claims, and closing or completion details for the announced transactions.