IDEX Corporation — Q3 2014 Form 10-Q
Business and period: IDEX designs and sells products across Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/Diversified Products (FSD). This unaudited report covers the three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Net sales | $533.2 | $490.6 | $1,623.9 | $1,503.5 |
| Gross margin | 44.0% | 43.1% | 44.4% | 43.0% |
| Operating income | $110.8 | $97.4 | $336.8 | $291.6 |
| Operating margin | 20.8% | 19.8% | 20.7% | 19.4% |
| Net income | $71.4 | $63.8 | $217.8 | $187.7 |
| Diluted EPS | $0.88 | $0.78 | $2.68 | $2.27 |
| EBITDA (non-GAAP) | $131.4 | $117.0 | $396.7 | $351.9 |
Q3 sales rose 9%: 7% organic growth, 1% acquisition contribution and 1% favorable currency translation. Nine-month sales grew 8%, including 6% organic growth, 1% from acquisitions and 1% favorable currency translation. Management attributed margin expansion principally to volume leverage and productivity; nine-month gross margin also benefited from prior-year structural cost actions.
Segment trends: Q3 sales increased 5% at FMT, 7% at HST and 19% at FSD. FSD led the quarter, with 18% organic growth and operating margin of 26.1%, up from 21.9%. FMT margin was 24.5% versus 24.4%; HST margin was 22.1% versus 20.6%. For the first nine months, sales grew 4% at FMT, 6% at HST and 20% at FSD; operating margins improved in all three segments. FSD's strong period included fulfillment of a large Dispensing order and comparison with a prior-year facility-disposal charge.
Cash, debt and liquidity
Cash and cash equivalents were $487.1 at September 30, 2014, including $376.5 held outside the U.S. Working capital was $678.4 and the current ratio was 2.7:1. Operating cash flow for the first nine months was $266.6, down 11.1% from $299.9, reflecting higher income-tax payments and working-capital needs, partly offset by higher earnings. Capital expenditures were $33.8, compared with $23.1 in 2013.
Total borrowings were $823.4, versus $773.9 at year-end 2013; the balance sheet classified $103.3 as current, including $102.7 of 2.58% Senior Euro Notes due June 2015. The company had $70.0 drawn on its $700.0 revolving facility and approximately $621.7 of available capacity. It reported compliance with debt covenants; interest coverage was 12.94:1 and leverage was 1.58:1, against limits of at least 3.0:1 and no more than 3.25:1. Approximately 9% of debt had floating rates. Management said cash, operating cash flow and facility capacity were sufficient for expected operating needs, capital spending, debt service, pension funding, repurchases and dividends for the remainder of 2014.
Capital allocation and notable items
During the first nine months, IDEX repurchased 2.0 million shares for $149.7 and paid $63.5 in dividends. Repurchase authorization remaining at September 30 was $218.2. The April 2014 Aegis Flow Technologies acquisition cost approximately $25.4, funded through the revolver; it added goodwill and intangible assets and contributed to acquisition-related inventory charges. Nine-month acquisition transaction costs were $1.5, and non-cash acquisition fair-value inventory charges were $1.3.
Foreign-currency translation reduced other comprehensive income by $55.7 in Q3 and $41.5 for the nine-month period, substantially affecting comprehensive income and accumulated other comprehensive income. The Q3 effective tax rate increased to 29.5% from 26.3%; the nine-month rate was 29.1% versus 27.9%, reflecting prior-year discrete tax benefits, jurisdictional income mix and expiration of the U.S. R&D credit, partly offset in 2014 by tax settlements.
Outlook, risks and contingencies
Management projected 5%–6% organic revenue growth for full-year 2014, Q4 diluted EPS of $0.85–$0.88, and full-year diluted EPS of $3.52–$3.55. Management cited volatility and delayed large projects in Europe and the Middle East, softness in agriculture and analytical instrumentation, and delayed municipal spending in parts of Asia. Results are also exposed to industrial activity, capital spending and foreign exchange movements. The company reported asbestos-related lawsuits; most resolved claims had been dismissed without payment, and settlements and legal costs had generally been covered by insurance, subject to deductibles. IDEX said it could not predict future insurance coverage and did not expect the claims to have a material adverse effect. Other ordinary-course legal proceedings were not expected to be material. No interim goodwill impairment trigger was identified; the IOP reporting unit’s fair value had been about 10% above carrying value in the 2013 annual test.
Key facts for investors to verify
- Whether the full-year organic growth and EPS outlook was achieved, and how much growth was organic versus acquisition- or currency-driven.
- Whether operating cash conversion improves as working-capital demands and tax payments normalize.
- Repayment or refinancing plans for the $102.7 million Euro Notes due June 2015, and continued covenant headroom.
- Durability of FSD’s exceptional growth and margins, including the contribution and repeatability of the large Dispensing order.
- Exposure to foreign-currency translation, project delays and the IOP reporting unit’s relatively narrow impairment cushion.
- Any changes in asbestos litigation, insurance recoveries, or the estimated range of unrecognized tax benefits.