IDEX Corporation — Q2 2013 Form 10-Q
Business context and period. IDEX designs and sells specialized products across Fluid & Metering Technologies, Health & Science Technologies, and Fire & Safety/Diversified Products. This unaudited filing covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $518.4m | $494.1m | $1,012.9m | $983.6m |
| Gross margin | 43.0% | 41.1% | 42.9% | 41.3% |
| Operating income / margin | $99.6m / 19.2% | $88.7m / 17.9% | $194.3m / 19.2% | $173.2m / 17.6% |
| Net income | $62.6m | $54.4m | $123.9m | $106.5m |
| Diluted EPS | $0.76 | $0.65 | $1.49 | $1.27 |
| Operating cash flow | Not separately stated | Not separately stated | $181.5m | $139.5m |
Q2 sales rose 5%, including 2% organic growth and 3% from acquisitions. First-half sales rose 3%, with organic sales flat. Management attributed higher gross and operating margins mainly to volume leverage, productivity improvements, and benefits from earlier restructuring actions. First-half SG&A rose to $240.6m from $225.3m, reflecting acquisition costs, volume-related expenses, and a $1.0m facility-closure charge.
At June 30, cash and cash equivalents were $374.5m, total borrowings were $815.5m, and working capital was $641.4m; the current ratio was 3.2:1. Cash increased $55.6m during the first half. Operating cash flow funded $15.8m of capital expenditures; investing cash flow also included $36.8m for acquisitions. Financing included $84.5m of share repurchases and $35.4m of dividends paid.
Segments and material changes
- Fluid & Metering Technologies: Q2 sales increased 7% to $225.5m, all attributed to organic growth; operating income rose to $56.1m and margin to 24.9% from 22.0%.
- Health & Science Technologies: Q2 sales increased 6% to $180.9m, reflecting acquisition growth despite a 2% organic decline; operating income was $34.5m and margin rose to 19.1% from 15.9%.
- Fire & Safety/Diversified Products: Q2 sales decreased 1% to $114.2m; operating income fell to $23.7m and margin to 20.7% from 22.5%, primarily due to lower volume and the facility-closure charge.
For the first half, IDEX reported higher sales, operating income, net income, and diluted EPS year over year. No restructuring expense was recorded in 2013, compared with $7.5m in the first half of 2012. Q2 2012 had included $2.6m of restructuring charges.
Outlook, risks, and unusual items
- Management forecast Q3 2013 diluted EPS of $0.72–$0.74 and raised its full-year 2013 diluted EPS outlook to $2.93–$2.98, with expected full-year organic revenue growth of 3%.
- Management said cash, operating cash flow, and available revolving-credit capacity should cover operating needs, planned capital spending, debt interest, benefit funding, repurchases, and dividends through the remainder of 2013 and 2014.
- Total borrowings were $815.5m; $55.0m was drawn on the $700m revolving facility, with approximately $635.3m of net availability. The company reported compliance with debt covenants: leverage ratio 1.88:1 versus a maximum 3.25:1, and interest coverage 10.66:1 versus a minimum 3.0:1.
- In March 2013, IDEX acquired FTL Seals for $34.5m in cash, funded through the revolving facility. The filing reports $1.4m of acquisition-related transaction costs and $1.8m of non-cash acquisition inventory charges. A separate $4.9m contingent consideration liability for the Matcon acquisition was expected to be paid in the first half of 2014.
- Risks include exposure to industrial demand, foreign exchange and interest-rate changes, and the ability to integrate acquisitions profitably. Asbestos-related lawsuits are pending; the company said most resolved claims were dismissed without payment and that it did not expect a material adverse effect, but noted uncertainty about future insurance coverage. Other ordinary-course legal proceedings were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether the forecast 3% organic growth and EPS outlook are achieved, particularly given flat first-half organic sales.
- Underlying Health & Science demand and the effect of acquisitions, foreign exchange, and continuing weakness in optics, defense, and research markets.
- Cash conversion and working-capital trends, alongside continued repurchases, dividends, and acquisition spending.
- Debt levels, covenant headroom, and the upcoming June 2015 maturity of the senior euro notes.
- Final purchase-price allocation for FTL, payment of Matcon contingent consideration, and any changes in asbestos-claim or insurance exposure.