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IEX > SEC Filings for IEX > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for IDEX CORP /DE/


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Under the Private Securities Litigation Reform Act

The "Overview and Outlook" and the "Liquidity and Capital Resources" sections of this management's discussion and analysis of financial condition and results of operations contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These statements relate to, among other things, operating results and are indicated by words or phrases such as "expects," "should," "will," and similar words or phrases. These expected statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from those statements. The risks and uncertainties include, but are not limited to, IDEX Corporation's ("IDEX" or the "Company") ability to integrate and operate acquired businesses on a profitable basis and other risks and uncertainties identified under the heading "Risk Factors" in item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and information contained in subsequent periodic reports filed by IDEX with the Securities and Exchange Commission. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.

Overview and Outlook

IDEX is an applied solutions company specializing in fluid and metering technologies, health and science technologies, and fire, safety and other diversified products built to customers specifications. IDEX's products are sold in niche markets to a wide range of industries throughout the world. Accordingly, its businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where IDEX does business and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are among the factors that influence the demand for IDEX's products.

The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. Within these three reportable segments, the Company maintains six strategic platforms, where we will primarily invest organically and through acquisitions, and seven groups, where we will primarily focus on organic growth to drive these high value diversified businesses. The Fluid & Metering Technologies segment is comprised of the Energy, Water and Waste Water, and Chemical, Food and Process ("CFP") platforms as well as the Agricultural group. The Health & Science Technologies segment is comprised of the Optics & Photonics, Scientific Fluidics, and MPT platforms as well as the Containment and Industrial groups. The Fire & Safety/Diversified Products segment is comprised of the Dispensing, Rescue, Band-It, and Fire Suppression groups.

The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, injectors, and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food, chemical, general industrial, water and wastewater, agricultural and energy industries.

The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, including very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, aerospace, telecommunications and electronics manufacturing, laboratory and commercial equipment used in the production of micro and nano scale materials, precision photonic solutions used in life sciences, research and defense markets, and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications.


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The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry, and engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications, precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.

Some of our key financial highlights for the nine months ended September 30, 2012 are as follows:

Sales of $1.5 billion rose 8%; organic sales - excluding acquisitions and foreign currency translation - were up 4%.

Operating income of $253.8 million increased 11%.

Net income increased 7% to $156.6 million.

Diluted EPS of $1.87 increased 12 cents.

We expect market conditions to remain challenging, particularly outside the US, resulting in expected fourth quarter flat organic revenue compared to the fourth quarter of 2011. Despite these challenging market conditions, our disciplined execution allows us to maintain our prior full year 2012 adjusted EPS guidance of $2.65 - $2.70.

Results of Operations

The following is a discussion and analysis of our results of operations for the three and nine month periods ended September 30, 2012 and 2011. Segment operating income excludes unallocated corporate operating expenses. Certain prior year amounts have been revised to include the Dispensing Equipment segment as part of the Fire & Safety/Diversified Products segment and to reflect the movement of our Trebor business unit from the Health & Science Technologies segment to the Fluid & Metering Technologies segment.

In this report, references to organic sales, a non-GAAP measure, refers to sales from continuing operations calculated according to generally accepted accounting principles in the United States but excludes (1) sales from acquired businesses during the first twelve months of ownership and (2) the impact of foreign currency translation. The portion of sales attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and (b) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. The Company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management's control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions because the nature, size, and number of acquisitions can vary dramatically from period to period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult.

Management's primary measurements of segment performance are sales, operating income, and operating margin. In addition, due to the highly acquisitive nature of the Company, the determination of operating income includes amortization of acquired intangible assets and, as a result, management reviews depreciation and amortization as a percentage of sales. These measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are analyzed with segment management.


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Consolidated Results in the Three Months Ended September 30, 2012 Compared with the Same Period of 2011

                                                                       Three Months
                                                                           Ended
                                                                       September 30,
(in thousands)                                                    2012              2011
Net sales                                                       $ 479,859         $ 476,881
Operating income                                                   80,588            71,305
Operating margin                                                     16.8 %            15.0 %
Depreciation and amortization                                   $  19,545         $  20,540
Depreciation and amortization as a percentage of net sales            4.1 %             4.3 %

Sales in the three months ended September 30, 2012 were $479.9 million, a 1% increase from the comparable period last year. This increase reflects a 1% increase in organic sales, 2% from acquisitions (ERC - April 2012 and Matcon - July 2012) and 2% unfavorable foreign currency translation. International sales represented approximately 49% of total sales in the current period compared with 53% in the same period in 2011.

For the third quarter of 2012, Fluid & Metering Technologies contributed 41% of sales and 45% of operating income; Health & Science Technologies accounted for 37% of sales and 29% of operating income; and Fire & Safety/Diversified Products represented 22% of sales and 26% of operating income.

Gross profit of $194.8 million in the third quarter of 2012 increased $13.3 million, or 7%, from 2011. Gross profit as a percent of sales, or gross margins, was 40.6% in the third quarter of 2012 and 38.1% in 2011. The increase in gross margin primarily resulted from an acquisition fair value inventory charge of $12.8 million for CVI MG recorded in 2011.

Selling, general and administrative ("SG&A") expenses decreased slightly to $107.2 million in the third quarter of 2012 from $107.3 million in 2011. The slight change reflects a decrease of approximately $5.4 million from cost savings initiatives, partially offset by an increase of approximately $2.6 million for incremental costs from new acquisitions and the absence of a $2.7 million reduction in expense from CEO forfeited equity compensation recorded in 2011. As a percentage of sales, SG&A expenses were 22.3% for 2012 and 22.5% for 2011.

During the three months ended September 30, 2012, the Company recorded pre-tax restructuring expenses totaling $7.1 million, while $2.9 million was recorded for the same period in 2011. These restructuring expenses were mainly attributable to employee severance related to employee reductions across various functional areas, the termination of a defined benefit pension plan and facility rationalization resulting from the Company's cost savings initiatives.

Operating income of $80.6 million in the third quarter of 2012 was up from the $71.3 million recorded in 2011, primarily reflecting improved productivity and an acquisition fair value inventory charge for CVI MG recorded in 2011. Operating income as a percent of sales, or operating margin, of 16.8% in the third quarter of 2012 was up from 15.0% in 2011 primarily due to productivity and the acquisition fair value inventory charge for CVI MG recorded in 2011, partially offset by increased expenses from restructuring-related charges and the dilutive impact from acquisitions.

Other income, net was $0.1 million in the third quarter of 2012 compared with a $0.4 million expense recorded in 2011, primarily due to higher losses on foreign currency in 2011.

Interest expense increased to $10.5 million in 2012 from $7.8 million in 2011. The increase was principally due to higher debt levels issued in conjunction with the CVI MG acquisition and higher interest rates associated with converting the Revolving Facility debt to the fixed rate 4.2% Senior Notes.


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The provision for income taxes is based on estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes increased to $20.1 million in the third quarter of 2012 compared to $14.8 million in the third quarter of 2011. The effective tax rate increased to 28.6% for the third quarter of 2012 compared to 23.4% in the third quarter of 2011 due to the mix of global pre-tax income among jurisdictions and a reversal of disallowed executive compensation expense in the prior year.

Net income for the quarter of $50.1 million increased from $48.3 million in 2011. Diluted earnings per share in the third quarter of 2012 of $0.60 increased $0.02, or 3%, compared with 2011.

Fluid & Metering Technologies Segment



                                                                       Three Months
                                                                           Ended
                                                                       September 30,
(in thousands)                                                    2012              2011
Net sales                                                       $ 198,000         $ 205,797
Operating income                                                   41,649            40,883
Operating margin                                                     21.0 %            19.9 %
Depreciation and amortization                                   $   7,246         $   8,603
Depreciation and amortization as a percentage of net sales            3.7 %             4.2 %

Sales of $198.0 million decreased $7.8 million, or 4%, in the third quarter of 2012 compared with 2011. This reflects a 1% decrease in organic sales and 3% unfavorable foreign currency translation. In the third quarter of 2012, organic sales decreased approximately 2% domestically and were flat internationally. Organic sales to customers outside the U.S. were approximately 48% of total segment sales during the third quarter of 2012, compared with 54% in 2011.

Sales within our Energy platform decreased compared to the third quarter of 2011 due to weakness in European markets caused by general economic conditions and warmer climate conditions, and a slowdown in liquid measurement projects. This was partially offset by strength in North American transportation end markets and in our distribution channel. Sales within our CFP platform decreased compared to the third quarter of 2011 on weak general industrial and chemical demand in our OEM and distributor channels in North America, Europe and China. Sales within our Water and Waste Water platform continues to experience ongoing municipal water end market softness in Europe and China. Sales within our Agricultural group increased compared to the third quarter of 2011, due to continued strong demand within this market.

Operating income and operating margin of $41.6 million and 21.0%, respectively, were higher than the $40.9 million and 19.9% recorded in the third quarter of 2011, primarily due to productivity and cost reduction initiatives, partially offset by slightly higher restructuring related charges.

Health & Science Technologies Segment



                                                                       Three Months
                                                                           Ended
                                                                       September 30,
(in thousands)                                                    2012              2011
Net sales                                                       $ 176,225         $ 172,911
Operating income                                                   27,305            19,287
Operating margin                                                     15.5 %            11.2 %
Depreciation and amortization                                   $  10,273         $   9,712
Depreciation and amortization as a percentage of net sales            5.8 %             5.6 %

Sales of $176.2 million increased $3.3 million, or 2%, in the third quarter of 2012 compared with 2011. This reflects 7% growth from acquisitions (Matcon and ERC), partially offset by a 4% decrease in organic sales and


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1% unfavorable foreign currency translation. In the third quarter of 2012, organic sales increased 9% domestically and decreased 15% internationally. Organic sales to customers outside the U.S. were approximately 48% of total segment sales in the third quarter of 2012, compared with 54% in 2011.

Organic sales within our MPT platform decreased compared to the third quarter of 2011 due to weakness in the Asian food and pharmaceutical markets. Organic sales within our Scientific Fluidics platform were flat compared to the third quarter of 2011 due to market volatility on inconsistent OEM demand in North America. Sales within our Containment group decreased slightly compared to the third quarter of 2011 due to weak oil & gas distributor sales in European markets. Sales within our Optics and Photonics platform decreased compared to the third quarter of 2011 as we continue to experience weakness within the semiconductor, life science and defense markets. Sales within our Industrial group increased compared to the third quarter of 2011 due to higher distributor sales, partially offset by weakness in Europe and China.

Operating income of $27.3 million in the third quarter of 2012 was up from the $19.3 million recorded in 2011, primarily due to the $12.8 million acquisition fair value inventory charge for CVI MG recorded in 2011 and cost savings from our prior period restructuring actions, partially offset by an increase in restructuring charges in 2012. Operating margin of 15.5% in the third quarter of 2012 was up from 11.2% in 2011, primarily due to the $12.8 million acquisition fair value inventory charge for CVI MG recorded in 2011, partially offset by the dilutive impact from acquisitions and a $2.7 million increase in restructuring charges.

Fire & Safety/Diversified Products Segment



                                                                  Three Months
                                                                      Ended
                                                                  September 30,
(in thousands)                                                 2012           2011
Net sales                                                    $ 108,199      $ 98,735
Operating income                                                24,738        19,263
Operating margin                                                  22.9 %        19.5 %
Depreciation and amortization                                $   1,622      $  1,844
Depreciation and amortization as a percentage of net sales         1.5 %         1.9 %

Sales of $108.2 million increased $9.5 million, or 10%, in the third quarter of 2012 compared with the third quarter of 2011. This reflects 13% organic growth offset by 3% unfavorable foreign currency translation. In the third quarter of 2012, organic sales increased 36% domestically and decreased 1% internationally. Organic sales to customers outside the U.S. were approximately 54% of total segment sales in the third quarter of 2012, compared with 61% in 2011.

Sales within our Dispensing group increased as a result of a large replenishment project in the North American market which began shipping in the second quarter of 2012, partially offset by weakness in European markets. The sales increase within our Band-It group was driven by general North American strength and product innovation, partially offset by weakness in Europe and the Middle East. Sales within our Fire Suppression group decreased as a result of weakness in European municipal fire markets, partially offset by growing sales in adjacent markets domestically and internationally. Sales within our Rescue group increased as a result of higher demand for our rescue tools within domestic markets, partially offset by shipment delays in Asia.

Operating income and operating margin of $24.7 million and 22.9%, respectively, were higher than the $19.3 million and 19.5% recorded in the third quarter of 2011, primarily due to improved productivity and cost reduction initiatives, partially offset by $0.4 million higher restructuring charges in 2012 compared to 2011 within our Fire Suppression group.


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Consolidated Results in the Nine Months Ended September 30, 2012 Compared with the Same Period of 2011

                                                                   Nine Months
                                                                      Ended
                                                                  September 30,
(in thousands)                                              2012                2011
Net sales                                                $ 1,463,420         $ 1,357,768
Operating income                                             253,807             228,655
Operating margin                                                17.4 %              16.8 %
Depreciation and amortization                            $    57,938         $    53,116
Depreciation and amortization as a percentage of
net sales                                                        4.0 %               3.9 %

Sales in the nine months ended September 30, 2012 were $1,463.4 million, an 8% increase from the comparable period last year. This increase reflects a 4% increase in organic sales, 6% from acquisitions (AT Films - January 2011, Microfluidics - March 2011, CVI MG - June 2011, ERC - April 2012 and Matcon - July 2012) and 2% unfavorable foreign currency translation. International sales represented approximately 51% of total sales in the period compared with 52% in 2011.

For the first nine months of 2012, Fluid & Metering Technologies contributed 42% of sales and 45% of operating income; Health & Science Technologies accounted for 36% of sales and 29% of operating income; and Fire & Safety/Diversified Products represented 22% of sales and 26% of operating income.

Gross profit of $600.8 million in the first nine months of 2012 increased $55.8 million, or 10%, from 2011. Gross margins were 41.1% in the first nine months of 2012 and 40.1% in 2011.

SG&A expenses increased to $332.4 million in the first nine months of 2012 from $313.5 million in 2011. The $18.9 million increase reflects approximately $26.3 million for incremental costs from new acquisitions, $2.7 million for a benefit from CEO forfeited equity compensation recorded in 2011 and a $2.8 million gain from the sale of a facility in Italy recorded in 2011, partially offset by a decrease of $12.9 million from cost savings initiatives. As a percentage of sales, SG&A expenses were 22.7% for 2012 and 23.1% for 2011.

During the nine months ended September 30, 2012, the Company recorded pre-tax restructuring expenses totaling $14.6 million, while $2.9 million was recorded for the same period in 2011. These restructuring expenses were mainly attributable to employee severance related to employee reductions across various functional areas, the termination of a defined benefit pension plan and facility rationalization resulting from the Company's cost savings initiatives.

Operating income of $253.8 million in the first nine months of 2012 was up from the $228.7 million recorded in 2011, primarily reflecting an increase in volume and improved productivity. Operating margin of 17.3% in the first nine months of 2012 was up from 16.8% in 2011 primarily due to volume leverage and productivity, partially offset by increased expenses from restructuring-related charges and the dilutive impact from acquisitions.

Interest expense increased to $31.7 million in 2012 from $20.9 million in 2011. The increase was principally due to higher debt levels, issued in conjunction with the CVI MG acquisition, and higher interest rates associated with converting the Revolving Facility debt to the fixed rate 4.2% Senior Notes.

The provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes increased to $65.4 million for the first nine months of 2012 compared to $60.2 in the same period in 2011. The effective tax rate increased to 29.5% for the first nine months of 2012 compared to 29.1% in the same period of 2011 due to the mix of global pre-tax income among jurisdictions, a reversal of disallowed executive compensation expense in the prior year and the impact of recent acquisitions.


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Net income for the current period of $156.6 million increased from the $146.5 million earned in 2011. Diluted earnings per share in the first nine months of 2012 of $1.87 increased $0.12, or 7%, compared with 2011.

Fluid & Metering Technologies Segment



                                                                        Nine Months
                                                                           Ended
                                                                       September 30,
(in thousands)                                                    2012              2011
Net sales                                                       $ 621,433         $ 614,367
Operating income                                                  132,477           124,221
Operating margin                                                     21.3 %            20.2 %
Depreciation and amortization                                   $  22,194         $  24,841
Depreciation and amortization as a percentage of net sales            3.6 %             4.1 %

Sales of $621.4 million increased $7.1 million, or 1%, in the first nine months of 2012 compared with 2011. This reflects 3% organic growth and 2% unfavorable foreign currency translation. The increase in organic sales was largely attributed to growth across our Energy platform, CFP platform, and our Agricultural group. In the first nine months of 2012, organic sales increased approximately 4% domestically and 3% internationally. Organic sales to customers outside the U.S. were approximately 47% of total segment sales during the first nine months of 2012, compared with 46% in 2011.

Sales within our Energy platform increased compared to the first nine months of 2011, due to strong demand for systems used in upstream and downstream oil and gas applications both domestically and internationally. Additionally, large Energy project sales to emerging markets drove international sales growth, partially offset by weakness in the European downstream markets due to general economic conditions. Domestic sales growth within Energy was driven by the transportation end markets and strength in our distribution channel. Sales within our CFP platform increased compared to the first nine months of 2011 on strong general industrial and chemical demand in both our OEM and distributor channels in North America and Asia. In addition, CFP sales growth accelerated in emerging markets. Sales within our Agriculture group increased due to robust . . .

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