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IEX > SEC Filings for IEX > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for IDEX CORP /DE/


5-Aug-2013

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 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, 2012 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 its 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 platforms, where we will invest in organic growth and acquisitions with a strategic view towards a platform with the potential for at least $500 million in revenue, and eight groups, where we will focus on organic growth and strategic acquisitions. The Fluid & Metering Technologies segment is comprised of the Energy, Diaphragm & Dosing Pump Technology, and Chemical, Food & Process platforms as well as the Water Services & Technology and Agricultural groups. The Health & Science Technologies segment is comprised of the IDEX Optics & Photonics, Scientific Fluidics and Materials Process Technologies platforms, as well as the Sealing Solutions and the 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, semiconductor, 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.


Table of Contents

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 six months ended June 30, 2013 are as follows:

Sales of $1,013 million rose 3%; organic sales - excluding acquisitions and foreign currency translation - were flat from the prior year period.

Operating income of $194.3 million increased 12% compared to 2012.

Net income increased 16% to $123.9 million.

Diluted EPS of $1.49 increased 22 cents, or 17%, compared to 2012.

Our projected third quarter 2013 EPS is in the range of $0.72 to $0.74. Given the second quarter results and the projection of 3% full year organic revenue growth, we have increased our full year 2013 outlook - we now expect full year 2013 diluted EPS of $2.93 to $2.98.

Results of Operations

The following is a discussion and analysis of our results of operations for the three and six month periods ended June 30, 2013 and 2012. Segment operating income excludes unallocated corporate operating expenses.

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.

Consolidated Results in the Three Months Ended June 30, 2013 Compared with the
Same Period of 2012



                                                                       Three Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 518,445         $ 494,144
Operating income                                                   99,559            88,650
Operating margin                                                     19.2 %            17.9 %
Depreciation and amortization                                   $  20,077         $  19,203
Depreciation and amortization as a percentage of net sales            3.9 %             3.9 %


Table of Contents

Sales in the three months ended June 30, 2013 were $518.4 million, a 5% increase from the comparable period last year. This increase reflects a 2% increase in organic sales and 3% from acquisitions (ERC - April 2012, Matcon - July 2012, and FTL - March 2013). International sales represented approximately 49% of total sales in the current period compared with 51% in the same period in 2012.

For the second quarter of 2013, Fluid & Metering Technologies contributed 43% of sales and 49% of operating income; Health & Science Technologies accounted for 35% of sales and 30% of operating income; and Fire & Safety/Diversified Products represented 22% of sales and 21% of operating income.

Gross profit of $222.8 million in the second quarter of 2013 increased $19.7 million, or 9.7%, from 2012. Gross profit as a percentage of sales, or gross margin, was 43.0% in the second quarter of 2013 and 41.1% in 2012. The increase in gross margin primarily reflects volume leverage, improved productivity and benefits from prior period restructuring activities.

Selling, general and administrative ("SG&A") expenses increased to $123.3 million in the second quarter of 2013 from $111.9 million in 2012. The $11.4 million increase reflects approximately $4.1 million of incremental costs from new acquisitions, a $1.0 million charge related to the closure of our Conshohocken facility, and $6.3 million of volume related expenses. As a percentage of sales, SG&A expenses were 23.8% for 2013 and 22.6% for 2012.

During the three months ended June 30, 2012, the Company recorded pre-tax restructuring expenses totaling $2.6 million. 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 $99.6 million in the second quarter of 2013 was up from the $88.7 million recorded in 2012, primarily from an increase in volume and improved productivity. Operating income as a percentage of sales, or operating margin, of 19.2% in the second quarter of 2013 was up from 17.9% in 2012. The increase is primarily due to volume leverage and improved productivity from prior period, and due to 2012 operating margin being negatively impacted by $2,6 million of restructuring charges.

Other expense, net was $0.6 million in the second quarter of 2013 compared with $0.2 million recorded in 2012, primarily due to higher losses on foreign currency.

Interest expense increased slightly to $10.6 million in 2013 from $10.5 million in 2012.

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 $25.8 million in the second quarter of 2013 compared to $23.5 million in the second quarter of 2012. The effective tax rate decreased to 29.2% for the second quarter of 2013 compared to 30.2% in the second quarter of 2012 due to the mix of global pre-tax income among jurisdictions.

Net income for the current quarter of $62.6 million increased from the $54.4 million in 2012. Diluted earnings per share in the second quarter of 2013 of $0.76 increased $0.11, or 17%, compared with 2012.

Fluid & Metering Technologies Segment



                                                                       Three Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 225,488         $ 210,715
Operating income                                                   56,115            46,302
Operating margin                                                     24.9 %            22.0 %
Depreciation and amortization                                   $   7,012         $   7,408
Depreciation and amortization as a percentage of net sales            3.1 %             3.5 %


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Sales of $225.5 million increased $14.8 million, or 7%, in the second quarter of 2013 compared with 2012. This sales increase is entirely attributed to organic growth. In the second quarter of 2013, organic sales increased approximately 10% domestically and 3% internationally. Organic sales to customers outside the U.S. were approximately 44% of total segment sales during the second quarter of 2013, compared with 47% in 2012.

Sales increased across all platforms and groups of the Fluid & Metering Technologies segment, compared to the second quarter of 2012. The increase within our Energy platform was primarily due to the continued rebound in our North American LPG market and global truck manufacturing. Sales increased within our Chemical, Food & Process platform primarily due to strength of chemical markets and large projects in Asia and the Middle East. The increase in sales within our Diaphragm & Dosing Pump Technology platform is mainly attributed to strength in the oil and gas markets. Sales within our Agricultural group increased due to strong seasonal demand. The sales increase within our Water Services & Technology group is primarily attributable to increased demands for new systems.

Operating income and operating margin of $56.1 million and 24.9%, respectively, were higher than the $46.3 million and 22.0% recorded in the second quarter of 2012, primarily due to volume leverage and the continued benefit of cost-out actions.

Health & Science Technologies Segment



                                                                       Three Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 180,867         $ 170,563
Operating income                                                   34,522            27,136
Operating margin                                                     19.1 %            15.9 %
Depreciation and amortization                                   $  10,947         $   9,559
Depreciation and amortization as a percentage of net sales            6.1 %             5.6 %

Sales of $180.9 million increased $10.3 million, or 6%, in the second quarter of 2013 compared with 2012. This reflects a 2% decrease in organic sales, 9% growth from acquisitions (ERC, Matcon and FTL) and 1% unfavorable foreign currency translation. In the second quarter of 2013, organic sales increased 3% domestically and decreased 7% internationally. Organic sales to customers outside the U.S. were approximately 50% of total segment sales in the second quarter of 2013, compared with 51% in 2012.

Sales within our MPT platform increased compared to the second quarter of 2012 primarily due to the Matcon acquisition and strength in the Asian food and pharmaceutical markets, partially offset by lower sales in North America. Sales increased compared to the second quarter of 2012 within our Scientific Fluidics platform due to a recovery in North American and Western European markets. Sales within our Sealing Solutions group increased compared to the second quarter of 2012 primarily due to the acquisition of FTL, and strong sales to the oil & gas and semiconductor markets. Sales within our Optics and Photonics platform decreased compared to the second quarter of 2012 due to continued weakness in the defense markets, lower catalog sales, and the exit of low margin business in 2013. Sales within our Industrial group decreased compared to the second quarter of 2012 due to softness in North American distributor sales, partially offset by slightly higher sales in the automotive end markets.

Operating income of $34.5 million in the second quarter of 2013 was higher than the $27.1 million recorded in 2012, primarily due to acquisitions, improved productivity and benefits from prior period restructuring actions. Operating margin of 19.1% in the second quarter of 2013 was an increase from 15.9% in 2012, due to 2012 being negatively impacted by $1.1 million of restructuring charges.


Table of Contents

Fire & Safety/Diversified Products Segment



                                                                       Three Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 114,236         $ 115,924
Operating income                                                   23,676            26,098
Operating margin                                                     20.7 %            22.5 %
Depreciation and amortization                                   $   1,741         $   1,824
Depreciation and amortization as a percentage of net sales            1.5 %             1.6 %

Sales of $114.2 million decreased $1.7 million, or 1%, in the second quarter of 2013 compared with the second quarter of 2012. This decrease was purely organic. In the second quarter of 2013, organic sales decreased 1% domestically and 2% internationally. Organic sales to customers outside the U.S. were approximately 57% of total segment sales in the second quarter of 2013, compared with 59% in 2012.

Sales within our Dispensing group decreased due to lower North American replenishment sales in the second quarter of 2013 compared with the second quarter of 2012, partially offset by increased market share in emerging markets and new product introductions. The sales increase within our Band-It group was driven by new vehicle platforms in North America and continued cable management shipments in China. Sales within our Fire Suppression group increased as a result of a stable North American market and a strong project funnel in China. Sales within our Rescue group increased as a result of robust demand from emerging markets.

Operating income and operating margin of $23.7 million and 20.7%, respectively, were lower than the $26.1 million and 22.5% recorded in the second quarter of 2012, primarily due to a $1.0 million charge related to the closure of the Company's Conshohocken, PA facility and lower volume.

Consolidated Results in the Six Months Ended June 30, 2013 Compared with the
Same Period of 2012



                                                                   Six Months
                                                                      Ended
                                                                    June 30,
(in thousands)                                               2013               2012
Net sales                                                 $ 1,012,893         $ 983,561
Operating income                                              194,271           173,219
Operating margin                                                 19.2 %            17.6 %
Depreciation and amortization                             $    39,916         $  38,393
Depreciation and amortization as a percentage of net
sales                                                             3.9 %             3.9 %

Sales in the six months ended June 30, 2013 were $1,013 million, a 3% increase from the comparable period last year. This increase is almost entirely due to acquisitions (ERC - April 2012, Matcon - July 2013, and FTL - March 2013). International sales represented approximately 51% of total sales in both the current period and the same period in 2012.

For the first six months of 2013, Fluid & Metering Technologies contributed 43% of sales and 47% of operating income; Health & Science Technologies accounted for 35% of sales and 30% of operating income; and Fire & Safety/Diversified Products represented 22% of sales and 23% of operating income.

Gross profit of $434.8 million in the first six months of 2013 increased $28.8 million, or 7.1%, from 2012. Gross margin of 42.9% in the first six months of 2013 increased from 41.3% for the same period in 2012 as a result of volume leverage, improved productivity and benefits from prior period restructuring activities.

SG&A expenses increased to $240.6 million in the first six months of 2013 from $225.3 million in 2012. The $15.3 million increase reflects approximately $7.6 million of incremental costs from new acquisitions, a $1.0 million charge related to the closure of our Conshohocken facility and $6.7 million of volume related expenses. As a percentage of sales, SG&A expenses were 23.8% for 2013 and 22.9% for 2012.


Table of Contents

During the six months ended June 30, 2012, the Company recorded pre-tax restructuring expenses totaling $7.5 million. 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 $194.3 million in the first six months of 2013 was up from the $173.2 million recorded in 2012, primarily reflecting an increase in volume and improved productivity. Operating margin of 19.2% in the first six months of 2013 was up from 17.6% in 2012 primarily due to improved productivity and benefits from prior period restructuring as well as 2012 operating margin being negatively impacted by restructuring-related charges.

Other income, net of $0.7 million in 2013 was greater than other expense, net of $0.1 million in 2012, primarily due to higher losses in foreign currency in 2012.

Interest expense was $21.2 million in 2013 and 2012.

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 $50.0 million for the first six months of 2013 compared to $45.4 in the same period in 2012. The effective tax rate decreased to 28.7% for the first six months of 2012 compared to 29.9% in the same period of 2012 primarily due to the enactment of the American Taxpayer Relief Act of 2012 in January 2013, which reinstated the U.S. R&D credit retroactively to January 1, 2012, as well as the mix of global pre-tax income among jurisdictions.

Net income for the current period of $123.9 million increased from the $106.5 million earned in 2012. Diluted earnings per share in the first six months of 2013 of $1.49 increased $0.22, or 17%, compared with 2012.

Fluid & Metering Technologies Segment



                                                                        Six Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 437,243         $ 423,433
Operating income                                                  104,194            90,828
Operating margin                                                     23.8 %            21.5 %
Depreciation and amortization                                   $  13,972         $  14,948
Depreciation and amortization as a percentage of net sales            3.2 %             3.5 %

Sales of $437.2 million increased $13.8 million, or 3%, in the first six months of 2013 compared with 2012. This sales increase was almost entirely attributable to organic growth as organic sales increased approximately 6% domestically and less than 1% internationally. Organic sales to customers outside the U.S. were approximately 45% of total segment sales during the first six months of 2013, compared with 47% in 2012.

Sales within our Energy platform increased compared to the first six months of 2012 due to the continued rebound in the North American LPG market, and project sales to emerging markets, which was partially offset by weakness in certain European markets due to general economic conditions. Sales within our Chemical, Food & Process platform increased compared to the first six months of 2012 due to strength in chemical markets and large projects in emerging markets, partially offset by weak general industrial demand in the first three months of 2013. Sales within our Agricultural group increased due to robust demand in North America. Our Water Services & Technology group saw increased sales based on demand for new systems and a stabilization of municipal water markets in North America.

Operating income and operating margin of $104.2 million and 23.8%, respectively, were higher than the $90.8 million and 21.5% recorded in the first six months of 2012, primarily due to volume strength and the continued benefit of prior period restructuring actions.


Table of Contents

Health & Science Technologies Segment



                                                                        Six Months
                                                                           Ended
                                                                         June 30,
(in thousands)                                                    2013              2012
Net sales                                                       $ 353,735         $ 344,349
Operating income                                                   66,789            57,406
Operating margin                                                     18.9 %            16.7 %
Depreciation and amortization                                   $  21,739         $  19,020
Depreciation and amortization as a percentage of net sales            6.1 %             5.5 %

Sales of $353.7 million increased $9.4 million, or 3%, in the first six months of 2013 compared with 2012. This increase reflects a 4% decrease in organic sales, 8% growth from acquisitions (ERC, Matcon, and FTL) and 1% unfavorable foreign currency translation. Organic sales in the first six months of 2013 were flat domestically and down 8% internationally. Organic sales to customers . . .

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