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IEX > SEC Filings for IEX > Form 10-K on 13-Feb-2014All Recent SEC Filings

Show all filings for IDEX CORP /DE/

Form 10-K for IDEX CORP /DE/


13-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Statement Under the Private Securities Litigation Reform Act This management's discussion and analysis, including, but not limited to, the section entitled "2013 Overview and Outlook", and other portions of this report, contains 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 may relate to, among other things, capital expenditures, cost reductions, cash flow, and operating improvements and are indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "management believes," "the Company believes," "we believe," "the Company intends" and similar words or phrases. These statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from the results described in those statements. These risks and uncertainties include, but are not limited to, the risks described in Item 1A, "Risk Factors" of this report, economic and political consequences resulting from terrorist attacks and wars; levels of industrial activity and economic conditions in the U.S. and other countries around the world; pricing pressures and other competitive factors, and levels of capital spending in certain industries - all of which could have a material impact on our order rates and results, particularly in light of the low levels of order backlogs we typically maintain; our ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which we operate; interest rates; capacity utilization and its effect on costs; labor markets; market conditions and material costs; and developments with respect to contingencies, such as litigation and environmental matters. The forward-looking statements included in this report are only made as of the date of this report, and we undertake no obligation to update them to reflect subsequent events or circumstances. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here. 2013 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 customer specifications. IDEX's products are sold in niche markets to a wide range of industries throughout the world. Accordingly, our businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where we do business and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in the industries that use our products and overall industrial activity are important factors that influence the demand for our products.

The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. Within our 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 seven groups, where we will focus on organic growth and strategic acquisitions. The Fluid & Metering Technologies segment contains the Energy, Water (comprised of Water Services & Technology and Diaphragm & Dosing Pump Technology), and Chemical, Food & Process platforms as well as the Agricultural group (comprised of Banjo.) The Health & Science Technologies segment contains the IDEX Optics & Photonics, Scientific Fluidics and Material Processing Technologies platforms, as well as the Sealing Solutions and the Industrial (comprised of Micropump and Gast) groups. The Fire & Safety/Diversified Products segment is comprised of the Dispensing, Rescue, Band-It, and Fire Suppression groups. Each platform/group is comprised of one or more of our 15 reporting units: five reporting units within Fluid & Metering Technologies (Energy; Chemical, Food, & Process; Water Services & Technology; Banjo; Diaphragm & Dosing Pump Technology); six reporting units within Health & Science Technologies (IDEX Optics and Photonics; Scientific Fluidics; Material Processing Technology; Sealing Solutions; Micropump; and Gast); and four reporting units within Fire & Safety/Diversified Products (Dispensing, Rescue, Band-It, and Fire Suppression).
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, valves, 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, life sciences, 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. The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, rescue tools, lifting bags and other components and systems for the


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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 2013 financial results are as follows:
Sales of $2.0 billion increased 4%; organic sales - excluding acquisitions and foreign currency translation - were up 2%.

Operating income of $395.5 million increased 208%.

Net income increased 578% to $255.2 million.

Diluted EPS of $3.09 increased $2.64 or 587% compared to 2012.

Overall we believe market conditions are marginally better than a year ago but still remain uneven. On a regional basis, North American demand has remained strong, the European market continues to stabilize, the emerging markets are growing, and Asia remains uneven. For 2014, based on the Company's current outlook, we anticipate 3 to 5 percent organic revenue growth in 2014 and EPS of $3.33 to $3.43.
Results of Operations
The following is a discussion and analysis of our results of operations for each of the three years in the period ended December 31, 2013. For purposes of this Item, reference is made to the Consolidated Statements of Operations in Part II, Item 8, "Financial Statements and Supplementary Data." Segment operating income excludes unallocated corporate operating expenses.
In the following discussion, and throughout 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) the impact of foreign currency translation and (2) sales from acquired businesses during the first twelve months of ownership. 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. In addition, this report references EBITDA and Adjusted EBITDA. These non-GAAP measures have been reconciled to Net income and Operating income within Item 6, "Selected Financial Data". Given the acquisitive nature of the Company which results in a higher level of amortization expense at recently acquired businesses, EBITDA and Adjusted EBITDA provides management with a better representation of performance of businesses across our three segments.
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 net income includes amortization of acquired intangible assets and, as a result, management reviews EBITDA and Adjusted EBITDA 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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Performance in 2013 Compared with 2012

(In thousands)                                        2013            2012         Change
Net sales                                         $ 2,024,130     $ 1,954,258          4  %
Operating income                                      395,513         128,218        208  %
Operating margin                                         19.5 %           6.6 %    1,290    bps
EBITDA                                            $   474,669     $   206,766        130  %
EBITDA as a percentage of net sales                      23.5 %          10.6 %    1,290    bps
Adjusted EBITDA                                   $   474,669     $   437,758          8  %
Adjusted EBITDA as a percentage of net sales             23.5 %          22.4 %      110    bps
Capital expenditures                              $    31,536     $    35,520        (11 )%
Capital expenditures as a percentage of net sales         1.6 %           1.8 %      (20 )  bps

Sales in 2013 were $2,024 million, a 4% increase from the comparable period last year. This increase reflects a 2% increase in organic sales and 2% from acquisitions (ERC - April 2012, Matcon - July 2012 and FTL -March 2013). Organic sales to customers outside the U.S. represented approximately 51% of total sales in the period compared with 50% in 2012.
In 2013, Fluid & Metering Technologies contributed 43% of sales and 47% of operating income; Health & Science Technologies contributed 35% of sales and 30% of operating income; and Fire & Safety/Diversified Products contributed 22% of sales and 23% of operating income.
Gross profit of $873.4 million in 2013 increased $69.7 million, or 8.7%, from 2012. Gross margins were 43.1% in 2013 and 41.1% in 2012.
SG&A expenses increased to $477.9 million in 2013 from $444.5 million in 2012. The $33.4 million increase reflects approximately $10.4 million of incremental costs from new acquisitions, $5.6 million of cost-out actions, a $1.7 million pension settlement, $1.2 million related to environmental reserve costs, and $18.6 million of volume-related expenses, partially offset by a $4.0 million gain on the settlement of the contingent consideration related to the Matcon business acquired in July 2012. As a percentage of sales, SG&A expenses were 23.6% for 2013 and 22.7% for 2012.
During 2012, the Company recorded pre-tax restructuring expenses totaling $32.5 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. These initiatives included exit costs related to five facility closures and severance benefits for 491 employees in 2012.
Operating income of $395.5 million in 2013 increased from the $128.2 million recorded in 2012, primarily reflecting an increase in volume, improved productivity and the impact of the $198.5 million asset impairment charges and the $32.5 million of restructuring-related charges recorded in 2012. Operating margin of 19.5% in 2013 was up from 6.6% in 2012 primarily due to volume leverage, productivity and the impact of asset impairment charges and restructuring-related charges in 2012.
Interest expense decreased slightly to $42.2 million in 2013 from $42.3 million in 2012. The decrease was principally due to lower debt levels.
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 $97.9 million in 2013 compared to $48.6 million in 2012. The effective tax rate decreased to 27.7% in 2013 compared to 56.3% in 2012, mainly due to the 2012 nonrecurring asset impairment charge recorded in the fourth quarter of 2012. The impairment charge increased our 2012 effective tax rate by 26.9%. Our effective tax rate was also impacted by recognition of the 2012 U.S. R&D credit in 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013 which reinstated the U.S. R&D Credit retroactively to January 1, 2012, recognition of additional UK R&D tax benefits, revaluation of the UK deferred tax liability due to the reduction in the UK statutory tax rate, the settlement of the contingent consideration agreement related to the Matcon business acquired in July 2012, and the mix of global pre-tax income among jurisdictions.
Net income for the year of $255.2 million increased from the $37.6 million earned in 2012. Diluted earnings per share in 2013 of $3.09 increased $2.64 from $0.45 in 2012.


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Fluid & Metering Technologies Segment

(In thousands)                                       2013          2012       Change
Net sales                                         $ 871,814     $ 833,288        5  %
Operating income                                    211,256       146,650       44  %
Operating margin                                       24.2 %        17.6 %    660    bps
EBITDA                                            $ 237,100     $ 176,312       34  %
EBITDA as a percentage of net sales                    27.2 %        21.2 %    600    bps
Adjusted EBITDA                                   $ 237,100     $ 210,295       13  %
Adjusted EBITDA as a percentage of sales               27.2 %        25.2 %    200    bps
Capital expenditures                              $  11,581     $  13,535      (14 )%
Capital expenditures as a percentage of net sales       1.3 %         1.6 %    (30 )  bps

Sales of $871.8 million increased $38.5 million, or 5%, in 2013 compared with 2012. This increase reflected 4% organic growth and 1% favorable foreign currency translation. The increase in organic sales was attributable to growth across all our platforms and groups within the segment. In 2013, organic sales increased approximately 3% domestically and 6% internationally. Organic sales to customers outside the U.S. were approximately 46% of total segment sales in 2013, compared with 47% in 2012.
Sales within our Energy platform increased compared to 2012, due to the strength of OEM truck builds and electronic retrofits in North America. Additional growth has been driven by growth across the LPG market, including North America, China, India and Russia. Sales within our CFP platform increased compared to 2012 on continued strength in the chemical markets, particularly with project opportunities in the Middle East and Asia, coupled with solid aftermarket performance. The CFP North American industrial distribution market started the year soft, but gradually recovered in the second half of 2013. Sales increases within our Agriculture group were driven by strong OEM demand in North America, new product introductions and an increase in market share. The sales increase in WST was driven by share gains and strong global project activity, specifically for projects in the US and Japan. DDPT saw only modest sales growth due to softness in several core markets, but this was offset by a pickup in the Middle East and the semiconductor markets.
Operating income and operating margin of $211.3 million and 24.2%, respectively, were higher than the $146.7 million and 17.6% recorded in 2012, primarily due to volume leverage and productivity initiatives as well as the impact of the $27.7 million of impairment charges and $6.3 million of restructuring charges recorded in 2012.

Health & Science Technologies Segment

(In thousands)                                       2013           2012         Change
Net sales                                         $ 714,650     $ 695,235            3  %
Operating income (loss)                             136,707       (62,835 )        318  %
Operating margin                                       19.1 %        (9.0 )%     2,810     bps
EBITDA                                            $ 180,711     $ (23,365 )        873  %
EBITDA as a percentage of net sales                    25.3 %        (3.4 )%     2,870     bps
Adjusted EBITDA                                   $ 180,711     $ 162,177           11  %
Adjusted EBITDA as a percentage of sales               25.3 %        23.3  %       200     bps
Capital expenditures                              $  12,280     $  13,140           (7 )%
Capital expenditures as a percentage of net sales       1.7 %         1.9  %       (20 )   bps

Sales of $714.7 million increased $19.4 million, or 3%, in 2013 compared with 2012. This increase reflected 6% growth from acquisitions (ERC, Matcon and FTL), offset by a 1% unfavorable foreign currency translation and a 2% decrease in organic sales. In 2013, organic sales decreased 1% domestically and 3% internationally. Organic sales to customers outside the U.S. were approximately 53% of total segment sales in 2013 compared with 51% in 2012.
Sales within our MPT platform increased compared to 2012 due to large projects in the pharmaceutical and chemical markets, driven by released capital spending, particularly in North America and Europe. Sales within our Scientific Fluidics


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platform increased on the success of new products introduced throughout 2013 and share gains. In the latter part of 2013, Scientific Fluidics benefited from the the easing of National Institute of Health funding constraints, which opened up further spending in our core Analytical Instruments and In Vitro Diagnostic markets. Sales within our Specialty Seals group increased compared to 2012 due to a full nine months of sales from FTL, acquired in March 2013, continued strong growth in oil & gas, and stability in the scientific and commercial aircraft end markets. Sales within our IOP platform decreased compared to 2012, primarily from continued weak demand in the defense, biotechnology and electronics end markets as well as the decision to exit certain product lines. Sales in our Industrial group decreased compared to 2012 due to several original equipment manufacturer ("OEM") orders that did not repeat in 2013.
Operating income and operating margin of $136.7 million and 19.1%, respectively, in 2013 were up from the operating loss and negative operating margin of $62.8 million and 9.0%, respectively, recorded in 2012, primarily due to volume leverage and productivity initiatives as well as the impact of the $170.8 million of impairment charges and the $14.7 million of restructuring charges recorded in 2012.

Fire & Safety/Diversified Products Segment

(In thousands)                                       2013          2012       Change
Net sales                                         $ 445,049     $ 437,053        2  %
Operating income                                    102,730        96,120        7  %
Operating margin                                       23.1 %        22.0 %    110    bps
EBITDA                                            $ 109,924     $ 103,370        6  %
EBITDA as a percentage of net sales                    24.7 %        23.7 %    100    bps
Adjusted EBITDA                                   $ 109,924     $ 111,710       (2 )%
Adjusted EBITDA as a percentage of sales               24.7 %        25.6 %    (90 )  bps
Capital expenditures                              $   5,040     $   6,654      (24 )%
Capital expenditures as a percentage of net sales       1.1 %         1.5 %    (40 )  bps

Sales of $445.0 million increased $8.0 million, or 2%, in 2013 compared with 2012. This increase reflected 1% organic growth and 1% favorable foreign currency translation. In 2013, organic sales increased 1% domestically and 2% internationally. Organic sales to customers outside the U.S. were approximately 56% of total segment sales in 2013, compared with 57% in 2012.
Sales within our Dispensing group decreased due to the fulfillment of the 2012 large replenishment order in the first quarter of 2013. However, excluding this order, sales increased on strength in our core North American markets, driven by low volatile organic compound ("VOC") programs, and expanded sales from our low-end automatic dispenser, X-Smart, in EMEA and Asia. The sales increase within our Band-It group was driven by general strength in the oil and gas applications market and large automotive blanket orders for new vehicle platforms in North America. Sales within our Fire Suppression group increased as a result of orders for fire suppression trailers at power production facilities, project orders in China, and a stable core business in North America and Western Europe. Sales within our Rescue group increased as a result of robust demand for our rescue tools within the North American and European markets.
Operating income and operating margin of $102.7 million and 23.1%, respectively, were higher than the $96.1 million and 22.0% recorded in 2012, primarily due to the impact of the $8.3 million of restructuring charges recorded in 2012, as well as volume leverage, partially offset by mix across businesses.


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Performance in 2012 Compared with 2011

(In thousands)                                        2012            2011         Change
Net sales                                         $ 1,954,258     $ 1,838,451          6  %
Operating income                                      128,218         304,656        (58 )%
Operating margin                                          6.6 %          16.6 %   (1,000 )   bps
EBITDA                                            $   206,766     $   375,599        (45 )%
EBITDA as a percentage of net sales                      10.6 %          20.4 %     (980 )   bps
Adjusted EBITDA                                   $   437,758     $   387,913         13  %
Adjusted EBITDA as a percentage of net sales             22.4 %          21.1 %      130     bps
Capital expenditures                              $    35,520     $    34,548          3  %
Capital expenditures as a percentage of net sales         1.8 %           1.9 %      (10 )   bps

Sales in 2012 were $1,954.3 million, a 6% increase from the comparable period last year. This increase reflects a 3% increase in organic sales, 5% 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. Organic sales to customers outside the U.S. represented approximately 50% of total sales in the period compared with 52% in 2011. In 2012, Fluid & Metering Technologies contributed 43% of sales and 82% of operating income; Health & Science Technologies contributed 35% of sales and
(35)% of operating income; and Fire & Safety/Diversified Products contributed 22% of sales and 53% of operating income. Gross profit of $803.7 million in 2012 increased $65.0 million, or 9%, from 2011. Gross margins were 41.1% in 2012 and 40.2% in 2011. SG&A expenses increased to $444.5 million in 2012 from $421.7 million in 2011. The $22.8 million increase reflects approximately $26.8 million of incremental costs from acquisitions, $2.7 million for a benefit from forfeited CEO 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 $9.5 million of cost savings initiatives. As a percentage of sales, SG&A expenses were 22.7% for 2012 and 22.9% for 2011. During 2012, the Company recorded pre-tax restructuring expenses totaling $32.5 million, compared with $12.3 million 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. These initiatives included exit costs related to five facility closures and severance benefits for 491 employees in 2012 and severance benefits for 292 employees in 2011. During 2012, the Company concluded that a non-cash impairment charge was required to reduce the carrying value of goodwill and intangible assets within the IOP reporting unit and goodwill and long-lived assets within the WST reporting unit. The goodwill within IOP primarily originated from the 2011 acquisition of CVI Melles Griot and the goodwill in WST primarily originated from the 2008 acquisitions of IETG and ADS. As a result of our annual test, an impairment charge was required within IOP due to continued softness in the Optics & Photonics end markets. In addition, we were required to perform an interim impairment test within WST at December 31, 2012 due to the reorganization of certain FMT businesses in the fourth quarter. This reorganization, combined with continued softness in municipal end markets, contributed to the impairment charge. As a result of the above testing, the Company recorded a pre-tax charge of $198.5 million in the fourth quarter of 2012. No additional impairments were identified at any of the other reporting units in 2012. Operating income of $128.2 million in 2012 was down from the $304.7 million recorded in 2011, primarily reflecting $198.5 million of asset impairment charges and an increase of $20.2 million in restructuring-related charges, partially offset by an increase in volume and improved productivity. Operating margin of 6.6% in 2012 was down from 16.6% in 2011 primarily due to the impact . . .

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