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IEX > SEC Filings for IEX > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for IDEX CORP /DE/

Form 10-Q for IDEX CORP /DE/


29-Apr-2014

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 This quarterly report on Form 10-Q, including 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, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities 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," "anticipates," "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, those 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, 2013, and information contained in subsequent 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, IDEX's businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where it 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 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, 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, 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. 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 three months ended March 31, 2014 are as follows:
Sales of $544.0 million increased 10%; organic sales - excluding acquisitions and foreign currency translation - were up 8%.


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Operating income of $113.8 million increased 20%

Net income increased 22% to $74.5 million.

Diluted EPS of $0.91 increased 17 cents, or 23%, compared to 2013.

Our projected second quarter 2014 EPS is in the range of $0.85 to $0.87. Given the Company's current outlook and the projection of 4-5% organic revenue growth for the year, we have increased our full year EPS outlook; we now expect full year 2014 diluted EPS of $3.38 to $3.45.

Results of Operations
The following is a discussion and analysis of our results of operations for the three month periods ended March 31, 2014 and 2013. Segment operating income excludes unallocated corporate operating expenses.
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. 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. In addition, this report references EBITDA. This non-GAAP measure has been reconciled to Net income and Operating income in this Item 2 under the heading "Non-GAAP Disclosures." Given the acquisitive nature of the Company management reviews EBITDA. This non-GAAP financial measure provides management with important information about the performance of the Company's businesses by, among other matters, eliminating the impact of higher amortization expense at recently acquired businesses.
Consolidated Results in the Three Months Ended March 31, 2014 Compared with the

Same Period of 2013

                                                              Three Months Ended
(In thousands)                                                     March 31,
                                                              2014          2013
Net sales                                                  $ 543,996     $ 494,448
Operating income                                             113,835        94,712
Operating margin                                                20.9 %        19.2 %
EBITDA                                                     $ 133,936     $ 115,830
EBITDA as a percentage of net sales                             24.6 %        23.4 %
Depreciation and amortization                              $  19,257     $  19,839
Depreciation and amortization as a percentage of net sales       3.5 %         4.0 %
Capital expenditures                                       $  10,809     $   7,625
Capital expenditures as a percentage of net sales                2.0 %         1.5 %

Sales in the three months ended March 31, 2014 were $544.0 million, a 10% increase from the comparable period last year. This increase reflects an 8% increase in organic sales, a 1% increase from acquisitions (FTL - March 2013) and 1% favorable foreign currency translation. Organic sales to customers outside the U.S. represented approximately 48% of total sales in 2014 compared to 52% during the same period of 2013.


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For the first three months of 2014, Fluid & Metering Technologies contributed 41% of sales and 43% of operating income; Health & Science Technologies accounted for 34% of sales and 27% of operating income; and Fire & Safety/Diversified Products represented 25% of sales and 30% of operating income.
Gross profit of $244.4 million in the first three months of 2014 increased $32.4 million, or 15%, from the same period in 2013. Gross margin of 44.9% in the first three months of 2014 increased from 42.9% during the same period in 2013. The increase in gross margin primarily resulted from an increase in volume and benefits from the Company's structural cost actions taken in prior years. Selling, general and administrative expenses increased to $130.6 million in the first three months of 2014 from $117.3 million during the same period of 2013. The change reflects an increase of approximately $1.2 million for incremental costs from a full quarter of the FTL acquisition and an increase in volume related expenses of $12.1 million. As a percentage of sales, SG&A expenses were 24.0% for the first three months of 2014 and 23.7% for the same period of 2013. Operating income of $113.8 million in the first three months of 2014 was up from the $94.7 million recorded during the same period in 2013, primarily reflecting an increase in volume and improved productivity. Operating margin of 20.9% in the first three months of 2014 was up from 19.2% during the same period of 2013, primarily due to volume leverage, productivity, and conversion of the large Dispensing order.
Other income - net of $0.8 million in the first three months of 2014 was down $0.4 million compared with the same period in 2013, primarily due to lower gains on foreign currency transactions.
Interest expense of $10.5 million in the first three months of 2014 was slightly down from $10.6 million in 2013.
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 of $29.7 million for the first three months of 2014 increased compared to $24.1 million recorded in the same period of 2013. The effective tax rate increased to 28.5% for the first three months of 2014 compared to 28.2% in the same period of 2013 due to the mix of global pre-tax income among jurisdictions. Additionally, the current quarter tax rate was favorably impacted by settlements with taxing authorities primarily related to purchase price adjustments for prior period acquisitions and the comparable quarter tax rate in the prior year was favorably impacted by 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.
Net income in the first three months of 2014 of $74.5 million increased from $61.3 million during the same period of 2013. Diluted earnings per share in the first three months of 2014 of $0.91 increased $0.17, or 23%, compared with the same period in 2013.

Fluid & Metering Technologies Segment
                                                              Three Months Ended
(In thousands)                                                     March 31,
                                                              2014          2013
Net sales                                                  $ 223,361     $ 211,755
Operating income                                              56,407        48,079
Operating margin                                                25.3 %        22.7 %
EBITDA                                                     $  63,237     $  55,322
EBITDA as a percentage of net sales                             28.3 %        26.1 %
Depreciation and amortization                              $   6,552     $   6,960
Depreciation and amortization as a percentage of net sales       2.9 %         3.3 %
Capital expenditures                                       $   4,009     $   2,776
Capital expenditures as a percentage of net sales                1.8 %         1.3 %

Sales of $223.4 million increased $11.6 million, or 6%, in the first three months of 2014 compared with the same period of 2013. This reflects a 5% increase in organic sales and 1% favorable foreign currency translation. In the first three months of 2014, organic sales increased 10% domestically and decreased 1% internationally compared to the 2013 period. Organic sales to customers outside the U.S. were approximately 43% of total segment sales during the first three months of 2014, compared with 45% during the same period in 2013.
Sales within our Energy platform increased in the first three months of 2014 compared to the same period of 2013, due to the benefit from larger than anticipated fuel consumption from the extended winter, and the strength of OEM truck builds and North American electronic retrofits. Sales within our Chemical, Food & Process platform increased compared to the first three


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months of 2013 based on stable general industrial demand, partially offset by project timing delays in emerging markets. Sales within our Agriculture group improved in spite of the extended winter. Diaphragm & Dosing Pump Technology platform sales increased compared to the first three months of 2013 due to increased demand in the oil and gas markets, and increased stability in the European and Asian markets. Sales in our Water Services & Technology group increased slightly in the first three months of 2014 compared to the same period in 2013 based on the continued improvement in municipal spending, driven by demand in North America, Japan and Europe.
Operating income and operating margin of $56.4 million and 25.3%, respectively, were higher than the $48.1 million and 22.7% recorded in the first three months of 2013, primarily due to increased volume, operational execution, and productivity.

Health & Science Technologies Segment
                                                              Three Months Ended
(In thousands)                                                     March 31,
                                                              2014          2013
Net sales                                                  $ 186,375     $ 172,868
Operating income                                              36,229        32,267
Operating margin                                                19.4 %        18.7 %
EBITDA                                                     $  46,951     $  43,315
EBITDA as a percentage of net sales                             25.2 %        25.1 %
Depreciation and amortization                              $  10,709     $  10,792
Depreciation and amortization as a percentage of net sales       5.7 %         6.2 %
Capital expenditures                                       $   3,509     $   2,786
Capital expenditures as a percentage of net sales                1.9 %         1.6 %

Sales of $186.4 million increased $13.5 million, or 8%, in the first three months of 2014 compared with the same period in 2013. This reflects 5% organic revenue growth and 3% growth from acquisitions (FTL - March 2013). In the first three months of 2014, organic sales increased 13% domestically and decreased 1% internationally. Organic sales to customers outside the U.S. were approximately 52% of total segment sales in the first three months of 2014 compared with 53% during the same period in 2013.
Sales within our Material Process Technologies platform increased compared to the first three months of 2013 due to large pharmaceutical project shipments in North America from orders placed in 2013. Sales within our Scientific Fluidics platform increased compared to the first three months of 2013 due to gaining market share through new product introductions and the continued strengthening of core analytical instrumentation and in vitro diagnostics markets. Sales within the Sealing Solutions group increased compared to the first three months of 2013 due to the acquisition of FTL in March 2013 as well as continued strong sales in North American energy markets. Sales within our Optics and Photonics platform decreased slightly compared to the first three months of 2013 due to softness in military spending as well as the decision to exit certain product lines. Sales within our Industrial group increased compared to the first three months of 2013 due to greater stability in North American distributor sales and our team's ability to capture market share.
Operating income and operating margin of $36.2 million and 19.4%, respectively, in the first three months of 2014 were up from the $32.3 million and 18.7% recorded in the same period of 2013, primarily due to increased volume and productivity.


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Fire & Safety/Diversified Products Segment
                                                              Three Months Ended
(In thousands)                                                     March 31,
                                                              2014          2013
Net sales                                                  $ 137,284     $ 111,513
Operating income                                              39,648        28,232
Operating margin                                                28.9 %        25.3 %
EBITDA                                                     $  41,561     $  30,291
EBITDA as a percentage of net sales                             30.3 %        27.2 %
Depreciation and amortization                              $   1,680     $   1,708
Depreciation and amortization as a percentage of net sales       1.2 %         1.5 %
Capital expenditures                                       $   1,807     $   1,480
Capital expenditures as a percentage of net sales                1.3 %         1.3 %

Sales of $137.3 million increased $25.8 million, or 23%, in the first three months of 2014 compared with the same period in 2013. This reflects 22% organic growth and 1% favorable foreign currency translation. In the first three months of 2014, organic sales increased 55% domestically and decreased 2% internationally, year over year. Organic sales to customers outside the U.S. were approximately 47% of total segment sales in the first three months of 2014 compared to 58% during the same period of 2013.
Sales within our Dispensing group increased as a result of fulfilling a large dispensing order, combined with modest growth in the core North American and European markets. Sales were stable within our Band-It group, driven by strong expansion in China and cable management project orders. Sales within our Fire Suppression group increased due to demand for power facility trailers, and strong project orders from China. Sales within our Rescue group decreased due to prolonged decision making on projects in China and Europe.
Operating income and operating margin of $39.6 million and 28.9%, respectively, in the first three months of 2014 were higher than the $28.2 million and 25.3% recorded in the first three months of 2013, primarily due to volume leverage and the fulfillment of the large Dispensing order.

Liquidity and Capital Resources
At March 31, 2014, working capital was $749.4 million and the current ratio was 3.4 to 1. Cash flows from operating activities for the first three months of 2014 increased $2.0 million, or 2.8%, to $74.2 million compared to the first three months of 2013, mainly due to higher earnings partially offset by an increase in operating working capital.
Cash flows provided by operating activities were more than adequate to fund capital expenditures of $10.8 million and $7.6 million in the first three months of 2014 and 2013, respectively. Capital expenditures were generally for machinery and equipment that improved productivity, tooling, business system technology and replacement of equipment and facilities. Management believes that the Company has sufficient capacity in its plants and equipment to meet expected needs for future growth.
The Company maintains the Revolving Facility, which is a $700.0 million unsecured, multi-currency bank credit facility expiring on June 27, 2016. At March 31, 2014, there were $17.0 million of outstanding borrowings under the Revolving Facility and outstanding letters of credit totaled approximately $7.9 million. The net available borrowing capacity under the Revolving Facility at March 31, 2014, was approximately $675.1 million. Borrowings under the Revolving Facility bear interest, at either an alternate base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin is based on the Company's senior, unsecured, long-term debt rating and can range from .875% to 1.70%. Based on the Company's credit rating at March 31, 2014, the applicable margin was 1.05%. Interest is payable (a) in the case of base rate loans, quarterly, and (b) in the case of LIBOR rate loans, on the maturity date of the borrowing, or quarterly from the effective date for borrowings exceeding three months. An annual Revolving Facility fee, also based on the Company's credit rating, is currently 20 basis points and is payable quarterly. There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility and 2.58% Senior Euro Notes. The most restrictive financial covenants under these debt instruments require a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.25 to 1. At March 31, 2014, the Company was in compliance with both of these financial covenants, as the Company's interest coverage ratio was 12.20 to 1 and the leverage ratio was 1.58 to 1. There are no financial covenants relating to the 4.5% Senior Notes or 4.2% Senior Notes; however, both are subject to cross-default provisions.


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On November 8, 2013, the Company's Board of Directors approved a $300.0 million increase in the authorized level for repurchases of common stock. Repurchases under the program will be funded with future cash flow generation. During the first three months of 2014, the Company purchased a total of 0.6 million shares at a cost of $40.1 million, of which $2.6 million was settled in April 2014. As of March 31, 2014, the Company had $327.8 million available under the authorized share repurchase programs.
The Company believes current cash, cash from operations and cash available under the Revolving Facility will be sufficient to meet its operating cash requirements, planned capital expenditures, interest on all borrowings, pension and postretirement funding requirements, expected share repurchases and annual dividend payments to holders of the Company's stock for the remainder of 2014. Additionally, in the event that suitable businesses are available for acquisition upon acceptable terms, the Company may obtain all or a portion of the financing for these acquisitions through the incurrence of additional borrowings. As of March 31, 2014, $17.0 million was outstanding under the Revolving Facility, with $7.9 million of outstanding letters of credit, resulting in net available borrowing capacity under the Revolving Facility at March 31, 2014 of approximately $675.1 million.

Non-GAAP Disclosures
The following is a reconciliation of EBITDA to the comparable measures of net income and operating income, as determined in accordance with U.S. GAAP. We have reconciled consolidated EBITDA to net income and we have reconciled segment EBITDA to operating income, as we do not allocate interest and income taxes to our segments. EBITDA means earnings before interest, income taxes, depreciation and amortization. Given the acquisitive nature of the Company which results in a higher level of amortization expense at recently acquired businesses, management uses EBITDA, in addition to operating income, to provide it with another way to measure financial performance of businesses across our three segments. Management also uses EBITDA for enterprise valuation purposes. We believe that EBITDA is also useful to some investors as an indicator of the strength and performance of the Company's and its segments ongoing business operations and a way to evaluate and compare operating performance and value companies within our industry. However, it should not be considered as an alternative to net income, operating income or any other items calculated in accordance with U.S. GAAP. The definition of EBITDA used here may differ from that used by other companies.

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