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40: R3 Condensed Consolidated Balance Sheets HTML 48K
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64: R5 Condensed Consolidated Statements of Comprehensive HTML 51K
Income
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Equity
43: R7 Condensed Consolidated Statements of Shareholders' HTML 45K
Equity (Parenthetical)
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Policies
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15: R19 Derivative Instruments HTML 41K
65: R20 Fair Value Measurements HTML 58K
103: R21 Leases HTML 77K
42: R22 Restructuring HTML 77K
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62: R24 Common and Preferred Stock HTML 35K
102: R25 Share-Based Compensation HTML 188K
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Policies (Policies)
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Acquisition Costs to Assets Acquired and
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Intangible Assets and Weighted Average
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75: R50 Business Segments - Schedule of Information on HTML 71K
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74: R54 Revenue - Deferred Revenue (Details) HTML 36K
88: R55 Revenue - Additional Information (Details) HTML 38K
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Weighted Average Shares Reconciles to Diluted
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76: R58 Inventories (Details) HTML 40K
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Changes in Carrying Amount of Goodwill (Details)
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Carrying Value and Accumulated Amortization for
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Financial Assets and Liabilities at Fair Value on
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(Exact Name of Registrant as Specified in its Charter)
iDelaware
i36-3555336
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
i1925 West
Field Court,
iSuite 200,
iLake Forest,
iIllinois
i60045
(Address
of principal executive offices)
(Zip Code)
Registrant’s telephone number: (i847) i498-7070
Title
of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iCommon Stock, par value $.01 per share
iIEX
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☑ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Net
change in retirement obligations (net of tax of $438)
—
—
—
i1,262
—
—
i1,262
Net
change on derivatives designated as cash flow hedges (net of tax of $361)
—
—
—
—
i1,227
—
i1,227
Issuance
of 264,090 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $3,415)
Net
change in retirement obligations (net of tax of $435)
—
—
—
i1,256
—
—
i1,256
Net
change on derivatives designated as cash flow hedges (net of tax of $359)
—
—
—
—
i1,224
—
i1,224
Issuance
of 169,785 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $679)
—
—
—
—
—
i11,891
i11,891
Repurchase
of 19,143 shares of common stock
—
—
—
—
—
(i2,962
)
(i2,962
)
Shares
surrendered for tax withholding
—
—
—
—
—
(i30
)
(i30
)
Share-based
compensation
i5,266
—
—
—
—
—
i5,266
Cash
dividends declared - $1.00 per common share outstanding
Net
change in retirement obligations (net of tax of $525)
—
—
—
i1,663
—
—
i1,663
Net
change on derivatives designated as cash flow hedges (net of tax of $356)
—
—
—
—
i1,210
—
i1,210
Issuance
of 215,823 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $1,171)
—
—
—
—
—
i14,834
i14,834
Shares
surrendered for tax withholding
—
—
—
—
—
(i1,074
)
(i1,074
)
Share-based
compensation
i5,692
—
—
—
—
—
i5,692
Cash
dividends declared - $0.50 per common share outstanding
Net
change in retirement obligations (net of tax of $505)
—
—
—
i1,413
—
—
i1,413
Net
change on derivatives designated as cash flow hedges (net of tax of $371)
—
—
—
—
i1,261
—
i1,261
Issuance
of 227,932 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $2,934)
Net
change in retirement obligations (net of tax of $455)
—
—
—
i1,270
—
—
i1,270
Net
change on derivatives designated as cash flow hedges (net of tax of $366)
—
—
—
—
i1,244
—
i1,244
Issuance
of 238,280 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $859)
—
—
—
—
—
i13,177
i13,177
Repurchase
of 209,100 shares of common stock
—
—
—
—
—
(i31,166
)
(i31,166
)
Shares
surrendered for tax withholding
—
—
—
—
—
(i510
)
(i510
)
Share-based
compensation
i5,083
—
—
—
—
—
i5,083
Cash
dividends declared - $0.43 per common share outstanding
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
1. iBasis
of Presentation and Significant Accounting Policies
The Condensed Consolidated Financial Statements of IDEX Corporation (“IDEX,”“we,”“our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The statements are unaudited but include all adjustments, consisting only of recurring items, except as noted, that the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three and nine months ended September
30,2019 are not necessarily indicative of the results to be expected for the entire year.
The Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
i
Recently
Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). This standard introduced a new lessee model that requires most leases to be recorded on the balance sheet and eliminates the required use of bright line tests for determining lease classification from U.S. GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases
(Topic 842): Targeted Improvements, which clarified ASU 2016-02 and had the same effective date as the original standard. ASU 2018-11 included an option to use the effective date of ASU 2016-02 as the date of initial application of transition as well as an option not to restate comparative periods in transition. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842):Codification Improvements, which also clarified ASU 2016-02 and is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.
The Company adopted this standard on January
1, 2019 using the optional transition method provided by the FASB in ASU 2018-11. As we did not restate comparative periods, the adoption had no impact on our previously reported results. We elected to use the practical expedient that allowed us not to reassess: (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases and the practical expedient that allows us to treat the lease and non-lease components as a single lease component for all asset classes. We also elected to account for short-term leases in accordance with Accounting Standards Codification (“ASC”) 842-20-25-2. The adoption of this standard had a material impact on our condensed consolidated balance sheet due to the recognition of right of use assets and lease liabilities.
Upon adoption, we recognized right of use assets and lease liabilities of approximately $i68 million that reflected the present value of future lease payments. The adoption of this standard did not have a material impact on our condensed consolidated results of operations or cash flows. See Note 13 for further information.
/
2. iAcquisitions and Divestitures
All of the Company’s acquisitions of businesses have been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired companies, after adjustments to reflect the fair values assigned to assets and liabilities, have been included in the
Company’s condensed consolidated financial statements from their respective dates of acquisition. The results of operations of the acquired companies have been included in the Company’s condensed consolidated results since the date of each acquisition.
The Company incurred acquisition-related transaction costs of $i0.6
million in the three months ended September 30, 2019 and $i1.3 million and $i1.5
million in the nine months ended September 30, 2019 and 2018, respectively. The Company did inot incur any acquisition-related
transaction costs in the three months ended September 30, 2018. These costs were recorded in Selling, general and administrative expenses and were related to completed transactions, pending transactions and potential transactions, including transactions that ultimately were not completed. The Company also incurred a $i3.3
million fair value inventory step-up charge associated with the completed 2019 acquisition in the three and nine months ended September 30, 2019. This charge was recorded in Cost of sales.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
2019
Acquisition
On July 18, 2019, the Company acquired the stock of Velcora Holding AB (“Velcora”) and its operating subsidiaries, Roplan and Steridose. Roplan is a global manufacturer of custom mechanical and shaft seals for a variety of end markets including food and beverage, marine, chemical, wastewater and water treatment. Steridose develops engineered hygienic mixers and valves for the global biopharmaceutical industry. Both companies are headquartered in Sweden, with operations in China, the United Kingdom and the United States. Roplan and Steridose had combined annual revenues in their most recent fiscal year of approximately $i40
million and operate in our Health & Science Technologies segment. Velcora was acquired for cash consideration of $i87.2 million and the assumption of $i51.1
million of debt. The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were $i97.4 million and $i47.5
million, respectively. The goodwill is not deductible for tax purposes.
The Company made an initial allocation of the purchase price for the Velcora acquisition as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities. These nonrecurring fair value measurements are classified as Level 3 in the fair value hierarchy. As the Company continues to obtain additional information about these assets and liabilities, including intangible asset appraisals, and continues to learn more about the newly acquired businesses, we will refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date
are considered for subsequent adjustment. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period, as required.
i
The preliminary allocation of the acquisition costs to the assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, is as follows:
(In
thousands)
Total
Current assets, net of cash acquired
$
i19,047
Property,
plant and equipment
i3,251
Goodwill
i97,352
Intangible
assets
i47,501
Other noncurrent assets
i791
Total
assets acquired
i167,942
Current liabilities
(i6,074
)
Long-term
borrowings
(i51,130
)
Deferred income taxes
(i23,103
)
Other
noncurrent liabilities
(i455
)
Net assets acquired
$
i87,180
/
Acquired
intangible assets consist of trade names, customer relationships and unpatented technology. The goodwill recorded for the acquisition reflects the strategic fit, revenue and earnings growth potential of these businesses.
i
The acquired intangible assets and weighted average amortization periods are as follows:
(In
thousands, except weighted average life)
Total
Weighted Average Life
Trade names
$
i6,411
i15
Customer
relationships
i34,673
i12
Unpatented
technology
i6,417
i9
Acquired
intangible assets
$
i47,501
/
On
September 3, 2019, the Company settled the debt assumed in the Velcora acquisition and incurred a loss on early retirement of $i0.7 million which was recorded in Other (income) expense - net in the Condensed Consolidated Statements of Operations for the three and nine months ended September
30, 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
2018 Acquisition
On July 23, 2018, the
Company acquired Finger Lakes Instrumentation (“FLI”), a technology leader in the design, development and production of low-noise cooled CCD and high speed, high-sensitivity Scientific CMOS cameras for the astronomy and life science markets. Headquartered in Lima, NY, FLI operates in our Health & Sciences Technologies segment. FLI was acquired for an aggregate purchase price of $i23.6 million, consisting of $i20.2
million in cash and contingent consideration valued at $i3.4 million as of the opening balance sheet date. The contingent consideration is based on the achievement of financial objectives during the i24-month
period following the close of the transaction. The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were $i12.6 million and $i7.9
million, respectively. Acquired intangible assets consist of trade names, customer relationships and unpatented technology. The goodwill recorded for the acquisition reflects the strategic fit, revenue and earnings growth potential of this business. The goodwill is deductible for tax purposes.
The Company finalized its allocation of the purchase price for the FLI acquisition as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities. These nonrecurring fair value measurements are classified as Level 3 in the fair value hierarchy.
3. iBusiness
Segments
IDEX has ithree reportable business segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”).
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, agriculture 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 sealing components, custom mechanical and shaft seals for a variety of end markets including food and beverage, marine, chemical, wastewater and water treatment, engineered hygienic mixers
and valves for the global biopharmaceutical industry, 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 designs, produces and distributes firefighting pumps, valves and controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry, engineered stainless steel banding
and clamping devices used in a variety of industrial and commercial applications and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.
i
Information on the Company’s business segments is presented below based on the nature of products and services offered. The
Company evaluates performance based on several factors, of which sales, operating income and operating margin are the primary financial measures. Intersegment sales are accounted for at fair value as if the sales were to third parties.
IDEX
is an applied solutions company specializing in the manufacture of fluid and metering technologies, health and science technologies and fire, safety and other diversified products built to customers’ specifications. The Company’s products include industrial pumps, compressors, flow meters, injectors, valves and related controls for use in a wide variety of process applications; precision fluidics solutions, including pumps, valves, degassing equipment, corrective tubing, fittings and complex manifolds, optical filters and specialty medical equipment and devices for use in life science applications; precision-engineered equipment for dispensing, metering and mixing paints; and engineered products for industrial and commercial markets, including fire and rescue, transportation equipment, oil and gas, electronics and communications.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Revenue is recognized when control of products or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products or providing those services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract
has commercial substance and collectability of the consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.
Disaggregation of Revenue
We have a comprehensive offering of products, including technologies, built to customers’ specifications that are sold in niche markets throughout the world. We disaggregate our revenue from contracts with customers by reporting unit and geographical
region for each of our segments as we believe it best depicts how the amount, nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue was attributed to geographical region based on the location of the customer. The following tables present our revenue disaggregated by reporting unit and geographical region.
i
Revenue by reporting unit for the three and nine months ended September 30,2019
and 2018 was as follows:
(1)
Other in 2019 includes: South America, Middle East, Australia and Africa.
(2) Revenue from North America, excluding U.S. of $i15,391from
FMT, $i6,348 from HST and $i7,544
from FSDP were included in Other for the three months ended September 30, 2018. Revenue from North America, excluding U.S. of $i44,610 from FMT, $i13,705
from HST and $i21,450 from FSDP were included in Other for the nine months ended September 30, 2018.
(3)
Other in 2018 includes: North America, excluding U.S., South America, Middle East, Australia and Africa.
The timing of revenue recognition, billings and cash collections can result in customer receivables, advance payments or billings in excess of revenue recognized. Customer receivables include both amounts billed and currently due from customers as well as unbilled amounts (contract assets) and are included in Receivables on our Condensed Consolidated Balance Sheets. Amounts are billed in accordance with contractual terms or as work progresses. Unbilled amounts arise when the timing of billing differs from the timing of revenue recognized, such as when contract provisions require specific milestones to be met before a customer can be billed. Unbilled amounts primarily relate to performance
obligations satisfied over time when the cost-to-cost method is utilized and the revenue recognized exceeds the amount billed to the customer as there is not yet a right to payment in accordance with contractual terms. Unbilled amounts are recorded as a contract asset when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract. Customer receivables are recorded at face amount less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses as a result of customers’ inability
to make required payments. Management evaluates the aging of customer receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future and records the appropriate provision.
i
The composition of Customer receivables was as follows:
Advance
payments and billings in excess of revenue recognized are included in Deferred revenue which is classified as current or noncurrent based on the timing of when we expect to recognize the revenue. The current portion is included in Accrued expenses and the noncurrent portion is included in Other noncurrent liabilities on our Condensed Consolidated Balance Sheets. Advance payments represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations satisfied over time. We generally receive advance payments from customers related to maintenance services which we recognize ratably over the service term. Billings in excess of revenue recognized represent contract
liabilities and primarily relate to performance obligations satisfied over time when the cost-to-cost method is utilized and revenue cannot yet be recognized as the Company has not completed the corresponding performance obligation. Contract liabilities are derecognized when revenue is recognized and the performance obligation is satisfied.
i
The
composition of Deferred revenue was as follows:
A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For our contracts that require complex design, manufacturing and installation activities, certain promises may not be separately identifiable from other promises in the contract and, therefore, not distinct. As a result, the entire contract
is accounted for as a single performance obligation. For our contracts that include distinct products or services that are substantially the same and have the same pattern of transfer to the customer over time, they are recognized as a series of distinct products or services. Certain of our contracts have multiple performance obligations for which we allocate the transaction price to each performance obligation using an estimate of the standalone selling price of each distinct product or service in the contract. For product sales, each product sold to a customer generally represents a distinct performance obligation. In such cases, the observable standalone
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
sales are used to determine the standalone selling price. In certain cases, we may be required to estimate standalone selling price using the expected cost plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct product or service.
Our performance obligations are satisfied at a point in time or over time as work progresses.
Performance obligations are supported by contracts with customers that provide a framework for the nature of the distinct products or service or bundle of products and services. We define service revenue as revenue from activities that are not associated with the design, development or manufacture of a product or the delivery of a software license.
Revenue from products and services transferred to customers at a point in time approximated i95%
of total revenues in the three and nine months ended September 30,2019 and 2018. Revenue recognized at a point in time relates to the majority of our product sales. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is in line with shipping terms.
Revenue from products and services transferred to customers over time approximated
i5% of total revenues in the three and nine months ended September 30,2019 and 2018.
Revenue earned by certain business units within the Water, Energy, Material Processing Technologies (“MPT”) and Dispensing reporting units is recognized over time because control transfers continuously to our customers. When accounting for over-time contracts, we use an input measure to determine the extent of progress towards completion of the performance obligation. For certain business units within the Water, Energy and MPT reporting units, revenue is recognized over time as work is performed based on the relationship between actual costs incurred to date for each contract and the total estimated costs for such contract at completion of the performance obligation (i.e. the cost-to-cost method).
We believe this measure of progress best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. Contract costs include labor, material and overhead. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. Revenues, including estimated fees or profits, are recorded proportionally
as costs are incurred. For certain business units within the Energy and Dispensing reporting units, revenue is recognized ratably over the contract term.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our estimates regularly. Due to uncertainties inherent in the estimation process, it is reasonably possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised. Such
revisions to costs and income are recognized in the period in which the revisions are determined as a cumulative catch-up adjustment. The impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize provisions for estimated losses on uncompleted contracts
in the period in which such losses are determined.
The Company records allowances for discounts and product returns at the time of sale as a reduction of revenue as such allowances can be reliably estimated based on historical experience and known trends. The Company also offers product warranties (primarily assurance-type) and accrues its estimated exposure for warranty claims at the time of sale based upon the length of the warranty period, warranty costs incurred and any other related information known to the Company.
5. iEarnings
Per Common Share
Earnings per common share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist of stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method, restricted stock and performance share units.
ASC 260, Earnings Per Share, concludes that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the
Company is required to apply the two-class method of computing basic and diluted earnings per share. The Company has determined that its outstanding shares of restricted stock are participating securities. Accordingly, EPS was computed using the two-class method prescribed by ASC 260.
Dilutive
effect of stock options, restricted stock and performance share units
i879
i1,147
i883
i1,210
Diluted
weighted average common shares outstanding
i76,577
i77,709
i76,415
i77,717
/
Options
to purchase approximately i0.3 million and i0.3
million shares of common stock for the three months ended September 30, 2019 and 2018, respectively, and i0.6 million and i0.3
million shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, were not included in the computation of diluted EPS because the effect of their inclusion would have been antidilutive.
Inventories
are stated at the lower of cost or net realizable value. Cost, which includes material, labor and factory overhead, is determined on a FIFO basis.
7. iGoodwill and Intangible Assets
i
The
changes in the carrying amount of goodwill for the nine months ended September 30, 2019, by reportable business segment, were as follows:
ASC
350, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. In the first nine months of 2019, there were no events or circumstances that would have required an interim impairment test. Annually, on October 31, goodwill and other acquired intangible assets with indefinite lives are tested for impairment. Based on the results of our annual impairment test at October 31, 2018, all reporting units had fair values in excess of their carrying values.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
i
The following table provides the gross carrying value and accumulated
amortization for each major class of intangible asset at September 30, 2019 and December 31, 2018:
The
Banjo trade name and the Akron Brass trade name are indefinite-lived intangible assets which are tested for impairment on an annual basis in accordance with ASC 350 or more frequently if events or changes in circumstances indicate that the assets might be impaired. In the first nine months of 2019, there were no events or circumstances that would have required an interim impairment test on these indefinite-lived intangible assets. The Company uses the relief-from-royalty method, a form of the income approach, to determine the fair value of these trade names. The relief-from-royalty method is dependent on a number of significant management assumptions, including estimates of revenues, royalty rates and discount rates.
In
the second quarter of 2019, the Company began to evaluate strategic alternatives for one of its businesses in the HST segment. Prior to making a final decision on the options that were presented for this business, the business was informed in the third quarter of 2019 of the loss of its largest customer. As a result, the Company accelerated its restructuring activities for this business and a decision was made to wind down the business over time. This event required an interim impairment test be performed on certain of its definite-lived intangible assets, which resulted in an impairment charge of $i7.1
million, consisting of $i6.1 million related to customer relationships and $i1.0
million related to unpatented technology. This charge was recorded as Restructuring expense in the Condensed Consolidated Statements of Operations. See Note 14 for further discussion.
Amortization of intangible assets was $i9.7 million and $i27.7
million for the three and nine months ended September 30,2019, respectively. Amortization of intangible assets was $i8.8 million and $i29.5
million for the three and nine months ended September 30,2018, respectively. Based on the intangible asset balances as of September 30, 2019, amortization expense is expected to approximate $i9.5 million
for the remaining three months of 2019, $i37.6 million in 2020, $i36.3
million in 2021, $i34.7 million in 2022 and $i31.8
million in 2023.
On
June 13, 2016, the Company completed a private placement of a $i100 million aggregate principal amount of i3.20%
Senior Notes due June 13, 2023 and a $i100 million aggregate principal amount of i3.37%
Senior Notes due June 13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13th and December 13th. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay
all, or any portion of the Notes, provided that such portion is greater than i5% of the aggregate principal amount of the Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the
Company may repurchase the Notes by making an offer to all holders of the Notes, subject to certain conditions.
The Purchase Agreement contains certain covenants that restrict the Company’s ability to, among other things, transfer or sell assets, incur indebtedness, create liens, transact with affiliates and engage in certain mergers or consolidations or other change of control transactions. In addition, the Company must comply with a leverage ratio and interest coverage ratio, as further described below, and the Purchase Agreement also limits the outstanding principal amount of priority debt that may be incurred by the Company
to i15% of consolidated assets. The Purchase Agreement provides for customary events of default. In the case of an event of default arising from specified events of bankruptcy or insolvency, all of the outstanding Notes will become due and payable immediately without further action or notice. In the case of a payment event of default, any holder
of the Notes affected thereby may declare all of the Notes held by it due and payable immediately. In the case of any other event of default, a majority of the holders of the Notes may declare all of the Notes to be due and payable immediately.
On May 31, 2019, the Company entered into a credit agreement (the “Credit Agreement”) along with certain of its subsidiaries, as borrowers (the “Borrowers”), Bank of America, N.A., as administrative agent, swing line lender and an issuer of letters of credit, with other agents party thereto. The Credit Agreement replaces the
Company’s existing five-year, $i700 million credit agreement, dated as of June 23, 2015, which was due to expire in June 2020.
Terms and fees of the 2019 Credit Agreement are essentially the same as the 2015 credit agreement except for certain fees and interest rate pricing that are more favorable
to the Company.
The Credit Agreement consists of a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $i800 million with a final maturity date of May 30,
2024. The maturity date may be extended under certain conditions for an additional one-year term. Up to $i75 million of the Revolving Facility under the Credit Agreement is available for the issuance of letters of credit. Additionally, up to $i50
million of the Revolving Facility is available to the Company for swing line loans, available on a same-day basis.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Proceeds
of the Revolving Facility are available for use by the Borrowers for working capital and other general corporate purposes, including refinancing existing debt of the Company and its subsidiaries. The Company may request increases in the lending commitments under the Credit Agreement, but the aggregate lending commitments pursuant to such increases may not exceed $i400
million. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain foreign subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement.
Borrowings under the Credit Agreement 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 better of the Company’s senior, unsecured, long-term debt rating or the Company’s applicable leverage ratio. Interest is payable (a) in the case of base rate loans, quarterly, and (b) in the case of LIBOR rate loans, on the last day of the applicable interest period selected, or every three months from the effective date of such interest period for interest periods exceeding three months.
Voluntary prepayments of any loans and voluntary reductions of the unutilized portion of the commitments under the Credit Agreement are permissible without penalty, subject to break funding payments and minimum
notice and minimum reduction amount requirements.
The Credit Agreement contains affirmative and negative covenants usual and customary for such senior unsecured credit agreements, including an interest coverage ratio test and a leverage ratio test, in each case tested quarterly and, in the case of the leverage ratio, with an option to increase the ratio for 12 months in connection with certain acquisitions. The negative covenants include restrictions on the Company on granting liens, entering into transactions resulting in fundamental changes (such as mergers or sales of all or substantially all of the assets of the Company), making certain subsidiary dividends or distributions, engaging in materially different
lines of businesses and allowing subsidiaries to incur certain additional debt.
The Credit Agreement also contains customary events of default (subject to grace periods, as appropriate).
At September 30, 2019, there was ino
balance outstanding under the Revolving Facility and $i10.1 million of outstanding letters of credit, resulting in a net available borrowing capacity under the Revolving Facility at September 30, 2019 of approximately $i789.9
million.
There are itwo key financial covenants that the Company is required to maintain in connection with the Revolving Facility and the Notes, a minimum interest coverage ratio of i3.00
to 1 and a maximum leverage ratio of i3.50 to 1, which is the ratio of the Company’s consolidated total debt to its consolidated EBITDA. In the case of the leverage ratio, there is an option to increase the ratio to i4.00
for 12 months in connection with certain acquisitions. At September 30, 2019, the Company was in compliance with both of these financial covenants. There are no financial covenants relating to the i4.5% Senior Notes or i4.2%
Senior Notes; however, both are subject to cross-default provisions.
11. iDerivative Instruments
The Company enters into cash flow hedges from time to
time to reduce the exposure to variability in certain expected future cash flows. The types of cash flow hedges the Company enters into include foreign currency exchange contracts designed to minimize the earnings impact on certain intercompany loans as well as interest rate exchange agreements designed to reduce the impact of interest rate changes on future interest expense that effectively convert a portion of floating-rate debt to fixed-rate debt.
The effective portion of gains or losses on interest rate exchange agreements is reported in accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into net income in the same period or periods in which the hedged transaction
affects net income. The remaining gain or loss in excess of the cumulative change in the present value of future cash flows or the hedged item, if any, is recognized in net income during the period of change. See Note 15 for the amount of loss reclassified into net income for interest rate contracts for the three and nine months ended September 30, 2019 and 2018. As of September 30, 2019, the Company did not have any interest rate contracts outstanding.
In
2010 and 2011, the Company entered into itwo separate forward starting interest rate exchange agreements in anticipation of the issuance of the i4.2%
Senior Notes and the i4.5% Senior Notes. The Company cash settled these two interest rate contracts in 2010 and 2011 for a total of $i68.9
million, which is being amortized into interest expense over the i10 year terms of the respective debt instruments. Approximately $i6.2
million of the pre-tax amount included in Accumulated other comprehensive income (loss)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
in shareholders’ equity at September 30, 2019 will be recognized
in net income over the next 12 months as the underlying hedged transactions are realized.
At March 31, 2018, the Company had outstanding foreign currency exchange contracts with a combined notional value of €i180
million that were not designated as hedges for accounting purposes and, as a result, the change in the fair value of these foreign currency exchange contracts and the corresponding foreign currency gain or loss on the revaluation of the intercompany loans were both recorded through earnings within Other (income) expense - net in the Condensed Consolidated Statements of Operations each period as incurred.
In April 2018, the Company settled its outstanding foreign currency exchange contracts in conjunction with its repayment of the underlying intercompany loans and did not extend these foreign currency exchange contracts.
Along with the repayment of the intercompany loans, the Company was required to make a capital contribution to one of its subsidiaries, which resulted in a $i2.2 million stamp duty in Switzerland which was recorded within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
As
a result of the foreign currency exchange contracts being settled in April 2018, the Company did inot record a gain or loss on the foreign currency exchange contracts
during the three months ended September 30, 2018. The Company recorded a gain of $i0.9 million during the nine months ended September 30, 2018. The foreign currency exchange gains were recorded
within Other (income) expense - net in the Condensed Consolidated Statements of Operations. The Company did inot record a gain or loss on the revaluation of intercompany loans during the three months ended September 30, 2018 due to these loans being settled in April 2018. The
Company did record a foreign currency transaction loss of $i0.9 million during the nine months ended September 30, 2018. The losses on the revaluation of the intercompany loans were recorded within Other (income) expense - net in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2018, the
Company received $i6.6 million in settlement of the foreign currency exchange contracts.
Fair values relating to derivative financial instruments reflect the estimated amounts that the Company would
receive or pay to sell or buy the contracts based on quoted market prices of comparable contracts at each balance sheet date.
12. iFair Value Measurements
ASC
820, Fair Value Measurements and Disclosures, defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
•
Level 1: Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or liabilities.
•
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
i
The following table summarizes the basis used to measure the
Company’s financial assets (liabilities) at fair value on a recurring basis in the balance sheets at September 30, 2019 and December 31, 2018:
There
were no transfers of assets or liabilities between Level 1 and Level 2 during the three and nine months ended September 30,2019 or the year ended December 31, 2018.
The Company utilized a Monte Carlo Simulation to determine the fair value of the contingent consideration associated with the acquisition of FLI as of the acquisition date. The $i3.4
million represents management’s best estimate of the liability, based on a range of outcomes of FLI’s two-year operating results, from August 1, 2018 to July 31, 2020, and is expected to be paid during the third quarter of 2020. As of September 30, 2019, the $i3.4
million of contingent consideration is included in Accrued expenses on the Condensed Consolidated Balance Sheets.
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short term nature of these instruments. At September 30, 2019, the fair value of the outstanding indebtedness under our i3.2%
Senior Notes, i3.37% Senior Notes, i4.5% Senior
Notes, i4.2% Senior Notes and other borrowings based on quoted market prices and current market rates for debt with similar credit risk and maturity was approximately $i875.9
million compared to the carrying value of $i850.3 million. At December 31, 2018, the fair value of the outstanding indebtedness under our i3.2%
Senior Notes, i3.37% Senior Notes, i4.5% Senior
Notes, i4.2% Senior Notes and other borrowings based on quoted market prices and current market rates for debt with similar credit risk and maturity was approximately $i851.5
million compared to the carrying value of $i850.4 million. These fair value measurements are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions to entities with a credit rating similar to ours.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
13. iLeases
The
Company leases certain office facilities, warehouses, manufacturing plants, equipment (which includes both office and plant equipment) and vehicles under operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Certain leases include ione
or more options to renew. The exercise of lease renewal options is at the Company’s sole discretion. There are currently no renewal periods included in any of the leases’ respective lease terms as they are not reasonably certain of being exercised. The Company does not have any material purchase options.
Certain of our lease agreements have rental payments that are adjusted periodically for inflation or that are based on usage. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
i
Supplemental
balance sheet information related to leases as of September 30, 2019 was as follows:
In the second quarter
of 2019, the Company began to evaluate strategic alternatives for one of its businesses in the HST segment. Prior to making a final decision on the options that were presented for this business, the business was informed in the third quarter of 2019 of the loss of its largest customer. As a result, the Company accelerated its restructuring activities for this business and a decision was made to wind down the business over time. This event required an interim impairment test be performed on its long-lived assets, which resulted in an impairment charge of $i0.6
million related to its building right-of-use asset. This charge was recorded as Restructuring expense in the Condensed Consolidated Statements of Operations. See Note 14 for further discussion.
As part of the adoption of the new lease standard, the Company derecognized its liability for the construction of a new leased facility that was recorded in Other noncurrent liabilities on the Condensed Consolidated Balance Sheets and recorded it as a right of use asset in Other noncurrent assets on the Condensed Consolidated Balance Sheets with a corresponding lease liability in Accrued expenses and Other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
i
The
components of lease cost for the three and nine months ended September 30,2019 were as follows:
The
Company uses the implicit rate to determine the present value of the lease payments. If the implicit rate is not defined in the lease, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The Company used either the implicit rate or the incremental borrowing rate based on the information available at the transition date to determine the present value of the lease payments as of January 1, 2019.
i
Total
lease liabilities at September 30, 2019 have scheduled maturities as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
14. iRestructuring
During
the year ended December 31, 2018 and the three and nine months ended September 30,2019, the Company recorded accruals for restructuring costs incurred as part of restructuring initiatives that supported the implementation of key strategic efforts designed to facilitate long-term, sustainable growth through cost reduction actions, consisting of employee reductions and facility rationalization. The restructuring costs included severance benefits, exit costs and asset impairments which were included in Restructuring expenses in the Condensed Consolidated Statements of Operations. Severance costs primarily consisted of severance benefits through payroll
continuation, COBRA subsidies, outplacement services, conditional separation costs and employer tax liabilities, while exit costs primarily consisted of lease exit and contract termination costs.
In the second quarter of 2019, the Company began to evaluate strategic alternatives for one of its businesses in the HST segment. Prior to making a final decision on the options that were presented for this business, the business was informed in the third quarter of 2019 of the loss of its largest customer. As a result, the Company accelerated its restructuring activities for this business and a decision was made to wind down
the business over time. This event required an interim impairment test be performed on the long-lived tangible and intangible assets of the business, which resulted in an impairment charge of $i9.7 million, consisting of $i6.1
million related to a customer relationships intangible asset, $i1.0 million related to an unpatented technology intangible asset, $i2.0
million related to property, plant and equipment and $i0.6 million related to a building right-of-use asset. This charge was recorded as Restructuring expense in the Condensed Consolidated Statements of Operations.
i
Pre-tax
restructuring expenses by segment for the three and nine months ended September 30,2019 were as follows:
Restructuring
accruals of $i3.3 million and $i6.2 million at September 30, 2019
and December 31, 2018, respectively, are recorded in Accrued expenses on the Condensed Consolidated Balance Sheets. Severance benefits are expected to be paid by the end of the year using cash from operations. iThe changes in the restructuring accrual for the nine months ended September 30, 2019 are as follows:
The
following table summarizes the amounts reclassified from accumulated other comprehensive income (loss) to net income during the three and nine months ended September 30,2019 and 2018:
The
Company recognizes the service cost component in both Selling, general and administrative expenses and Cost of sales in the Condensed Consolidated Statements of Operations depending on the functional area of the underlying employees included in the plans.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data
and where otherwise indicated)
(unaudited)
16. iCommon and Preferred Stock
On December 1, 2015, the Company’s Board of Directors approved an increase of $i300.0
million in the authorized level of repurchases of common stock. This followed the prior Board of Directors approved repurchase authorization of $i400.0 million that was announced by the Company on November 6, 2014. These authorizations have no expiration date. Repurchases under the program will be funded with future cash flow generation or borrowings available
under the Revolving Facility. During the nine months endedSeptember 30, 2019, the Company repurchased a total of i389 thousand shares at a cost of $i54.7
million. During the nine months endedSeptember 30, 2018, the Company repurchased a total of i357 thousand shares at a cost of $i51.7
million, of which $i1.0 million was settled in October 2018. As of September 30, 2019, the amount of share repurchase authorization remaining was $i322.3
million.
The
Company typically grants equity awards annually at its regularly scheduled first quarter meeting of the Board of Directors based on their recommendation from the Compensation Committee.
Stock Options
Stock options generally vest ratably over ifour years.
iWeighted average option fair values and assumptions for the periods specified are disclosed below. The fair value of each option grant was estimated on the date of the grant using the Binomial lattice option pricing model.
Restricted stock awards generally cliff vest after ithree years for employees and non-employee directors. Unvested restricted stock carries dividend and voting rights and the sale of the shares is restricted prior to the date of vesting. iA
summary of the Company’s restricted stock activity as of September 30, 2019 and changes during the nine months endedSeptember 30, 2019 are presented as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Cash-Settled Restricted Stock
The Company also maintains a cash-settled share based compensation plan for certain employees. Cash-settled restricted stock awards generally cliff vest after ithree
years.i Cash-settled restricted stock awards are recorded at fair value on a quarterly basis using the market price of the Company’s stock on the last day of the quarter. A summary of the Company’s unvested cash-settled restricted stock activity as of September 30,
2019 and changes during the nine months endedSeptember 30, 2019 are presented in the following table:
Dividend
equivalents are paid on certain cash-settled restricted stock awards. iTotal compensation cost for cash-settled restricted stock is as follows:
Weighted average performance share unit fair values and assumptions for the period specified are disclosed below. The performance share units are market condition awards and have been assessed at fair value on the date of grant using a Monte Carlo simulation model.
On
December 31, 2018, i69,995 performance share units vested. Based on the Company’s relative total shareholder return rank during the
three year period ended December 31, 2018, the Company achieved a i250% payout factor and issued i174,994
common shares in February 2019.
i
Total compensation cost for performance share units is as follows:
The
Company’s policy is to recognize compensation cost on a straight-line basis, assuming forfeitures, over the requisite service period for the entire award. Classification of stock compensation cost within the Condensed Consolidated Statements of Operations is consistent with classification of cash compensation for the same employees.
As of September 30, 2019, there was $i15.2
million of total unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of i1.4 years, $i6.2
million of total unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of i1.1 years, $i4.3
million of total unrecognized compensation cost related to cash-settled restricted shares that is expected to be recognized over a weighted-average period of i1.0 years and $i10.8
million of total unrecognized compensation cost related to performance share units that is expected to be recognized over a weighted-average period of i1.0 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
18. iRetirement Benefits
The
Company sponsors several qualified and nonqualified defined benefit and defined contribution pension plans and other postretirement plans for its employees. iThe following tables provide the components of net periodic benefit cost for its major defined benefit plans and its other postretirement plans.
The
Company previously disclosed in its financial statements for the year ended December 31, 2018, that it expected to contribute approximately $i0.6 million to its defined benefit plans and $i1.1
million to its other postretirement benefit plans in 2019. During the first nine months of 2019, the Company contributed a total of $i0.1 million to fund these plans.
Effective
September 30, 2019, the IDEX Corporation Retirement Plan (“Plan”) was amended to freeze the accrual of retirement benefits for all participants. This action impacted fewer than i60 participants, as the Plan had been closed to new entrants and frozen as of December 31, 2005 for all but certain older, longer service participants. The overall financial impact of the freeze was to reduce
the Plan liabilities by approximately $i1.2 million. In addition, the Company recorded a settlement charge of $i0.5
million which was recorded in Other (income) expense - net in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where
otherwise indicated)
(unaudited)
19. iLegal Proceedings
The Company and certain of its subsidiaries are involved in pending and threatened legal, regulatory and other proceedings arising in the ordinary
course of business. These proceedings may pertain to matters such as product liability or contract disputes, and may also involve governmental inquiries, inspections, audits or investigations relating to issues such as tax matters, intellectual property, environmental, health and safety issues, governmental regulations, employment and other matters. Although the results of such legal proceedings cannot be predicted with certainty, the Company believes that the ultimate disposition of these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s business, financial condition, results of operations or cash flows.
20. iIncome
Taxes
The Company’s 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 decreased to $i24.0 million
for the three months ended September 30, 2019 from $i26.9 million during the same period in 2018. The effective tax rate decreased to i18.6%
for the three months ended September 30, 2019 compared i20.2% to during the same period in 2018 due to a decrease in the impact of Global Intangible Low-Taxed Income (“GILTI”) related to U.S. Treasury regulations as well as the mix of global pre-tax income among jurisdictions.
The
provision for income taxes decreased to $i82.2 million for the nine months ended September 30, 2019 from $i87.7
million during the same period in 2018. The effective tax rate decreased to i20.0% for the nine months ended September 30, 2019 compared to i21.9%
during the same period in 2018 due to a decrease in the impact of GILTI related to U.S. Treasury regulations, the excess tax benefits related to share-based compensation as well as the mix of global pre-tax income among jurisdictions.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits
balance may change within the next twelve months by a range of izero to $i0.8
million.
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 “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 the Private Securities Litigation Reform Act of 1995,
as amended. These statements may relate to, among other things, capital expenditures, acquisitions, cost reductions, cash flow, revenues, earnings, market conditions, global economies and operating improvements, and are indicated by words or phrases such as “anticipates,”“estimates,”“plans,”“expects,”“projects,”“forecasts,”“should,”“could,”“will,”“management believes,”“the Company believes,”“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 those anticipated at the date of this report. The risks and uncertainties include, but are not limited to, the following: 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 order rates and the Company’s results, particularly in light of the low levels of order backlogs it typically maintains; the Company’s 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 the Company operates; developments
with respect to trade policy and tariffs; interest rates; capacity utilization and the effect this has 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 here are only made as of the date of this report, and management undertakes no obligation to publicly update them to reflect subsequent events or circumstances, except as may be required by law. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.
IDEX is an applied solutions company specializing in the manufacture of 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 across 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 important 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 13 platforms, where we focus on organic growth and strategic acquisitions. Each of our 13 platforms is also a reporting unit that we annually test goodwill for impairment.
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, agriculture and energy industries. The Fluid & Metering Technologies segment contains the Energy platform
(comprised of Corken, Liquid Controls, SAMPI and Toptech), the Valves platform (comprised of Alfa Valvole, Richter and Aegis), the Water platform (comprised of Pulsafeeder, OBL, Knight, ADS, Trebor and iPEK), the Pumps platform (comprised of Viking and Warren Rupp) and the Agriculture platform (comprised of Banjo).
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 sealing components, custom mechanical and shaft seals for a variety
of end markets including food and beverage, marine, chemical, wastewater and water treatment, engineered hygienic mixers and valves for the global biopharmaceutical industry, 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 Health & Science Technologies segment contains the Scientific Fluidics & Optics platform (comprised of Eastern Plastics, Rheodyne, Sapphire Engineering, Upchurch Scientific, ERC, CiDRA Precision Services, thinXXS,
CVI Melles Griot, Semrock, Advanced Thin Films and FLI), the Sealing Solutions platform (comprised of Precision Polymer Engineering, FTL Seals Technology, Novotema, SFC Koenig and Velcora), the Gast platform, the Micropump platform and the Material Processing Technologies platform (comprised of Quadro, Fitzpatrick, Microfluidics and Matcon).
The Fire & Safety/Diversified Products segment designs, produces and develops firefighting pumps, valves and controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry, engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world. The Fire & Safety/Diversified Products segment is comprised
of the Fire & Safety platform (comprised of Class 1, Hale, Akron Brass, AWG Fittings, Godiva, Dinglee, Hurst Jaws of Life, Lukas and Vetter), the BAND-IT platform and the Dispensing platform.
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.
This
report references organic sales, a non-GAAP measure, that refers to sales from continuing operations calculated according to generally accepted accounting principles in the United States of America (“U.S. GAAP”) but excludes (1) the impact of foreign currency translation and (2) sales from acquired or divested businesses during the first twelve months of ownership or divestiture. 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 and divestitures because they can obscure underlying business trends and make comparisons of long term performance difficult due to the varying nature, size and number of transactions from period to period and between the Company and its peers.
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 from recently acquired businesses, management uses EBITDA as an internal operating metric to provide another representation of the businesses’ performance across our three segments and for enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the Company and a way to evaluate and compare operating performance and value companies within our industry. Management believes that EBITDA margin is useful for the same reason as EBITDA. EBITDA is also used to calculate certain financial covenants, as discussed in Note 10 in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1, “Financial Statements.”
Organic sales have been reconciled to net sales and EBITDA has been reconciled to net income in Item 2 under the heading “Non-GAAP Disclosures.” The reconciliation of segment EBITDA to net income was performed on a consolidated basis due to the fact that we do not allocate consolidated interest expense or the consolidated provision for income taxes to our segments.
Management uses Adjusted operating income, Adjusted net income, Adjusted EBITDA and Adjusted EPS as metrics by which to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as restructuring expenses and
a fair value inventory step-up charge.
The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.
Some of our key financial results for the three months ended September 30, 2019 when compared to the same period in the prior year are as follows:
•
Sales
of $624.2 million were flat; organic sales (which excludes acquisitions and foreign currency translation) were also flat.
•
Operating income of $141.8 milliondecreased2%. Adjusted for a $3.3 million fair value inventory step-up charge and $12.0 million of restructuring expenses, adjusted operating income increased 5% to $157.1 million.
•
Net
income of $105.2 milliondecreased1%. Adjusted for a $2.6 million fair value inventory step-up charge and $9.2 million of restructuring expenses, net of tax benefit, adjusted net income increased6% to $117.0 million.
•
EBITDA of $160.1 million was 26% of sales and covered interest expense by 14
times. Adjusted EBITDA of $175.4 million was 28% of sales and covered interest expense by over 15 times.
•
Diluted EPS of $1.37 was flat. Adjusted EPS of $1.52increased11 cents, or 8%.
Some of our key financial results for the nine months ended September
30, 2019 when compared to the same period in the prior year are as follows:
•
Sales of $1,888.6 millionincreased1%; organic sales (which excludes acquisitions and foreign currency translation) were up2%.
•
Operating income of $444.8
millionincreased4%. Adjusted for a $3.3 million fair value inventory step-up charge and $14.1 million of restructuring expenses, adjusted operating income increased 6% to $462.2 million.
•
Net income of $328.7 millionincreased5%. Adjusted for a $2.6 million fair value inventory step-up charge and $10.7 million of restructuring expenses, net of tax benefit,
adjusted net income increased7% to $342.0 million.
•
EBITDA of $501.5 million was 27% of sales and covered interest expense by over 15 times. Adjusted EBITDA of $518.9 million was 27% of sales and covered interest expense by almost 16 times.
•
Diluted
EPS of $4.30increased28 cents, or 7%. Adjusted EPS of $4.47increased37 cents, or 9%.
Given the Company’s current outlook, we are projecting fourth quarter2019 EPS in the range of $1.33 to $1.35 with full
year 2019 adjusted EPS of $5.80 to $5.82. We are also projecting fourth quarter organic revenue growth to be flat with full year organic revenue growth of 2%.
The following is a discussion and analysis of our results of operations
for the three and nine months ended September 30,2019 and 2018. Segment operating income and EBITDA exclude unallocated corporate operating expenses of $17.9 million and $18.5 million for the three months ended September 30, 2019 and 2018, respectively, and $55.7 million and $61.2 million for the nine months endedSeptember 30,
2019 and 2018, respectively.
Consolidated Results for the Three Months Ended September 30, 2019 Compared with the Same Period in 2018
For the three months
ended September 30, 2019, Fluid & Metering Technologies contributed 38% of sales, 49% of operating income and 47% of EBITDA; Health & Science Technologies contributed 37% of sales, 25% of operating income and 28% of EBITDA; and Fire & Safety/Diversified Products contributed 25% of sales, 26% of operating income and 25% of EBITDA. These percentages are calculated on the basis of total segment (not total Company) sales, operating income and EBITDA.
Sales in the third
quarter of 2019 were $624.2 million, which was flat compared to the same period in 2018. This reflects flat organic sales and a 1% increase from acquisitions (Velcora - July 2019 and Finger Lakes - July 2018), offset by a 1%unfavorable impact from foreign currency translation. Sales to customers outside the U.S. represented approximately 50% of total sales in both the third quarters of 2019 and 2018.
Gross profit of $282.0
million in the third quarter of 2019increased$1.7 million, or 1%, compared to the same period in 2018, and gross margin of 45.2% in the third quarter of 2019 increased 20 basis points from 45.0% during the same period in 2018. Both gross profit and gross margin increased compared to the prior year period primarily due to price and productivity initiatives, partially offset by a fair value inventory step-up charge included in the current year period and higher engineering investments.
Selling,
general and administrative expenses decreased to $128.3 million in the third quarter of 2019 from $130.5 million during the same period in 2018. The decrease is primarily due to lower variable compensation costs and an overall tighter cost control environment in 2019. Corporate costs of $17.2 million in the third quarter of 2019 decreased to $17.9 million in the same period of 2018 primarily due to lower variable compensation
costs. As a percentage of sales, selling, general and administrative expenses were 20.6% for the third quarter of 2019, down40 basis points compared to 21.0% during the same period in 2018.
The Company incurred $12.0 million of restructuring expenses in the third quarter of 2019 compared with $4.6 million
during the same period in 2018. The restructuring expenses included severance benefits of $1.9 million and exit costs of $0.4 million as well as an asset impairment charge of $9.7 million. In the second quarter of 2019, the Company began to evaluate strategic alternatives for one of its businesses in the HST segment. Prior to making a final decision on the options that were presented for this business, the business was informed in the third quarter of 2019 of the loss of its largest customer. As a result, the Company accelerated its restructuring activities for this business and a decision was made to wind down the business over time, requiring the asset impairment charge.
Operating
income of $141.8 million and operating margin of 22.7% in the third quarter of 2019 were down from the $145.1 million and 23.3%, respectively, recorded during the same period in 2018. The decrease in operating income and margin is primarily due to a fair value inventory step-up charge and higher restructuring expenses in 2019, partially offset by gross margin expansion and reduced selling, general and administrative expenses in 2019.
Other (income) expense - net increased to $1.2 million
of expense in the third quarter of 2019 compared to $0.9 million of expense during the same period in 2018, primarily due to a loss on early retirement of debt assumed in the Velcora acquisition and a tax refund received in 2018 that did not reoccur in 2019, partially offset by lower foreign currency transaction losses in 2019 compared to the same period in 2018.
Interest expense of $11.3 million in the third quarter of 2019
was higher than the $11.0 million in the same period of 2018 due to debt assumed in the Velcora acquisition.
The Company’s 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 decreased to $24.0 million in the third
quarter of 2019 compared to $26.9 million during the same period in 2018. The effective tax rate decreased to 18.6% for the third quarter of 2019 compared to 20.2% for the same period in 2018 due to a decrease in the impact of Global Intangible Low-Taxed Income (“GILTI”) related to U.S. Treasury regulations as well as the mix of global pre-tax income among jurisdictions.
Net income in the third quarter of 2019 of $105.2
milliondecreased from $106.4 million during the same period in 2018. Diluted earnings per share in the third quarter of 2019 of $1.37 was flat compared to the same period in 2018.
Sales of $240.9 millionincreased$1.6 million, or 1%, in the third quarter of 2019 compared to the same period in 2018. This reflects a 2%increase in organic sales, partially offset by a 1%unfavorable impact from foreign currency translation. In the third quarter of 2019, sales increased 2% domestically and decreased1%
internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 45% of total segment sales in both the third quarters of 2019 and 2018.
Sales within our Pumps platform increased in the third quarter of 2019 compared to the same period in 2018 due to strength in LACT (lease automatic custody transfer) projects and strong OEM activity. Sales within our Energy platform increased slightly in the third quarter of 2019 compared to
the same period in 2018 due to strength in Latin America. Sales within our Valves platform were relatively flat in the third quarter of 2019 compared to the same period in 2018 due to the softening global industrial landscape. Sales within our Water platform decreased compared to the same period in 2018, primarily due to weakness within the European and Asian distribution markets and project delays in the U.S. Sales within our Agriculture platform decreased in the third quarter of 2019 compared to the same period in 2018 due to decreased demand across both the
agriculture and industrial OEM markets.
Operating income of $77.5 million and operating margin of 32.2% in the third quarter of 2019 were higher than the $69.8 million and 29.2%, respectively, recorded during the same period in 2018, primarily due to price and productivity initiatives, partially offset by higher engineering investments.
Sales of $229.6 millionincreased$7.2 million, or 3%, in the third quarter of 2019 compared to the same period in 2018. This reflects a 1%increase in organic sales and a 3%increase from acquisitions (Velcora - July 2019 and FLI - July 2018), partially offset by a 1%unfavorable impact from foreign currency translation. In the third quarter of 2019, sales increased4% domestically and 2% internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 55% of total segment sales in both the third quarters of 2019 and 2018.
Sales within our Material Processing Technologies platform increased in the third quarter of 2019 compared to the same period in 2018, primarily due to timing of projects and strength
in the pharma market. Sales within our Sealing Solutions platform increased in the third quarter of 2019 compared to the same period in 2018, primarily due to the Velcora acquisition, partially offset by continued softness in the semiconductor and automotive end markets. Sales within our Scientific Fluidics & Optics platform increased in the third quarter of 2019 compared to the same period in 2018 due to new products, market share wins, solid demand in our primary end markets and the FLI acquisition. Sales within our Gast platform decreased in the third
quarter of 2019 compared to the same period in 2018, primarily due to a slowdown across various industrial end markets. Sales within our Micropump
platform decreased in the third quarter of 2019 compared to the same period in 2018 due to weakness in core printing and industrial distribution.
Operating
income of $40.2 million in the third quarter of 2019 was lower than the $49.1 million recorded during the same period in 2018 and operating margin of 17.5% in the third quarter of 2019 was lower than the 22.1% recorded during the same period in 2018, primarily due to higher restructuring expenses (including the asset impairment) in 2019, the fair value inventory step-up charge related to the Velcora acquisition and higher engineering investments and amortization, partially
offset by higher volume and price.
Sales of $154.5 million decreased $7.3 million, or 5%, in the third quarter of 2019 compared to the same period in 2018. This reflects a 3%decrease in organic sales and a 2%unfavorable impact from foreign currency translation. In the third quarter of 2019, sales decreased6% domestically and 3% internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 52% of total segment sales in the third quarter of 2019 compared to 51% during the same period in 2018.
Sales
within our Dispensing platform decreased in the third quarter of 2019 compared to the same period in 2018 primarily due to large projects in the U.S. from 2018 not repeating in 2019, weakness in Asian markets and unfavorable foreign currency translation. Sales within our Fire & Safety platform decreased in the third quarter of 2019 compared to the same period in 2018 due to lower large project tenders globally. Sales within our Band-It platform increased in the third quarter of 2019
compared to the same period in 2018 due to strength in the transportation market.
Operating income $42.0 million and operating margin of 27.2% in the third quarter of 2019 were lower than the $44.7 million and 27.6%, respectively, recorded during the same period in 2018, mainly due to reduced volume.
Consolidated
Results for the Nine Months EndedSeptember 30, 2019 Compared with the Same Period in 2018
For the nine months ended September 30, 2019, Fluid & Metering Technologies contributed 39% of sales, 45% of operating income and 43% of EBITDA; Health & Science Technologies contributed 36% of sales, 30%
of operating income and 32% of EBITDA; and Fire & Safety/Diversified Products contributed 25% of sales, 25% of operating income and 25% of EBITDA. These percentages are calculated on the basis of total segment (not total Company) sales, operating income and EBITDA.
Sales in the first nine months of 2019 were $1,888.6 million, which was a 1%increase compared to the same period in 2018. This reflects a 2%increase in organic sales and a 1% increase from acquisitions (Velcora - July 2019 and Finger Lakes - July 2018), partially offset by a 2%unfavorable impact from foreign currency translation. Sales to customers outside the U.S. represented approximately 50% of total sales in the first nine months of 2019 compared to 51% during the same period in 2018.
Gross profit of $858.1 million in the first nine months of 2019increased$13.9 million, or 2%, compared to the same period in 2018, while gross margin of 45.4% in the first nine months of 2019increased20 basis points from 45.2% during the same period in 2018. Both gross profit and gross margin increased compared to the prior year period primarily due to price, volume leverage and productivity initiatives, partially offset by a fair value inventory step-up charge and higher engineering costs.
Selling,
general and administrative expenses decreased to $399.2 million in the first nine months of 2019 from $406.4 million during the same period in 2018, primarily due to lower variable compensation costs and amortization in 2019 as well as the stamp
duty charge in 2018. Corporate costs decreased
to $55.0 million in the first nine months of 2019 compared to $60.0 million during the same period in 2018 primarily due to lower variable compensation costs as well as the stamp duty charge in 2018. As a percentage of sales, selling, general and administrative expenses were 21.1% for the first nine months of 2019, down70 basis points compared to 21.8% during the same period in 2018.
The
Company incurred $14.1 million of restructuring expenses in the first nine months of 2019 compared with $8.3 million during the same period in 2018. The restructuring expenses included severance benefits of $3.8 million and exit costs of $0.6 million as well as an asset impairment charge of $9.7 million. In the second quarter of 2019, the Company began to evaluate strategic alternatives for one of its businesses in the HST segment. Prior to making a final decision on the options that were presented for this business, the business was informed in the third quarter of 2019 of the loss of its largest customer. As a result, the
Company accelerated its restructuring activities for this business and a decision was made to wind down the business over time, requiring the asset impairment charge.
Operating income of $444.8 million and operating margin of 23.6% in the first nine months of 2019 were up from the $429.6 million and 23.0%, respectively, recorded during the same period in 2018. The increases in operating income and operating margin are primarily due to gross margin expansion and lower
selling, general and administrative expenses, partially offset by a fair value inventory step-up charge and higher restructuring expenses in 2019.
Other (income) expense - net was $0.7 million of expense in the first nine months of 2019 compared to $3.6 million of income during the same period in 2018, primarily due to foreign currency transaction gains in 2018 that did not repeat in 2019 as well as a pension settlement charge in 2019.
Interest
expense of $33.3 million in the first nine months of 2019 was essentially flat compared to the same period in 2018.
The provision for income taxes decreased to $82.2 million in the first nine months of 2019 compared to $87.7 million during the same period in 2018. The effective tax rate decreased to 20.0% in the first nine
months of 2019 compared to 21.9% during the same period in 2018 due to a decrease in the impact of GILTI related to U.S. Treasury regulations, the excess tax benefits related to share-based compensation as well as the mix of global pre-tax income among jurisdictions.
Net income of $328.7 million in the first nine months of 2019increased from $312.4 million during the same period in 2018. Diluted earnings per share of $4.30
in the first nine months of 2019increased$0.28, or 7%, compared to the same period in 2018.
Sales of $729.6 millionincreased$15.2 million, or 2%, in the first nine months of 2019 compared to the same period in 2018. This reflects a 4%increase in organic sales, partially offset by a 2%unfavorable impact from foreign currency translation. In the first nine months of 2019, sales increased2% both domestically and internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 44% of total segment sales in the first nine months of both 2019 and 2018.
Sales
within our Pumps platform increased in the first nine months of 2019 compared to the same period in 2018 due to strength in OEM activity and LACT projects. Sales within our Valves platform increased in the first nine months of 2019 compared to the same period in 2018 primarily due to strong demand within the chemical end market. Sales within our Water platform increased slightly in the first nine months of 2019 compared to the same period in 2018
due to increased project demand. Sales within our Energy platform increased slightly in the first nine months of 2019 compared to the same period in 2018 due to new product launches. Sales within our Agriculture platform decreased in the first nine months of 2019 compared to the same period in 2018 due to decreased demand across both OEM and distribution channels in North America and Europe.
Operating income of $223.5 million and operating margin of 30.6%
in the first nine months of 2019 were higher than the $207.1 million and 29.0%, respectively, recorded in the first nine months of 2018, primarily due to higher volume and productivity initiatives, partially offset by higher engineering investments.
Sales of $687.2 millionincreased$16.2 million, or 2%, in the first nine months of 2019 compared to the same period in 2018. This reflects a 2%increase in organic sales and a 2%increase from acquisitions (Velcora - July 2019 and FLI - July 2018), partially offset by a 2%unfavorable impact from foreign currency translation. In the first nine months of 2019,
sales increased6% domestically and decreased 1% internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 55% of total segment sales in the first nine months of 2019 compared to 57% during the same period in 2018.
Sales within our Gast platform increased in the first nine months of 2019
compared to the same period in 2018 primarily due to new product introductions in the food and beverage market. Sales within our Scientific Fluidics & Optics platform increased in the first nine months of 2019 compared to the same period in 2018 due to new product introductions, increased demand for IVD, biotechnology, DNA sequencing and defense and the FLI acquisition. Sales within our Material Processing Technologies platform decreased in the first nine months of 2019 compared to the same period in 2018 primarily due to timing of large projects in 2019
as compared to 2018. Sales within our Sealing Solutions platform decreased in the first nine months of 2019 compared to the same period in 2018 due to market softness in the semiconductor and automotive end markets, partially offset by the Velcora acquisition. Sales within our Micropump platform decreased in the first nine months of 2019 compared to the same period in 2018 due to industrial distribution softness.
Operating income of $151.1 million
and operating margin of 22.0% in the first nine months of 2019 were lower than the $153.5 million and 22.9%, respectively, recorded during the same period in 2018, primarily due to higher restructuring expenses (including the asset impairment) in 2019, the fair value inventory step-up charge related to the Velcora acquisition and higher engineering investments, partially offset by higher volume and lower amortization.
Sales of $474.7 milliondecreased$10.6 million, or 2%, in the first nine months of 2019 compared to the same period in 2018. This reflects flat organic sales offset by a 2%unfavorable impact from foreign currency translation. In the first nine months of 2019, sales were flat domestically and decreased 4% internationally compared to the same period in 2018. Sales to customers outside the U.S. were approximately 52%
of total segment sales in the first nine months of 2019 compared with 53% during the same period in 2018.
Sales within our Dispensing platform decreased in the first nine months of 2019 compared to the same period in 2018 due to large projects in the U.S. from 2018 not repeating in 2019. Sales within our BAND-IT platform increased in the first nine months of 2019 compared to the
same period in 2018 due to strength in the transportation market. Sales within our Fire & Safety platform increased in the first nine months of 2019 compared to the same period in 2018 primarily due to elevated OEM backlog and strong demand for rescue tools.
Operating income of $125.9 million and operating margin of 26.5% in the first nine months of 2019 were lower than the $130.2 million
and 26.8%, respectively, recorded during the same period in 2018, primarily due to lower volume at Dispensing and higher engineering investments.
Cash flows
from operating activities for the first nine months of 2019increased$51.1 million, or 16%, to $376.9 million compared to the first nine months of 2018 due to higher earnings and favorable operating working capital, partially offset by higher prepaid taxes and accrued expenses. At September 30, 2019, working capital was $820.0 million and the
Company’s current ratio was 3.2 to 1. At September 30, 2019, the Company’s cash and cash equivalents totaled $516.0 million, of which $373.2 million was held outside of the United States.
Investing Activities
Cash flows used in investing activities for the first nine months of 2019increased$57.6 million to $122.6 million compared to the same period in 2018 primarily due to $87.2 million spent on the acquisition of Velcora in 2019 compared to $20.2 million spent on the acquisition of FLI in 2018, partially offset by lower capital expenditures in 2019 and $4.0 million spent on the purchase of intellectual property assets from Phantom in 2018.
Cash flows from operations were more than adequate to fund capital expenditures of $36.8 million and $39.9 million in the first nine months of 2019 and 2018, respectively.
Capital expenditures were generally for machinery and equipment that supported growth, improved productivity, tooling, business system technology, replacement of equipment and investments in new facilities. Management believes that the Company has ample capacity in its plants and equipment to meet demand increases for future growth in the intermediate term.
Financing Activities
Cash flows used in financing activities for the first nine months of 2019 were $192.7 million compared to $134.6 million
during the same period in 2018, primarily as a result of higher debt repayments due to the repayment of debt assumed in the Velcora acquisition as well as higher share repurchases and dividends paid in 2019.
On June 13, 2016, the Company completed a private placement of a $100 million aggregate principal amount of 3.20% Senior Notes due June 13, 2023 and a $100 million aggregate principal amount of 3.37% Senior Notes due June
13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement, dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13th and December 13th. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay all, or any portion of the Notes; provided that such portion
is greater than 5% of the aggregate principal amount of the Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the Company may repurchase the Notes by making an offer to all holders of the Notes, subject to certain conditions.
On May 31, 2019, the Company entered into a credit agreement (the “Credit Agreement”) along with certain of its subsidiaries,
as borrowers (the “Borrowers”), Bank of America, N.A., as administrative agent, swing line lender and an issuer of letters of credit, with other agents party thereto. The Credit Agreement consists of a revolving credit facility (the “Revolving Facility”), which is an $800.0 million unsecured, multi-currency bank credit facility expiring on May 30, 2024. The Credit Agreement replaces the Company’s existing five-year, $700 million credit agreement, dated as of June 23, 2015, which was due to expire in June 2020. At September 30, 2019, there was
no balance outstanding under the Revolving Facility and $10.1 million of outstanding letters of credit, resulting in a net available borrowing capacity under the Revolving Facility of $789.9 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 better of the Company’s senior, unsecured, long-term debt rating or the Company’s applicable leverage ratio. Interest is payable (a) in the case of base rate loans, quarterly, and (b) in the case of LIBOR rate loans, on the last day
of the applicable interest period selected, or every three months from the effective date of such interest period for interest periods exceeding three months. The Company may request increases in the lending commitments under the Credit Agreement, but the aggregate lending commitments pursuant to such increases may not exceed $400 million.
The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain foreign subsidiaries of the Company as borrowers
under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement.
There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility
and the Notes, a minimum interest coverage ratio of 3.00 to 1 and a maximum leverage ratio of 3.50 to 1. In the case of the leverage ratio, there is an option to increase the ratio to 4.00 for 12 months in connection with certain acquisitions. At September 30, 2019, the Company was in compliance with both of these financial covenants, as the Company’s interest coverage ratio was 15.96 to 1 and the leverage ratio was 1.24 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.
On December 1, 2015, the Company’s Board of Directors approved an increase of $300.0 million in the authorized level for repurchases of common stock. This followed the prior Board of Directors approved repurchase authorization of $400.0 million that was announced by the Company on November 6, 2014. Repurchases under the program will be funded with future cash flow generation or borrowings
available under the Revolving Facility. During the nine months ended September 30, 2019, the Company repurchased a total of 389 thousand shares at a cost of $54.7 million. During the nine months ended September 30, 2018, the Company repurchased a total of 357 thousand shares at a cost of $51.7 million, of which $1.0 million settled in October 2018. As of September 30, 2019, the amount
of share repurchase authorization remaining is $322.3 million.
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 and principal payments on all borrowings, pension and postretirement funding requirements, authorized share repurchases and annual dividend payments to holders of the Company’s common stock for the remainder of 2019. 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.
Non-GAAP Disclosures
Set forth below are reconciliations of Adjusted gross profit, Adjusted operating income, Adjusted net income, Adjusted EPS, EBITDA and Adjusted EBITDA to the comparable measures of gross profit, operating income and net income, as determined in accordance with U.S. GAAP. We have reconciled Adjusted gross profit to Gross profit, Adjusted operating income to Operating income; Adjusted net income to Net income; Adjusted EPS to EPS; and consolidated EBITDA, segment EBITDA, Adjusted EBITDA and Adjusted segment EBITDA to Net
income. The reconciliation of segment EBITDA to net income was performed on a consolidated basis due to the fact that we do not allocate consolidated interest expense or the consolidated provision for 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 from recently acquired businesses, management uses EBITDA as an internal operating metric to provide another representation of the businesses’ performance across our three segments and for enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the
Company and a way to evaluate and compare operating performance and value companies within our industry. Management believes that EBITDA margin is useful for the same reason as EBITDA. EBITDA is also used to calculate certain financial covenants, as discussed in Note 10 in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements.”
This report references organic sales, a non-GAAP measure, that refers to sales from continuing operations calculated according to U.S. GAAP but excludes (1) the impact of foreign currency translation and (2) sales from acquired or divested businesses during the first twelve months of ownership or divestiture. 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 and divestitures because they can obscure underlying business trends and make comparisons of long term performance difficult due to the varying nature, size and number of transactions
from period to period and between the Company and its peers.
Management uses Adjusted gross profit, Adjusted operating income, Adjusted net income, Adjusted EBITDA and Adjusted EPS as metrics by which to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as restructuring expenses and a fair value inventory step-up charge. Management also supplements its U.S. GAAP financial statements with adjusted information to provide investors with greater insight, transparency and a more comprehensive understanding of the information used by management in its financial and operational decision making.
In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures. We believe that free cash flow is an important measure of operating performance because it provides management a measurement of cash generated from operations that is available for mandatory payment obligations and investment opportunities, such as funding acquisitions, paying dividends, repaying debt and repurchasing our common stock.
The non-GAAP financial measures disclosed by the
Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.
1. Reconciliations of the Change in Net Sales to Organic Net Sales
As discussed in the Annual Report on Form 10-K for the year ended December 31, 2018, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. See Part 1, Notes to the Condensed Consolidated Financial Statements, Note 1 Basis of Presentation and Significant Accounting Policies. The adoption of recent accounting standards as described in
Note 1 had a material impact on our condensed consolidated balance sheet due to the recognition of right of use assets and lease liabilities but did not have and is not expected to have a material impact on our condensed consolidated results of operations or cash flows. Aside from recent accounting standards adopted as described in Note 1, there have been no changes to the Company’s critical accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018 that have a material impact on our condensed consolidated financial statements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. The Company may, from time to time, enter into foreign currency forward contracts and interest rate swaps on its debt when it believes there is a financial advantage in doing so. A treasury risk management policy, adopted by the Board of Directors, describes the procedures and controls over derivative financial and commodity instruments, including foreign currency forward contracts
and interest rate swaps. Under the policy, the Company does not use financial or commodity derivative instruments for trading purposes, and the use of these instruments is subject to strict approvals by senior officers. Typically, the use of derivative instruments is limited to foreign currency forward contracts and interest rate swaps on the Company’s outstanding long-term debt. As of September 30, 2019, the Company did not have any derivative instruments outstanding.
Foreign
Currency Exchange Rates
The Company’s foreign currency exchange rate risk is limited principally to the Euro, Swiss Franc, British Pound, Canadian Dollar, Indian Rupee, Chinese Renminbi and Swedish Krona. The Company manages its foreign exchange risk principally through invoicing customers in the same currency as the source of products. The effect of transaction gains and losses is reported within Other (income) expense-net in the Condensed Consolidated Statements of Operations.
Interest Rate Fluctuation
The
Company does not have significant interest rate exposure due to substantially all of the $849.1 million of debt outstanding as of September 30, 2019 being fixed rate debt.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2019, that the Company’s disclosure controls and procedures were effective.
There has been no change in the Company’s
internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company and its subsidiaries are party to legal proceedings as described in Note 19 in Part I, Item 1, “Legal Proceedings,” and such disclosure is incorporated by reference into this Item 1, “Legal Proceedings.” In addition, the Company and six of its subsidiaries are presently named as defendants in a number of lawsuits claiming various asbestos-related personal injuries, allegedly as a result of exposure to products
manufactured with components that contained asbestos. These components were acquired from third party suppliers and were not manufactured by the Company or any of the defendant subsidiaries. To date, the majority of the Company’s settlements and legal costs, except for costs of coordination, administration, insurance investigation and a portion of defense costs, have been covered in full by insurance, subject to applicable deductibles. However, the Company cannot predict whether and to what extent insurance will be available to continue to cover these settlements and legal costs, or how insurers may respond to claims that are tendered
to them. Claims have been filed in jurisdictions throughout the United States and the United Kingdom. Most of the claims resolved to date have been dismissed without payment. The balance of the claims have been settled for various immaterial amounts. Only one case has been tried, resulting in a verdict for the Company’s business unit. No provision has been made in the financial statements of the Company, other than for insurance deductibles in the ordinary course, and the Company does not currently believe the asbestos-related claims will have a material adverse effect on the Company’s business, financial position, results of operations
or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the Company’s purchases of its common stock during the quarter ended September 30, 2019:
On
December 1, 2015, the Company’s Board of Directors approved an increase of $300.0 million in the authorized level of repurchases of common stock. This followed the prior Board of Directors approved repurchase authorization of $400.0 million that was announced by the Company on November 6, 2014. These authorizations have no expiration date.
The following
financial information from IDEX Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.
*104
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.