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4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 11K
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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.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,”“accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Number of shares of common stock of IDEX Corporation outstanding as of October 31, 2008:
82,642,543 (net of treasury shares).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
The condensed consolidated financial statements of IDEX Corporation (“IDEX” or the “Company”)
have been prepared in accordance with 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, which 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, 2008 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 should be read in conjunction with the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectibility of the sales price is
reasonably assured. For product sales, delivery does not occur until the products have been
shipped and risk of loss has been transferred to the customer. Revenue from services is recognized
when the services are provided or ratably over the contract term. Some arrangements with customers
may include multiple deliverables, including the combination of products and services. In such
cases the Company has identified these as separate elements in accordance with Emerging Issues Task
Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and recognizes revenue
consistent with the policy for each separate element based on the fair value of each accounting
unit. Revenues from certain long-term contracts are recognized on the percentage-of-completion
method. Percentage-of-completion is measured principally by the percentage of costs incurred to
date for each contract to the estimated total costs for such contract at completion. Provisions for
estimated losses on uncompleted long-term contracts are made in the period in which such losses are
determined. 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 in the near-term. Such revisions to costs and income are recognized in
the period in which the revisions are determined.
The Company records allowances for discounts, product returns and customer incentives 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 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.
2. Acquisitions
On January 1, 2008, the Company acquired ADS, LLC (“ADS”), a leading provider of metering
technology and flow monitoring services for water and wastewater markets. ADS is headquartered in
Huntsville, Alabama, with regional sales and service offices throughout the United States and
Australia. With annual revenues of approximately $70 million, ADS operates within the Company’s
Fluid & Metering Technologies Segment. The Company acquired ADS for an aggregate purchase price of
$156.4 million, consisting entirely of cash. Approximately $155.0 million of the cash payment was
financed by borrowings under the Company’s credit facility, of which $140.0 million was reflected
as restricted cash at December 31, 2007. Goodwill and intangible assets recognized as part of this
transaction were $104.2 million and $51.9 million, respectively. The $104.2 million of goodwill is
not deductible for tax purposes.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
The purchase price for ADS, including transaction costs, has been allocated to the assets
acquired and liabilities assumed based on estimated fair values at the date of the acquisition. The
purchase price allocation is preliminary and further refinements may be necessary pending
finalization of asset valuations.
The results of operations for this acquisition have been included within the Company’s
financial results from the date of the acquisition. The Company does not consider this acquisition
to be material to its results of operations for any of the periods presented.
3. Restructuring
During the three and nine months ended September 30, 2008, the Company recorded pre-tax
restructuring expenses totaling $5.3 million. These restructuring expenses, included in the line
item “Restructuring expenses” in the Consolidated Statements of Operations, were related to the
Company’s restructuring program to support the implementation of key strategic initiatives designed
to achieve long-term sustainable growth. The restructuring program includes the announced cessation
of manufacturing operations in its Dispensing segment’s Milan, Italy facility. This plant closure
is expected to improve operating productivity and enhance capacity utilization. In addition, the
Company has initiated company-wide plans which include management and administrative workforce
reductions as well as an additional facility consolidation. Employees separated or to be separated
from the Company as a result of these initiatives were offered severance packages, as appropriate.
The expenses recorded during the three months and nine months ended September 30, 2008 included
costs related to involuntary terminations and other direct costs associated with implementing these
initiatives. The Company currently expects the total cost of these initiatives to be approximately
$15 million and anticipates recognizing the majority of the remaining costs in 2008.
The following table summarizes the restructuring activity for the three and nine months ended
September 30, 2008:
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
4. Discontinued Operations
On August 13, 2007, the Company completed the sale of Halox, its chemical and electrochemical
systems product line operating as a unit of Pulsafeeder in IDEX’s Fluid & Metering Technologies
Segment, resulting in an after-tax loss of $0.1 million.
Summarized results of the Company’s discontinued operations are as follows:
Three Months
Nine Months
Ended September 30,
Ended September 30,
(in thousands)
2007
2007
Revenue
$
292
$
1,428
Loss from discontinued operations before income taxes
$
(539
)
$
(1,106
)
Income tax benefit
189
387
Net loss on sale of discontinued operations before income taxes
(55
)
(55
)
Loss from discontinued operations
$
(405
)
$
(774
)
5. Business Segments
The Company consists of four reporting segments: Fluid & Metering Technologies, Health &
Science Technologies, Dispensing Equipment and Fire & Safety/Diversified Products.
The Fluid & Metering Technologies Segment produces pumps, flow meters, and related controls
for the movement of liquids and gases in a diverse range of end markets from industrial
infrastructure to food and beverage. The Health & Science Technologies Segment produces a wide
variety of small-scale, highly accurate pumps, valves, fittings and medical devices, as well as
compressors used in medical, dental and industrial applications. The Dispensing Equipment Segment
produces highly engineered equipment for dispensing, metering and mixing colorants, paints, inks
and dyes, as well as refinishing equipment. The Fire & Safety/Diversified Products Segment produces
firefighting pumps, rescue tools, lifting bags and other components and systems for the fire and
rescue industry, as well as engineered stainless steel banding and clamping devices used in a
variety of industrial and commercial applications.
Information on the Company’s business segments from continuing operations is presented below,
based on the nature of products and services offered. The Company evaluates performance based on
several factors, of which operating income is the primary financial measure. Intersegment sales are
accounted for at fair value as if the sales were to third parties.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
Three Months
Nine Months
Ended September 30,
Ended September 30,
(in thousands)
2008
2007
2008
2007
Net sales:
Fluid & Metering Technologies:
External customers
$
169,957
$
143,438
$
517,641
$
420,323
Intersegment sales
301
404
905
1,319
Total group sales
170,258
143,842
518,546
421,642
Health & Science Technologies:
External customers
82,506
82,709
251,279
243,819
Intersegment sales
383
557
2,499
2,537
Total group sales
82,889
83,266
253,778
246,356
Dispensing Equipment:
External customers
31,543
38,145
138,152
135,897
Intersegment sales
—
—
—
—
Total group sales
31,543
38,145
138,152
135,897
Fire & Safety/Diversified Products:
External customers
81,187
70,592
227,093
212,595
Intersegment sales
2
—
6
1
Total group sales
81,189
70,592
227,099
212,596
Intersegment elimination
(686
)
(961
)
(3,410
)
(3,857
)
Total net sales
$
365,193
$
334,884
$
1,134,165
$
1,012,634
Operating income (loss):
Fluid & Metering Technologies
$
32,735
$
31,559
$
101,635
$
91,443
Health & Science Technologies
16,540
16,703
47,673
45,733
Dispensing Equipment
(32,074
)
5,625
(6,547
)
31,577
Fire & Safety/Diversified Products
20,455
16,533
56,793
50,008
Corporate office and other
(8,239
)
(7,272
)
(28,230
)
(25,196
)
Total operating income
$
29,417
$
63,148
$
171,324
$
193,565
6. Earnings Per Common Share
Earnings per common share (“EPS”) are 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, unvested
shares, and shares issuable in connection with certain deferred compensation agreements (“DCUs”).
Basic weighted average shares reconciles to diluted weighted average shares as follows:
Three Months
Nine Months
Ended September 30,
Ended September 30,
(in thousands)
2008
2007
2008
2007
Basic weighted average common shares outstanding
81,572
80,832
81,320
80,563
Dilutive effect of stock options, unvested shares, and DCUs
1,385
1,479
1,343
1,442
Diluted weighted average common shares outstanding
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
Options to purchase approximately 2.0 million and 1.7 million shares of common stock as of
September 30, 2008 and 2007, respectively, were not included in the computation of diluted EPS
because the exercise price was greater than the average market price of the Company’s common stock
and, therefore, the effect of their inclusion would be antidilutive.
Inventories carried on a LIFO basis amounted to $157.2 million and $148.4 million at September30, 2008 and December 31, 2007, respectively. Inventory valued on a FIFO basis was $33.3 million at
September 30, 2008 and $29.0 million at December 31, 2007, respectively. The FIFO inventory was
greater than the LIFO inventory value by $5.2 million at September 30, 2008 and $4.2 million at
December 31, 2007. Additionally, included in the LIFO inventory value is $35.6 million and $31.8
million at September 30, 2008 and December 31, 2007, respectively, related to the historical
adjustment to record inventory at fair value as of the original acquisition date.
8. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2008,
by reporting segment, were as follows:
Statement of Financial Accounting Standard (“SFAS”) No. 142, “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. Goodwill represents
the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed.
The Company tested goodwill for impairment during the fourth quarter of 2007. At that time, the
Company concluded that the fair value of each of the reporting units was in excess of the carrying
value.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
In accordance with SFAS No. 142, the Company concluded that events had occurred and
circumstances had changed during the third quarter of 2008 which required the Company to perform an
interim period goodwill impairment test at Fluid Management Americas, a reporting unit within the
Company’s Dispensing Equipment segment. During the third quarter of 2008, Fluid Management Americas
experienced a downturn in capital spending by its customer base and lost a major retail customer.
The Company performed the first step of the two-step impairment test and compared the fair
value of the reporting unit to its carrying value. Consistent with the Company’s approach in its
annual impairment testing, in assessing the fair value of the Fluid Management Americas reporting
unit, the Company considered both the market approach and income approach. Under the market
approach, the fair value of the reporting unit is based on comparing the reporting unit to
comparable publicly traded companies or comparable entities which have been recently acquired in
arms-length transactions. Under the income approach, the fair value of the reporting unit is based
on the present value of estimated future cash flows. The income approach is dependent on a number
of significant management assumptions including estimates of operating results, capital
expenditures, other operating costs and discount rates. Due to current conditions within the market
and the specific reporting unit, weighting was equally attributed to both the market and income
approaches (50% each) in arriving at the fair value of the reporting unit. The Company determined
that the fair value of the Fluid Management Americas reporting unit was less than the carrying
value of the net assets of the reporting unit, and thus the Company performed step two of the
impairment test.
In step two of the impairment test, the Company determined the implied fair value of the
goodwill and compared it to the carrying value of the goodwill. The Company allocated the current
fair value of the Fluid Management Americas reporting unit to all of its assets and liabilities as
if the reporting unit had presently been acquired in a business combination. The excess of the fair
value of the reporting unit over the fair value of its identifiable assets and liabilities is the
implied fair value of goodwill. The Company’s step two analysis resulted in an implied fair value
of goodwill of $21.2 million, and as a result, the Company recognized an estimated impairment
charge of $30.1 million in the third quarter of 2008. The $30.1 million impairment charge is an
estimate. The Company is awaiting the completion of certain asset valuations in order to finalize
this estimate and, if a further adjustment is necessary, the Company will record this amount during
the fourth quarter of 2008.
The following table provides the gross carrying value and accumulated amortization for each
major class of intangible asset as of September 30, 2008 and December 31, 2007:
The Banjo trade name is an indefinite lived intangible asset which is tested for impairment on
an annual basis or more frequently if events or changes in circumstances indicate that the asset
might be impaired.
The Company maintains a $600.0 million unsecured domestic, multi-currency bank revolving
credit facility (“Credit Facility”), which expires on December 21, 2011. At September 30, 2008
there was $365.2 million outstanding under the Credit Facility and outstanding letters of credit
totaled approximately $7.5 million. The net available borrowing under the Credit Facility as of
September 30, 2008, was approximately $227.3 million.
Interest is payable quarterly on the outstanding borrowings at the bank agent’s reference
rate. Interest on borrowings based on LIBOR plus an applicable margin is payable on the maturity
date of the borrowing, or quarterly from the effective date for borrowings exceeding three months.
The applicable margin is based on the Company’s senior, unsecured, long-term debt rating and can
range from 24 to 50 basis points. Based on the Company’s BBB rating at September 30, 2008, the
applicable margin was 40 basis points. An annual Credit Facility fee, also based on the Company’s
credit rating, is currently 10 basis points and is payable quarterly.
In addition to the $600.0 million Credit Facility, on April 18, 2008the Company entered into
a $100.0 million senior bank term loan agreement (“Term Loan”) with covenants consistent with the
existing Credit Facility and a maturity concurrent with the Credit Facility on December 21, 2011.
At September 30, 2008, there was $100.0 million outstanding under the Term Loan with $5.0 million
included within short term borrowings. Interest under the Term Loan is based on the bank agent’s
reference rate or LIBOR plus an applicable margin and is payable at the end of the selected
interest period, but at least quarterly. The applicable margin is based on the Company’s senior,
unsecured, long-term debt rating and can range from 45 to 100 basis points. Based on the Company’s
current debt rating, the applicable margin is 80 basis points. The Term Loan requires repayments of
$5.0 million, $5.0 million and $7.5 million in April of 2009, 2010, and 2011, respectively, with
the remaining balance due on December 21, 2011.
The Company also has a $30.0 million demand line of credit (“Short-Term Facility”), which
expires on December 12, 2008. Borrowings under the Short-Term Facility are based on LIBOR plus an
applicable margin. At September 30, 2008, there were no borrowings under the Short-Term Facility.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
11. Derivative Instruments
The Company enters into cash flow hedges to reduce the exposure to variability in certain
expected future cash flows. The type of cash flow hedges the Company enters into includes foreign
currency contracts and interest rate exchange agreements that effectively convert a portion of
floating-rate debt to fixed-rate debt and are designed to reduce the impact of interest rate
changes on future interest expense.
The effective portion of gains or losses on interest rate exchange agreements is reported in
accumulated other comprehensive income 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 into net income during the period of change.
Fair values relating to derivative financial instruments reflect the estimated amounts that
the Company would receive or pay to terminate the contracts at the reporting date based on quoted
market prices of comparable contracts at each balance sheet date.
At September 30, 2008, the Company had two interest rate swaps. One interest rate swap,
expiring in January 2011, effectively converted $250.0 million of floating rate debt into fixed
rate debt at an interest rate of 3.25%. The second interest rate swap, expiring December 21, 2011,
effectively converted an additional $100.0 million of floating rate debt into fixed rate debt at an
interest rate of 4.00%. The fair value of the interest rate swaps of $4.6 million was recorded as a
non-current asset at September 30, 2008.
The net gain recognized to net income for the three and nine months ended September 30, 2008
related to these cash flow hedges was immaterial. Based on interest rates at September 30, 2008, no
significant portion of the amount included in accumulated other comprehensive income in
shareholders’ equity at September 30, 2008 will be recognized to net income over the next 12 months
as the underlying hedged transactions are realized.
At September 30, 2008, the Company had two foreign currency exchange contracts with an
aggregate notional amount of $3.7 million to manage its exposure to fluctuations in foreign
currency exchange rates. The change in fair market value of these contracts for the three and nine
months ended September 30, 2008 was immaterial.
12. Fair Value Measurements
The Company adopted SFAS No. 157, “Fair Value Measurements,” on January 1, 2008, for our
financial assets and financial liabilities. SFAS No. 157 defines fair value, provides guidance for
measuring fair value and requires certain disclosures. SFAS No. 157 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 statement utilizes a fair value hierarchy that prioritizes
the inputs to 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.
Interest rate swap derivative financial instruments
(included in other noncurrent assets)
$
4,575
—
$
4,575
—
Foreign currency contracts (included in accrued expenses)
$
30
—
$
30
—
In determining the fair value of the Company’s interest rate swap derivatives, the Company
uses a present value of expected cash flows based on market observable interest rate yield curves
commensurate with the term of each instrument and the credit default swap market to reflect the
credit risk of either the Company or the counterparty.
Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment”, using the
modified prospective method, and thus did not restate any prior period amounts. Under this method,
compensation cost in the three and nine months ending September 30, 2008 and 2007 include the
portion vesting in the period for (1) all share-based payments granted prior to, but not vested as
of December 31, 2005, based on the grant date fair value estimated using the Black-Scholes
option-pricing model in accordance with the original provisions of SFAS No. 123 and (2) all
share-based payments granted subsequent to December 31, 2005, based on the grant date fair value
estimated using the Binomial lattice option-pricing model.
During 2008, the Company has granted approximately 1.1 million stock options and 0.6 million
unvested shares, respectively.
Total compensation cost for stock options is as follows:
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
Total compensation cost for unvested shares is as follows:
Three Months
Nine Months
Ended September 30,
Ended September 30,
(in thousands)
2008
2007
2008
2007
Cost of goods sold
$
24
$
8
$
55
$
20
Selling, general and administrative expenses
2,160
986
5,739
3,153
Total expense before income taxes
2,184
994
5,794
3,173
Income tax benefit
(356
)
(177
)
(1,097
)
(628
)
Total expense after income taxes
$
1,828
$
817
$
4,697
$
2,545
Classification of stock compensation cost within the Consolidated Statements of Operations is
consistent with classification of cash compensation for the same employees and $0.1 million of
compensation cost was capitalized as part of inventory.
As of September 30, 2008, there was $15.1 million of total unrecognized compensation cost
related to stock options that is expected to be recognized over a weighted-average period of 1.4
years, and $18.4 million of total unrecognized compensation cost related to unvested shares that is
expected to be recognized over a weighted-average period of 1.4 years.
15. Retirement Benefits
The Company sponsors several qualified and nonqualified defined benefit and defined
contribution pension plans and other postretirement plans for its employees. The following tables
provide the components of net periodic benefit cost for its major defined benefit plans and its
other postretirement plans.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
Other Postretirement Benefits
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands)
2008
2007
2008
2007
Service cost
$
153
$
202
$
459
$
457
Interest cost
332
264
999
919
Net amortization
29
(4
)
99
169
Net periodic benefit cost
$
514
$
462
$
1,557
$
1,545
The Company previously disclosed in its financial statements for the year ended December 31,2007, that it expected to contribute approximately $1.8 million to these pension plans and $1.2
million to its other postretirement benefit plans in 2008. As of September 30, 2008, $1.7 million
of contributions have been made to the pension plans and $0.7 million have been made to its other
postretirement benefit plans. The Company presently anticipates contributing up to an additional
$0.6 million in 2008 to fund these pension plans and other postretirement benefit plans.
16. Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary course of business,
none of which are expected to have a material adverse effect on its business, financial condition,
results of operations or cash flows.
17. Income 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 from continuing
operations decreased to $9.2 million in the third quarter of 2008 from $19.2 million in the third
quarter of 2007. The effective tax rate decreased to 32.5% for the third quarter of 2008 compared
to 33.1% in the third quarter of 2007 due to the mix of global pre-tax income among jurisdictions
which was partially offset by the non-recurring unfavorable discrete items in the third quarter of
2008 and the non-renewal of the federal research and development tax credit as of September 30,2008.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and
various state and foreign jurisdictions. The Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation (“FIN”) No. 48 Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 on January 1, 2007. In accordance with FIN No. 48, the
Company recognized a cumulative-effect adjustment of $1.2 million, increasing its liability for
unrecognized tax benefits, interest, and penalties and reducing the January 1, 2007 balance of
retained earnings. 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 zero
to $0.3 million.
18. New Accounting Pronouncements
On February 6, 2008, the FASB issued a FASB Staff Position (“FSP”) to allow a one-year
deferral of adoption of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized at fair value on a nonrecurring basis. The Company adopted SFAS No. 157 on January1, 2008 and is currently assessing the impact on non-financial assets and non-financial liabilities
within the consolidated financial statements.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), “Business Combinations”,
which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial statements, the
identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. SFAS No. 141(R) is to be applied
prospectively to business combinations for which the acquisition date is on or after an entity’s
fiscal year that begins after December 15, 2008. The Company will adopt this statement for
acquisitions consummated after its effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting
standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary.
Minority interests will be recharacterized as noncontrolling interests and classified as a
component of equity. It also establishes a single method of accounting for changes in a parent’s
ownership interest in a subsidiary and requires expanded disclosures. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008. The implementation of this standard will not
have a material impact on our consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment to FASB Statement No. 133.” SFAS No. 161 is intended to improve
financial standards for derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company is currently evaluating the impact of SFAS No. 161 on its financial
statements.
In April 2008, the FASB issued Financial Staff Position (“FSP”) 142-3, “Determination of the
Useful Life of Intangible Assets”. FSP No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 is
effective for fiscal years beginning after December 15, 2008. The implementation of this standard
will not have a material impact on our consolidated financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles”. SFAS No. 162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective
60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The implementation of this standard will not have a material impact on our
consolidated financial position and results of operations.
In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”
Under EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be
included in the two-class method of computing EPS. EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years. The Company is currently
evaluating the impact of EITF No. 03-6-1 on its financial statements.
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(unaudited)
In September 2008, the FASB issued FSP No. 133-1 and FIN No. 45-4, “Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement No. 161”. FSP No. 133-1 and FIN
No. 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are
effective for quarterly periods beginning after November 15, 2008, and fiscal years that include
those periods. FSP No. 133-1 and FIN No. 45-4 is effective for reporting periods (annual or
interim) ending after November 15, 2008. The implementation of this standard will not have a
material impact on our consolidated financial position and results of operations.
In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active”. FSP No. 157-3 clarifies the application of
SFAS No. 157, which the Company adopted as of January 1, 2008, in cases where a market is not
active. The Company has considered the guidance provided by FSP No. 157-3 in its determination of
estimated fair values as of September 30, 2008, and the impact was not material.
19. Subsequent Events
In October 2008, the Company acquired Richter Chemie-Technik (“Richter”), iPEK Spezial-TV
(“iPEK”), Integrated Environmental Technology Group (“IETG”) and Semrock Inc. (“Semrock”).
Richter, a provider of premium quality lined pumps, valves and control equipment for the
chemical, fine chemical and pharmaceutical industries, was acquired for cash consideration of
approximately $101 million. Richter’s corrosion resistant fluoroplastic lined products offer
solutions for demanding applications in the process industry. Headquartered in Kempen, Germany,
with facilities in China and the U.S., Richter has annual revenues of approximately $53 million.
Richter will be operated within IDEX’s Fluid & Metering Technologies Segment.
iPEK, a provider of systems focused on infrastructure analysis, specifically waste water
collection systems, was acquired for cash consideration of approximately $43 million. iPEK, is a
developer of remote controlled systems for infrastructure inspection. Headquartered in Hirschegg,
Austria, iPEK has annual revenues of approximately $25 million. iPEK will be operated within IDEX’s
Fluid & Metering Technologies Segment and is expected to leverage the ADS acquisition which closed
in January 2008.
IETG, a provider of flow monitoring and underground utility surveillance services for the
water and wastewater markets, was acquired for cash consideration of approximately $35 million.
IETG products and services enable water companies to effectively manage their water distribution
and sewerage networks, while its surveillance service specializes in underground asset detection
and mapping for utilities and other private companies. Headquartered in Leeds, United Kingdom, IETG
has annual revenues of approximately $26 million. IETG will operate as part of the Company’s ADS
business within IDEX’s Fluid & Metering Technologies Segment.
Semrock, a provider of optical filters for biotech and analytical instrumentation in the life
sciences markets, was acquired for cash consideration of approximately $60 million. Semrock’s
products are used in the biotechnology and analytical instrumentation industries. Semrock produces
optical filters using state-of-the-art manufacturing processes which enable them to offer
significant improvements in the performance and reliability of their customers’ instruments.
Headquartered in Rochester, New York, Semrock has annual revenues of approximately $21 million.
Semrock will operate as part of HST Core within IDEX’s Health & Science Technologies Segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Under the Private Securities Litigation Reform Act
The “Historical Overview” and the “Liquidity and Capital Resources” sections of this
management’s discussion and analysis of our financial condition and results of operations contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act of 1934, as amended. These statements may relate to,
among other things, operating results and are indicated by words or phrases such as “expects,”“should,”“will,” and similar words or phrases. These statements are subject to inherent
uncertainties and risks that could cause actual results to differ materially from those anticipated
at the date of this filing. The risks and uncertainties include, but are not limited to, IDEX
Corporation’s (“IDEX” or the “Company”) ability to integrate and operate acquired businesses on a
profitable basis and other risks and uncertainties identified under the heading “Risk Factors”
included in item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31,2007 and information contained in subsequent periodic reports filed by IDEX with the Securities and
Exchange Commission. Investors are cautioned not to rely unduly on forward-looking statements when
evaluating the information presented here.
Historical Overview
IDEX is an applied solutions company specializing in fluid and metering technologies, health
and science technologies, dispensing equipment, and fire, safety and other diversified products
built to its customers’ specifications. Our products are sold in niche markets to a wide range of
industries throughout the world. Accordingly, our businesses are affected by levels of industrial
activity and economic conditions in the U.S. and in other countries where we do business and by the
relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital
spending in certain industries and overall industrial activity are among the factors that influence
the demand for our products.
IDEX consists of four reportable segments: Fluid & Metering Technologies, Health & Science
Technologies, Dispensing Equipment and Fire & Safety/Diversified Products.
The Fluid & Metering Technologies Segment produces pumps, compressors, flow meters and related
controls for the movement of liquids and gases in a diverse range of end markets from industrial
infrastructure to food and beverage; and provides metering technology and flow monitoring services
for water and wastewater markets. The Health & Science Technologies Segment produces a wide variety
of small scale, highly accurate pumps, valves, fittings and medical devices, as well as compressors
used in medical, dental and industrial applications. The Dispensing Equipment Segment produces
highly engineered equipment for dispensing, metering and mixing colorants, paints, inks and dyes,
hair colorants and other personal care products, as well as refinishing equipment. The Fire &
Safety/Diversified Products Segment produces firefighting pumps, rescue tools, lifting bags and
other components and systems for the fire and rescue industry; and engineered stainless steel
banding and clamping devices used in a variety of industrial and commercial applications.
The Company has a history of achieving above-average operating margins. Our operating margins
have exceeded the average operating margin for the companies that comprise the Value Line Composite
Index (“VLCI”) every year since 1988. We view the VLCI operating performance statistics as a proxy
for an average industrial company. Our operating margins are influenced by, among other things,
utilization of facilities as sales volumes change and inclusion of newly acquired businesses.
The following is a discussion and analysis of our financial position and results of operations
for the period ended September 30, 2008 and 2007. For purposes of this discussion and analysis
section, reference is made to the table below and the Company’s Condensed Consolidated Statements
of Operations included in Item 1.
Performance in the Three Months Ended September 30, 2008 Compared with the Same Period of 2007
Sales in the three months ended September 30, 2008 were $365.2 million, a 9% improvement from
the comparable period last year. Two acquisitions (Isolation Technologies — October 2007 and ADS
— January 2008) accounted for a sales improvement of 7%, organic sales grew 1% and foreign
currency translation contributed 1%. Sales to international customers represented approximately 46%
of total sales in both 2008 and 2007.
Fluid & Metering Technologies sales of $170.3 million for the three months ended September 30,2008 rose $26.4 million, or 18% compared with 2007, reflecting 4% organic growth, 13% for
acquisitions (ADS) and 1% favorable foreign currency translation. Growth was driven by continued
global demand for infrastructure-related applications and acquisition performance. In the third
quarter of 2008, organic sales grew approximately 6% domestically and were essentially flat
internationally. Organic business sales to customers outside the U.S. were approximately 40% of
total segment sales during the third quarter of 2008, compared to 42% in 2007.
Health & Science Technologies sales of $82.9 million were flat compared to the third quarter
of 2007. This reflects a 3% increase for acquisitions (Isolation Technologies) and 1% from
favorable foreign currency translation, offset by a 4% decrease in organic growth. The decrease in
organic growth reflects the exit from two specific OEM contracts. In the third quarter of 2008,
organic sales increased 4% domestically and decreased 16% internationally. Organic business sales
to customers outside the U.S. were approximately 38% of total segment sales in the third quarter of
2008, compared to 43% in 2007.
Dispensing Equipment sales of $31.5 million decreased $6.6 million, or 17% in the third
quarter of 2008 compared with 2007. This decrease reflects a 21% decrease in organic growth,
partially offset by 4% from favorable foreign currency translation. The dispensing business
experienced deterioration in capital spending in both the European and North American markets and
the loss of a major retail customer during the quarter. In the third quarter of 2008, organic sales
decreased 38% domestically and 11% internationally. Organic sales to customers outside the U.S.
were approximately 72% of total segment sales in the third quarter of 2008, compared with 64% in
the comparable quarter of 2007.
Fire & Safety/Diversified Products sales of $81.2 million increased $10.6 million, or 15% in
the third quarter of 2008 compared with 2007. This increase reflects a 13% increase in organic
business volume and 2% from favorable foreign currency translation. The engineered band clamping
business as well as the rescue business achieved strong growth driven by global demand for
infrastructure-related applications and rescue equipment serving emerging markets. In the third
quarter of 2008, organic business sales were flat domestically and increased 25% internationally.
Organic sales to customers outside the U.S. were approximately 56% of total segment sales in the
third quarter of 2008, compared to 51% in 2007.
Data includes acquisition of ADS (January 2008) and Quadro (June 2007) in the Fluid & Metering
Technologies segment and Isolation Technologies (October 2007) in the Health & Science Technologies
segment from the dates of acquisition.
(2)
Group operating income excludes unallocated corporate operating expenses.
(3)
Excludes amortization of debt issuance expenses and unearned stock compensation.
Gross profit of $146.4 million in the third quarter of 2008 increased $8.7 million, or 6% from
2007. Gross profit as a percent of sales was 40.1% in the third quarter of 2008 and 41.1% in 2007.
The decrease in gross margin primarily reflects product mix, an inventory valuation adjustment at
Fluid Management Americas and the impact of recent acquisitions.
Selling, general and administrative (“SG&A”) expenses increased to $81.6 million in the third
quarter of 2008 from $74.5 million in 2007. The $7.1 million increase reflects approximately $4.7
million of incremental costs associated with recently acquired businesses and $2.4 million volume
related expenses. As a percent of sales, SG&A expenses were
22.4% for 2008 and 22.2% for 2007.
During the three months ended September 30, 2008, the Company recorded pre-tax restructuring
expenses totaling $5.3 million. These restructuring expenses were related to the Company’s
restructuring program to support the implementation of key strategic initiatives designed to
achieve long-term sustainable growth, which includes the previously announced cessation of
manufacturing operations in its Dispensing segment’s Milan, Italy facility. The
plant closure is expected to improve operating productivity and enhance capacity utilization.
In addition, the Company has initiated company-wide plans which include management and
administrative workforce reductions as well as an additional facility consolidation. Employees
separated or to be separated from the Company as a result of these initiatives were offered
severance packages, as appropriate. The expenses recorded during the three months ended September30, 2008 included costs related to involuntary terminations and other direct costs associated with
implementing these initiatives.
During the third quarter of 2008 in accordance with SFAS No. 142, the Company concluded that
events had occurred and circumstances had changed which required the Company to perform an interim
period goodwill impairment test at Fluid Management Americas, a reporting unit within the Company’s
Dispensing Equipment Segment. Fluid Management Americas has experienced a downturn in capital
spending by its customer base and the loss of a major retail customer. The Company performed an
impairment test and compared the fair value of the reporting unit to its carrying value. It was
determined that the fair value of Fluid Management Americas was less than the carrying value of the
net assets. The excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of goodwill. The Company’s analysis resulted in an
implied fair value of goodwill of $21.2 million, and as a result, the Company recognized an
impairment charge of $30.1 million in the third quarter of 2008.
Operating income decreased $33.7 million, or 53%, to $29.4 million in the third quarter of
2008 from $63.1 million in 2007, primarily reflecting increased SG&A expenses from previously
announced restructuring-related and goodwill impairment charges, as well as the impact from
acquisitions, partially offset by an increase in volume. Third quarter operating margins were 8.1%
of sales compared with 18.9% in the third quarter of 2007. The decrease was driven primarily by the
impact of the previously announced restructuring-related charges, goodwill impairment charges, as
well as expenses associated with recent acquisitions. In the Fluid & Metering Technologies Segment,
operating income of $32.7 million in the third quarter of 2008 was up from the $31.6 million
recorded in 2007 principally due to strong global demand for process control and
infrastructure-related applications. Operating margins within the Fluid & Metering Technologies
Segment of 19.2% in the current quarter were down from 21.9% in 2007, due to the impact of recent
acquisitions. In the Health & Science Technologies Segment, operating income of $16.5 million and
operating margins of 20.0% in the third quarter of 2008 were down slightly from the $16.7 million
and 20.1% recorded in 2007. In the Dispensing Equipment Segment, operating loss of $32.1 million
and operating margins of (101.7)% in the third quarter of 2008 were down from the $5.6 million of
operating income and 14.7% recorded in 2007, due to lower volume within related end markets,
inventory valuation adjustment and goodwill impairment charges. Operating income and operating
margins in the Fire & Safety/Diversified Products Segment of $20.5 million and 25.2%, respectively,
were higher than the $16.5 million and 23.4% recorded in 2007, due primarily to increased volume
and favorable product mix.
Other income of $2.7 million in 2008 was $2.3 million higher than the $0.4 million in 2007,
primarily due to foreign exchange gain and higher interest income.
Interest expense decreased to $3.9 million in 2008 from $5.5 million in 2007. The decrease was
due to a lower interest rate environment and the refinancing of the $150.0 million senior notes to
a lower interest rate.
The provision for income taxes from continuing operations is based upon estimated annual tax
rates for the year applied to federal, state and foreign income. The provision for income taxes
decreased to $9.2 million in the third quarter of 2008 compared to the third quarter of 2007, which
was $19.2 million. The effective tax rate of 32.5% in the third quarter of 2008 was lower compared
to 33.1% in the same period of 2007 due to the mix of global pre-tax income among jurisdictions
which was partially offset by the non-recurring unfavorable discrete items in the third quarter of
2008 and the non-renewal of the federal research and development tax credit as of September 30,2008.
Income from continuing operations for the current quarter was $19.1 million, 51% lower than
the $38.8 million earned in the third quarter of 2007. Diluted earnings per share from continuing
operations in the third quarter of 2008 of $0.23 decreased $0.24, or 51%, compared with the third
quarter of 2007.
Loss from discontinued operations for 2007 was $0.4 million, which resulted from operations
for Halox.
Net income for the current quarter of $19.1 million decreased from the $38.4 million earned in
the third quarter of 2007, which included loss from discontinued operations of $0.4 million.
Diluted earnings per share in the third quarter of 2008 of $0.23 decreased $0.24, or 51%, compared
with the third quarter of 2007.
Performance in the Nine Months Ended September 30, 2008 Compared with the Same Period of 2007
Sales in the nine months ended September 30, 2008 were $1,134.2 million, a 12% improvement
from the comparable period last year. Three acquisitions accounted for a sales improvement of 7%,
foreign currency translation contributed 3% and organic sales improved 2%. Sales to international
customers represented approximately 47% of total sales in the current period compared to 46% in the
same period in 2007.
Fluid & Metering Technologies sales of $518.5 million for the nine months ended September 30,2008 rose $96.9 million, or 23% compared with 2007, reflecting 6% organic growth, 15% for
acquisitions and a 2% favorable impact from foreign currency translation. Growth was driven by
continued global demand for infrastructure-related applications and acquisition performance. In the
first nine months of 2008, organic sales grew approximately 4% domestically and 7% internationally.
Organic business sales to customers outside the U.S. were approximately 42% of total segment sales
during the first nine months of 2008, compared to 41% in 2007.
Health & Science Technologies sales of $253.8 million increased $7.4 million, or 3%, in the
first nine months of 2008 compared with last year’s period. This increase reflects a 4% increase
for acquisitions, 1% from favorable foreign currency translation and a 2% decline in organic
growth. In the nine month period of 2008, organic sales increased 1% domestically and decreased 5%
internationally. Organic business sales to customers outside the U.S. were approximately 39% of
total segment sales in the first nine months of 2008 compared with 40% in the comparable period of
2007.
Dispensing Equipment sales of $138.2 million increased $2.3 million, or 2% in the nine month
period of 2008 compared with 2007. This increase reflects a 7% decrease in organic growth offset by
9% from favorable foreign currency translation. In the first nine months of 2008, organic sales
decreased 26% domestically and increased 4% internationally. Organic sales to customers outside the
U.S. were approximately 72% of total segment sales in the first nine months of 2008, compared with
65% in the comparable period of 2007.
Fire & Safety/Diversified Products sales of $227.1 million increased $14.5 million, or 7% in
the first nine months of 2008 compared with 2007. This increase reflects a 4% increase in organic
business volume and 3% from favorable foreign currency translation. The engineered band clamping
business as well as rescue business achieved strong growth. In the first nine months of 2008,
organic business sales were essentially flat domestically and increased 25% internationally.
Organic sales to customers outside the U.S. were approximately 56% of total segment sales during
the first nine months of 2008, compared to 51% in 2007.
Gross profit of $464.8 million in the first nine months of 2008 increased $39.9 million, or 9%
from 2007. Gross profit as a percent of sales was 41.0% in 2008 and 42.0% in 2007. The decrease in
gross margin primarily reflects product mix, higher material costs and the effect from recent
acquisitions.
SG&A expenses increased to $258.1 million in the first nine months of 2008 from $231.3 million
in 2007. This increase reflects $17.8 million of incremental costs associated with recent
acquisitions and approximately $9.0 million for volume-related expenses. As a percent of sales,
SG&A expenses were 22.8% for 2008 and 22.9% for 2007.
During the nine months ended September 30, 2008, the Company recorded pre-tax restructuring
expenses totaling $5.3 million. These restructuring expenses were related to the Company’s
restructuring program to support the implementation of key strategic initiatives designed to
achieve long-term sustainable growth, which includes the previously announced cessation of
manufacturing operations in its Dispensing segment’s Milan, Italy facility. The
plant closure is expected to improve operating productivity and enhance capacity utilization.
In addition, the Company has initiated company-wide plans which include management and
administrative workforce reductions as well as an additional facility consolidation. Employees
separated or to be separated from the Company as a result of these initiatives were offered
severance packages, as appropriate. The expenses recorded during the nine months ended September30, 2008 included costs related to involuntary terminations and other direct costs associated with
implementing these initiatives.
During the first nine months of 2008 in accordance with SFAS No. 142, the Company concluded
that events had occurred and circumstances had changed which required the Company to perform an
interim period goodwill impairment test at Fluid Management Americas, a reporting unit within the
Company’s Dispensing Equipment Segment. Fluid Management Americas has experienced a downturn in
capital spending by its customer base and the loss of a major retail customer. The Company
performed an impairment test and compared the fair value of the reporting unit to its carrying
value. It was determined that the fair value of Fluid Management Americas was less than the
carrying value of the net assets. The excess of the fair value of the reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’s
analysis resulted in an implied fair value of goodwill of $21.2 million, and as a result, the
Company recognized an impairment charge of $30.1 million in the first nine months of 2008.
Operating income decreased $22.2 million, or 11%, to $171.3 million in the first nine months
of 2008 from $193.6 million in 2007, primarily reflecting increased SG&A expenses from previously
announced restructuring-related and goodwill impairment charges, partially offset by higher
volumes. Nine month operating margins were 15.1% of sales, 400 basis points lower than the same
period of 2007. The decrease was driven primarily by the impact of the previously announced
restructuring-related and goodwill impairment charges as well as expenses associated with recent
acquisitions. In the Fluid & Metering Technologies Segment, operating income of $101.6 million in
the first nine months of 2008 was up from the $91.4 million recorded in 2007 principally due to
strong global demand for process control and infrastructure-related applications. Operating margins
within the Fluid & Metering Technologies Segment of 19.6% in the current period were down from
21.7% in 2007, due to the impact of recent acquisitions. In the Health & Science Technologies
Segment, operating income of $47.7 million and operating margins of 18.8% in the first nine months
of 2008 were up from the $45.7 million and 18.6% recorded in 2007 principally due to favorable
product mix. In the Dispensing Equipment Segment, operating loss of $6.5 million and operating
margins of (4.7)% in the first nine months of 2008 were down from the $31.6 million operating
income and 23.2% recorded in 2007, due to lower volume within related end markets, goodwill
impairment charges and selective material cost increases. Operating income and operating margins in
the Fire & Safety/Diversified Products Segment of $56.8 million and 25.0%, respectively, were
higher than the $50.0 million and 23.5% recorded in 2007, due primarily to favorable product mix.
Interest expense decreased to $13.6 million in 2008 from $18.0 million in 2007. The decrease
was due to a lower interest rate environment and the refinancing of the $150.0 million senior notes
to a lower interest rate.
The provision for income taxes from continuing operations is based upon estimated annual tax
rates for the year applied to federal, state and foreign income. The provision for income taxes
decreased to $55.1 million in the first nine months of 2008 from $59.6 million in 2007. The
effective tax rate increased to 34.1% in the first nine months of 2008 compared to 33.7% in the
same period of 2007 due to the mix of global pre-tax income among jurisdictions, non-recurring
unfavorable discrete items in 2008 and the non-renewal of the federal research and development tax
credit as of September 30, 2008.
Income from continuing operations for the current period was $106.5 million, 9% lower than the
$117.5 million earned in the same period of 2007. Diluted earnings per share from continuing
operations in the first nine months of 2008 of $1.29 decreased $0.14, or 10%, compared with the
nine months of 2007.
Loss from discontinued operations for 2007 was $0.8 million, which resulted from operations
for Halox.
Net income for the current period of $106.5 million decreased from the $116.7 million earned
in the first nine months of 2007, which included a loss from discontinued operations of $0.8
million. Diluted earnings per share in the first nine months of 2008 of $1.29 decreased $0.13, or
9%, compared with the same period of 2007.
Liquidity and Capital Resources
At September 30, 2008, working capital was $446.8 million and our current ratio was 3.1 to 1.
Cash flows from operating activities increased $28.5 million, or 21%, to $166.7 million in the
first nine months of 2008 mainly due to the improved operating results discussed above.
Cash flows provided by operations were more than adequate to fund capital expenditures of
$19.1 million and $18.8 million in the first nine months of 2008 and 2007, respectively. Capital
expenditures were generally for machinery and equipment that improved productivity and tooling to
support the global sourcing initiatives, although a portion was for business system technology and
replacement of equipment and facilities. Management believes that the Company has ample capacity in
its plants and equipment to meet expected needs for future growth in the intermediate term.
The Company acquired ADS in January 2008 for cash consideration of $156.4 million.
Approximately $155.0 million of the cash payment was financed by borrowings under the Company’s
credit facility, of which $140.0 million was reflected as restricted cash at December 31, 2007.
The Company maintains a $600.0 million unsecured domestic, multi-currency bank revolving
credit facility (“Credit Facility”), which expires on December 21, 2011. At September 30, 2008
there was $365.2 million outstanding under the Credit Facility and outstanding letters of credit
totaled approximately $7.5 million. The net available borrowing under the Credit Facility as of
September 30, 2008, was approximately $227.3 million. Interest is payable quarterly on the
outstanding borrowings at the bank agent’s reference rate. Interest on borrowings based on LIBOR
plus an applicable margin is payable on the maturity date of the borrowing, or quarterly from the
effective date for borrowings exceeding three months. The applicable margin is based on the
Company’s senior, unsecured, long-term debt rating and can range from 24 basis points to 50 basis
points. Based on the Company’s BBB rating at September 30, 2008, the applicable margin was 40 basis
points. An annual Credit Facility fee, also based on the Company’s credit rating, is currently 10
basis points and is payable quarterly. During the first nine months of 2008 the Company had two
interest rate swaps. One interest rate swap, expiring in January 2011, effectively converted $250.0
million of floating rate debt into fixed rate debt at an interest rate of 3.25%. The second
interest rate swap, expiring December 21, 2011, effectively converted an additional $100.0 million
of floating rate debt into fixed rate debt at an interest rate of 4.00%
We also have a one-year, renewable $30.0 million demand line of credit (“Short-Term
Facility”), which expires on December 12, 2008. Borrowings under the Short-Term Facility are at
LIBOR plus an applicable margin. At September 30, 2008, there were no borrowings outstanding under
this facility.
On April 18, 2008, the Company completed a $100.0 million senior bank term loan agreement
(Term Loan) with covenants consistent with the existing Credit Facility and a maturity on December21, 2011. At September 30, 2008, there was $100.0 million outstanding under the Term Loan with $5.0
million included within short-term borrowings. Interest under the Term Loan is based on the bank
agent’s reference rate or LIBOR plus an applicable margin and is payable at the end of the selected
interest period, but at least quarterly. The applicable margin is based on the Company’s senior,
unsecured, long-term debt rating and can range from 45 to 100 basis points. Based on the Company’s
current debt rating, the applicable margin is 80 basis points. The Term Loan requires repayments of
$5.0 million, $5.0 million and $7.5 million in April of 2009, 2010, and 2011, respectively, with
the remaining balance due on December 21, 2011. The Company used the proceeds of the term loan to
pay down existing debt outstanding under the Credit Facility.
On April 21, 2008, the Company’s Board of Directors authorized the repurchase of up to $125.0
million of its outstanding common shares. Repurchases under the new program will be funded with
cash flow generation, and made from time to time in either the open market or through private
transactions. The timing, volume, and nature of
share repurchases will be at the discretion of management, dependent on market conditions,
other priorities for cash investment, applicable securities laws, and other factors, and may be
suspended or discontinued at any time.
During the current downturn in global financial markets, some companies have experienced
difficulties accessing their cash equivalents, trading investment securities, drawing on revolvers,
issuing debt and raising capital generally, which has had a material adverse impact on their
liquidity. Given our cash flow from operations and our availability under the Credit Facility, we
have not experienced any material issues and we continue to expect that our current liquidity,
notwithstanding these adverse market conditions, will be sufficient to meet our operating
requirements, interest on all borrowings, required debt repayments, any authorized share
repurchases, planned capital expenditures, and annual dividend payments to holders of common stock
during the next twelve months. In the event that suitable businesses are available for acquisition
upon terms acceptable to the Board of Directors, we may obtain all or a portion of the financing
for the acquisitions through the incurrence of additional long-term borrowings, to the extent such
borrowings are available in light of the current market conditions.
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. We may, from time to time, enter into foreign currency forward contracts
and interest rate swaps on our debt when we believe 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, we do not use derivative financial or
commodity 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. The
Company’s exposure related to derivative instruments is, in the aggregate, not material to its
financial position, results of operations or cash flows.
The Company’s foreign currency exchange rate risk is limited principally to the Euro, British
Pound, Canadian Dollar and Chinese Yuan. We manage our foreign exchange risk principally through
invoicing our customers in the same currency as the source of our products. The effect of
transaction gains and losses is reported within “Other income-net” on the Condensed Consolidated
Statements of Operations. At September 30, 2008the Company had two foreign currency contracts with
an aggregate notional amount of $3.7 million.
The Company’s interest rate exposure is primarily related to the $472.5 million of total debt
outstanding at September 30, 2008. The majority of the debt is priced at interest rates that float
with the market. In order to mitigate this interest exposure, the Company entered into interest
rate exchange agreements that effectively converted $350.0 million of our floating-rate debt to a
fixed-rate. A 50-basis point movement in the interest rate on the remaining $122.5 million
floating-rate debt would result in an approximate $0.6 million annualized increase or decrease in
interest expense and cash flows.
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. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by SEC Rule 13a-15(b), 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 the Company’s 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 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 controls over financial reporting.
During the three months ended September 2008, the Company implemented a new ERP system at one
of our larger business units. The Company believes that effective internal control over financial
reporting was maintained during and after this conversion.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and five of its subsidiaries have been 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. Such components were acquired from third
party suppliers, and were not manufactured by any of the subsidiaries. To date, all 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 such settlements and legal costs, or how insurers may
respond to claims that are tendered to them.
Claims have been filed in Alabama, Arizona, California, Connecticut, Delaware, Florida,
Georgia, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Texas, Utah, Virginia, Washington, West Virginia and Wyoming. Most of the
claims resolved to date have been dismissed without payment. The balance have been settled for
various insignificant 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 flow.
The Company is also party to various other legal proceedings arising in the ordinary course of
business, none of which is expected to have a material adverse effect on its business, financial
condition, results of operations or cash flow.
On April 21, 2008, IDEX’s Board of Directors authorized the repurchase of up to
$125.0 million of its outstanding common shares either in the open market or through private
transactions.
Item 5. Other Information.
There has been no material change to the procedures by which security holders may recommend
nominees to the Company’s board.
Item 6. Exhibits.
The exhibits listed in the accompanying “Exhibit Index” are filed as part of this report.
SIGNATURES
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.
Restated Certificate of Incorporation of IDEX Corporation (formerly HI, Inc.) (incorporated by reference to
Exhibit No. 3.1 to the Registration Statement on Form S-1 of IDEX, et al., Registration No. 33-21205, as filed
on April 21, 1988)
3.1(a)
Amendment to Restated Certificate of Incorporation of IDEX Corporation (formerly HI, Inc.), (incorporated by
reference to Exhibit No. 3.1(a) to the Quarterly Report of IDEX on Form 10-Q for the quarter ended March 31,1996, Commission File No. 1-10235)
Amended and Restated By-Laws of IDEX Corporation (incorporated by reference to Exhibit No. 3.2 to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 of IDEX, et al., Registration No. 33-21205, as filed
on July 17, 1989)
3.2(a)
Amended and Restated Article III, Section 13 of the Amended and Restated By-Laws of IDEX Corporation
(incorporated by reference to Exhibit No. 3.2(a) to Post-Effective Amendment No. 3 to the Registration Statement
on Form S-1 of IDEX, et al., Registration No. 33-21205, as filed on February 12, 1990)
Specimen Certificate of Common Stock of IDEX Corporation (incorporated by reference to Exhibit No. 4.3 to the
Registration Statement on Form S-2 of IDEX, et al., Registration No. 33-42208, as filed on September 16, 1991)
4.3
Credit Agreement, dated as of December 21, 2006, among IDEX Corporation, Bank of America N.A. as Agent and
Issuing Bank, and the other financial institutions party hereto (incorporated by reference to Exhibit No. 10.1
to the Current Report of IDEX on Form 8-K dated December 22, 2006, Commission File No. 1-10235)
*4.3 (a)
Amendment No. 2 to Credit Agreement, dated as of September 29, 2008, among IDEX Corporation, Bank of America
N.A. as Agent and Issuing Bank, and the other financial institutions party hereto
Term Loan Agreement, dated April 18, 2008, among IDEX Corporation, Bank of America N.A. as Agent, and the other
financial institutions party hereto (incorporated by reference to Exhibit No. 10.1 to the Current Report of IDEX
on Form 8-K dated April 18, 2008, Commission File No. 1-10235)
10.1
First Amendment to Stock Purchase Agreement, dated December 28, 2007, by and between Nova Holdings, LLC and IDEX
Corporation (incorporated by reference to Exhibit 10.1 to the Current Report of IDEX Corporation on Form 8-K,
dated January 7, 2008, Commission File No. 1-10235)
10.2
IDEX Corporation Incentive Award Plan (as Amended and Restated) (incorporated by reference to Appendix A of the
Proxy Statement of IDEX Corporation, filed March 7, 2008, Commission File No. 1-10235)
10.3
IDEX Corporation Restricted Stock Award Agreement with Lawrence Kingsley, dated April 8, 2008 (incorporated by
reference to Exhibit 10.2 to the Current Report of IDEX Corporation on Form 8-K, dated April 8, 2008, Commission
File No. 1-10235)
10.4
IDEX Corporation Restricted Stock Award Agreement with Dominic Romeo, dated April 8, 2008 (incorporated by
reference to Exhibit 10.3 to the Current Report of IDEX Corporation on Form 8-K, dated April 8, 2008, Commission
File No. 1-10235)