UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2013 | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to | |
Commission file number 1-10235
IDEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 36-3555336 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1925 West Field Court, Lake Forest, Illinois | 60045 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number:
(847) 498-7070
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, par value $.01 per share | New York Stock Exchange and Chicago Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(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 Act). Yes ¨ No þ
The aggregate market value, as of the last business day of the registrant's most recently completed second fiscal quarter, of the common stock (based on the June 28, 2013 closing price of $53.81) held by non-affiliates of IDEX Corporation was $4,383,366,044.
The number of shares outstanding of IDEX Corporation’s common stock, par value $.01 per share, as of February 10, 2014 was 80,889,147.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement with respect to the 2014 annual meeting of stockholders (the “2014 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
Table of Contents
PART I. | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III. | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV. | ||
Item 15. | ||
PART I
Item 1. | Business. |
IDEX Corporation (“IDEX” or the “Company”) is a Delaware corporation incorporated on September 24, 1987. The Company is an applied solutions business that sells an extensive array of pumps, flow meters and other fluidics systems and components and engineered products to customers in a variety of markets around the world. All of the Company’s business activities are carried out through wholly-owned subsidiaries.
The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. Within our three reportable segments, the Company maintains six platforms, where we will invest in organic growth and acquisitions with a strategic view towards a platform with the potential for at least $500 million in revenue, and seven groups, where we will focus on organic growth and strategic acquisitions. The Fluid & Metering Technologies segment contains the Energy, Water (comprised of Water Services & Technology and Diaphragm & Dosing Pump Technology), and Chemical, Food & Process platforms as well as the Agricultural group (comprised of Banjo). The Health & Science Technologies segment contains the IDEX Optics & Photonics, Scientific Fluidics and Material Processing Technologies platforms, as well as the Sealing Solutions and the Industrial (comprised of Micropump and Gast) groups. The Fire & Safety/Diversified Products segment is comprised of the Dispensing, Rescue, Band-It, and Fire Suppression groups. Each platform/group is comprised of one or more of our 15 reporting units: five reporting units within Fluid & Metering Technologies (Energy; Chemical, Food, & Process; Water Services & Technology; Banjo; Diaphragm & Dosing Pump Technology); six reporting units within Health & Science Technologies (IDEX Optics and Photonics; Scientific Fluidics; Materials Processing Technology; Sealing Solutions; Micropump; and Gast); and four reporting units within Fire & Safety/Diversified Products (Dispensing, Rescue, Band-It, and Fire Suppression).
IDEX believes that each of its reporting units is a leader in its product and service areas. The Company also believes that its strong financial performance has been attributable to its ability to design and engineer specialized quality products, coupled with its ability to identify and successfully consummate and integrate strategic acquisitions.
FLUID & METERING TECHNOLOGIES SEGMENT
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 & wastewater, agricultural and energy industries. Fluid & Metering Technologies application-specific pump and metering solutions serve a diverse range of end markets, including industrial infrastructure (fossil fuels, refined & alternative fuels, and water & wastewater), chemical processing, agricultural, food & beverage, pulp and paper, transportation, plastics and resins, electronics and electrical, construction & mining, pharmaceutical and bio-pharmaceutical, machinery and numerous other specialty niche markets. Fluid & Metering Technologies accounted for 43% of IDEX’s sales and 47% of IDEX’s operating income in 2013, with approximately 46% of its sales to customers outside the U.S.
Banjo. Banjo is a provider of special purpose, severe-duty pumps, valves, fittings and systems used in liquid handling. Banjo is based in Crawfordsville, Indiana and its products are used in agricultural and industrial applications. Approximately 13% of Banjo’s 2013 sales were to customers outside the U.S.
Energy. Energy consists of the Company’s Corken, Faure Herman, Liquid Controls, S.A.M.P.I. and Toptech businesses. Energy is a leading supplier of flow meters, electronic registration and control products, rotary vane and turbine pumps, reciprocating piston compressors, and terminal automation control systems. Headquartered in Lake Bluff, Illinois (Liquid Controls products), Energy has additional facilities in Longwood, Florida and Zwijndrech, Belgium (Toptech products); Oklahoma City, Oklahoma (Corken products); La Ferté Bernard, France (Faure Herman products); and Altopascio, Italy (S.A.M.P.I. products). Applications for Liquid Controls and S.A.M.P.I. positive displacement flow meters, electronic, registration and control products include mobile and stationary metering installations for wholesale and retail distribution of petroleum and liquefied petroleum gas, aviation refueling, and industrial metering and dispensing of liquids and gases. Corken products consist of positive-displacement rotary vane pumps, single and multistage regenerative turbine pumps, and small horsepower reciprocating piston compressors. Toptech supplies terminal automation hardware and software to control and manage inventories, as well as transactional data and invoicing, to customers in the oil, gas and refined-fuels markets. Faure Herman is a leading supplier of ultrasonic and helical turbine flow meters used in the custody transfer and control of high value fluids and gases. Approximately 52% of Energy’s 2013 sales were to customers outside the U.S.
Chemical, Food & Process ("CFP"). CFP consists of the Company’s Richter and Viking businesses. CFP is a producer of fluoroplastic lined corrosion-resistant magnetic drive and mechanical seal pumps, shut-off, control and safety valves for corrosive, hazardous, contaminated, pure and high-purity fluids, as well as rotary internal gear, external gear, vane and rotary lobe pumps, custom-engineered OEM pumps, strainers, gear reducers and engineered pump systems. Richter’s corrosion resistant fluoroplastic lined products offer superior solutions for demanding applications in the process industry. Viking’s
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products consist of external gear pumps, strainers and reducers, and related controls used for transferring and metering thin and viscous liquids sold under the Viking and Wright Flow brands. Viking products primarily serve the chemical, petroleum, pulp & paper, plastics, paints, inks, tanker trucks, compressor, construction, food & beverage, personal care, pharmaceutical and biotech markets. CFP maintains operations in Kempen, Germany (Richter products); Cedar Falls, Iowa (Richter and Viking products); and Eastbourne, East Sussex, England and Shannon, Ireland (Viking products). CFP primarily uses independent distributors to market and sell its products. Approximately 55% of CFP’s 2013 sales were to customers outside the U.S.
Diaphragm & Dosing Pump Technology ("DDPT"). DDPT consists of the Company’s Knight, Pulsafeeder-EPO, Pulsafeeder-SPO, Trebor and Warren Rupp businesses. DDPT is a leading provider of ultra-pure chemical pumps, liquid heating systems, air-operated and natural gas-operated double diaphragm pumps, high-pressure pumps, alloy and non-metallic gear pumps, centrifugal pumps, special purpose rotary pumps, peristaltic pumps, transfer pumps, as well as dispensing equipment for industrial laundries, commercial dishwashing and chemical metering. Knight is a leading manufacturer of pumps and dispensing equipment for industrial laundries, commercial dishwashing and chemical metering. Pulsafeeder products (which also include OBL products) are used to introduce precise amounts of fluids into processes to manage water quality and chemical composition, as well as peristaltic pumps. Its markets include water & wastewater treatment, oil and gas, power generation, pulp and paper, chemical and hydrocarbon processing, and swimming pools. Trebor is a leader in high-purity fluid handling products, including air-operated diaphragm pumps and deionized water-heating systems. Trebor products are used in manufacturing of semiconductors, disk drives and flat panel displays. Warren Rupp products (which also include Pumper Parts and Versa-Matic products) are used for abrasive and semisolid materials as well as for applications where product degradation is a concern or where electricity is not available or should not be used. Warren Rupp products primarily serve the chemical, paint, food processing, electronics, construction, utilities, mining and industrial maintenance markets. DDPT maintains operations in Salt Lake City, Utah (Trebor products); Mansfield, Ohio (Warren Rupp products); Rochester, New York, Punta Gorda, Florida and Milan, Italy (Pulsafeeder products); Lake Forest, California, Mississauga, Ontario, Canada, Eastbourne, East Sussex, England, and Unanderra, Australia (Knight products); and a maquiladora in Ciudad Juarez, Chihuahua, Mexico (Knight products). Approximately 47% of DDPT’s 2013 sales were to customers outside the U.S.
Water Services & Technology ("WST"). WST consists of the Company’s ADS, IETG and iPEK businesses. WST is a leading provider of metering technology and flow monitoring products and underground surveillance services for wastewater markets. ADS’s products and services provide comprehensive integrated solutions that enable industry, municipalities and government agencies to analyze and measure the capacity, quality and integrity of wastewater collection systems, including the maintenance and construction of such systems. IETG’s 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. iPEK supplies remote controlled systems used for infrastructure inspection. WST maintains operations in Huntsville, Alabama and various other locations in the United States and Australia (ADS products and services); Leeds, England (IETG products and services); and Hirschegg, Austria, and Sulzberg, Germany (iPEK products). Approximately 43% of WST’s 2013 sales were to customers outside the U.S.
HEALTH & SCIENCE TECHNOLOGIES SEGMENT
The Health & Science Technologies Segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, including very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, aerospace, 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 segment accounted for 35% of IDEX’s sales and 30% of operating income in 2013, with approximately 55% of its sales to customers outside the U.S.
Scientific Fluidics. Scientific Fluidics consists of Eastern Plastics, Rheodyne, Ismatec, Sapphire Engineering, Upchurch Scientific and ERC. Scientific Fluidics has facilities in Rohnert Park, California (Rheodyne products); Bristol, Connecticut (Eastern Plastics products); Wertheim-Mondfeld, Germany (Ismatec products); Middleboro, Massachusetts (Sapphire Engineering products); Oak Harbor, Washington (Ismatec and Upchurch Scientific products); and Kawaguchi, Japan (ERC products). Eastern Plastics products, which consist of high-precision integrated fluidics and associated engineered plastics solutions, are used in a broad set of end markets including medical diagnostics, analytical instrumentation, and laboratory automation. Rheodyne products consist of injectors, valves, fittings and accessories for the analytical instrumentation market. These products are used by manufacturers of high pressure liquid chromatography (“HPLC”) equipment servicing the pharmaceutical, biotech, life science, food & beverage, and chemical markets. Ismatec products include peristaltic metering
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pumps, analytical process controllers, and sample preparation systems. Sapphire Engineering and Upchurch Scientific products consist of fluidic components and systems for the analytical, biotech and diagnostic instrumentation markets, such as fittings, precision-dispensing pumps and valves, tubing and integrated tubing assemblies, filter sensors and other micro-fluidic and nano-fluidic components, as well as advanced column hardware and accessories for the high performance liquid chromatography market. The products produced by Sapphire Engineering and Upchurch Scientific primarily serve the pharmaceutical, drug discovery, chemical, biochemical processing, genomics/proteomics research, environmental labs, food/agriculture, medical lab, personal care, and plastics/polymer/rubber production markets. ERC manufactures gas liquid separations and detection solutions for the life science, analytical instrumentation and clinical chemistry markets. ERC’s products consist of in-line membrane vacuum degassing solutions, refractive index detectors and ozone generation systems. Approximately 54% of Scientific Fluidics' 2013 sales were to customers outside the U.S.
IDEX Optics and Photonics ("IOP"). IOP consists of CVI Melles Griot (“CVI MG”), Semrock, and AT Films (including Precision Photonics products). CVI MG is a global leader in the design and manufacture of precision photonic solutions used in the life sciences, research, semiconductor, security and defense markets. CVI MG’s innovative products are focused on the generation, control and productive use of light for a variety of key science and industrial applications. Products consist of specialty lasers and light sources, electro-optical components, specialty shutters, opto-mechanical assemblies and components. In addition, CVI MG produces critical components for life science research, electronics manufacturing, military and other industrial applications including lenses, mirrors, filters and polarizers. These components are utilized in a number of important applications such as spectroscopy, cytometry (cell counting), guidance systems for target designation, remote sensing, menology and optical lithography. CVI MG is headquartered in Albuquerque, New Mexico, with additional manufacturing sites located in Carlsbad, California; Rochester, New York; Isle of Man, British Isles; Leicester, England; Kyongki-Do, Korea; Tokyo, Japan; and Didam, The Netherlands. Semrock is a provider of optical filters for biotech and analytical instrumentation in the life sciences markets. Semrock’s optical filters are produced using state-of-the-art manufacturing processes which enable it to offer its customers significant improvements in instrument performance and reliability. Semrock is located in Rochester, New York. AT Films specializes in optical components and coatings for applications in the fields of scientific research, defense, aerospace, telecommunications and electronics manufacturing. AT Films’ core competence is the design and manufacture of filters, splitters, reflectors and mirrors with the precise physical properties required to support their customers’ most challenging and cutting-edge optical applications. The Precision Photonics portion of its business specializes in optical components and coatings for applications in the fields of scientific research, aerospace, telecommunications and electronics manufacturing. AT Films is headquartered in Boulder, Colorado. Approximately 54% of IOP’s 2013 sales were to customers outside the U.S.
Sealing Solutions. Sealing Solutions consists of Precision Polymer Engineering (“PPE”) and FTL Sealing Solutions ("FTL"), acquired in March 2013. PPE, which is located in Blackburn, England, is a provider of proprietary high performance seals and advanced sealing solutions for a diverse range of global industries and applications, including hazardous duty, analytical instrumentation, semiconductor/solar, process technologies, pharmaceutical, electronics, and food applications. FTL, located in Leeds, England, specializes in the design and application of high integrity rotary seals, specialty bearings, and other custom products for the oil & gas, mining, power generation, and marine markets. Approximately 80% of Sealing Solutions' 2013 sales were to customers outside the U.S.
Gast. Gast consists of the Company’s Gast and Jun-Air businesses. The Gast business is a leading manufacturer of air-moving products, including air motors, low-range and medium-range vacuum pumps, vacuum generators, regenerative blowers and fractional horsepower compressors. Gast products are used in a variety of long-life applications requiring a quiet, clean source of moderate vacuum or pressure. Gast products primarily serve the medical equipment, environmental equipment, computers and electronics, printing machinery, paint mixing machinery, packaging machinery, graphic arts, and industrial manufacturing markets. The Jun-Air business is a provider of low-decibel, ultra-quiet vacuum compressors suitable for medical, dental and laboratory applications. Based in Benton Harbor, Michigan, Gast also has a logistics and commercial center in Redditch, England. Approximately 27% of Gast’s 2013 sales were to customers outside the U.S.
Micropump. Micropump, headquartered in Vancouver, Washington, is a leader in small, precision-engineered, magnetically and electromagnetically driven rotary gear, piston and centrifugal pumps. Micropump products are used in low-flow abrasive and corrosive applications. Micropump products primarily serve the printing machinery, medical equipment, paints and inks, chemical processing, pharmaceutical, refining, laboratory, electronics, pulp and paper, water treatment, textiles, peristaltic metering pumps, analytical process controllers and sample preparation systems markets. Approximately 80% of Micropump’s 2013 sales were to customers outside the U.S.
Material Processing Technologies ("MPT"). MPT consists of Quadro, Fitzpatrick, Microfluidics and Matcon Group Limited (“Matcon”). Quadro is a leading provider of particle control solutions for the pharmaceutical and bio-pharmaceutical markets. Based in Waterloo, Ontario, Canada, Quadro’s core capabilities include fine milling, emulsification and special handling of liquid and solid particulates for laboratory, pilot phase and production scale processing. Fitzpatrick is a global
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leader in the design and manufacture of process technologies for the pharmaceutical, food and personal care markets. Fitzpatrick designs and manufactures customized size reduction, roll compaction and drying systems to support their customers’ product development and manufacturing processes. Fitzpatrick is headquartered in Elmhurst, Illinois. Microfluidics is a global leader in the design and manufacture of laboratory and commercial equipment used in the production of micro and nano scale materials for the pharmaceutical and chemical markets. Microfluidics is the exclusive producer of the Microfluidizer family of high shear fluid processors for uniform particle size reduction, robust cell disruption and nanoparticle creation. Microfluidics has offices in Newton, Massachusetts. Matcon is a global leader in material processing solutions for high value powders used in the manufacture of pharmaceuticals, food, plastics, and fine chemicals. Matcon’s innovative products consist of the original cone valve powder discharge system and filling, mixing and packaging systems, all of which support its customers’ automation and process requirements. These products are critical to its customers’ need to maintain clean, reliable and repeatable formulations of prepackaged foods and pharmaceuticals while helping them achieve lean and agile manufacturing. Matcon is located in Evesham, Worcestershire, England. Approximately 63% of MPT’s 2013 sales were to customers outside the U.S.
FIRE & SAFETY/DIVERSIFIED PRODUCTS SEGMENT
The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry, 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 segment accounted for 22% of IDEX’s sales and 23% of IDEX’s operating income in 2013, with approximately 56% of its sales to customers outside the U.S.
Fire Suppression. Fire Suppression consists of the Company’s Class 1, Hale and Godiva businesses, which produce truck-mounted and portable fire pumps, stainless steel valves, foam and compressed air foam systems, pump modules and pump kits, electronic controls and information systems, conventional and networked electrical systems, and mechanical components for the fire, rescue and specialty vehicle markets. Fire Suppression’s customers are primarily OEMs. Fire Suppression is headquartered in Ocala, Florida (Class 1 and Hale products), with additional facilities located in Warwick, England (Godiva products). Approximately 41% of Fire Suppression’s 2013 sales were to customers outside the U.S.
Rescue. Rescue consists of the Company’s Dinglee, Hurst Jaws of Life, Lukas and Vetter businesses, which produce hydraulic, battery, gas and electric-operated rescue equipment, hydraulic re-railing equipment, hydraulic tools for industrial applications, recycling cutters, pneumatic lifting and sealing bags for vehicle and aircraft rescue, environmental protection and disaster control, and shoring equipment for vehicular or structural collapse. Rescue's customers are primarily public and private fire and rescue organizations. Rescue has facilities in Shelby, North Carolina (Hurst Jaws of Life products); Tianjin, China (Dinglee products); Erlangen, Germany (Lukas products); and Zulpich, Germany (Vetter products). Approximately 78% of Rescue’s 2013 sales were to customers outside the U.S.
Band-It. Band-It is a leading producer of high-quality stainless steel banding, buckles and clamping systems. The BAND-IT brand is highly recognized worldwide. Band-It products are used for securing exhaust system heat and sound shields, industrial hose fittings, traffic signs and signals, electrical cable shielding, identification and bundling, and in numerous other industrial and commercial applications. Band-It products primarily serve the automotive, transportation equipment, oil and gas, general industrial maintenance, electronics, electrical, communications, aerospace, utility, municipal and subsea marine markets. Band-It is based in Denver, Colorado, with additional operations in Staveley, Derbyshire, England, and an IDEX shared manufacturing facility in China. Approximately 35% of Band-It’s 2013 sales were to customers outside the U.S.
Dispensing . Dispensing produces precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world. Dispensing is a global supplier of precision-designed tinting, mixing, dispensing and measuring equipment for auto refinishing and architectural paints. Dispensing products are used in retail and commercial stores, hardware stores, home centers, department stores, automotive body shops as well as point-of-purchase dispensers. Dispensing is headquartered in Sassenheim, The Netherlands with additional facilities in Wheeling, Illinois; Unanderra, Australia; and Milan, Italy, as well as IDEX shared manufacturing facilities in India and China. Approximately 61% of Dispensing's 2013 sales were to customers outside the U.S.
INFORMATION APPLICABLE TO THE COMPANY’S BUSINESS IN GENERAL AND ITS SEGMENTS
Competitors
The Company’s businesses participate in highly competitive markets. IDEX believes that the principal points of competition are product quality, price, design and engineering capabilities, product development, conformity to customer specifications, quality of post-sale support, timeliness of delivery, and effectiveness of our distribution channels.
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Principal competitors of the Fluid & Metering Technologies segment are the Pump Solutions Group (Maag, Blackmer and Wilden products) of Dover Corporation (with respect to pumps and small horsepower compressors used in liquified petroleum gas distribution facilities, rotary gear pumps, and air-operated double-diaphragm pumps); Milton Roy LLC (with respect to metering pumps and controls); and Tuthill Corporation (with respect to rotary gear pumps).
Principal competitors of the Health & Science Technologies segment are the Thomas division of Gardner Denver, Inc. (with respect to vacuum pumps and compressors); Thermo Scientific Dionex products (with respect to analytical instrumentation); Parker Hannifin (with respect to sealing devices); Valco Instruments Co., Inc. (with respect to fluid injectors and valves); and Gooch & Housego PLC (with respect to electro-optic and precision photonics solutions used in the life sciences market).
The principal competitors of the Fire & Safety/Diversified Products segment are Waterous Company, a unit of American Cast Iron Pipe Company (with respect to truck-mounted firefighting pumps), Holmatro, Inc. (with respect to rescue tools), CPS Color Group Oy (with respect to dispensing and mixing equipment for the paint industry) and Panduit Corporation (with respect to stainless steel bands, buckles and tools).
Employees
At December 31, 2013, the Company had 6,787 employees. Approximately 7% of employees were represented by labor unions, with various contracts expiring through January 2017. Management believes that the Company’s relationship with its employees is good. The Company historically has been able to renegotiate its collective bargaining agreements satisfactorily, with its last work stoppage in March 1993.
Suppliers
The Company manufactures many of the parts and components used in its products. Substantially all materials, parts and components purchased by the Company are available from multiple sources.
Inventory and Backlog
The Company regularly and systematically adjusts production schedules and quantities based on the flow of incoming orders. Backlogs typically are limited to one to one and a half months of production. While total inventory levels also may be affected by changes in orders, the Company generally tries to maintain relatively stable inventory levels based on its assessment of the requirements of the various industries served.
Raw Materials
The Company uses a wide variety of raw materials which are generally available from a number of sources. As a result, shortages from any single supplier have not had, and are not likely to have a material impact on operations.
Shared Services
The Company has production facilities in Suzhou, China and Vadodara, India that support multiple business units. IDEX also has personnel in China, India, Dubai, Latin America and Singapore that provide sales and marketing, product design and engineering, and sourcing support to its business units, as well as personnel in various locations in Europe, South America, the Middle East and Japan to support sales and marketing efforts of IDEX businesses in those regions.
Segment Information
For segment financial information for the years 2013, 2012 and 2011, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 11 of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”
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Executive Officers of the Registrant
Set forth below are the names of the executive officers of the Company, their ages, years of service, the positions held by them, and their business experience during the past five years.
Name | Age | Years of Service | Position | |||
Andrew K. Silvernail | 43 | 5 | Chairman of the Board and Chief Executive Officer | |||
Heath A. Mitts | 43 | 8 | Vice President and Chief Financial Officer | |||
Frank J. Notaro | 50 | 16 | Vice President-General Counsel and Secretary | |||
Daniel J. Salliotte | 47 | 9 | Vice President-Mergers, Acquisitions and Treasury | |||
Michael J. Yates | 48 | 8 | Vice President and Chief Accounting Officer | |||
Jeffrey D. Bucklew | 43 | 2 | Chief Human Resources Officer | |||
Mr. Silvernail has served as Chief Executive Officer since August 2011 and as Chairman of the Board since January 2012. Prior to that, Mr. Silvernail was Vice President-Group Executive Health & Science Technologies, Global Dispensing and Fire & Safety/Diversified Products from January 2011 to August 2011. From February 2010 to December 2010, Mr. Silvernail was Vice President-Group Executive Health & Sciences Technologies and Global Dispensing. Mr. Silvernail joined IDEX in January 2009 as Vice President-Group Executive Health & Science Technologies. Prior to joining IDEX, Mr. Silvernail served as Group President at Rexnord Industries from April 2005 to August 2008.
Mr. Mitts has served as Vice President and Chief Financial Officer since March 2011. Mr. Mitts was hired as Vice President-Corporate Finance in September 2005.
Mr. Notaro has served as Vice President-General Counsel and Secretary since March 1998.
Mr. Salliotte has served as Vice President-Mergers, Acquisitions and Treasury since February 2011. Mr. Salliotte joined IDEX in October 2004 as Vice President-Strategy and Business Development.
Mr. Yates has served as Vice President and Chief Accounting Officer since February 2010. Mr. Yates was hired as Vice President-Controller in October 2005.
Mr. Bucklew has served as the Chief Human Resources Officer since joining IDEX in March 2012. Prior to joining IDEX, Mr. Bucklew served as the Vice President of Human Resources for Accretive Health from March 2009 to March 2012 and held various human resources leadership roles with General Electric from January 1995 to March 2009.
The Company’s executive officers are elected at a meeting of the Board of Directors immediately following the annual meeting of stockholders, and they serve until the meeting of the Board immediately following the next annual meeting of stockholders, or until their successors are duly elected and qualified or until their death, resignation or removal.
Public Filings
Copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are made available free of charge at www.idexcorp.com as soon as reasonably practicable after being filed electronically with the SEC. Our reports are also available free of charge on the SEC’s website, www.sec.gov. Information on the Company’s website is not incorporated into this Form 10-K.
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Item 1A. Risk Factors.
For an enterprise as diverse and complex as the Company, a wide range of factors present risks to the Company and could materially affect future developments and performance. In addition to the factors affecting specific business operations identified in connection with the description of our operations and the financial results of our operations elsewhere in this report, the most significant of these factors are as follows:
Changes in U.S. or International Economic Conditions Could Adversely Affect the Sales and Profitability of Our Businesses.
In 2013, 49% of the Company’s sales were derived from domestic operations while 51% were derived from international operations. The Company’s largest end markets include life sciences and medical technologies, fire and rescue, petroleum LPG, paint and coatings, chemical processing, water & wastewater treatment and optical filters and components. A slowdown in the U.S. or global economy and, in particular, any of these specific end markets could reduce the Company’s sales and profitability.
Conditions in Foreign Countries in Which We Operate Could Adversely Affect Our Business.
In 2013, approximately 51% of our total sales were to customers outside the U.S. We expect our international operations and export sales to continue to be significant for the foreseeable future. Our sales from international operations and our sales from export are both subject in varying degrees to risks inherent in doing business outside the United States. These risks include the following:
• | possibility of unfavorable circumstances arising from host country laws or regulations; |
• | risks of economic instability; |
• | currency exchange rate fluctuations and restrictions on currency repatriation; |
• | potential negative consequences from changes to taxation policies; |
• | disruption of operations from labor and political disturbances; |
• | changes in tariff and trade barriers and import or export licensing requirements; and, |
• | insurrection or war. |
Any of these events could have an adverse impact on our business and operations.
Our Inability to Continue to Develop New Products Could Limit Our Sales Growth.
The Company’s sales grew 2% organically in 2013 and 3% in 2012. Approximately 12% of our 2013 sales were derived from new products developed over the past three years. Our ability to continue to grow organically is tied in large part to our ability to continue to develop new products.
Our Growth Strategy Includes Acquisitions and We May Not be Able to Make Acquisitions of Suitable Candidates or Integrate Acquisitions Successfully.
Our historical growth has included, and our future growth is likely to continue to include, acquisitions. We intend to continue to seek acquisition opportunities both to expand into new markets and to enhance our position in existing markets throughout the world. We may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain financing needed to consummate those acquisitions, complete proposed acquisitions or successfully integrate acquired businesses into our existing operations. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings, or otherwise prove beneficial to us.
Acquisitions involve numerous risks, including the assumption of undisclosed or unindemnified liabilities, difficulties in the assimilation of the operations, technologies, services and products of the acquired companies and the diversion of management’s attention from other business concerns. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses.
The Markets We Serve are Highly Competitive and this Competition Could Reduce our Sales and Operating Margins.
Most of our products are sold in competitive markets. Maintaining and improving our competitive position will require continued investment by us in manufacturing, engineering, quality standards, marketing, customer service and support, and our distribution networks. We may not be successful in maintaining our competitive position. Our competitors may develop products that are superior to our products, or may develop methods of more efficiently and effectively providing products and services or may adapt more quickly than us to new technologies or evolving customer requirements. Pricing pressures may
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require us to adjust the prices of our products to stay competitive. We may not be able to compete successfully with our existing competitors or with new competitors. Failure to continue competing successfully could reduce our sales, operating margins and overall financial performance.
We are Dependent on the Availability of Raw Materials, Parts and Components Used in Our Products.
While we manufacture certain parts and components used in our products, we require substantial amounts of raw materials and purchase some parts and components from suppliers. The availability and prices for raw materials, parts and components may be subject to curtailment or change due to, among other things, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. Any change in the supply of, or price for, these raw materials or parts and components could materially affect our business, financial condition, results of operations and cash flow.
Significant Movements in Foreign Currency Exchange Rates May Harm Our Financial Results.
We are exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, Canadian Dollar, British Pound, Indian Rupee and Chinese Renminbi. Any significant change in the value of the currencies of the countries in which we do business against the U.S. Dollar could affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our results of operations. For additional detail related to this risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk.”
An Unfavorable Outcome of Any of Our Pending Contingencies or Litigation Could Adversely Affect Us.
We currently are involved in legal and regulatory proceedings. Where it is reasonably possible to do so, we accrue estimates of the probable costs for the resolution of these matters. These estimates are developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future operating results for any particular quarter or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. For additional detail related to this risk, see Item 3. “Legal Proceedings.”
Our Intangible Assets, Including Goodwill, are a Significant Portion of Our Total Assets and a Write-off of Our Intangible Assets Would Adversely Impact Our Operating Results and Significantly Reduce Our Net Worth.
Our total assets reflect substantial intangible assets, primarily goodwill and identifiable intangible assets. At December 31, 2013, goodwill and intangible assets totaled $1,349.5 million and $311.2 million, respectively. These assets result from our acquisitions, representing the excess of cost over the fair value of the tangible net assets we have acquired. Annually, or when certain events occur that require a more current valuation, we assess whether there has been an impairment in the value of our goodwill and identifiable intangible assets. If future operating performance at one or more of our reporting units were to fall significantly below forecast levels, we could be required to reflect, under current applicable accounting rules, a non-cash charge to operating income for an impairment. Any determination requiring the write-off of a significant portion of our goodwill or identifiable intangible assets would adversely impact our results of operations and net worth. As an example, in accordance with Accounting Standards Codification (“ASC”) No. 350, the Company concluded that a significant non-cash asset impairment charge of $198.5 million was required in the fourth quarter of 2012 to reduce the carrying value of goodwill and intangible assets within the IOP platform and goodwill and long-lived assets within the WST group. See Note 4 in Part II, Item 8, "Financial Statements and Supplementary Data" for further discussion on goodwill and intangible assets.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company’s principal plants and offices have an aggregate floor space area of approximately 4.1 million square feet, of which 2.7 million square feet (65%) is located in the U.S. and approximately 1.4 million square feet (35%) is located outside the U.S., primarily in the U.K. (9%), Germany (8%), China (4%) and The Netherlands (3%). Management considers these facilities suitable and adequate for their operations. Management believes the Company can meet demand increases over the near term with its existing facilities, especially given its operational improvement initiatives that usually increase capacity. The Company’s executive office occupies 36,588 square feet of leased space in Lake Forest, Illinois.
Approximately 2.7 million square feet (65%) of the principal plant and office floor area is owned by the Company, and the balance is held under lease. Approximately 1.7 million square feet (40%) of the principal plant and office floor area is held by business units in the Fluid & Metering Technologies segment; 1.3 million square feet (32%) is held by business units in the
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Health & Science Technologies segment; and 1.0 million square feet (23%) is held by business units in the Fire & Safety/Diversified Products segment.
Item 3. Legal Proceedings.
The Company and six of its subsidiaries are presently named as defendants in a number of lawsuits claiming various asbestos-related personal injuries and seeking money damages, 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 any of the 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 its 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. 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 affected business unit. No provision has been made in the financial statements of the Company for these asbestos-related claims, other than for insurance deductibles in the ordinary course, and the Company does not currently believe these claims will have a material adverse effect on it.
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 it.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The principal market for the Company’s common stock is the New York Stock Exchange, but the common stock is also listed on the Chicago Stock Exchange. As of February 10, 2014, there were approximately 6,500 shareholders of record of our common stock and there were 80,889,147 shares outstanding.
The high and low sales prices of the common stock per share and the dividends paid per share during the last two years is as follows:
2013 | 2012 | ||||||||||||||||||||||
High | Low | Dividends | High | Low | Dividends | ||||||||||||||||||
First Quarter | $ | 53.84 | $ | 47.43 | $ | 0.20 | $ | 43.15 | $ | 36.73 | $ | 0.17 | |||||||||||
Second Quarter | 57.38 | 49.55 | 0.23 | 44.14 | 36.91 | 0.20 | |||||||||||||||||
Third Quarter | 65.32 | 53.95 | 0.23 | 43.96 | 34.06 | 0.20 | |||||||||||||||||
Fourth Quarter | 74.08 | 63.21 | 0.23 | 46.69 | 39.74 | 0.20 | |||||||||||||||||
Our payment of dividends in the future will be determined by our Board of Directors and will depend on business conditions, our earnings and other factors.
For information pertaining to securities authorized for issuance under equity compensation plans and the related weighted average exercise price, see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
The following table provides information about the Company’s purchases of common stock during the quarter ended December 31, 2013:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Dollar Value that May Yet be Purchased Under the Plans or Programs(1) | |||||||||
October 1, 2013 to October 31, 2013 | 259,700 | $ | 65.90 | 259,700 | $ | 78,329,477 | |||||||
November 1, 2013 to November 30, 2013 | 56,345 | $ | 70.44 | 56,345 | $ | 374,360,309 | |||||||
December 1, 2013 to December 31, 2013 | 89,829 | $ | 71.53 | 89,829 | $ | 367,934,947 | |||||||
Total | 405,874 | $ | 69.29 | 405,874 | $ | 367,934,947 | |||||||
(1) | On November 8, 2013, the Company’s Board of Directors approved an increase in the authorized level for repurchases of common stock by $300.0 million. This followed the prior Board of Directors approved repurchase authorizations of $200.0 million, announced by the Company on October 22, 2012; $50.0 million, announced by the Company on December 6, 2011; and the original repurchase authorization of $125.0 million announced by the Company on April 21, 2008. |
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Performance Graph. The following table compares total shareholder returns over the last five years to the Standard & Poor’s (the “S&P”) 500 Index, the S&P Midcap Industrials Sector Index and the Russell 2000 Index assuming the value of the investment in our common stock and each index was $100 on December 31, 2008. Total return values for our common stock, the S&P 500 Index, S&P Midcap Industrials Sector Index and the Russell 2000 Index were calculated on cumulative total return values assuming reinvestment of dividends. The shareholder return shown on the graph below is not necessarily indicative of future performance.
12/08 | 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | |||||||||||||
IDEX Corporation | $ | 100.00 | $ | 128.99 | $ | 161.99 | $ | 153.50 | $ | 192.67 | $ | 305.80 | ||||||
S&P 500 Index | $ | 100.00 | $ | 123.45 | $ | 139.24 | $ | 139.23 | $ | 157.90 | $ | 204.63 | ||||||
S&P Midcap Industrials Sector Index | $ | 100.00 | $ | 133.84 | $ | 173.49 | $ | 170.32 | $ | 204.66 | $ | 291.54 | ||||||
Russell 2000 Index | $ | 100.00 | $ | 125.22 | $ | 156.90 | $ | 148.35 | $ | 179.54 | $ | 232.98 | ||||||
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Item 6. Selected Financial Data.(1)
(Dollars in thousands, except per share data) | 2013 | 2012 (2) | 2011 | 2010 | 2009 | ||||||||||||||
RESULTS OF OPERATIONS | |||||||||||||||||||
Net sales | $ | 2,024,130 | $ | 1,954,258 | $ | 1,838,451 | $ | 1,513,073 | $ | 1,329,661 | |||||||||
Gross profit | 873,364 | 803,700 | 738,673 | 618,483 | 522,386 | ||||||||||||||
Selling, general and administrative expenses | 477,851 | 444,490 | 421,703 | 358,272 | 325,453 | ||||||||||||||
Asset impairments | — | 198,519 | — | — | — | ||||||||||||||
Restructuring expenses | — | 32,473 | 12,314 | 11,095 | 12,079 | ||||||||||||||
Operating income | 395,513 | 128,218 | 304,656 | 249,116 | 184,854 | ||||||||||||||
Other income (expense) — net | (178 | ) | 236 | (1,443 | ) | (1,092 | ) | 1,151 | |||||||||||
Interest expense | 42,206 | 42,250 | 29,332 | 16,150 | 17,178 | ||||||||||||||
Provision for income taxes | 97,914 | 48,574 | 80,024 | 74,774 | 55,436 | ||||||||||||||
Net income | 255,215 | 37,630 | 193,857 | 157,100 | 113,391 | ||||||||||||||
Earnings Per Share(3) | |||||||||||||||||||
— basic | $ | 3.11 | $ | 0.45 | $ | 2.34 | $ | 1.93 | $ | 1.41 | |||||||||
— diluted | $ | 3.09 | $ | 0.45 | $ | 2.32 | $ | 1.90 | $ | 1.40 | |||||||||
Weighted average shares outstanding | |||||||||||||||||||
— basic | 81,517 | 82,689 | 82,145 | 80,466 | 79,716 | ||||||||||||||
— diluted | 82,489 | 83,641 | 83,543 | 81,983 | 80,727 | ||||||||||||||
Year-end shares outstanding | 81,196 | 82,727 | 83,234 | 82,070 | 80,970 | ||||||||||||||
Cash dividends per share | $ | 0.89 | $ | 0.80 | $ | 0.68 | $ | 0.60 | $ | 0.48 | |||||||||
FINANCIAL POSITION | |||||||||||||||||||
Current assets | $ | 990,953 | $ | 881,865 | $ | 789,161 | $ | 692,758 | $ | 451,712 | |||||||||
Current liabilities | 304,609 | 291,427 | 258,278 | 353,668 | 189,682 | ||||||||||||||
Working capital | 686,344 | 590,438 | 530,883 | 339,090 | 262,030 | ||||||||||||||
Current ratio | 3.3 | 3.0 | 3.1 | 2.0 | 2.4 | ||||||||||||||
Total assets | $ | 2,887,577 | $ | 2,785,390 | $ | 2,836,107 | $ | 2,381,695 | $ | 2,098,157 | |||||||||
Total borrowings | 773,876 | 786,576 | 808,810 | 527,895 | 400,100 | ||||||||||||||
Shareholders’ equity | 1,572,989 | 1,464,998 | 1,513,135 | 1,375,660 | 1,268,104 | ||||||||||||||
PERFORMANCE MEASURES AND OTHER DATA | |||||||||||||||||||
Percent of net sales: | |||||||||||||||||||
Gross profit | 43.1 | % | 41.1 | % | 40.2 | % | 40.9 | % | 39.3 | % | |||||||||
SG&A expenses | 23.6 | % | 22.7 | % | 22.9 | % | 23.7 | % | 24.5 | % | |||||||||
Operating income | 19.5 | % | 6.6 | % | 16.6 | % | 16.5 | % | 13.9 | % | |||||||||
Income before income taxes | 17.4 | % | 4.4 | % | 14.9 | % | 15.3 | % | 12.7 | % | |||||||||
Net income | 12.6 | % | 1.9 | % | 10.5 | % | 10.4 | % | 8.5 | % | |||||||||
Capital expenditures | $ | 31,536 | $ | 35,520 | $ | 34,548 | $ | 32,769 | $ | 25,525 | |||||||||
Depreciation and amortization | 79,334 | 78,312 | 72,386 | 58,108 | 56,346 | ||||||||||||||
Return on average assets | 9.0 | % | 1.3 | % | 7.4 | % | 7.0 | % | 5.3 | % | |||||||||
Borrowings as a percent of capitalization | 33.0 | % | 34.9 | % | 34.8 | % | 27.7 | % | 24.0 | % | |||||||||
Return on average shareholders' equity | 16.8 | % | 2.5 | % | 13.4 | % | 11.9 | % | 9.4 | % | |||||||||
Employees at year end | 6,787 | 6,717 | 6,814 | 5,966 | 5,300 | ||||||||||||||
Shareholders at year end | 6,500 | 6,700 | 7,000 | 7,000 | 7,000 | ||||||||||||||
NON-GAAP MEASURES | |||||||||||||||||||
EBITDA | $ | 474,669 | $ | 206,766 | $ | 375,599 | $ | 306,132 | $ | 242,351 | |||||||||
EBITDA as a percentage of net sales | 23.5 | % | 10.6 | % | 20.4 | % | 20.2 | % | 18.2 | % | |||||||||
Adjusted EBITDA(4) | $ | 474,669 | $ | 437,758 | $ | 387,913 | $ | 317,227 | $ | 254,430 | |||||||||
Adjusted EBITDA as a percentage of net sales (4) | 23.5 | % | 22.4 | % | 21.1 | % | 21.0 | % | 19.1 | % | |||||||||
(1) | For additional detail, see Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.” |
(2) | Fiscal year 2012 includes an impairment charge for goodwill and intangible assets within the IOP platform and an impairment charge for goodwill and long-lived assets within the WST group. |
(3) | Calculated by applying the two-class method of allocating earnings to common stock and participating securities as required by ASC 260, Earnings Per Share. |
(4) | The following is a reconciliation of EBITDA and Adjusted EBITDA to the comparable measures of net income and operating income, as determined in accordance with U.S. GAAP. We have reconciled consolidated EBITDA to net income and we have reconciled segment EBITDA to operating income, as we do not allocate interest and income taxes to our segments. EBITDA means earnings before interest, income taxes, depreciation and amortization. Given the acquisitive nature of the Company which results in a higher level of amortization expense at recently acquired businesses, management uses EBITDA as an internal operating metric to provide management with another representation of performance of businesses across our three segments and for enterprise valuation purposes. In addition, EBITDA has been adjusted for items that are not reflective of ongoing operations, such as asset impairments and restructuring expenses to arrive at Adjusted EBITDA. Management believes that Adjusted EBITDA is useful as an analytical indicator of leverage capacity and debt servicing ability, and uses it to measure financial performance as well as for planning purposes. We believe that Adjusted EBITDA is also useful to some investors as an indicator of the strength and performance of the Company's and its segments ongoing business operations and a way to evaluate and compare operating performance and value companies within our industry. However, it should not be considered as an alternative to net income, operating income or any other items calculated in accordance with U.S. GAAP. The definition of EBITDA used here may differ from that used by other companies. |
For the Years Ended December 31, | ||||||||||||||||||||
Consolidated | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Net Income | $ | 255,215 | $ | 37,630 | $ | 193,857 | $ | 157,100 | $ | 113,391 | ||||||||||
+ Income taxes | 97,914 | 48,574 | 80,024 | 74,774 | 55,436 | |||||||||||||||
+ Interest Expense | 42,206 | 42,250 | 29,332 | 16,150 | 17,178 | |||||||||||||||
+ Depreciation & amortization | 79,334 | 78,312 | 72,386 | 58,108 | 56,346 | |||||||||||||||
EBITDA | 474,669 | 206,766 | 375,599 | 306,132 | 242,351 | |||||||||||||||
+ Restructuring | — | 32,473 | 12,314 | 11,095 | 12,079 | |||||||||||||||
+ Asset impairment | — | 198,519 | — | — | — | |||||||||||||||
Adjusted EBITDA | $ | 474,669 | $ | 437,758 | $ | 387,913 | $ | 317,227 | $ | 254,430 | ||||||||||
Net sales | $ | 2,024,130 | $ | 1,954,258 | $ | 1,838,451 | $ | 1,513,073 | $ | 1,329,661 | ||||||||||
EBITDA as a percentage of net sales | 23.5 | % | 10.6 | % | 20.4 | % | 20.2 | % | 18.2 | % | ||||||||||
Adjusted EBITDA as a percentage of net sales | 23.5 | % | 22.4 | % | 21.1 | % | 21.0 | % | 19.1 | % | ||||||||||
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
FMT | HST | FSD | FMT | HST | FSD | FMT | HST | FSD | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 211,256 | $ | 136,707 | $ | 102,730 | $ | 146,650 | $ | (62,835 | ) | $ | 96,120 | $ | 164,818 | $ | 106,037 | $ | 85,901 | |||||||||||||||||
+ Other income (expense) | (1,789 | ) | 508 | 342 | 25 | (511 | ) | 143 | (249 | ) | (1,822 | ) | 1,108 | |||||||||||||||||||||||
+ Depreciation & amortization | 27,633 | 43,496 | 6,852 | 29,637 | 39,981 | 7,107 | 32,368 | 30,055 | 8,516 | |||||||||||||||||||||||||||
EBITDA | 237,100 | 180,711 | 109,924 | 176,312 | (23,365 | ) | 103,370 | 196,937 | 134,270 | 95,525 | ||||||||||||||||||||||||||
+ Restructuring | — | — | — | 6,262 | 14,744 | 8,340 | 2,861 | 2,130 | 5,227 | |||||||||||||||||||||||||||
+ Asset impairment | — | — | — | 27,721 | 170,798 | — | ||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 237,100 | $ | 180,711 | $ | 109,924 | $ | 210,295 | $ | 162,177 | $ | 111,710 | $ | 199,798 | $ | 136,400 | $ | 100,752 | ||||||||||||||||||
Net sales | $ | 871,814 | $ | 714,650 | $ | 445,049 | $ | 833,288 | $ | 695,235 | $ | 437,053 | $ | 831,287 | $ | 607,900 | $ | 402,425 | ||||||||||||||||||
EBITDA as a percentage of net sales | 27.2 | % | 25.3 | % | 24.7 | % | 21.2 | % | (3.4 | )% | 23.7 | % | 23.7 | % | 22.1 | % | 23.7 | % | ||||||||||||||||||
Adjusted EBITDA as a percentage of net sales | 27.2 | % | 25.3 | % | 24.7 | % | 25.2 | % | 23.3 | % | 25.6 | % | 24.0 | % | 22.4 | % | 25.0 | % | ||||||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Under the Private Securities Litigation Reform Act
This management’s discussion and analysis, including, but not limited to, the section entitled “2013 Overview and Outlook”, and other portions of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These statements may relate to, among other things, capital expenditures, cost reductions, cash flow, and operating improvements and are indicated by words or phrases such as “anticipate,” “estimate,” “plans,” “expects,” “projects,” “should,” “will,” “management believes,” “the Company believes,” “we believe,” “the Company intends” and similar words or phrases. These statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from the results described in those statements. These risks and uncertainties include, but are not limited to, the risks described in Item 1A, "Risk Factors" of this report, economic and political consequences resulting from terrorist attacks and wars; levels of industrial activity and economic conditions in the U.S. and other countries around the world; pricing pressures and other competitive factors, and levels of capital spending in certain industries — all of which could have a material impact on our order rates and results, particularly in light of the low levels of order backlogs we typically maintain; our ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which we operate; interest rates; capacity utilization and its effect on costs; labor markets; market conditions and material costs; and developments with respect to contingencies, such as litigation and environmental matters. The forward-looking statements included in this report are only made as of the date of this report, and we undertake no obligation to update them to reflect subsequent events or circumstances. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.
2013 Overview and Outlook
IDEX is an applied solutions company specializing in fluid and metering technologies, health and science technologies, and fire, safety and other diversified products built to customer specifications. IDEX’s products are sold in niche markets to a wide range of industries throughout the world. Accordingly, our businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where we do business and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in the industries that use our products and overall industrial activity are important factors that influence the demand for our products.
The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. Within our three reportable segments, the Company maintains six platforms, where we will invest in organic growth and acquisitions with a strategic view towards a platform with the potential for at least $500 million in revenue, and seven groups, where we will focus on organic growth and strategic acquisitions. The Fluid & Metering Technologies segment contains the Energy, Water (comprised of Water Services & Technology and Diaphragm & Dosing Pump Technology), and Chemical, Food & Process platforms as well as the Agricultural group (comprised of Banjo.) The Health & Science Technologies segment contains the IDEX Optics & Photonics, Scientific Fluidics and Material Processing Technologies platforms, as well as the Sealing Solutions and the Industrial (comprised of Micropump and Gast) groups. The Fire & Safety/Diversified Products segment is comprised of the Dispensing, Rescue, Band-It, and Fire Suppression groups. Each platform/group is comprised of one or more of our 15 reporting units: five reporting units within Fluid & Metering Technologies (Energy; Chemical, Food, & Process; Water Services & Technology; Banjo; Diaphragm & Dosing Pump Technology); six reporting units within Health & Science Technologies (IDEX Optics and Photonics; Scientific Fluidics; Material Processing Technology; Sealing Solutions; Micropump; and Gast); and four reporting units within Fire & Safety/Diversified Products (Dispensing, Rescue, Band-It, and Fire Suppression).
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, valves, injectors, and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food, chemical, general industrial, water and wastewater, agricultural and energy industries. The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, including very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, life sciences, aerospace, telecommunications and electronics manufacturing, laboratory and commercial equipment used in the production of micro and nano scale materials, precision photonic solutions used in life sciences, research and defense markets, and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications. The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, rescue tools, lifting bags and other components and systems for the
13
fire and rescue industry, and engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications, precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.
Some of our 2013 financial results are as follows:
• | Sales of $2.0 billion increased 4%; organic sales — excluding acquisitions and foreign currency translation — were up 2%. |
• | Operating income of $395.5 million increased 208%. |
• | Net income increased 578% to $255.2 million. |
• | Diluted EPS of $3.09 increased $2.64 or 587% compared to 2012. |
Overall we believe market conditions are marginally better than a year ago but still remain uneven. On a regional basis, North American demand has remained strong, the European market continues to stabilize, the emerging markets are growing, and Asia remains uneven. For 2014, based on the Company’s current outlook, we anticipate 3 to 5 percent organic revenue growth in 2014 and EPS of $3.33 to $3.43.
Results of Operations
The following is a discussion and analysis of our results of operations for each of the three years in the period ended December 31, 2013. For purposes of this Item, reference is made to the Consolidated Statements of Operations in Part II, Item 8, “Financial Statements and Supplementary Data.” Segment operating income excludes unallocated corporate operating expenses.
In the following discussion, and throughout this report, references to organic sales, a non-GAAP measure, refers to sales from continuing operations calculated according to generally accepted accounting principles in the United States but excludes (1) the impact of foreign currency translation and (2) sales from acquired businesses during the first twelve months of ownership. The portion of sales attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and (b) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. The Company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions because the nature, size, and number of acquisitions can vary dramatically from period to period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult. In addition, this report references EBITDA and Adjusted EBITDA. These non-GAAP measures have been reconciled to Net income and Operating income within Item 6, "Selected Financial Data". Given the acquisitive nature of the Company which results in a higher level of amortization expense at recently acquired businesses, EBITDA and Adjusted EBITDA provides management with a better representation of performance of businesses across our three segments.
Management’s primary measurements of segment performance are sales, operating income, and operating margin. In addition, due to the highly acquisitive nature of the Company, the determination of net income includes amortization of acquired intangible assets and, as a result, management reviews EBITDA and Adjusted EBITDA as a percentage of sales. These measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are analyzed with segment management.
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Performance in 2013 Compared with 2012
(In thousands) | 2013 | 2012 | Change | ||||||||
Net sales | $ | 2,024,130 | $ | 1,954,258 | 4 | % | |||||
Operating income | 395,513 | 128,218 | 208 | % | |||||||
Operating margin | 19.5 | % | 6.6 | % | 1,290 | bps | |||||
EBITDA | $ | 474,669 | $ | 206,766 | 130 | % | |||||
EBITDA as a percentage of net sales | 23.5 | % | 10.6 | % | 1,290 | bps | |||||
Adjusted EBITDA | $ | 474,669 | $ | 437,758 | 8 | % | |||||
Adjusted EBITDA as a percentage of net sales | 23.5 | % | 22.4 | % | 110 | bps | |||||
Capital expenditures | $ | 31,536 | $ | 35,520 | (11 | )% | |||||
Capital expenditures as a percentage of net sales | 1.6 | % | 1.8 | % | (20 | ) | bps | ||||
Sales in 2013 were $2,024 million, a 4% increase from the comparable period last year. This increase reflects a 2% increase in organic sales and 2% from acquisitions (ERC — April 2012, Matcon — July 2012 and FTL —March 2013). Organic sales to customers outside the U.S. represented approximately 51% of total sales in the period compared with 50% in 2012.
In 2013, Fluid & Metering Technologies contributed 43% of sales and 47% of operating income; Health & Science Technologies contributed 35% of sales and 30% of operating income; and Fire & Safety/Diversified Products contributed 22% of sales and 23% of operating income.
Gross profit of $873.4 million in 2013 increased $69.7 million, or 8.7%, from 2012. Gross margins were 43.1% in 2013 and 41.1% in 2012.
SG&A expenses increased to $477.9 million in 2013 from $444.5 million in 2012. The $33.4 million increase reflects approximately $10.4 million of incremental costs from new acquisitions, $5.6 million of cost-out actions, a $1.7 million pension settlement, $1.2 million related to environmental reserve costs, and $18.6 million of volume-related expenses, partially offset by a $4.0 million gain on the settlement of the contingent consideration related to the Matcon business acquired in July 2012. As a percentage of sales, SG&A expenses were 23.6% for 2013 and 22.7% for 2012.
During 2012, the Company recorded pre-tax restructuring expenses totaling $32.5 million. These restructuring expenses were mainly attributable to employee severance related to employee reductions across various functional areas, the termination of a defined benefit pension plan and facility rationalization resulting from the Company’s cost savings initiatives. These initiatives included exit costs related to five facility closures and severance benefits for 491 employees in 2012.
Operating income of $395.5 million in 2013 increased from the $128.2 million recorded in 2012, primarily reflecting an increase in volume, improved productivity and the impact of the $198.5 million asset impairment charges and the $32.5 million of restructuring-related charges recorded in 2012. Operating margin of 19.5% in 2013 was up from 6.6% in 2012 primarily due to volume leverage, productivity and the impact of asset impairment charges and restructuring-related charges in 2012.
Interest expense decreased slightly to $42.2 million in 2013 from $42.3 million in 2012. The decrease was principally due to lower debt levels.
The provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes increased to $97.9 million in 2013 compared to $48.6 million in 2012. The effective tax rate decreased to 27.7% in 2013 compared to 56.3% in 2012, mainly due to the 2012 nonrecurring asset impairment charge recorded in the fourth quarter of 2012. The impairment charge increased our 2012 effective tax rate by 26.9%. Our effective tax rate was also impacted by recognition of the 2012 U.S. R&D credit in 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013 which reinstated the U.S. R&D Credit retroactively to January 1, 2012, recognition of additional UK R&D tax benefits, revaluation of the UK deferred tax liability due to the reduction in the UK statutory tax rate, the settlement of the contingent consideration agreement related to the Matcon business acquired in July 2012, and the mix of global pre-tax income among jurisdictions.
Net income for the year of $255.2 million increased from the $37.6 million earned in 2012. Diluted earnings per share in 2013 of $3.09 increased $2.64 from $0.45 in 2012.
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Fluid & Metering Technologies Segment
(In thousands) | 2013 | 2012 | Change | ||||||||
Net sales | $ | 871,814 | $ | 833,288 | 5 | % | |||||
Operating income | 211,256 | 146,650 | 44 | % | |||||||
Operating margin | 24.2 | % | 17.6 | % | 660 | bps | |||||
EBITDA | $ | 237,100 | $ | 176,312 | 34 | % | |||||
EBITDA as a percentage of net sales | 27.2 | % | 21.2 | % | 600 | bps | |||||
Adjusted EBITDA | $ | 237,100 | $ | 210,295 | 13 | % | |||||
Adjusted EBITDA as a percentage of sales | 27.2 | % | 25.2 | % | 200 | bps | |||||
Capital expenditures | $ | 11,581 | $ | 13,535 | (14 | )% | |||||
Capital expenditures as a percentage of net sales | 1.3 | % | 1.6 | % | (30 | ) | bps | ||||
Sales of $871.8 million increased $38.5 million, or 5%, in 2013 compared with 2012. This increase reflected 4% organic growth and 1% favorable foreign currency translation. The increase in organic sales was attributable to growth across all our platforms and groups within the segment. In 2013, organic sales increased approximately 3% domestically and 6% internationally. Organic sales to customers outside the U.S. were approximately 46% of total segment sales in 2013, compared with 47% in 2012.
Sales within our Energy platform increased compared to 2012, due to the strength of OEM truck builds and electronic retrofits in North America. Additional growth has been driven by growth across the LPG market, including North America, China, India and Russia. Sales within our CFP platform increased compared to 2012 on continued strength in the chemical markets, particularly with project opportunities in the Middle East and Asia, coupled with solid aftermarket performance. The CFP North American industrial distribution market started the year soft, but gradually recovered in the second half of 2013. Sales increases within our Agriculture group were driven by strong OEM demand in North America, new product introductions and an increase in market share. The sales increase in WST was driven by share gains and strong global project activity, specifically for projects in the US and Japan. DDPT saw only modest sales growth due to softness in several core markets, but this was offset by a pickup in the Middle East and the semiconductor markets.
Operating income and operating margin of $211.3 million and 24.2%, respectively, were higher than the $146.7 million and 17.6% recorded in 2012, primarily due to volume leverage and productivity initiatives as well as the impact of the $27.7 million of impairment charges and $6.3 million of restructuring charges recorded in 2012.
Health & Science Technologies Segment
(In thousands) | 2013 | 2012 | Change | ||||||||
Net sales | $ | 714,650 | $ | 695,235 | 3 | % | |||||
Operating income (loss) | 136,707 | (62,835 | ) | 318 | % | ||||||
Operating margin | 19.1 | % | (9.0 | )% | 2,810 | bps | |||||
EBITDA | $ | 180,711 | $ | (23,365 | ) | 873 | % | ||||
EBITDA as a percentage of net sales | 25.3 | % | (3.4 | )% | 2,870 | bps | |||||
Adjusted EBITDA | $ | 180,711 | $ | 162,177 | 11 | % | |||||
Adjusted EBITDA as a percentage of sales | 25.3 | % | 23.3 | % | 200 | bps | |||||
Capital expenditures | $ | 12,280 | $ | 13,140 | (7 | )% | |||||
Capital expenditures as a percentage of net sales | 1.7 | % | 1.9 | % | (20 | ) | bps | ||||
Sales of $714.7 million increased $19.4 million, or 3%, in 2013 compared with 2012. This increase reflected 6% growth from acquisitions (ERC, Matcon and FTL), offset by a 1% unfavorable foreign currency translation and a 2% decrease in organic sales. In 2013, organic sales decreased 1% domestically and 3% internationally. Organic sales to customers outside the U.S. were approximately 53% of total segment sales in 2013 compared with 51% in 2012.
Sales within our MPT platform increased compared to 2012 due to large projects in the pharmaceutical and chemical markets, driven by released capital spending, particularly in North America and Europe. Sales within our Scientific Fluidics
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platform increased on the success of new products introduced throughout 2013 and share gains. In the latter part of 2013, Scientific Fluidics benefited from the the easing of National Institute of Health funding constraints, which opened up further spending in our core Analytical Instruments and In Vitro Diagnostic markets. Sales within our Specialty Seals group increased compared to 2012 due to a full nine months of sales from FTL, acquired in March 2013, continued strong growth in oil & gas, and stability in the scientific and commercial aircraft end markets. Sales within our IOP platform decreased compared to 2012, primarily from continued weak demand in the defense, biotechnology and electronics end markets as well as the decision to exit certain product lines. Sales in our Industrial group decreased compared to 2012 due to several original equipment manufacturer (“OEM”) orders that did not repeat in 2013.
Operating income and operating margin of $136.7 million and 19.1%, respectively, in 2013 were up from the operating loss and negative operating margin of $62.8 million and 9.0%, respectively, recorded in 2012, primarily due to volume leverage and productivity initiatives as well as the impact of the $170.8 million of impairment charges and the $14.7 million of restructuring charges recorded in 2012.
Fire & Safety/Diversified Products Segment
(In thousands) | 2013 | 2012 | Change | ||||||||
Net sales | $ | 445,049 | $ | 437,053 | 2 | % | |||||
Operating income | 102,730 | 96,120 | 7 | % | |||||||
Operating margin | 23.1 | % | 22.0 | % | 110 | bps | |||||
EBITDA | $ | 109,924 | $ | 103,370 | 6 | % | |||||
EBITDA as a percentage of net sales | 24.7 | % | 23.7 | % | 100 | bps | |||||
Adjusted EBITDA | $ | 109,924 | $ | 111,710 | (2 | )% | |||||
Adjusted EBITDA as a percentage of sales | 24.7 | % | 25.6 | % | (90 | ) | bps | ||||
Capital expenditures | $ | 5,040 | $ | 6,654 | (24 | )% | |||||
Capital expenditures as a percentage of net sales | 1.1 | % | 1.5 | % | (40 | ) | bps | ||||
Sales of $445.0 million increased $8.0 million, or 2%, in 2013 compared with 2012. This increase reflected 1% organic growth and 1% favorable foreign currency translation. In 2013, organic sales increased 1% domestically and 2% internationally. Organic sales to customers outside the U.S. were approximately 56% of total segment sales in 2013, compared with 57% in 2012.
Sales within our Dispensing group decreased due to the fulfillment of the 2012 large replenishment order in the first quarter of 2013. However, excluding this order, sales increased on strength in our core North American markets, driven by low volatile organic compound ("VOC") programs, and expanded sales from our low-end automatic dispenser, X-Smart, in EMEA and Asia. The sales increase within our Band-It group was driven by general strength in the oil and gas applications market and large automotive blanket orders for new vehicle platforms in North America. Sales within our Fire Suppression group increased as a result of orders for fire suppression trailers at power production facilities, project orders in China, and a stable core business in North America and Western Europe. Sales within our Rescue group increased as a result of robust demand for our rescue tools within the North American and European markets.
Operating income and operating margin of $102.7 million and 23.1%, respectively, were higher than the $96.1 million and 22.0% recorded in 2012, primarily due to the impact of the $8.3 million of restructuring charges recorded in 2012, as well as volume leverage, partially offset by mix across businesses.
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Performance in 2012 Compared with 2011
(In thousands) | 2012 | 2011 | Change | ||||||||
Net sales | $ | 1,954,258 | $ | 1,838,451 | 6 | % | |||||
Operating income | 128,218 | 304,656 | (58 | )% | |||||||
Operating margin | 6.6 | % | 16.6 | % | (1,000 | ) | bps | ||||
EBITDA | $ | 206,766 | $ | 375,599 | (45 | )% | |||||
EBITDA as a percentage of net sales | 10.6 | % | 20.4 | % | (980 | ) | bps | ||||
Adjusted EBITDA | $ | 437,758 | $ | 387,913 | 13 | % | |||||
Adjusted EBITDA as a percentage of net sales | 22.4 | % | 21.1 | % | 130 | bps | |||||
Capital expenditures | $ | 35,520 | $ | 34,548 | 3 | % | |||||
Capital expenditures as a percentage of net sales | 1.8 | % | 1.9 | % | (10 | ) | bps | ||||
Sales in 2012 were $1,954.3 million, a 6% increase from the comparable period last year. This increase reflects a 3% increase in organic sales, 5% from acquisitions (AT Films — January 2011, Microfluidics — March 2011, CVI MG — June 2011, ERC — April 2012 and Matcon — July 2012) and 2% unfavorable foreign currency translation. Organic sales to customers outside the U.S. represented approximately 50% of total sales in the period compared with 52% in 2011.
In 2012, Fluid & Metering Technologies contributed 43% of sales and 82% of operating income; Health & Science Technologies contributed 35% of sales and (35)% of operating income; and Fire & Safety/Diversified Products contributed 22% of sales and 53% of operating income.
Gross profit of $803.7 million in 2012 increased $65.0 million, or 9%, from 2011. Gross margins were 41.1% in 2012 and 40.2% in 2011.
SG&A expenses increased to $444.5 million in 2012 from $421.7 million in 2011. The $22.8 million increase reflects approximately $26.8 million of incremental costs from acquisitions, $2.7 million for a benefit from forfeited CEO equity compensation recorded in 2011 and a $2.8 million gain from the sale of a facility in Italy recorded in 2011, partially offset by $9.5 million of cost savings initiatives. As a percentage of sales, SG&A expenses were 22.7% for 2012 and 22.9% for 2011.
During 2012, the Company recorded pre-tax restructuring expenses totaling $32.5 million, compared with $12.3 million for the same period in 2011. These restructuring expenses were mainly attributable to employee severance related to employee reductions across various functional areas, the termination of a defined benefit pension plan and facility rationalization resulting from the Company’s cost savings initiatives. These initiatives included exit costs related to five facility closures and severance benefits for 491 employees in 2012 and severance benefits for 292 employees in 2011.
During 2012, the Company concluded that a non-cash impairment charge was required to reduce the carrying value of goodwill and intangible assets within the IOP reporting unit and goodwill and long-lived assets within the WST reporting unit. The goodwill within IOP primarily originated from the 2011 acquisition of CVI Melles Griot and the goodwill in WST primarily originated from the 2008 acquisitions of IETG and ADS. As a result of our annual test, an impairment charge was required within IOP due to continued softness in the Optics & Photonics end markets. In addition, we were required to perform an interim impairment test within WST at December 31, 2012 due to the reorganization of certain FMT businesses in the fourth quarter. This reorganization, combined with continued softness in municipal end markets, contributed to the impairment charge. As a result of the above testing, the Company recorded a pre-tax charge of $198.5 million in the fourth quarter of 2012.
No additional impairments were identified at any of the other reporting units in 2012.
Operating income of $128.2 million in 2012 was down from the $304.7 million recorded in 2011, primarily reflecting $198.5 million of asset impairment charges and an increase of $20.2 million in restructuring-related charges, partially offset by an increase in volume and improved productivity. Operating margin of 6.6% in 2012 was down from 16.6% in 2011 primarily due to the impact of asset impairment charges and restructuring-related charges, as well as the dilutive impact from acquisitions, partially offset by volume leverage and productivity.
Interest expense increased to $42.3 million in 2012 from $29.3 million in 2011. The increase was principally due to higher debt levels resulting from the CVI MG acquisition and higher interest rates associated with replacing our Revolving Facility debt in 2011 with fixed rate 4.2% Senior Notes.
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The provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes decreased to $48.6 million in 2012 compared to $80.0 in 2011. The effective tax rate increased to 56.3% in 2012 compared to 29.2% in 2011, mainly due to the nonrecurring asset impairment charge recorded in the fourth quarter of 2012. The impairment charge increased our effective tax rate by 26.9%. Our effective tax rate was also impacted by the mix of global pre-tax income among jurisdictions, a reversal of disallowed executive compensation expense in the prior year and the impact of recent acquisitions.
Net income for the year of $37.6 million decreased from the $193.9 million earned in 2011. Diluted earnings per share in 2012 of $0.45 decreased $1.87, or 81%, from $2.32 in 2011.
Fluid & Metering Technologies Segment
(In thousands) | 2012 | 2011 | Change | ||||||||
Net sales | $ | 833,288 | $ | 831,287 | — | % | |||||
Operating income | 146,650 | 164,818 | (11 | )% | |||||||
Operating margin | 17.6 | % | 19.8 | % | (220 | ) | bps | ||||
EBITDA | $ | 176,312 | $ | 196,937 | (10 | )% | |||||
EBITDA as a percentage of net sales | 21.2 | % | 23.7 | % | (250 | ) | bps | ||||
Adjusted EBITDA | $ | 210,295 | $ | 199,798 | 5 | % | |||||
Adjusted EBITDA as a percentage of net sales | 25.2 | % | 24.0 | % | 120 | bps | |||||
Capital expenditures | $ | 13,535 | $ | 12,543 | 8 | % | |||||
Capital expenditures as a percentage of net sales | 1.6 | % | 1.5 | % | 10 | bps | |||||
Sales of $833.3 million increased $2.0 million in 2012 compared with 2011. This increase reflected 2% organic growth offset by 2% unfavorable foreign currency translation. The increase in organic sales was largely attributed to growth across our Energy platform and our Agricultural group. In 2012, organic sales increased approximately 7% domestically and decreased 3% internationally. Organic sales to customers outside the U.S. were approximately 47% of total segment sales in 2012, compared with 48% in 2011.
Sales within our Energy platform increased compared to 2011, due to strong demand for systems used in midstream and downstream oil and gas applications both domestically and internationally. Additionally, large Energy project sales to emerging markets drove international sales growth, partially offset by weakness in the European downstream markets due to general economic conditions. Domestic sales growth within Energy was driven by the transportation end markets and strength in our distribution channel. Sales within our CFP platform increased compared to 2011 on strong general industrial and chemical demand in both our OEM and distributor channels in North America and Asia. In addition, CFP sales growth accelerated in emerging markets. Sales within our Agriculture group increased due to robust demand in North America. DDPT sales increased compared to 2011, due to a modest increase in project activity for the chemical and industrial businesses. Offsetting these sales increases, was a sales decrease in our WST group, which continues to face funding headwinds in the municipal water end market.
Operating income and operating margin of $146.7 million and 17.6%, respectively, were lower than the $164.8 million and 19.8% recorded in 2011, primarily due to $27.7 million of impairment charges and an increase of $3.4 million of restructuring charges, partially offset by productivity and cost reduction initiatives.
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Health & Science Technologies Segment
(In thousands) | 2012 | 2011 | Change | ||||||||
Net sales | $ | 695,235 | $ | 607,900 | 14 | % | |||||
Operating income (loss) | (62,835 | ) | 106,037 | (159 | )% | ||||||
Operating margin | (9.0 | )% | 17.4 | % | (2,640 | ) | bps | ||||
EBITDA | $ | (23,365 | ) | $ | 134,270 | (117 | )% | ||||
EBITDA as a percentage of net sales | (3.4 | )% | 22.1 | % | (2,550 | ) | bps | ||||
Adjusted EBITDA | $ | 162,177 | $ | 136,400 | 19 | % | |||||
Adjusted EBITDA as a percentage of net sales | 23.3 | % | 22.4 | % | 90 | bps | |||||
Capital expenditures | $ | 13,140 | $ | 12,938 | 2 | % | |||||
Capital expenditures as a percentage of net sales | 1.9 | % | 2.1 | % | (20 | ) | bps | ||||
Sales of $695.2 million increased $87.3 million, or 14%, in 2012 compared with 2011. This increase reflected 16% growth from acquisitions (AT Films, Microfluidics, CVI MG, ERC and Matcon), offset by a 1% unfavorable foreign currency translation and a 1% decrease in organic sales. In 2012, organic sales increased 2% domestically and decreased 4% internationally. Organic sales to customers outside the U.S. were approximately 51% of total segment sales in both 2012 and 2011.
Sales within our MPT platform increased compared to 2011 due to a full twelve months of sales from Microfluidics, acquired in March 2011, strength in Asian food and pharmaceutical markets, and large project orders received in the second half of 2011 which shipped during the first half of 2012. Sales within our Scientific Fluidics platform decreased compared to 2011 due to slowed instrumentation end markets driven by National Institutes of Health funding concerns, inventory reduction programs by our customers and inconsistent OEM demand in North America, partially offset by modest growth in the life sciences end market, particularly in Asia. Sales within our Sealing Solutions group increased slightly compared to 2011 due to an increase in distributor sales and an upturn in the diesel and gas engine markets. Sales within our IOP platform increased compared to 2011 primarily as a result of our CVI MG acquisition. However, 2012 sales within our IOP platform were lower than anticipated due to weak demand in the defense, biotech and electronics end markets. Sales in our Industrial group decreased compared to 2011 due to lower sales to distributors and slower sales into automotive end markets.
An operating loss of $62.8 million in 2012 was down from the $106.0 million of income recorded in 2011, primarily due to $170.8 million of impairment charges and $14.7 million of current period restructuring charges, partially offset by the $15.8 million acquisition fair value inventory charge for CVI MG recorded in 2011 and productivity from prior period restructuring actions. A negative operating margin of 9.0% in 2012 was down from 17.4% in 2011, due to the dilutive impact from acquisitions, current period restructuring charges and impairment charges.
Fire & Safety/Diversified Products Segment
(In thousands) | 2012 | 2011 | Change | ||||||||
Net sales | $ | 437,053 | $ | 402,425 | 9 | % | |||||
Operating income | 96,120 | 85,901 | 12 | % | |||||||
Operating margin | 22.0 | % | 21.3 | % | 70 | bps | |||||
EBITDA | $ | 103,370 | $ | 95,525 | 8 | % | |||||
EBITDA as a percentage of net sales | 23.7 | % | 23.7 | % | — | bps | |||||
Adjusted EBITDA | $ | 111,710 | $ | 100,752 | 11 | % | |||||
Adjusted EBITDA as a percentage of net sales | 25.6 | % | 25.0 | % | 60 | bps | |||||
Capital expenditures | $ | 6,654 | $ | 5,644 | 18 | % | |||||
Capital expenditures as a percentage of net sales | 1.5 | % | 1.4 | % | 10 | bps | |||||
Sales of $437.1 million increased $34.6 million, or 9%, in 2012 compared with 2011. This increase reflected 11% organic growth offset by 2% unfavorable foreign currency translation. In 2012, organic sales increased 29% domestically and 1% internationally. Organic sales to customers outside the U.S. were approximately 57% of total segment sales in 2012, compared with 63% in 2011.
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Sales within our Dispensing group increased on strength in our core North American markets driven by a large replenishment project, which began shipping in the second quarter of 2012. The sales increase within our Band-It group was driven by general North American industrial market improvement and strength in the oil and gas applications market. Sales within our Fire Suppression group increased as a result of geographic expansions into Asian markets and through the penetration into product adjacencies. Sales within our Rescue group increased as a result of robust demand for our rescue tools within North American markets and traction in South and Central America initiatives.
Operating income of $96.1 million was higher than the $85.9 million recorded in 2011, primarily due to volume leverage and productivity, partially offset by an increase of $3.1 million in restructuring charges and a $2.8 million gain on the sale of a facility in 2011. Operating margin of 22.0% in 2012 was up from 21.3% in 2011, primarily due to improved productivity and cost reduction initiatives, partially offset by current period restructuring charges and the gain on the sale of a facility in 2011.
Liquidity and Capital Resources
At December 31, 2013, working capital was $686.3 million and the Company’s current ratio was 3.25 to 1. Cash flows from operating activities increased $75.3 million, or 23.1%, to $401.5 million in 2013, primarily due to higher operating income. At December 31, 2013, the Company’s cash and cash equivalents totaled $439.6 million, of which $309.1 million was held outside of the United States. During the year ended December 31, 2013, the Company repatriated $11.7 million of foreign earnings resulting in $0.9 million of incremental income tax expense. The Company has made no estimate for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries that might be payable if these earnings were repatriated since the Company considers these amounts to be permanently invested.
Cash flows from operations were more than adequate to fund capital expenditures of $31.5 million and $35.5 million in 2013 and 2012, respectively. Capital expenditures were generally for machinery and equipment that improved productivity, 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 demand increases for future growth in the intermediate term.
The Company acquired FTL Seals Technology, Ltd ("FTL") in March 2013 for cash consideration of $34.5 million (£23.1 million). The entire purchase price was funded with borrowings under the Revolving Facility.
The Company maintains a revolving credit facility (the “Revolving Facility”), which is a $700.0 million unsecured, multi-currency bank credit facility expiring on June 27, 2016. At December 31, 2013, $10.0 million was outstanding under the Revolving Facility, with $8.7 million of outstanding letters of credit. The net available borrowing capacity under the Revolving Facility at December 31, 2013, was approximately $681.3 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. This applicable margin is based on the Company’s senior, unsecured, long-term debt rating and can range from .875% to 1.70%. Based on the Company’s credit rating at December 31, 2013, the applicable margin was 1.05%. Interest is payable (a) in the case of base rate loans, quarterly, and (b) in the case of LIBOR rate loans, on the maturity date of the borrowing, or quarterly from the effective date for borrowings exceeding three months. An annual Revolving Facility fee, also based on the Company’s credit rating, is currently 20 basis points and is payable quarterly.
On June 9, 2010, the Company completed a private placement of €81.0 million ($96.8 million) aggregate principal amount of 2.58% Series 2010 Senior Euro Notes due June 9, 2015 (“2.58% Senior Euro Notes”) pursuant to a Master Note Purchase Agreement, dated June 9, 2010 (the “Purchase Agreement”). The Purchase Agreement provides for the issuance of additional series of notes in the future, provided that the aggregate principal amount outstanding under the agreement at any time does not exceed $750.0 million. The 2.58% Senior Euro Notes bear interest at a rate of 2.58% per annum, which is payable semi-annually in arrears on each June 9th and December 9th and will mature on June 9, 2015. The 2.58% Senior Euro Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other senior debt. The Company may at any time prepay all or any portion of the 2.58% Senior Euro Notes; provided that any such portion is greater than 5% of the aggregate principal amount of notes then outstanding under the Purchase Agreement. In the event of a prepayment, the Company would be required to pay an amount equal to par plus accrued interest plus a make-whole premium. The Purchase Agreement contains certain covenants that restrict the Company’s ability to, among other things, transfer or sell assets, create liens and engage in certain mergers or consolidations. In addition, the Company must comply with a leverage ratio and interest coverage ratio as set forth in the Purchase Agreement. 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 outstanding 2.58% Senior Euro Notes will become due and payable immediately without further action or notice. In the case of payment events of defaults, any holder of the 2.58% Senior Euro Notes affected thereby may declare all the 2.58% Senior Euro Notes held by it due and payable immediately. In the case of any other event of default, a majority of the holders of the 2.58% Senior Euro Notes may declare all the 2.58% Senior Euro Notes to be due and payable immediately.
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On December 6, 2010, the Company completed a public offering of $300.0 million 4.5% senior notes due December 15, 2020 (“4.5% Senior Notes”). The net proceeds from the offering of approximately $295.7 million, after deducting a $1.6 million issuance discount, a $1.9 million underwriting commission and $0.8 million offering expenses, were used to repay $250.0 million of outstanding bank indebtedness, with the balance used for general corporate purposes. The 4.5% Senior Notes bear interest at a rate of 4.5% per annum, which is payable semi-annually in arrears on each June 15 and December 15. The Company may redeem all or a portion of the 4.5% Senior Notes at any time prior to maturity at the redemption prices set forth in the Note Indenture governing the 4.5% Senior Notes. The Company may issue additional debt from time to time pursuant to the Indenture. The Indenture and 4.5% Senior Notes contain covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of the 4.5% Senior Notes also require the Company to make an offer to repurchase the 4.5% Senior Notes upon a change of control triggering event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest, if any.
On December 9, 2011, the Company completed a public offering of $350.0 million 4.2% senior notes due December 15, 2021 (“4.2% Senior Notes”). The net proceeds from the offering of approximately $346.2 million, after deducting a $0.9 million issuance discount, a $2.3 million underwriting commission and $0.6 million offering expenses, were used to repay $306.0 million of outstanding bank indebtedness, with the balance used for general corporate purposes. The 4.2% Senior Notes bear interest at a rate of 4.2% per annum, which is payable semi-annually in arrears on each June 15 and December 15. The Company may redeem all or part of the 4.2% Senior Notes at any time prior to maturity at the redemption prices set forth in the Note Indenture governing the 4.2% Senior Notes. The Company may issue additional debt from time to time pursuant to the Indenture. The Indenture and 4.2% Senior Notes contain covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of the 4.2% Senior Notes also require the Company to make an offer to repurchase the 4.2% Senior Notes upon a change of control triggering event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest, if any.
On April 15, 2010, the Company entered into a forward starting interest rate contract with a notional amount of $300.0 million and a settlement date in December 2010. This contract was entered into in anticipation of the issuance of the 4.5% Senior Notes and was designed to lock in the market interest rate as of April 15, 2010. In December 2010, the Company settled and paid this interest rate contract for $31.0 million. The $31.0 million is being amortized into interest expense over the 10 year term of the 4.5% Senior Notes, which results in an effective interest rate of 5.8%.
On July 12, 2011, the Company entered into a forward starting interest rate contract with a notional amount of $350.0 million and a settlement date of September 30, 2011. This contract was entered into in anticipation of the issuance of the 4.2% Senior Notes and was designed to lock in the market interest rate as of July 12, 2011. On September 29, 2011, the Company settled this interest rate contract for $34.7 million with a payment made on October 3, 2011. Simultaneously, the Company entered into a separate interest rate contract with a notional amount of $350.0 million and a settlement date of February 28, 2012. The contract was entered into in anticipation of the expected issuance of the 4.2% Senior Notes and was designed to maintain the market rate as of July 12, 2011. In December 2011, the Company settled and paid the September interest rate contract for $4.0 million, resulting in a total settlement of $38.7 million. Of the $38.7 million, $0.8 was recognized as other expense in 2011 and the balance of $37.9 million is being amortized into interest expense over the 10 year term of the 4.2% Senior Notes, which results in an effective interest rate of 5.3%.
There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility and the 2.58% Senior Euro Notes. The most restrictive financial covenants under these debt instruments require a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.25 to 1. At December 31, 2013, the Company was in compliance with both of these financial covenants, as the Company’s interest coverage ratio was 11.73 to 1 and the leverage ratio was 1.63 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 November 8, 2013, the Company’s Board of Directors approved an increase in the authorized level for repurchases of common stock by $300.0 million. Repurchases under the program will be funded with future cash flow generation. During 2013, the Company purchased a total of 2.9 million shares at a cost of $167.5 million compared to 2.2 million shares purchased at a cost of $89.6 million in 2012. As of December 31, 2013 there was $368 million remaining under authorized repurchases.
The Company believes current cash, cash from operations and cash available under the Revolving Facility will be sufficient to meet its operating cash requirements, planned capital expenditures, interest on all borrowings, pension and postretirement funding requirements, authorized share repurchases and annual dividend payments to holders of the Company’s stock for the next twelve months. 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
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additional borrowings. As of December 31, 2013, $10.0 million was outstanding under the Revolving Facility, with $8.7 million of outstanding letters of credit, resulting in net available borrowing capacity under the Revolving Facility at December 31, 2013 of approximately $681.3 million.
Contractual Obligations
Our contractual obligations include pension and postretirement medical benefit plans, rental payments under operating leases, payments under capital leases, and other long-term obligations arising in the ordinary course of business. There are no identifiable events or uncertainties, including the lowering of our credit rating that would accelerate payment or maturity of any of these commitments or obligations.
The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2013, and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings. Additional detail regarding these obligations is provided in the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”
Payments Due by Period | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
(In thousands) | |||||||||||||||||||
Borrowings(1) | $ | 991,761 | $ | 33,968 | $ | 181,468 | $ | 56,400 | $ | 719,925 | |||||||||
Operating lease obligations | 50,065 | 15,426 | 19,553 | 9,141 | 5,945 | ||||||||||||||
Capital lease obligations(2) | 3,008 | 564 | 1,152 | 1,292 | — | ||||||||||||||
Purchase obligations(3) | 98,740 | 96,153 | 2,587 | — | — | ||||||||||||||
Pension and post-retirement obligations | 98,883 | 9,098 | 17,511 | 19,314 | 52,960 | ||||||||||||||
Total contractual obligations(4) | $ | 1,242,457 | $ | 155,209 | $ | 222,271 | $ | 86,147 | $ | 778,830 | |||||||||
(1) | Includes interest payments based on contractual terms and current interest rates for variable debt. |
(2) | Consists primarily of tangible personal property leases. |
(3) | Consists primarily of inventory commitments. |
(4) | Comprises liabilities recorded on the balance sheet of $841.2 million, and obligations not recorded on the balance sheet of $401.3 million. |
Critical Accounting Policies
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”
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 ASC 605-25 “Revenue Recognition-Multiple-Element Arrangements-Recognition” and recognizes revenue consistent with the policy for each separate element based on the relative selling price method. Revenues from some 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
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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.
Goodwill, long-lived and intangible assets — The Company evaluates the recoverability of certain noncurrent assets utilizing various estimation processes. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. An indefinite lived intangible asset or goodwill impairment exists when the carrying amount of intangible assets and goodwill exceeds its fair value. Assessments of possible impairments of goodwill, long-lived or intangible assets are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and indefinite-lived intangible asset balances is performed annually. The amount and timing of impairment charges for these assets require the estimation of future cash flows and the fair value of the related assets.
The Company’s business acquisitions result in recording goodwill and other intangible assets, which affect the amount of amortization expense and possible impairment expense that the Company will incur in future periods. The Company follows the guidance prescribed in ASC 350, “Goodwill and Other Intangible Assets” to test goodwill and intangible assets for impairment. Annually, on October 31, or more frequently if triggering events occur, the Company compares the fair value of their reporting units to the carrying value of each reporting unit to determine if a goodwill impairment exists.
The Company determines the fair value of each reporting unit utilizing an income approach (discounted cash flows) weighted 50% and a market approach consisting of a comparable public company multiples methodology weighted 50%. To determine the reasonableness of the calculated fair values, the Company reviews the assumptions to ensure that neither the income approach nor the market approach yielded significantly different valuations.
The key assumptions are updated every year for each reporting unit for the income and market methodology used to determine fair value. Various assumptions are utilized including forecasted operating results, annual operating plans, strategic plans, economic projections, anticipated future cash flows, the weighted average cost of capital, market data and market multiples. The assumptions that have the most significant effect on the fair value calculation are the weighted average cost of capital, the market multiples and terminal growth rates. The 2013 and 2012 ranges for these three assumptions utilized by the Company are as follows:
Assumptions | 2013 Range | 2012 Range | ||
Weighted average cost of capital | 10.0% to 14.5% | 10.0% to 14.0% | ||
Market multiples | 7.5x to 14.5x | 7.5x to 11.0x | ||
Terminal growth rates | 3.0% to 3.5% | 3.0% to 3.5% | ||
In assessing the fair value of the reporting units, 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. 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. Weighting was equally attributed to both the market and income approaches (50% each) in arriving at the fair value of the reporting units.
In 2013, there were no triggering events or changes in circumstances that would have required a review other than as of our annual test date. Based on the results of our measurement at October 31, 2013, all reporting units had a fair value that was significantly in excess of carrying value, except for our IOP reporting unit, which had a fair value greater than 10% above carrying value. The IOP reporting unit was written down to its fair value in 2012 as result of our goodwill impairment and thus the fair value continues to be near the carrying value.
In 2012, as a result of our annual impairment test for the IOP reporting unit and as a result of the reorganization of certain FMT reporting units, the Company determined that the fair value of the IOP and WST reporting units was less than the carrying value of the net assets of the reporting units, and thus the Company performed step two of the goodwill impairment test. In step two of the goodwill impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value, which resulted in a $149.8 million goodwill impairment charge at the IOP reporting unit and a $20.7 million impairment charge at the WST reporting unit.
The unamortized Banjo trade name was determined to be an indefinite lived intangible asset which is tested for impairment on an annual basis in accordance with ASC 350 or more frequently if events or changes in circumstances indicate
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that the asset might be impaired. The Company uses the relief-from-royalty method, a form of the income approach. The relief-from-royalty method is dependent on a number of significant management assumptions, including estimates of revenues, royalty rates and discount rates.
In 2013, there were no triggering events or changes in circumstances that would have required a review other than as of our annual test date and the Company concluded that the fair value of the Banjo trade name was in excess of the carrying value as of October 31, 2013.
In 2012, as a result of our annual impairment test, the Company concluded that the fair value of the CVI Melles Griot trade names within the IOP reporting unit was less than the carrying value, resulting in a $21.0 million impairment charge. The Company also determined that the CVI Melles Griot trade names no longer had an indefinite life and reclassified the remaining $26.0 million to definite lived assets that will be amortized over a remaining useful life of 15 years.
A long-lived asset impairment exists when the carrying amount of the asset exceeds its fair value. Assessments of possible impairments of long-lived assets are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. The amount and timing of impairment charges for these assets require the estimation of future cash flows and the fair value of the related assets. In 2013, the Company concluded that certain long lived assets had a fair value that was less than the carrying value of the assets, resulting in $2.7 million of impairment charges. In 2012, the Company concluded that certain long lived assets within the WST reporting unit had a fair value that was less than the carrying value of the assets, resulting in a $7.0 million impairment charge.
Defined benefit retirement plans — The plan obligations and related assets of the defined benefit retirement plans are presented in Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.” Level 1 assets are valued using unadjusted quoted prices for identical assets in active markets. Level 2 assets are valued using quoted prices or other observable inputs for similar assets. Level 3 assets are valued using unobservable inputs, but reflect the assumptions market participants would use in pricing the assets. Plan obligations and the annual pension expense are determined by consulting with actuaries using a number of assumptions provided by the Company. Key assumptions in the determination of the annual pension expense include the discount rate, the rate of salary increases, and the estimated future return on plan assets. To the extent actual amounts differ from these assumptions and estimated amounts, results could be adversely affected.
Changes in the discount rate assumptions will impact the (gain) loss amortization and interest cost components of the projected benefit obligation (PBO), which in turn, may impact the Company’s funding decisions if the PBO exceeds plan assets. Each 100 basis point increase or decrease in the discount rate will cause a corresponding decrease or increase, respectively, in the PBO of an estimated $23.0 million based upon the December 31, 2013 data.
Recently Adopted Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02 which requires additional disclosures regarding the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. This guidance is effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013 and its adoption did not impact the consolidated financial position, results of operations or cash flows of the Company. See Note 14 for a further discussion on other comprehensive income (loss).
Item 7A. 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.
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The Company’s foreign currency exchange rate risk is limited principally to the Euro, British Pound, Canadian Dollar, Indian Rupee and Chinese Renminbi. 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 on the Consolidated Statements of Operations.
The Company’s interest rate exposure is primarily related to its $773.9 million of total debt outstanding at December 31, 2013. Approximately 1% of the debt is priced at interest rates that float with the market. A 50 basis point movement in the interest rate on the floating rate debt would result in an approximate $0.1 million annualized increase or decrease in interest expense and cash flows. The remaining debt is fixed rate debt.
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Item 8. Financial Statements and Supplementary Data.
IDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, | |||||||
2013 | 2012 | ||||||
(In thousands except share and per share amounts) | |||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 439,629 | $ | 318,864 | |||
Receivables — net | 253,226 | 256,095 | |||||
Inventories | 230,967 | 234,950 | |||||
Other current assets | 67,131 | 71,956 | |||||
Total current assets | 990,953 | 881,865 | |||||
Property, plant and equipment — net | 213,488 | 219,161 | |||||
Goodwill | 1,349,456 | 1,321,727 | |||||
Intangible assets — net | 311,227 | 341,372 | |||||
Other noncurrent assets | 22,453 | 21,265 | |||||
Total assets | $ | 2,887,577 | $ | 2,785,390 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Trade accounts payable | $ | 133,312 | $ | 117,341 | |||
Accrued expenses | 150,751 | 150,176 | |||||
Short-term borrowings | 1,871 | 7,335 | |||||
Dividends payable | 18,675 | 16,575 | |||||
Total current liabilities | 304,609 | 291,427 | |||||
Long-term borrowings | 772,005 | 779,241 | |||||
Deferred income taxes | 144,908 | 121,349 | |||||
Other noncurrent liabilities | 93,066 | 128,375 | |||||
Total liabilities | 1,314,588 | 1,320,392 | |||||
Commitments and contingencies (Note 8) | |||||||
Shareholders’ equity | |||||||
Preferred stock: | |||||||
Authorized: 5,000,000 shares, $.01 per share par value; Issued: none | — | — | |||||
Common stock: | |||||||
Authorized: 150,000,000 shares, $.01 per share par value; Issued: 89,154,190 shares at December 31, 2013 and 87,732,405 shares at December 31, 2012 | 892 | 877 | |||||
Additional paid-in capital | 607,766 | 550,682 | |||||
Retained earnings | 1,293,740 | 1,113,541 | |||||
Treasury stock at cost: 7,958,510 shares at December 31, 2013 and 5,005,518 shares at December 31, 2012 | (326,104 | ) | (156,699 | ) | |||
Accumulated other comprehensive loss | (3,305 | ) | (43,403 | ) | |||
Total shareholders’ equity | 1,572,989 | 1,464,998 | |||||
Total liabilities and shareholders’ equity | $ | 2,887,577 | $ | 2,785,390 | |||
See Notes to Consolidated Financial Statements.
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IDEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(In thousands except per share amounts) | |||||||||||
Net sales | $ | 2,024,130 | $ | 1,954,258 | $ | 1,838,451 | |||||
Cost of sales | 1,150,766 | 1,150,558 | 1,099,778 | ||||||||
Gross profit | 873,364 | 803,700 | 738,673 | ||||||||
Selling, general and administrative expenses | 477,851 | 444,490 | 421,703 | ||||||||
Asset impairments | — | 198,519 | — | ||||||||
Restructuring expenses | — | 32,473 | 12,314 | ||||||||
Operating income | 395,513 | 128,218 | 304,656 | ||||||||
Other income (expense) — net | (178 | ) | 236 | (1,443 | ) | ||||||
Interest expense | 42,206 | 42,250 | 29,332 | ||||||||
Income before income taxes | 353,129 | 86,204 | 273,881 | ||||||||
Provision for income taxes | 97,914 | 48,574 | 80,024 | ||||||||
Net income | $ | 255,215 | $ | 37,630 | $ | 193,857 | |||||
Earnings per common share: | |||||||||||
Basic earnings per common share | $ | 3.11 | $ | 0.45 | $ | 2.34 | |||||
Diluted earnings per common share | $ | 3.09 | $ | 0.45 | $ | 2.32 | |||||
Share data: | |||||||||||
Basic weighted average common shares outstanding | 81,517 | 82,689 | 82,145 | ||||||||
Diluted weighted average common shares outstanding | 82,489 | 83,641 | 83,543 | ||||||||
See Notes to Consolidated Financial Statements.
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IDEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(In thousands) | |||||||||||
Net income | $ | 255,215 | $ | 37,630 | $ | 193,857 | |||||
Other comprehensive income (loss) | |||||||||||
Gains (losses) and reclassification adjustments for derivatives, net of tax | 4,738 | 4,780 | (20,254 | ) | |||||||
Pension and other postretirement adjustments, net of tax | 21,788 | (7,159 | ) | (8,398 | ) | ||||||
Cumulative translation adjustment | 13,572 | 14,445 | (14,108 | ) | |||||||
Comprehensive income | $ | 295,313 | $ | 49,696 | $ | 151,097 | |||||
See Notes to Consolidated Financial Statements.
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IDEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock and Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||
Cumulative Translation Adjustment | Retirement Benefits Adjustments | Cumulative Unrealized Gain (Loss) on Derivatives | |||||||||||||||||||||||||
(In thousands except share and per share amounts) | |||||||||||||||||||||||||||
Balance, December 31, 2010 | $ | 442,117 | $ | 1,005,040 | $ | 38,302 | $ | (30,088 | ) | $ | (20,923 | ) | $ | (58,788 | ) | $ | 1,375,660 | ||||||||||
Net income | — | 193,857 | — | — | — | — | 193,857 | ||||||||||||||||||||
Cumulative translation adjustment | — | — | (14,108 | ) | — | — | — | (14,108 | ) | ||||||||||||||||||
Net change in retirement obligations (net of tax benefit of $4,222) | — | — | — | (8,398 | ) | — | — | (8,398 | ) | ||||||||||||||||||
Net change on derivatives designated as cash flow hedges (net of tax benefit of $12,500) | — | — | — | — | (20,254 | ) | — | (20,254 | ) | ||||||||||||||||||
Issuance of 1,596,145 shares of common stock from issuance of unvested shares, exercise of stock options and deferred compensation plans (net of tax of $4,150) | 37,621 | — | — | — | — | — | 37,621 | ||||||||||||||||||||
Share-based compensation | 11,250 | — | — | — | — | — | 11,250 | ||||||||||||||||||||
Unvested shares surrendered for tax withholding | — | — | — | — | — | (6,008 | ) | (6,008 | ) | ||||||||||||||||||
Cash dividends declared — $.68 per common share outstanding | — | (56,485 | ) | — | — | — | — | (56,485 | ) | ||||||||||||||||||
Balance, December 31, 2011 | $ | 490,988 | $ | 1,142,412 | $ | 24,194 | $ | (38,486 | ) | $ | (41,177 | ) | $ | (64,796 | ) | $ | 1,513,135 | ||||||||||
Net income | — | 37,630 | |||||||||||||||||||||||||