Document
Table of Contents


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________ 
Form 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
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 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)
Emerging growth company  ¨
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨   No   þ 
Number of shares of common stock of IDEX Corporation outstanding as of April 19, 2017: 76,307,919.
 


Table of Contents


TABLE OF CONTENTS
 
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
Item 4.
 
 
 
Item 1.
Item 2.
Item 6.


Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
(unaudited)
 
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
216,095

 
$
235,964

Receivables, less allowance for doubtful accounts of $7,483 at March 31, 2017 and $8,078 at December 31, 2016
294,707

 
272,813

Inventories
257,900

 
252,859

Other current assets
54,978

 
61,085

Total current assets
823,680

 
822,721

Property, plant and equipment — net
250,114

 
247,816

Goodwill
1,645,565

 
1,632,592

Intangible assets — net
428,583

 
435,504

Other noncurrent assets
15,843

 
16,311

Total assets
$
3,163,785

 
$
3,154,944

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Trade accounts payable
$
135,462

 
$
128,933

Accrued expenses
142,670

 
152,852

Short-term borrowings
323

 
1,046

Dividends payable

 
26,327

Total current liabilities
278,455

 
309,158

Long-term borrowings
950,283

 
1,014,235

Deferred income taxes
171,438

 
166,427

Other noncurrent liabilities
122,304

 
121,230

Total liabilities
1,522,480

 
1,611,050

Commitments and contingencies

 

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: 90,190,717 shares at March 31, 2017 and 90,200,951 shares at December 31, 2016
902

 
902

Additional paid-in capital
702,644

 
697,213

Retained earnings
1,910,638

 
1,834,739

Treasury stock at cost: 13,636,301 shares at March 31, 2017 and 13,760,266 shares at December 31, 2016
(794,442
)
 
(787,307
)
Accumulated other comprehensive income (loss)
(178,437
)
 
(201,653
)
Total shareholders’ equity
1,641,305

 
1,543,894

Total liabilities and shareholders’ equity
$
3,163,785

 
$
3,154,944

See Notes to Condensed Consolidated Financial Statements

1

Table of Contents


IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Net sales
 
$
553,552

 
$
502,572

Cost of sales
 
302,611

 
279,237

Gross profit
 
250,941

 
223,335

Selling, general and administrative expenses
 
130,473

 
119,990

Restructuring expenses
 
4,797

 

Operating income
 
115,671

 
103,345

Other (income) expense - net
 
(308
)
 
44

Interest expense
 
11,552

 
10,489

Income before income taxes
 
104,427

 
92,812

Provision for income taxes
 
28,528

 
24,682

Net income
 
$
75,899

 
$
68,130

 
 
 
 
 
Basic earnings per common share
 
$
0.99

 
$
0.90

Diluted earnings per common share
 
$
0.99

 
$
0.89

 
 
 
 
 
Share data:
 
 
 
 
Basic weighted average common shares outstanding
 
76,115

 
75,749

Diluted weighted average common shares outstanding
 
76,894

 
76,699

See Notes to Condensed Consolidated Financial Statements

2

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IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Net income
 
$
75,899

 
$
68,130

Other comprehensive income (loss)
 
 
 
 
Reclassification adjustments for derivatives, net of tax
 
1,042

 
1,097

Pension and other postretirement adjustments, net of tax
 
1,124

 
671

Cumulative translation adjustment
 
21,050

 
16,217

Other comprehensive income (loss)
 
23,216

 
17,985

Comprehensive income
 
$
99,115

 
$
86,115

See Notes to Condensed Consolidated Financial Statements

3

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IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands except share amounts)
(unaudited)
 
 
 
 
 
 
Accumulated Other Comprehensive
Income (Loss)
 
 
 
 
 
Common
Stock and
Additional
Paid-In Capital
 
Retained
Earnings
 
Cumulative
Translation
Adjustment
 
Retirement
Benefits
Adjustment
 
Cumulative
Unrealized Gain (Loss) on
Derivatives
 
Treasury
Stock
 
Total
Shareholders’
Equity
Balance, December 31, 2016
$
698,115

 
$
1,834,739

 
$
(155,544
)
 
$
(27,852
)
 
$
(18,257
)
 
$
(787,307
)
 
$
1,543,894

Net income

 
75,899

 

 

 

 

 
75,899

Cumulative translation adjustment

 

 
21,050

 

 

 

 
21,050

Net change in retirement obligations (net of tax of $552)

 

 

 
1,124

 

 

 
1,124

Net change on derivatives designated as cash flow hedges (net of tax of $635)

 

 

 

 
1,042

 

 
1,042

Issuance of 205,965 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options (net of tax of $4,221)


 

 

 

 

 
6,074

 
6,074

Repurchase of 82,000 shares of common stock

 

 

 

 

 
(7,562
)
 
(7,562
)
Unvested shares surrendered for tax withholding

 

 

 

 

 
(5,647
)
 
(5,647
)
Share-based compensation
5,431

 

 

 

 

 

 
5,431

Balance, March 31, 2017
$
703,546

 
$
1,910,638

 
$
(134,494
)
 
$
(26,728
)
 
$
(17,215
)
 
$
(794,442
)
 
$
1,641,305

See Notes to Condensed Consolidated Financial Statements

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IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
75,899

 
$
68,130

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,903

 
9,067

Amortization of intangible assets
11,789

 
10,890

Amortization of debt issuance costs
329

 
378

Share-based compensation expense
6,159

 
6,442

Deferred income taxes
1,293

 
2,950

Non-cash interest expense associated with forward starting swaps
1,677

 
1,724

Changes in (net of effect from acquisitions):
 
 
 
Receivables
(20,058
)
 
(19,267
)
Inventories
(2,761
)
 
(270
)
Other current assets
6,570

 
(6,597
)
Trade accounts payable
5,188

 
6,451

Accrued expenses
(11,565
)
 
(6,641
)
Other - net
1,556

 
(2,892
)
Net cash flows provided by operating activities
84,979

 
70,365

Cash flows from investing activities
 
 
 
Additions of property, plant and equipment
(10,162
)
 
(8,650
)
Acquisition of businesses, net of cash acquired

 
(221,556
)
Other - net
546

 
91

Net cash flows (used in) investing activities
(9,616
)
 
(230,115
)
Cash flows from financing activities
 
 
 
Borrowings under revolving facilities
13,000

 
275,391

Payments under revolving facilities
(80,224
)
 
(20,994
)
Dividends paid
(26,327
)
 
(24,662
)
Proceeds from stock option exercises
6,074

 
8,258

Purchase of common stock
(7,005
)
 
(46,864
)
Unvested shares surrendered for tax withholding
(5,647
)
 
(4,717
)
Other - net
738

 

Net cash flows provided by (used in) financing activities
(99,391
)
 
186,412

Effect of exchange rate changes on cash and cash equivalents
4,159

 
3,765

Net increase (decrease) in cash
(19,869
)
 
30,427

Cash and cash equivalents at beginning of year
235,964

 
328,018

Cash and cash equivalents at end of period
$
216,095

 
$
358,445

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Interest
$
760

 
$
965

Income taxes - net
5,888

 
9,516

See Notes to Condensed Consolidated Financial Statements

5

Table of Contents


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)

1.    Basis of Presentation and Significant Accounting Policies
The Condensed Consolidated Financial Statements of IDEX Corporation (“IDEX,” “we,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The statements are unaudited but include all adjustments, consisting only of recurring items, except as noted, that the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire year.
The Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Recently Adopted Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for a company’s sponsored defined benefit pension and other postretirement plans. Under this ASU, companies are required to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. This ASU also requires companies to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service cost component of periodic net benefit cost is eligible for capitalization. The Company elected to early adopt this standard in the quarter ended March 31, 2017 as presenting the service cost within income from operations is more indicative of our current pension cost. The Company adopted this standard retrospectively and thus $0.8 million was reclassified from Selling, general and administrative expenses to Other (income) expense - net for the three months ended March 31, 2016 to conform to current period presentation. The Company elected to apply the practical expedient that permits the use of previously disclosed service cost and other costs from the prior year’s pension and other postretirement benefit plan footnote in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the income statement. The Company included the required disclosures and the changes resulting from the adoption of this standard in Note 16.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under this ASU, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. This ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. In addition, companies will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The Company early adopted this standard on January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the FIFO or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance on January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods for the

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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Company on January 1, 2018, with early adoption permitted. The Company does not believe the guidance will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard introduces a new lessee model that will require most leases to be recorded on the balance sheet and eliminates the required use of bright line tests in current U.S. GAAP for determining lease classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Companies are permitted to adopt the standard early and a modified retrospective application is required. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a new five-step model for recognizing revenue from contracts with customers. Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
In 2016, we established an implementation team and analyzed the impact of the standard by surveying business units and reviewing contracts to identify potential differences that may result from applying the requirements of the new standard. We made significant progress on our contract reviews during 2016 and the first quarter of 2017. While we are continuing to assess all potential impacts of the new standard, we currently believe that the most significant potential change relates to contracts for the development, manufacture and sale of customized products in our Health & Science Technologies segment. Due to the complexity of certain contracts in our Health & Science Technologies segment, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms. However, under the new standard we expect revenue recognition to remain substantially unchanged as the contract reviews support the recognition of revenue at a point in time, which is consistent with our current revenue recognition model. We also expect revenue recognition related to the Fluid & Metering Technologies segment and the Fire & Safety/Diversified Products segment to remain substantially unchanged. The implementation team has reported these initial findings and progress of the project to the Audit Committee. The Company is still evaluating the impact of the new guidance on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018.

2.    Acquisitions and Divestitures
All of the Company’s acquisitions have been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired companies, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements from their respective dates of acquisition.
The Company incurred $0.1 million and $1.0 million of acquisition-related transaction costs in the three months ended March 31, 2017 and 2016, respectively. These costs were recorded in Selling, general and administrative expenses and were related to completed transactions, pending transactions and potential transactions, including transactions that ultimately were not completed. During the three months ended March 31, 2016, the Company recorded $2.2 million of fair value inventory step-up charges in Cost of sales associated with the completed 2016 acquisition of Akron Brass Holding Corporation (“Akron Brass”).

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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



2016 Acquisitions
On March 16, 2016, the Company acquired the stock of Akron Brass, a producer of a large array of engineered life–safety products for the safety and emergency response markets, which includes apparatus valves, monitors, nozzles, specialty lighting, electronic vehicle–control systems and firefighting hand tools. The business was acquired to complement and create synergies with our existing Hale, Class 1, and Godiva businesses. Headquartered in Wooster, Ohio, Akron Brass operates in our Fire & Safety/Diversified Products segment. Akron Brass was acquired for cash consideration of $221.4 million. The purchase price was funded with borrowings under the Company’s revolving facilities. The final goodwill and intangible assets recognized as part of the transaction were $124.6 million and $90.4 million, respectively. The goodwill is not deductible for tax purposes.
On July 1, 2016, the Company acquired the stock of AWG Fittings GmbH (“AWG Fittings”), a producer of engineered products for the safety and emergency response markets, including valves, monitors and nozzles. The business was acquired to complement and create synergies with our existing Hale, Class 1, Godiva and Akron Brass businesses. Headquartered in Ballendorf, Germany, AWG Fittings operates in our Fire & Safety/Diversified Products segment. AWG Fittings was acquired for cash consideration of $47.5 million (€42.8 million). The purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of the transaction were $22.1 million and $10.3 million, respectively. The goodwill is not deductible for tax purposes.
On August 31, 2016, the Company acquired the stock of SFC Koenig AG (“SFC Koenig”), a producer of highly engineered expanders and check valves for critical applications across the transportation, hydraulic, aviation and medical markets. Headquartered in Dietikon, Switzerland, SFC Koenig operates in our Health & Science Technologies segment. SFC Koenig was acquired for cash consideration of $241.1 million (€215.9 million). The purchase price was funded with cash on hand and borrowings under the Company’s revolving facilities. Goodwill and intangible assets recognized as part of the transaction were $144.4 million and $117.0 million, respectively. The goodwill is not deductible for tax purposes. The Company is continuing to evaluate the valuation of certain income tax liabilities associated with the SFC Koenig acquisition and is in the process of finalizing the purchase price allocation. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period, as required. Only items identified as of the acquisition date will be considered for subsequent adjustment.
2016 Divestitures
The Company periodically reviews its operations for businesses which may no longer be aligned with its strategic objectives and focus on core business and customers. Any resulting gain or loss recognized due to divestitures is recorded within Loss (gain) on sale of businesses - net.
On July 29, 2016, the Company completed the sale of its Hydra-Stop product line for $15.0 million in cash, resulting in a pre-tax gain on the sale of $5.8 million. In addition, the Company can earn up to $2 million based on the achievement of financial objectives for net sales in 2016 and 2017.  The Company earned $1.0 million for the achievement of 2016 net sales objectives, which represents the maximum earn out for 2016. The Company can earn an additional $1.0 million based on 2017 net sales. The results of Hydra-Stop were reported within the Fluid & Metering Technologies segment and generated $7.5 million of revenues in 2016 through the date of sale.
On September 9, 2016, the Company completed the sale of its Melles Griot KK (“CVI Japan”) subsidiary for $17.5 million in cash, resulting in a pre-tax loss on the sale of $7.9 million. The results of CVI Japan were reported within the Health & Science Technologies segment and generated $13.1 million of revenues in 2016 through the date of sale.
On October 10, 2016, the Company completed the sale of its IETG and 40Seven subsidiaries for $2.7 million in cash, resulting in a pre-tax loss on the sale of $4.2 million. The results of IETG and 40Seven were reported within the Fluid & Metering Technologies segment and generated $8.3 million of revenues in 2016 through the date of sale.
On December 30, 2016, the Company completed the sale of its Korea Electro-Optics Co., Ltd. (“CVI Korea”) subsidiary for $3.8 million in cash, resulting in a pre-tax loss on the sale of $16.0 million. The results of CVI Korea were reported within the Health & Science Technologies segment and generated $11.7 million of revenues in 2016 through the date of sale.


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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



3.    Business Segments
The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products.
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, valves, 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, agriculture and energy industries. The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, including very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded sealing components, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, aerospace, telecommunications and electronics manufacturing, laboratory and commercial equipment used in the production of micro and nano scale materials, precision photonic solutions used in life sciences, research and defense markets, and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications. The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, apparatus valves, monitors, nozzles, 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.
Information on the Company’s business segments is presented below, based on the nature of products and services offered. The Company evaluates performance based on several factors, of which operating income is the primary financial measure. Intersegment sales are accounted for as if the sales were to third parties.
 

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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016 (1)
Net sales
 
 
 
 
Fluid & Metering Technologies
 
 
 
 
External customers
 
$
216,655

 
$
211,709

Intersegment sales
 
115

 
134

Total group sales
 
216,770

 
211,843

Health & Science Technologies
 
 
 
 
External customers
 
199,575

 
186,251

Intersegment sales
 
104

 
92

Total group sales
 
199,679

 
186,343

Fire & Safety/Diversified Products
 
 
 
 
External customers
 
137,322

 
104,612

Intersegment sales
 
125

 
6

Total group sales
 
137,447

 
104,618

Intersegment elimination
 
(344
)
 
(232
)
Total net sales
 
$
553,552

 
$
502,572

Operating income
 
 
 
 
Fluid & Metering Technologies
 
$
57,813

 
$
51,703

Health & Science Technologies
 
42,238

 
40,682

Fire & Safety/Diversified Products
 
32,626

 
25,654

Corporate office expense and other (2)
 
(17,006
)
 
(14,694
)
Total operating income
 
115,671

 
103,345

Interest expense
 
11,552

 
10,489

Other (income) expense - net
 
(308
)
 
44

Income before income taxes
 
$
104,427

 
$
92,812

(1) Certain amounts in the prior year income statement have been reclassified to conform to the current presentation due to the early adoption of ASU 2017-07.
(2) Corporate office expense for the three months ended March 31, 2016 includes a $3.7 million benefit from the reversal of the contingent consideration related to a 2015 acquisition.

 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Fluid & Metering Technologies
$
1,079,230

 
$
1,065,670

Health & Science Technologies
1,281,976

 
1,266,036

Fire & Safety/Diversified Products
709,135

 
705,735

Corporate office
93,444

 
117,503

Total assets
$
3,163,785

 
$
3,154,944



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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



4.    Earnings Per Common Share
Earnings per common share (“EPS”) are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist of stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method, restricted stock, and performance share units.
ASC 260, Earnings Per Share, provides that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. The Company has determined that its outstanding shares of restricted stock are participating securities. Accordingly, earnings per common share are computed using the more dilutive of the treasury stock method and the two-class method prescribed by ASC 260.
Basic weighted average shares reconciles to diluted weighted average shares as follows:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Basic weighted average common shares outstanding
 
76,115

 
75,749

Dilutive effect of stock options, restricted stock, and performance share units
 
779

 
950

Diluted weighted average common shares outstanding
 
76,894

 
76,699

Options to purchase approximately 0.3 million and 1.4 million shares of common stock for the three months ended March 31, 2017, and 2016, respectively, were not included in the computation of diluted EPS because the effect of their inclusion would be antidilutive.

5.    Inventories
The components of inventories as of March 31, 2017 and December 31, 2016 were:
 
 
March 31,
2017
 
December 31,
2016
Raw materials and component parts
$
158,236

 
$
154,278

Work in process
38,460

 
34,832

Finished goods
61,204

 
63,749

Total
$
257,900

 
$
252,859

Inventories are stated at the lower of cost or net realizable value. Cost, which includes material, labor and factory overhead, is determined on a FIFO basis.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



6.    Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2017, by reportable business segment, were as follows:
 
 
Fluid &
Metering
Technologies
 
Health &
Science
Technologies
 
Fire & Safety/
Diversified
Products
 
Total
Balance at December 31, 2016
$
573,437

 
$
699,299

 
$
359,856

 
$
1,632,592

Foreign currency translation
3,068

 
5,732

 
3,474

 
12,274

Acquisition adjustments

 
636

 
63

 
699

Balance at March 31, 2017
$
576,505

 
$
705,667

 
$
363,393

 
$
1,645,565

ASC 350, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of the reporting unit below its carrying value. In the first three months of 2017, there were no events or circumstances that would have required an interim impairment test. Annually, on October 31, goodwill and other acquired intangible assets with indefinite lives are tested for impairment. Based on the results of our annual impairment test at October 31, 2016, all reporting units had fair values in excess of their carrying values. In addition to performing our annual impairment test, we also performed interim impairment tests due to the divestitures in the third and fourth quarters of 2016 as well as the reorganization of certain reporting units. As a result of these impairment tests, the Company concluded that the reporting units had fair values in excess of their carrying values, which was consistent with our annual impairment test at October 31, 2016.

     The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets at March 31, 2017 and December 31, 2016:
 
 
At March 31, 2017
 
 
 
At December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
$
9,863

 
$
(6,809
)
 
$
3,054

 
11
 
$
9,856

 
$
(6,635
)
 
$
3,221

Trade names
114,403

 
(44,714
)
 
69,689

 
16
 
113,428

 
(42,653
)
 
70,775

Customer relationships
334,735

 
(130,996
)
 
203,739

 
12
 
369,087

 
(161,065
)
 
208,022

Unpatented technology
102,260

 
(41,392
)
 
60,868

 
12
 
106,747

 
(44,516
)
 
62,231

Other
829

 
(496
)
 
333

 
10
 
6,527

 
(6,172
)
 
355

Total amortized intangible assets
562,090

 
(224,407
)
 
337,683

 
 
 
605,645

 
(261,041
)
 
344,604

Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Banjo trade name
62,100

 

 
62,100

 
 
 
62,100

 

 
62,100

Akron Brass trade name
28,800

 

 
28,800

 
 
 
28,800

 

 
28,800

Total intangible assets
$
652,990

 
$
(224,407
)
 
$
428,583

 
 
 
$
696,545

 
$
(261,041
)
 
$
435,504

The Banjo trade name is 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 that the asset might be impaired. In the first three months of 2017, there were no events or circumstances that would have required an interim impairment test. Based on the results of our annual impairment test at October 31, 2016, the fair value of the Banjo trade name was greater than 25% in excess of the carrying value.
The Akron Brass trade name is an indefinite-lived intangible asset that was acquired as a result of the Akron Brass acquisition in March 2016 and is tested for impairment on an annual basis in accordance with ASC 350 or more frequently if events or changes in circumstances indicate that the asset might be impaired. In the first three months of 2017, there were no events or circumstances

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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



that would have required an interim impairment test. Based on the results of our annual impairment test at October 31, 2016, the fair value of the Akron Brass trade name was near its carrying value as a result of the acquisition of this business in March 2016.
Amortization of intangible assets was $11.8 million and $10.9 million for the three months ended March 31, 2017 and 2016, respectively. Based on the intangible asset balances as of March 31, 2017, amortization expense is expected to approximate $31.7 million for the remaining nine months of 2017, $35.2 million in 2018, $33.2 million in 2019, $32.0 million in 2020 and $30.8 million in 2021.

7.    Accrued Expenses
The components of accrued expenses as of March 31, 2017 and December 31, 2016 were:
 
 
March 31,
2017
 
December 31,
2016
Payroll and related items
$
54,041

 
$
67,600

Management incentive compensation
6,582

 
16,339

Income taxes payable
13,393

 
8,808

Insurance
9,420

 
9,416

Warranty
5,887

 
5,628

Deferred revenue
15,463

 
12,607

Restructuring
4,148

 
3,893

Liability for uncertain tax positions
2,359

 
1,366

Accrued interest
10,449

 
1,663

Other
20,928

 
25,532

Total accrued expenses
$
142,670

 
$
152,852


8.    Other Noncurrent Liabilities
The components of other noncurrent liabilities as of March 31, 2017 and December 31, 2016 were:
 
 
March 31,
2017
 
December 31,
2016
Pension and retiree medical obligations
$
98,656

 
$
93,604

Liability for uncertain tax positions
2,079

 
2,623

Deferred revenue
2,361

 
2,442

Other
19,208

 
22,561

Total other noncurrent liabilities
$
122,304

 
$
121,230



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



9.    Borrowings
Borrowings at March 31, 2017 and December 31, 2016 consisted of the following:
 
 
March 31,
2017
 
December 31,
2016
Revolving Facility
$
105,342

 
$
169,579

4.5% Senior Notes, due December 2020
300,000

 
300,000

4.2% Senior Notes, due December 2021
350,000

 
350,000

3.2% Senior Notes, due June 2023
100,000


100,000

3.37% Senior Notes, due June 2025
100,000


100,000

Other borrowings
527

 
1,294

Total borrowings
955,869

 
1,020,873

Less current portion
323

 
1,046

Less deferred debt issuance costs
4,133

 
4,399

Less unaccreted debt discount
1,130

 
1,193

Total long-term borrowings
$
950,283

 
$
1,014,235

On June 13, 2016, the Company completed a private placement of $100 million aggregate principal amount of 3.20% Senior Notes due June 13, 2023 and $100 million aggregate principal amount of 3.37% Senior Notes due June 13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement, dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13th and December 13th. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay all, or any portion of the Notes; provided that such portion is greater than 5% of the aggregate principal amount of Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the Company may repurchase Notes by making an offer to all holders of the Notes, subject to certain conditions.
The Purchase Agreement contains certain covenants that restrict the Company’s ability to, among other things, transfer or sell assets, incur indebtedness, create liens, transact with affiliates and engage in certain mergers or consolidations or other change of control transactions. In addition, the Company must comply with a leverage ratio and interest coverage ratio, as further described below, and the Purchase Agreement also limits the outstanding principal amount of priority debt that may be incurred by the Company to 15% of consolidated assets. The Purchase Agreement provides for customary events of default. In the case of an event of default arising from specified events of bankruptcy or insolvency, all of the outstanding Notes will become due and payable immediately without further action or notice. In the case of payment event of default, any holder of the Notes affected thereby may declare all the Notes held by it due and payable immediately. In the case of any other event of default, a majority of the holders of Notes may declare all of the Notes to be due and payable immediately.
On June 23, 2015, the Company entered into a credit agreement (the “Credit Agreement”) along with certain of its subsidiaries, as borrowers (the “Borrowers”), Bank of America, N.A., as administrative agent, swing line lender and an issuer of letters of credit, with other agents party thereto. The Credit Agreement replaced the Company’s existing five-year, $700 million credit agreement, dated as of June 27, 2011, which was due to expire on June 27, 2016.
The Credit Agreement consists of a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $700 million, with a final maturity date of June 23, 2020. The maturity date may be extended under certain conditions for an additional one-year term. Up to $75 million of the Revolving Facility is available for the issuance of letters of credit. Additionally, up to $50 million of the Revolving Facility is available to the Company for swing line loans, available on a same-day basis.
Proceeds of the Revolving Facility are available for use by the Borrowers for acquisitions, working capital and other general corporate purposes, including refinancing existing debt of the Company and its subsidiaries. The Company may request increases in the lending commitments under the Credit Agreement, but the aggregate lending commitments pursuant to such increases may not exceed $350 million. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain foreign subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation,
the Company is required to guarantee the obligations of any such subsidiaries.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Borrowings under the Credit Agreement bear interest, at either an alternate base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin is based on the Company’s senior, unsecured, long-term debt rating and can range from .005% to 1.50%. Based on the Company’s credit rating at March 31, 2017, the applicable margin was 1.10%, resulting in a weighted average interest rate of 1.51% at March 31, 2017. 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.
The Credit Agreement requires payment to the lenders of a facility fee based upon (a) the amount of the lenders’ commitments under the credit facility from time to time and (b) the applicable corporate credit ratings of the Company. Voluntary prepayments of any loans and voluntary reductions of the unutilized portion of the commitments under the credit facility are permissible without penalty, subject to break funding payments and minimum notice and minimum reduction amount requirements.
The negative covenants include, among other things, limitations (each of which is subject to customary exceptions for
financings of this type) on our ability to grant liens; enter into transactions resulting in fundamental changes (such as mergers or sales of all or substantially all of the assets of the Company); restrict subsidiary dividends or other subsidiary distributions; enter into transactions with the Company’s affiliates; and incur certain additional subsidiary debt.
The Credit Agreement also contains customary events of default (subject to grace periods, as appropriate) including among others: nonpayment of principal, interest or fees; breach of the representations or warranties in any material respect; breach of the financial, affirmative or negative covenants; payment default on, or acceleration of, other material indebtedness; bankruptcy or insolvency; material judgments entered against the Company or any of its subsidiaries; certain specified events under the Employee Retirement Income Security Act of 1974, as amended; certain changes in control of the Company; and the invalidity or unenforceability of the Credit Agreement or other documents associated with the Credit Agreement.
At March 31, 2017, $105.3 million was outstanding under the Revolving Facility, with $9.1 million of outstanding letters of credit, resulting in net available borrowing capacity under the Revolving Facility at March 31, 2017 of approximately $585.6 million.
There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility and the Notes, a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1, which is the ratio of the Company’s consolidated total debt to its consolidated EBITDA. At March 31, 2017, the Company was in compliance with both of these financial covenants. 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.

10.    Derivative Instruments
The Company enters into cash flow hedges from time to time to reduce the exposure to variability in certain expected future cash flows. The type of cash flow hedges the Company enters into includes foreign currency contracts and interest rate exchange contracts that effectively convert a portion of floating-rate debt to fixed-rate debt and are designed to reduce the impact of interest rate changes on future interest expense.
The effective portion of gains or losses on interest rate exchange contracts is reported in Accumulated other comprehensive income (loss) in Shareholders’ equity and reclassified into net income in the same period or periods in which the hedged transaction affects net income. The remaining gain or loss in excess of the cumulative change in the present value of future cash flows or the hedged item, if any, is recognized into net income during the period of change. See Note 13 for the amount of loss reclassified into income for interest rate contracts for the three months ended March 31, 2017 and 2016. As of March 31, 2017, the Company did not have any interest rate contracts outstanding.
In 2010 and 2011, the Company entered into two separate forward starting interest rate contracts in anticipation of the issuance of the 4.2% Senior Notes and the 4.5% Senior Notes. The Company cash settled these two interest rate contracts in 2010 and 2011 for a total of $68.9 million, which is being amortized into interest expense over the 10 year term of the debt instruments. Approximately $6.6 million of the pre-tax amount included in accumulated other comprehensive income (loss) in shareholders’ equity at March 31, 2017 will be recognized to net income over the next 12 months as the underlying hedged transactions are realized.

During the three months ended March 31, 2017, the Company entered into four foreign currency forward contracts with a combined notional value of €180 million that have not been designated as hedges for accounting purposes. These contracts are used to manage foreign currency exposure related to changes in the value of intercompany loans caused by changes in foreign

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



exchange rates. The change in the fair value of the foreign currency forward contracts and the corresponding change in the fair value of the intercompany loans of the Company are both recorded through earnings each period as incurred.  During the three months ended March 31, 2017, the Company recorded a net gain of $0.4 million within Other income (expense) - net in the Condensed Consolidated Statements of Operations related to these forward contracts.

Fair values relating to derivative financial instruments reflect the estimated amounts that the Company would receive or pay to sell or buy the contracts based on quoted market prices of comparable contracts at each balance sheet date. The following table sets forth the fair value amounts of derivative instruments held by the Company as of March 31, 2017 and December 31, 2016:

 
 
Fair Value Assets (Liabilities)
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Balance Sheet Caption
 
 
(In thousands)
 
 
Forward exchange contracts
 
$
(373
)
 
$

 
Accrued expenses

11.    Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The following table summarizes the basis used to measure the Company’s financial assets at fair value on a recurring basis in the balance sheets at March 31, 2017 and December 31, 2016:
 
 
Basis of Fair Value Measurements
 
Balance at 
 March 31, 2017
 
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
5,071

 
$
5,071

 
$

 
$

Foreign exchange contracts
(373
)
 

 
(373
)
 

 
 
Basis of Fair Value Measurements
 
Balance at 
 December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
5,369

 
$
5,369

 
$

 
$

There were no transfers of assets or liabilities between Level 1 and Level 2 during the three months ended March 31, 2017 or the year ended December 31, 2016.
The carrying value of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair values because of the short term nature of these instruments. At March 31, 2017, the fair value of the outstanding indebtedness under our Revolving Facility, 3.2% Senior Notes, 3.37% Senior Notes, 4.5% Senior Notes and 4.2% Senior Notes, based on quoted market prices and current market rates for debt with similar credit risk and maturity, was approximately $974.2 million compared to the carrying value of $954.2 million. This fair value measurement is classified as Level 2 within the fair value hierarchy since it is determined based upon significant inputs observable in the market, including interest rates on recent financing transactions to entities with a credit rating similar to ours.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



12.    Restructuring
During the first quarter of 2017, the Company recorded restructuring costs of $4.8 million as part of the 2016 restructuring initiatives that support the implementation of key strategic efforts designed to facilitate long-term, sustainable growth through cost reduction actions, primarily consisting of employee reductions and facility rationalization. The restructuring costs included severance benefits for 97 employees. The costs incurred related to these initiatives were included in Restructuring expenses in the Consolidated Statements of Operations while the related accruals were included in Accrued expenses in the Consolidated Balance Sheets. Severance costs primarily consisted of severance benefits through payroll continuation, COBRA subsidies, outplacement services, conditional separation costs and employer tax liabilities, while exit costs primarily consisted of asset disposals or impairments.
Pre-tax restructuring expenses by segment for the three months ended March 31, 2017 are as follows:
 
 
Severance Costs
 
Exit Costs
 
Total
 
 
(In thousands)
Fluid & Metering Technologies
 
$
1,566

 
$

 
$
1,566

Health & Science Technologies
 
2,470

 
558

 
3,028

Fire & Safety/Diversified Products
 
73

 

 
73

Corporate/Other
 
130

 

 
130

Total restructuring costs
 
$
4,239

 
$
558

 
$
4,797

Restructuring accruals of $4.1 million and $3.9 million at March 31, 2017 and December 31, 2016, respectively, are recorded in Accrued expenses in the Consolidated Balance Sheets. Severance benefits are expected to be paid by the end of the year using cash from operations. The changes in the restructuring accrual for the three months ended March 31, 2017 are as follows:
 
 
Restructuring
 
 
(In thousands)
Balance at January 1, 2017
 
$
3,893

Restructuring expenses
 
4,797

Payments, utilization and other
 
(4,542
)
Balance at March 31, 2017
 
$
4,148

    
13.    Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 March 31, 2017
 
Three Months Ended 
 March 31, 2016
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Cumulative translation adjustment
$
21,050

 
$

 
$
21,050

 
$
16,217

 
$

 
$
16,217

Pension and other postretirement adjustments
1,676

 
(552
)
 
1,124

 
993

 
(322
)
 
671

Reclassification adjustments for derivatives
1,677

 
(635
)
 
1,042

 
1,724

 
(627
)
 
1,097

Total other comprehensive income (loss)
$
24,403

 
$
(1,187
)
 
$
23,216

 
$
18,934

 
$
(949
)
 
$
17,985



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



The following table summarizes the amounts reclassified from accumulated other comprehensive income to net income during the three months ended March 31, 2017 and 2016:
 
 
 
Three Months Ended 
 March 31,
 
 
 
2017
 
2016
 
Pension and other postretirement plans
 
 
 
 
 
Amortization of service cost
 
$
1,676

 
$
993

 
Total before tax
 
1,676

 
993

 
Provision for income taxes
 
(552
)
 
(322
)
 
Total net of tax
 
$
1,124

 
$
671

 
Derivatives
 
 
 
 
 
Reclassification adjustments
 
$
1,677

 
$
1,724

 
Total before tax
 
1,677

 
1,724

 
Provision for income taxes
 
(635
)
 
(627
)
 
Total net of tax
 
$
1,042

 
$
1,097

 

The Company recognizes the service cost component in both Selling, general and administrative expenses and Cost of sales, depending on the functional area of the underlying employees included in the plans.

14.    Common and Preferred Stock
On December 1, 2015, the Company’s Board of Directors approved a $300.0 million increase in the authorized level for repurchases of common stock. Repurchases will be funded with future cash flow generation or borrowings available under the Revolving Facility. During the three months ended March 31, 2017, the Company purchased a total of 82 thousand shares at a cost of $7.6 million, of which $0.6 million was settled in April 2017. During the three months ended March 31, 2016, the Company purchased 628 thousand shares at a cost of $45.8 million, of which $1.2 million was settled in April 2016. As of March 31, 2017, the amount of share repurchase authorization remaining is $572.4 million.
At March 31, 2017 and December 31, 2016, the Company had 150 million shares of authorized common stock, with a par value of $.01 per share, and 5 million shares of authorized preferred stock, with a par value of $.01 per share. No preferred stock was outstanding at March 31, 2017 or December 31, 2016.

15.    Share-Based Compensation

Stock Options
Weighted average option fair values and assumptions for the periods specified are disclosed below. The fair value of each option grant was estimated on the date of the grant using the Binomial lattice option pricing model.
 
 
 
 
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Weighted average fair value of option grants
 
$24.11
 
$18.40
Dividend yield
 
1.45%
 
1.70%
Volatility
 
29.41%
 
29.71%
Risk-free forward interest rate
 
0.82% - 3.04%
 
0.53% - 2.50%
Expected life (in years)
 
5.83
 
5.91

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Total compensation cost for stock options is as follows:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cost of goods sold
 
$
186

 
$
119

Selling, general and administrative expenses
 
2,284

 
2,295

Total expense before income taxes
 
2,470

 
2,414

Income tax benefit
 
(747
)
 
(760
)
Total expense after income taxes
 
$
1,723

 
$
1,654

A summary of the Company’s stock option activity as of March 31, 2017, and changes during the three months ended March 31, 2017, are presented in the following table:
 
Stock Options
Shares
 
Weighted
Average
Price
 
Weighted-Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
1,987,946

 
$
61.83

 
6.84
 
$
56,144,876

Granted
427,895

 
93.17

 
 
 
 
Exercised
(110,112
)
 
55.17

 
 
 
 
Forfeited
(25,755
)
 
77.15

 
 
 
 
Outstanding at March 31, 2017
2,279,974

 
$
67.87

 
7.25
 
$
58,471,654

Vested and expected to vest as of March 31, 2017
2,117,100

 
$
66.61

 
7.10
 
$
56,949,565

Exercisable at March 31, 2017
1,188,689

 
$
54.28

 
5.67
 
$
46,633,546


Restricted Stock
Restricted stock awards generally cliff vest after three years for employees and non-employee directors. Unvested restricted stock carries dividend and voting rights and the sale of the shares is restricted prior to the date of vesting. A summary of the Company’s restricted stock activity as of March 31, 2017, and changes during the three months ended March 31, 2017, are presented as follows:

Restricted Stock
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1, 2017
217,898

 
$
76.19

Granted
55,440

 
93.05

Vested
(62,994
)
 
71.02

Forfeited
(11,725
)
 
79.24

Unvested at March 31, 2017
198,619

 
$
82.36

Dividends are paid on restricted stock awards, whose fair value is equal to the market price of the Company’s stock at the date of the grant.

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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)




Total compensation cost for restricted shares is as follows:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cost of goods sold
 
$
152

 
$
128

Selling, general and administrative expenses
 
1,253

 
1,530

Total expense before income taxes
 
1,405

 
1,658

Income tax benefit
 
(439
)
 
(513
)
Total expense after income taxes
 
$
966

 
$
1,145


Cash-Settled Restricted Stock
The Company also maintains a cash-settled share based compensation plan for certain employees. Cash-settled restricted stock awards generally cliff vest after three years. A summary of the Company’s unvested cash-settled restricted stock activity as of March 31, 2017, and changes during the three months ended March 31, 2017, are presented in the following table:
Cash-Settled Restricted Stock
Shares
 
Weighted-Average
Fair Value
Unvested at January 1, 2017
103,790

 
$
90.06

Granted
33,505

 
93.51

Vested
(26,300
)
 
91.96

Forfeited
(7,550
)
 
93.51

Unvested at March 31, 2017
103,445

 
$
93.51

Dividend equivalents are paid on certain cash-settled restricted stock awards. Total compensation cost for cash-settled restricted stock is as follows:
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cost of goods sold
 
$
248

 
$
189

Selling, general and administrative expenses
 
430

 
500

Total expense before income taxes
 
678

 
689

Income tax benefit
 
(142
)
 
(98
)
Total expense after income taxes
 
$
536

 
$
591



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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Performance Share Units
Weighted average performance share unit fair values and assumptions for the period specified are disclosed below. The performance share units are market condition awards and have been assessed at fair value on the date of grant using a Monte Carlo simulation model.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Weighted average fair value of performance share units
 
$115.74
 
$111.42
Dividend yield
 
—%
 
—%
Volatility
 
17.36%
 
17.99%
Risk-free forward interest rate
 
1.45%
 
0.89%
Expected life (in years)
 
2.85
 
2.86
 A summary of the Company’s performance share unit activity as of March 31, 2017, and changes during the three months ended March 31, 2017, are presented in the following table:

Performance Share Units
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1, 2017
137,055

 
$
104.18

Granted
65,530

 
115.76

Vested

 

Forfeited and other
(3,925
)
 
100.95

Unvested at March 31, 2017
198,660

 
$
108.06

The Company granted 63,325 performance share units in February 2014, which vested on December 31, 2016. Based on the Company’s relative total shareholder return rank during the three year period ended December 31, 2016, the Company achieved a 141% payout that resulted in 89,288 shares issued in February 2017.
Total compensation cost for performance share units is as follows:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cost of goods sold
 
$

 
$

Selling, general and administrative expenses
 
1,606

 
1,681

Total expense before income taxes
 
1,606

 
1,681

Income tax benefit
 
(507
)
 
(535
)
Total expense after income taxes
 
$
1,099

 
$
1,146

The Company’s policy is to recognize compensation cost on a straight-line basis, assuming forfeitures, over the requisite service period for the entire award. Classification of stock compensation cost within the Consolidated Statements of Operations is consistent with classification of cash compensation for the same employees.
As of March 31, 2017, there was $16.6 million of total unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 1.6 years, $7.5 million of total unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of 1.2 years, $4.6 million of total unrecognized compensation cost related to cash-settled restricted shares that is expected to be recognized over a weighted-average period of 1.2 years, and $10.7 million of total unrecognized compensation cost related to performance share units that is expected to be recognized over a weighted-average period of 1.2 years.


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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



16.    Retirement Benefits
The Company sponsors several qualified and nonqualified defined benefit and defined contribution pension plans and other postretirement plans for its employees. The following tables provide the components of net periodic benefit cost for its major defined benefit plans and its other postretirement plans. As disclosed in Note 1, the Company elected to early adopt ASU 2017-17 during the quarter ended March 31, 2017. As a result, the Company recorded Interest cost, Expected return on plan assets, and Net amortization within Other (income) expense - net. The Company adopted this standard retrospectively and thus $0.8 million was reclassified from Selling, general and administrative expenses to Other (income) expense - net for the three months ended March 31, 2016 to conform to current period presentation.
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Three Months Ended March 31,
 
2017
 
2016
 
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
Service cost
$
254

 
$
482

 
$
294

 
$
299

Interest cost
660

 
308

 
747

 
350

Expected return on plan assets
(944
)
 
(264
)
 
(1,175
)
 
(219
)
Net amortization
642

 
382

 
827

 
238

Net periodic benefit cost
$
612

 
$
908

 
$
693

 
$
668

 
 
Other Postretirement Benefits
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Service cost
 
$
152

 
$
132

Interest cost
 
204

 
174

Net amortization
 
(198
)
 
(154
)
Net periodic benefit cost
 
$
158

 
$
152

The Company previously disclosed in its financial statements for the year ended December 31, 2016, that it expected to contribute approximately $5.8 million to its defined benefit plans and $0.1 million to its other postretirement benefit plans in 2017. As of March 31, 2017, the Company continues to expect to contribute approximately $5.8 million to its defined benefit plans and $0.1 million to its other postretirement benefit plans in 2017. The Company contributed a total of $0.6 million during the first three months of 2017 to fund these plans.

17.    Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary course of business, none of which are expected to have a material impact on its financial condition, results of operations or cash flows.


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IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)




18.    Income Taxes

The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes increased to $28.5 million in the three months ended March 31, 2017 from $24.7 million in the same period of 2016. The effective tax rate increased to 27.3% for the three months ended March 31, 2017 compared to 26.6% in the same period of 2016 due to the mix of global pre-tax income among jurisdictions.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $2.4 million.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Under the Private Securities Litigation Reform Act
This quarterly report on Form 10-Q, including the “Overview and Outlook” and the “Liquidity and Capital Resources” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements may relate to, among other things, capital expenditures, acquisitions, cost reductions, cash flow, revenues, earnings, market conditions, global economies and operating improvements, and are indicated by words or phrases such as “anticipate,” “estimate,” “plans,” “expects,” “projects,” “forecasts,” “should,” “could,” “will,” “management believes,” “the Company believes,” “the Company intends,” and similar words or phrases. These statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from those anticipated at the date of this report. The risks and uncertainties include, but are not limited to, the following: economic and political consequences resulting from terrorist attacks and wars; levels of industrial activity and economic conditions in the U.S. and other countries around the world; pricing pressures and other competitive factors, and levels of capital spending in certain industries, all of which could have a material impact on order rates and IDEX Corporation’s results, particularly in light of the low levels of order backlogs it typically maintains; its ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which the company operates; interest rates; capacity utilization and the effect this has on costs; labor markets; market conditions and material costs; and developments with respect to contingencies, such as litigation and environmental matters. The forward-looking statements included here are only made as of the date of this report, and management undertakes no obligation to publicly update them to reflect subsequent events or circumstances, except as may be required by law. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.

Overview and Outlook
IDEX is an applied solutions company specializing in fluid and metering technologies, health and science technologies, and fire, safety and other diversified products built to customers’ specifications. IDEX’s products are sold in niche markets to a wide range of industries throughout the world. Accordingly, IDEX’s businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where it does business and by the relationship of the U.S. Dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are important factors that influence the demand for IDEX’s products.
The Company has three reportable business segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”). Within our three reportable segments, the Company maintains thirteen platforms, where we focus on organic growth and strategic acquisitions. Each of our thirteen platforms is also a reporting unit, where we annually test goodwill for impairment.
The Fluid & Metering Technologies segment contains the Energy (comprised of Corken, Faure Herman, Liquid Controls, SAMPI, and Toptech), Valves (comprised of Alfa Valvole, Richter, and Aegis), Water (comprised of Pulsafeeder, OBL, Knight, ADS, Trebor, and iPEK), Pumps (comprised of Viking and Warren Rupp), and Agriculture (comprised of Banjo) platforms. The Health & Science Technologies segment contains the Scientific Fluidics & Optics (comprised of Eastern Plastics, Rheodyne, Sapphire Engineering, Upchurch Scientific, ERC, CiDRA Precision Services, CVI Melles Griot, Semrock, and AT Films), Sealing Solutions (comprised of Precision Polymer Engineering, FTL Seals Technology, Novotema, and SFC Koenig), Gast, Micropump,

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and Material Processing Technologies (comprised of Quadro, Fitzpatrick, Microfluidics, and Matcon) platforms. The Fire & Safety/Diversified Products segment is comprised of the Fire & Safety (comprised of Class 1, Hale, Akron Brass, AWG Fittings, Godiva, Dinglee, Hurst Jaws of Life, Lukas, and Vetter), Band-It, and Dispensing platforms. 
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 & wastewater, agriculture and energy industries.
The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, including very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded sealing components, 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, valves, monitors, nozzles, 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.
Management’s primary measurements of segment performance are sales, operating income, and operating margin. In addition, due to the highly acquisitive nature of the Company, the determination of operating income includes amortization of acquired intangible assets and, as a result, management reviews depreciation and amortization as a percentage of sales. These measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are analyzed with segment management.
This report references organic sales, a non-GAAP measure, that refers to sales calculated according to U.S. GAAP but excluding amounts from acquired or divested businesses during the first twelve months after acquisition or divestiture and the impact of foreign currency translation. The portion of sales attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and (b) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. The Company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because the nature, size, and number 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.
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 another representation of the businesses performance across our three segments and for enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the Company and a way to evaluate and compare operating performance and value companies within our industry. Management believes EBITDA margin is useful for the same reason as EBITDA. EBITDA is also used to calculate certain financial covenants, as discussed in Note 9 of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements.”
Organic sales have been reconciled to net sales and EBITDA has been reconciled to net income in Item 2 under the heading “Non-GAAP Disclosures.” The reconciliation of segment EBITDA to net income was performed on a consolidated basis due to the fact that we do not allocate consolidated interest expense or the consolidated provision for income taxes to our segments.

Management uses Adjusted operating income, Adjusted net income, and Adjusted EPS as metrics by which to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as restructuring expenses.
The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP, and the financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

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Some of our key financial results for the three months ended March 31, 2017 when compared to the same period from the prior year are as follows:
Sales of $554 million increased 10%; organic sales (which excludes acquisitions, divestitures and foreign currency translation) were up 5%.
Operating income of $116 million increased 12%. Adjusted operating income of $120 million, adjusted for $4.8 million of restructuring charges, increased 17%.
Net income increased 11% to $76 million or 14% of sales. Adjusted net income of $79 million, adjusted for $3 million of restructuring charges net of tax benefit, increased 16% or 14% of sales.
EBITDA of $137 million was 25% of sales and covered interest expense by nearly 12 times.
Diluted EPS of $0.99 increased 10 cents, or 11%. Adjusted EPS of $1.03 increased 14 cents, or 16%.
Given the Company’s current outlook, we are projecting second quarter 2017 EPS in the range of $1.04 to $1.06 with full year 2017 adjusted EPS of $4.00 to $4.10. We are also projecting full year organic revenue growth expectations of 3% to 4% with 2% to 3% growth in the second quarter.

Results of Operations
The following is a discussion and analysis of our results of operations for the three month periods ended March 31, 2017 and 2016. Segment operating income and EBITDA exclude unallocated corporate operating expenses of $17.0 million and $14.7 million for the three months ended March 31, 2017 and 2016, respectively.

Consolidated Results for the Three Months Ended March 31, 2017 Compared with the Same Period of 2016
 
(In thousands)
Three Months Ended 
 March 31,
 
2017
 
2016
Net sales
$
553,552

 
$
502,572

Operating income
115,671

 
103,345

Operating margin
20.9
%
 
20.6
%
For the three months ended March 31, 2017, Fluid & Metering Technologies contributed 39% of sales, 44% of operating income and 41% of EBITDA; Health & Science Technologies contributed 36% of sales, 32% of operating income and 35% of EBITDA; and Fire & Safety/Diversified Products contributed 25% of sales, 24% of operating income and 24% of EBITDA. These percentages are calculated on the basis of total segment (not total Company) sales, operating income and EBITDA.
Sales in the three months ended March 31, 2017 were $553.6 million, which was a 10% increase compared to the same period last year. This reflects a 5% increase in organic sales, a 7% net favorable impact from acquisitions (Akron Brass - March 2016, AWG Fittings - July 2016 and SFC Koenig - September 2016) and divestitures (Hydra-Stop - July 2016, CVI Japan - September 2016, IETG - October 2016, and CVI Korea - December 2016) and 2% unfavorable foreign currency translation. Sales to customers outside the U.S. represented approximately 49% of total sales in the first three months of 2017 compared with 51% during the same period in 2016.
Gross profit of $250.9 million in the first three months of 2017 increased $27.6 million, or 12%, from the same period in 2016. Gross margin of 45.3% in the first three months of 2017 increased 90 basis points from 44.4% during the same period in 2016, primarily due to productivity, volume leverage and a $2.2 million fair value inventory step-up charge in the prior year period. Gross profit increased compared to 2016 as a result of a full quarter of prior year acquisitions.
Selling, general and administrative expenses increased to $130.5 million in the first three months of 2017 from $120.0 million during the same period of 2016. The change is due to $12.6 million of net incremental costs from acquisitions and divestitures, offset by benefits from prior period restructuring and cost controls. As a percentage of sales, selling, general and administrative expenses were 23.5% for the first three months of 2017, down 30 basis points compared to 23.8% during the same period of 2016.
Other (income) expense - net in the first three months of 2017 was flat compared with the same period in 2016.
Interest expense of $11.6 million in the first three months of 2017 was up from $10.5 million in 2016 primarily as a result of the Notes issued in June 2016.

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Operating income of $115.7 million in the first three months of 2017 was up from the $103.3 million recorded during the same period in 2016, while operating margin of 20.9% was up from 20.6% recorded in the same period of 2016. The increase in operating income and margin is primarily due to operational efficiency and a $2.2 million fair value inventory step-up charge in the prior year period, partially offset by $4.8 million of restructuring-related charges in the current period.
The provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes of $28.5 million for the first three months of 2017 increased compared to $24.7 million recorded in the same period of 2016. The effective tax rate increased to 27.3% for the first three months of 2017 compared to 26.6% in the same period of 2016 due to the mix of global pre-tax income among jurisdictions.
Net income in the first three months of 2017 of $75.9 million increased from $68.1 million during the same period of 2016. Diluted earnings per share in the first three months of 2017 of $0.99 increased $0.10, or 11%, compared with the same period in 2016.
Fluid & Metering Technologies Segment
(In thousands)
Three Months Ended 
 March 31,
 
2017
 
2016
Net sales
$
216,770

 
$
211,843

Operating income
57,813

 
51,703

Operating margin
26.7
%
 
24.4
%
Sales of $216.8 million increased $4.9 million, or 2%, in the first three months of 2017 compared with the same period of 2016. This reflects a 6% increase in organic sales, a 3% unfavorable impact from divestitures (Hydra-Stop - July 2016 and IETG - October 2016), and a 1% unfavorable impact from foreign currency translation. In the first three months of 2017, sales increased 8% domestically and decreased 5% internationally compared to the same period in 2016. Sales to customers outside the U.S. were approximately 41% of total segment sales during the first three months of 2017 compared with 44% during the same period in 2016.
Sales within our Energy platform were flat in the first three months of 2017 compared to the same period of 2016 primarily as a result of strong oil & gas project orders, a healthy US aviation project funnel and a stable stationary market offset by continued weakness in the North American LPG mobile market and lower than expected truck builds. Sales within our Pumps platform increased compared to the first three months of 2016 due to strength in oil & gas upstream markets, as well as a solid North American industrial distribution market and higher project volume. Sales within the Water platform decreased in the first three months of 2017 due to the Hydra-Stop and IETG divestitures, partially offset with an increase in municipal spending and health care end markets. Sales within our Agricultural platform increased in the first three months of 2017 compared to the same period of 2016 due to strong global demand across North America, Europe and Latin America. Sales in the Valves platform were up in the first three months of 2017 compared to the prior year period as a result of accelerated improvements in Europe as well as a strong global automotive market and the petro-chemical end market.
Operating income and operating margins of $57.8 million and 26.7%, respectively, in the first three months of 2017 were higher than the $51.7 million and 24.4%, respectively, recorded in the first three months of 2016, primarily due to productivity, higher volume and the benefit from prior period restructuring initiatives, partially offset by current period restructuring expenses.
Health & Science Technologies Segment
(In thousands)
Three Months Ended 
 March 31,
 
2017
 
2016
Net sales
$
199,679

 
$
186,343

Operating income
42,238

 
40,682

Operating margin
21.2
%
 
21.8
%
Sales of $199.7 million increased $13.3 million, or 7%, in the first three months of 2017 compared with the same period in 2016. This reflects a 5% increase in organic sales, a 5% net favorable impact from acquisitions (SFC Koenig - September 2016) and divestitures (CVI Japan - September 2016 and CVI Korea - December 2016) and a 3% unfavorable impact from foreign currency translation. In the first three months of 2017, sales increased 15% domestically and increased 2% internationally. Sales to customers outside the U.S. were approximately 55% of total segment sales in the first three months of 2017 compared with 58% during the same period in 2016.

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Sales within our Material Processing Technologies platform decreased in the first three months of 2017 compared to the same period in 2016 due to the timing on pharmaceutical project shipments. Sales within our Scientific Fluidics & Optics platform were down compared to the first three months of 2016 due to the CVI Japan and CVI Korea divestitures, partially offset by strong demand in all primary end markets, including analytical instrumentation, IVD, and life sciences. Sales within our Sealing Solutions platform increased compared to the first three months of 2016 due to the inclusion of a full quarter of the SFC Koenig acquisition as well as continued strength in the semiconductor and transportation end markets. Sales within our Gast platform decreased compared to the first three months of 2016, primarily due to the impact of OEM headwinds. Sales within our Micropump platform decreased compared to the first three months of 2016 due to continued weakness in printing markets partially offset by increasing demand in North American industrial distribution markets.
Operating income of $42.2 million in the first three months of 2017 was up from the $40.7 million recorded in the same period of 2016, primarily due to higher volume and productivity improvements within the segment, partially offset by 2017 restructuring expenses related to site consolidations within the Material Processing Technologies platform. Operating margin of 21.2% in the first three months of 2017 was down from the 21.8% recorded in the same period of 2016, primarily due to the site consolidation related restructuring expenses.
Fire & Safety/Diversified Products Segment
(In thousands)
Three Months Ended 
 March 31,
 
2017
 
2016
Net sales
$
137,447

 
$
104,618

Operating income
32,626

 
25,654

Operating margin
23.7
%
 
24.5
%
Sales of $137.4 million increased $32.8 million, or 31%, in the first three months of 2017 compared with the same period in 2016. This reflects a 1% increase in organic revenue, a 33% favorable acquisition impact (Akron Brass - March 2016 and AWG Fittings - July 2016) and a 3% unfavorable impact from foreign currency translation. In the first three months of 2017, sales increased 43% domestically and increased 22% internationally, compared with the same period in 2016. Sales to customers outside the U.S. were approximately 52% of total segment sales in the first three months of 2017 compared to 56% during the same period of 2016.
Sales within our Dispensing platform decreased compared to the first three months of 2016, primarily driven by lower X-Smart sales in Asia and large European projects from the prior year that did not repeat. Sales within our Band-It platform increased compared to the first three months of 2016 due to solid growth in the energy and transportation markets, partially offset by lack of project funding in Asia. Sales within our Fire & Safety platform increased compared to the first three months of 2016 primarily due to a full quarter of the Akron Brass and AWG Fittings acquisitions as well as strength in the Industrial market.
Operating income of $32.6 million in the first three months of 2017 was higher than the $25.7 million recorded in the same period of 2016 while operating margin of 23.7% recorded in the first three months of 2017 was lower than the 24.5% recorded for the same period of 2016. The lower operating margin was due to the dilutive impact of prior year acquisitions resulting from a higher level of amortization and a lower operating margin run rate from the acquired businesses compared to the historical businesses within the segment. The higher operating income was due to the incremental impact of the prior year acquisitions.

Liquidity and Capital Resources
Operating Activities
At March 31, 2017, the Company’s cash and cash equivalents totaled $216.1 million, of which $186.8 million was held outside of the United States. At March 31, 2017, working capital was $545.2 million and the current ratio was 3.0 to 1. Cash flows from operating activities for the first three months of 2017 increased $14.6 million, or 21%, to $85.0 million compared to the first three months of 2016, due to higher net income and lower U.S. federal income tax payments, partially offset by higher bonus payments.
Investing Activities
Cash flows used in investing activities for the first three months of 2017 decreased $220.5 million to $9.6 million compared to the same period in 2016, primarily due to $221.6 million spent on the acquisition of Akron Brass.
Cash flows provided by operating activities were more than adequate to fund capital expenditures of $10.2 million and $8.7 million in the first three months of 2017 and 2016, respectively. Capital expenditures were generally for machinery and equipment

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that improved productivity, tooling, business system technology, replacement of equipment and investments in new facilities. Management believes the Company has sufficient capacity in its plants and equipment to meet expected needs for future growth.
Financing Activities
Cash flows used in financing activities for the first three months of 2017 was $99.4 million compared to cash flows provided by financing activities of $186.4 million in the same period of 2016, primarily as a result of borrowings to fund the Akron Brass acquisition, partially offset by lower stock repurchases and higher payments under revolving facilities in 2017 compared to the same period in 2016.
On June 13, 2016, the Company completed a private placement of $100 million aggregate principal amount of 3.20% Senior Notes due June 13, 2023 and $100 million aggregate principal amount of 3.37% Senior Notes due June 13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement, dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13th and December 13th. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay all, or any portion of the Notes; provided that such portion is greater than 5% of the aggregate principal amount of Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the Company may repurchase Notes by making an offer to all holders of the Notes, subject to certain conditions.
The Credit Agreement consists of the Revolving Facility, which is a $700.0 million unsecured, multi-currency bank credit facility expiring on June 23, 2020. At March 31, 2017, there were $105.3 million of outstanding borrowings under the Revolving Facility and outstanding letters of credit totaled approximately $9.1 million. The net available borrowing capacity under the Revolving Facility at March 31, 2017, was approximately $585.6 million. Borrowings under the Revolving Facility bear interest, at either an alternate base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin is based on the Company’s senior, unsecured, long-term debt rating and can range from .005% to 1.50%. Based on the Company’s credit rating at March 31, 2017, the applicable margin was 1.10%, resulting in a weighted average interest rate of 1.51% at March 31, 2017. 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 15 basis points and is payable quarterly.
There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility and the Notes, which require a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1. At March 31, 2017, the Company was in compliance with both of these financial covenants, as the Company’s interest coverage ratio was 11.65 to 1 and the leverage ratio was 1.78 to 1. There are no financial covenants relating to the 4.5% Senior Notes or 4.2% Senior Notes; however, both are subject to cross-default provisions.
On December 1, 2015, the Company’s Board of Directors approved a $300.0 million increase in the authorized level for repurchases of common stock. Repurchases under the program will be funded with future cash flow generation or borrowings available under the Revolving Facility. During the first three months of 2017, the Company purchased a total of 82 thousand shares at a cost of $7.6 million, of which $0.6 million settled in April 2017. During the three months ended March 31, 2016, the Company purchased 628 thousand shares at a cost of $45.8 million, of which $1.2 million was settled in April 2016. As of March 31, 2017, the amount of share repurchase authorization remaining is $572.4 million.
The Company believes current cash, cash from operations and cash available under the Revolving Facility will be sufficient to meet its operating cash requirements, planned capital expenditures, interest on all borrowings, pension and postretirement funding requirements, expected share repurchases and annual dividend payments to holders of the Company’s stock for the remainder of 2017. Additionally, in the event that suitable businesses are available for acquisition upon acceptable terms, the Company may obtain all or a portion of the financing for these acquisitions through the incurrence of additional borrowings.

Non-GAAP Disclosures

Set forth below are reconciliations of Adjusted operating income, Adjusted net income, Adjusted EPS, and EBITDA to the comparable measures of net income and operating income, as determined in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). We have reconciled Adjusted operating income to Operating income; Adjusted net income to Net income; Adjusted EPS to EPS; consolidated EBITDA and segment EBITDA to net income. The reconciliation of segment EBITDA to net income was performed on a consolidated basis due to the fact that we do not allocate consolidated interest expense or the consolidated provision for income taxes to our segments.
EBITDA means earnings before interest, income taxes, depreciation and amortization. Given the acquisitive nature of the Company, which results in a higher level of amortization expense at recently acquired businesses, management uses EBITDA as an internal operating metric to provide another representation of the businesses performance across our three segments and for

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enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the Company and a way to evaluate and compare operating performance and value companies within our industry. Management believes EBITDA margin is useful for the same reason as EBITDA. EBITDA is also used to calculate certain financial covenants, as discussed in Note 9 of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements.”
This report references organic sales, a non-GAAP measure, that refers to sales calculated according to U.S. GAAP but excluding amounts from acquired or divested businesses during the first twelve months after acquisition or divestiture and the impact of foreign currency translation. The portion of sales attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and (b) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. The Company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because they can obscure underlying business trends and make comparisons of long term performance difficult due to the varying nature, size and number of transactions from period to period and between the Company and its peers.

Management uses Adjusted operating income, Adjusted net income, and Adjusted EPS as metrics by which to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as restructuring expenses. Management also supplements its U.S. GAAP financial statements with adjusted information to provide investors with greater insight, transparency, and a more comprehensive understanding of the information used by management in its financial and operational decision making.

In addition to measuring our cash flow generation and usage based upon the operating, investing and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure free cash flow (a non-GAAP measure) which represents net cash provided by operating activities minus capital expenditures. We believe that free cash flow is an important measure of operating performance because it provides management a measurement of cash generated from operations that is available for mandatory payment obligations and investment opportunities, such as funding acquisitions, paying dividends, repaying debt and repurchasing our common stock.
The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.
 
 
 
 
 
1. Reconciliations of Reported-to-Adjusted Operating Income
 
 
(in thousands)
 
 
Three Months Ended 
 March 31,
 
 
 
2017
 
2016
Reported operating income
 
 
$
115,671

 
$
103,345

 + Restructuring expenses
 
 
4,797

 

Adjusted operating income
 
 
$
120,468

 
$
103,345

 
 
 
 
 
 
Net sales
 
 
553,552

 
502,572

Operating margin
 
 
20.9
%
 
20.6
%
Adjusted operating margin
 
 
21.8
%
 
20.6
%

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2. Reconciliations of Reported-to-Adjusted Net Income
 
 
(in thousands)
 
 
Three Months Ended 
 March 31,
 
 
 
2017
 
2016
Reported net income
 
 
$
75,899

 
$
68,130

 + Restructuring expenses
 
 
4,797

 

 + Tax impact on restructuring expenses
 
 
(1,529
)
 

Adjusted net income
 
 
$
79,167

 
$
68,130

 
 
 
 
 
 
3. Reconciliations of Reported-to-Adjusted EPS
 
 
 
(shares in thousands)
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Reported EPS
 
$
0.99

 
$
0.89

 + Restructuring expenses
 
0.06

 

 + Tax impact on restructuring expenses
 
(0.02
)
 

Adjusted EPS
 
$
1.03

 
$
0.89

 
 
 
 
 
Diluted weighted average shares
 
76,894

 
76,699

 
 
 
 
 
 
 
 
 
 
 
4. Reconciliations of Reported-to-Adjusted Operating Income and Margin
(dollars in thousands)
 
Three months ended March 31, 2017
 
 
FMT
 
HST
 
FSDP
 
Corporate
 
IDEX
Reported operating income (loss)
 
$
57,813

 
$
42,238

 
$
32,626

 
$
(17,006
)
 
$
115,671

 + Restructuring expenses
 
1,566

 
3,028

 
73

 
130

 
4,797

Adjusted operating income (loss)
 
$
59,379

 
$
45,266

 
$
32,699

 
$
(16,876
)
 
$
120,468

 
 
 
 
 
 
 
 
 
 
 
Net sales (eliminations)
 
$
216,770

 
$
199,679

 
$
137,447

 
$
(344
)
 
$
553,552

 
 
 
 
 
 
 
 
 
 
 
Operating margin
 
26.7
%
 
21.2
%
 
23.7
%
 
n/m

 
20.9
%
Adjusted operating margin
 
27.4
%
 
22.7
%
 
23.8
%
 
n/m

 
21.8
%

 
 
 
 
 
 
 
 
 
 
 
5. Reconciliations of Reported-to-Adjusted Operating Income and Margin
(dollars in thousands)
 
Three months ended March 31, 2016
 
 
FMT
 
HST
 
FSDP
 
Corporate
 
IDEX
Reported operating income (loss)
 
$
51,703

 
$
40,682

 
$
25,654

 
$
(14,694
)
 
$
103,345

 + Restructuring expenses
 

 

 

 

 

Adjusted operating income (loss)
 
$
51,703

 
$
40,682

 
$
25,654

 
$
(14,694
)
 
$
103,345