IDEX Corporation Reports 2002 Results
Sales, Earnings and Cash Flow Improve, 2003 Performance Depends on Strength of the Economy
IDEX Corporation (NYSE: IEX) reported that orders, sales, net income, earnings per share and cash flow improved for the year ended December 31, 2002.
-Orders increased 5 percent to 749.8 million.
-Sales improved 2 percent to $742.0 million, reflecting 3 percent growth
from acquisitions and 1 percent from foreign currency translation, which was offset by a 2 percent decline in the base business.
-Gross margins grew 1.6 percentage points.
-Operating margins at 13.5 percent were slightly below the prior year on a consistent accounting basis (excluding goodwill and trademark amortization, and restructuring).
-Diluted EPS of $1.67 was 59 percent higher than the $1.05 earned in 2001 and net income of $54.1 million was improved 65 percent from $32.7 million.
-Net income in 2001 was unfavorably affected by two items on an after- tax basis - $11.4 million in goodwill and trademark amortization (which is not currently subject to amortization under U.S. GAAP) and $7.1 million of restructuring charges.
-Working capital of $112.9 million was a record low 15 percent of sales.
Free cash flow was a record $97.1 million and 1.8-times net income.
Second quarter primary common stock offering of 1.5 million shares raised $50.8 million of new capital.
-Debt to total capitalization was 32 percent, the strongest year-end financial position in company history.
-Three strategic acquisitions were completed.
-Progress continues on corporate initiatives.
"We saw no significant recovery in our markets throughout the year. While business was clearly better in 2002 than it was in the second half of 2001, our level of orders for the last four quarters has remained flat. Our focus on operational excellence has driven improvements in all businesses and is rapidly becoming part of the IDEX culture. This allowed us to expand gross margins by 1.6 percentage points year-over-year and produce another record year in cash flow, while providing the freedom to invest in new products and markets."
Dennis K. Williams (Chairman, President and CEO)
Sales for the year increased 2 percent to $742.0 million from $726.9 million in 2001. Acquisitions accounted for 3 percent of the improvement and foreign currency translation added another 1 percent, which was partially offset by a 2 percent decline in the base businesses. Domestic sales were up 3 percent and international sales -- net of foreign currency translation -- decreased 2 percent. For the year, international sales were 41 percent of the total, down slightly from 42 percent in 2001.
Operating margins were 13.5 percent in 2002. Compared to 2001 on the same accounting basis -- excluding goodwill and trademark amortization (in accordance with new accounting rules effective January 1, 2002) and restructuring charges -- 2002 margins were slightly lower.
Net income was $54.1 million, or $1.67 per diluted share. In 2001, net income on an as reported basis was $32.7 million, or $1.05 per diluted share. While the 2002 performance represents a 65 percent improvement in net income, 2001 net income was unfavorably affected by two items on an after-tax basis -- $11.4 million in goodwill and trademark amortization, and $7.1 million of restructuring charges.
New orders for 2002 totaled $749.8 million and were 5 percent higher than in the prior year. Excluding the impact of foreign currency translation and the four acquisitions made since the beginning of 2001 -- Versa-Matic (June 2001), Halox (April 2002), Rheodyne (July 2002), and Wrightech (October 2002) -- orders were 1 percent above the prior year, as business conditions across the global manufacturing sector remained sluggish. During 2002, IDEX's backlog rose modestly by $7.8 million. At year-end, the company had a typical unfilled order backlog of slightly over one month's sales.
The Pump Products Group contributed 58 percent of 2002 sales and 62 percent of operating income, the Dispensing Equipment Group accounted for 19 percent of sales and 16 percent of operating income, and the Other Engineered Products Group represented 23 percent of sales and 22 percent of operating income.
Fourth Quarter Results Exceed Prior Year But Are Below Third Quarter
Sales in the latest quarter increased 11 percent, to $187.5 million, from the prior-year quarter and were 1 percent lower than in the third.
Compared with the 2001 fourth quarter, acquisitions accounted for a 4 percent sales improvement, foreign currency translation provided a 3 percent increase, and base business shipments were up 4 percent. Domestic sales in the quarter rose 12 percent while international sales -- net of foreign currency translation -- were 4 percent higher. Sales to international customers were 43 percent of the total, the same as the prior-year quarter.
Sales declined $1.6 million from the third to fourth quarter, as lower sales in the Pump Products Group were only partially offset by higher shipments in the other two groups. The $3.1 million decline in Pump Products sales principally reflected weakness in the general industrial and chemical processing markets, as Viking Pump and Warren Rupp -- two of IDEX's traditionally higher-margin businesses -- had sequential quarterly sales declines of $3.1 million or 8 percent.
Fourth quarter operating margins were 12.0 percent. Compared on the same accounting basis (excluding goodwill and trademark amortization, and restructuring charges), margins were 0.4 of a percentage point lower than the same quarter of 2001, and 2.2 percentage points below margins in the third quarter of 2002.
The sequential margin decline from the third quarter reflected lower sales and volume-related profit reductions at Viking Pump and Warren Rupp in the Pump Products Group. It also reflected incremental costs associated with developing new products and markets as investments were made in all three groups to generate future top- and bottom-line growth. In addition, margins were affected by $1.2 million of higher-than-normal legal, professional and other costs primarily associated with a reserve established for a patent infringement suit, and filing the equity registration statement with the SEC that became effective in December. The margin decline from the fourth quarter of 2001, on the same accounting basis, resulted from higher operating income from increased sales being offset by additional investments in the businesses, the higher-than-normal expenses described above, and a less profitable mix of sales within the businesses.
Net income for the fourth quarter was $12.2 million, or 37 cents per diluted share. This represented a significant improvement from the $4.3 million of net income, or 14 cents per diluted share, recorded in the fourth quarter of 2001. Net income in the 2001 quarter was affected by two items on an after-tax basis -- $3.0 million in goodwill and trademark amortization, and $3.6 million of restructuring charges. Compared with the third quarter of 2002, fourth quarter net income and diluted earnings per share were 18 percent lower.
New orders for the fourth quarter totaled $189.1 million, 17 percent higher than the same 2001 quarter and virtually unchanged from the third quarter. Excluding the impact of acquisitions and foreign currency translation, orders were 11 percent higher than in the fourth quarter of 2001.
Strong Financial Position; Record Free Cash Flow
IDEX ended the year with total assets of $931.1 million, and working capital of $112.9 million. The working capital to sales relationship at 15.2 percent was the lowest in company history. Total debt decreased by $50.8 million during the year to $241.1 million, as the $74.9 million borrowed for current year acquisitions was offset by cash flow from operations and $50.8 million in proceeds from the primary common stock offering in the second quarter. Free cash flow (cash flow from operating activities less capital expenditures) was $97.1 million, a new record for the company, and 1.8-times net income. EBITDA (earnings before interest, income taxes, depreciation and amortization) totaled $129.6 million and covered interest expense by almost 8 times. Debt to total capitalization at year-end was 32 percent, the strongest year-end financial position in company history, and down from 42 percent at December 31, 2001.
Progress Continues on Corporate Initiatives
"Momentum continued to build in all the corporate initiatives," Williams said. "Global sourcing saved us $11.8 million in 2002 versus $3.6 million in 2001, which represented a savings of 30 percent versus our prior sources. This process has continued to improve, and we have shortened the time to qualify global suppliers. Savings from Kaizen, Lean Manufacturing and Six Sigma increased to nearly six times our 2001 savings, as the business units are transitioning from just using the tools to truly running the business differently. The benefit from this effort was a 1.6 percentage point increase in gross margins and a nice reduction in working capital.
"The rollout of IDEXconnect.com to our pump distribution customers continues, with 75 distributors online and more scheduled for 2003," Williams noted. "In 2003, we will continue to add the functionality that distributors need."
2003 Financial Performance Depends on Pace of New Orders and Strength of the Economy
Looking ahead to 2003, Williams said, "We have not seen any order growth for the last four quarters. This reflects the sluggishness in the U.S. and the other worldwide end-markets we serve. Unfortunately, we are not in the position to project how the economy will perform in the next few quarters. As a short-cycle business, our financial performance depends on the current pace of incoming orders, and we have very limited visibility of future business conditions. However, we believe IDEX is well positioned for earnings improvement as the economy strengthens. This is based on our lower cost structures resulting from restructuring actions; our operational excellence initiatives of Lean, Kaizen, Six Sigma, global sourcing and eBusiness; and using our strong cash flow to cut debt and interest expense. In addition, we continue to pursue acquisitions - such as Rheodyne, Halox and Wrightech - to drive the company's longer term profitable growth."
A Note on EBITDA and Free Cash Flow
EBITDA means earnings before interest, income taxes, depreciation and amortization. EBITDA commonly is used as an analytical indicator of leverage capacity and debt servicing ability. EBITDA should not be considered as an alternative to net income, cash flows from operating activities or any other items calculated in accordance with U.S. GAAP, or as an indicator of operating performance. Free cash flow means cash flow from operating activities minus capital expenditures. The definitions of EBITDA and free cash flow used here may differ from those being used by other companies.
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These statements may relate to, among other things, capital expenditures, cost reductions, cash flow, and operating improvements and are indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "management believes," "the company believes," "the company intends," and similar words or phrases. Forward-looking statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from those anticipated at the date of this news release. The risks and uncertainties include, but are not limited to, the following: economic and political consequences resulting from the September 11, 2001 terrorist attacks; 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's results, particularly in light of the low levels of order backlogs it typically maintains; the company's ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which IDEX 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 news release, and IDEX undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.
IDEX Corporation is a manufacturer of pumps and metering products, dispensing equipment, and other engineered products with leading positions in niche markets. Its products are sold to a wide range of industries throughout the world. IDEX shares are traded on the New York Stock Exchange and Chicago Stock Exchange under the symbol "IEX."
For more detailed information on IDEX results, IDEX Corporation and its business units, visit the company's Web site.
Source: IDEX Corporation