IDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
312,436
|
|
|
$
|
243,511
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
29,725
|
|
|
28,425
|
|
Amortization of intangible assets
|
29,505
|
|
|
35,381
|
|
Amortization of debt issuance expenses
|
998
|
|
|
989
|
|
Share-based compensation expense
|
19,814
|
|
|
18,143
|
|
Deferred income taxes
|
(1,480
|
)
|
|
1,888
|
|
Non-cash interest expense associated with forward starting swaps
|
4,869
|
|
|
5,004
|
|
Changes in (net of the effect from acquisitions):
|
|
|
|
Receivables
|
(34,057
|
)
|
|
(28,407
|
)
|
Inventories
|
(27,903
|
)
|
|
(4,869
|
)
|
Other current assets
|
7,635
|
|
|
(15,113
|
)
|
Trade accounts payable
|
(4,420
|
)
|
|
3,681
|
|
Accrued expenses
|
33
|
|
|
9,912
|
|
Other - net
|
(11,402
|
)
|
|
(1,965
|
)
|
Net cash flows provided by operating activities
|
325,753
|
|
|
296,580
|
|
Cash flows from investing activities
|
|
|
|
Purchases of property, plant and equipment
|
(39,856
|
)
|
|
(28,054
|
)
|
Purchase of intellectual property
|
(4,000
|
)
|
|
—
|
|
Acquisition of businesses, net of cash acquired
|
(20,205
|
)
|
|
—
|
|
Proceeds from disposal of fixed assets
|
211
|
|
|
5,159
|
|
Other - net
|
(1,180
|
)
|
|
(337
|
)
|
Net cash flows used in investing activities
|
(65,030
|
)
|
|
(23,232
|
)
|
Cash flows from financing activities
|
|
|
|
Borrowings under revolving credit facilities
|
—
|
|
|
33,000
|
|
Payments under revolving credit facilities
|
(11,128
|
)
|
|
(181,692
|
)
|
Dividends paid
|
(94,913
|
)
|
|
(82,869
|
)
|
Proceeds from stock option exercises
|
26,793
|
|
|
18,980
|
|
Purchases of common stock
|
(50,654
|
)
|
|
(22,650
|
)
|
Shares surrendered for tax withholding
|
(11,260
|
)
|
|
(5,903
|
)
|
Settlement of foreign exchange contracts
|
6,593
|
|
|
4,406
|
|
Net cash flows used in financing activities
|
(134,569
|
)
|
|
(236,728
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(10,337
|
)
|
|
30,707
|
|
Net increase (decrease) in cash
|
115,817
|
|
|
67,327
|
|
Cash and cash equivalents at beginning of year
|
375,950
|
|
|
235,964
|
|
Cash and cash equivalents at end of period
|
$
|
491,767
|
|
|
$
|
303,291
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
Cash paid for:
|
|
|
|
Interest
|
$
|
18,547
|
|
|
$
|
19,406
|
|
Income taxes - net
|
73,138
|
|
|
78,629
|
|
Significant non-cash activities:
|
|
|
|
Capital expenditures for construction of new leased facility
|
11,616
|
|
|
—
|
|
Contingent consideration for acquisition
|
3,375
|
|
|
—
|
|
See Notes to Condensed Consolidated Financial Statements
IDEX CORPORATION
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 and nine months ended
September 30, 2018
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, 2017
.
Recently Adopted Accounting Standards
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which requires an entity to disclose its accounting policy related to releasing income tax effects from accumulated other comprehensive income (loss), whether it has elected to reclassify the stranded tax effects in accumulated other comprehensive income (loss) to retained earnings in the statement of shareholders’ equity and if it has elected to reclassify the stranded tax effects in accumulated other comprehensive income (loss) to retained earnings, what the reclassification encompasses. The Company early adopted this standard on a retrospective basis on January 1, 2018. The adoption resulted in an increase of
$6.4 million
to Retained earnings and a corresponding change of
$6.4 million
to Accumulated other comprehensive income (loss) at January 1, 2018.
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 a 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 the FASB guidance for revenue recognition. The Company adopted this standard on January 1, 2018 and accounted for the purchase of the intellectual property assets from Phantom Controls utilizing this guidance. See Note 7 for further information.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
, which amends Accounting Standards Codification (“ASC”) 740,
Income Taxes
. This ASU requires that the income tax consequences of an intra-entity asset transfer other than inventory are recognized at the time of the transfer. An entity will continue to recognize the income tax consequences of an intercompany transfer of inventory when the inventory is sold to a third party. The Company adopted this standard on a modified retrospective basis on January 1, 2018. The adoption resulted in a decrease of
$7.3 million
to Other current assets, a decrease of
$6.7 million
to Deferred income taxes and a decrease of
$0.6 million
to Retained earnings at January 1, 2018.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
(a consensus of the FASB Emerging Issues Task Force). This ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides 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,
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
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. 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 performing extensive contract reviews to identify potential differences that may result from applying the requirements of the new standard. The contract reviews generally supported the recognition of revenue at a point in time, which is consistent with the current revenue recognition model used by most of our business units. As a result, revenue recognition remains unchanged under the new standard. For our business units that currently recognize revenue under a percentage of completion model, revenue recognition also remains unchanged as the contract reviews supported the recognition of revenue over time. The Company has implemented the appropriate changes to its processes, systems and controls to comply with the new guidance. The Company adopted this standard on January 1, 2018 using the modified retrospective approach applied to contracts that were not completed as of January 1, 2018. The adoption of this standard did not have an impact on our condensed consolidated financial statements, except to provide additional disclosures. The Company elected the following practical expedients: significant financing component, sales tax presentation, contract costs, shipping and handling activities and disclosures. See Note 4 for further details on revenue.
Recently Issued Accounting Standards
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. Upon adoption, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The FASB has also issued the following standards which clarify ASU 2016-02 and have the same effective date as the original standard: ASU 2018-10,
Codification Improvements to Topic 842, Leases and
ASU 2018-11,
Leases (Topic 842): Targeted Improvements
.
The Company has selected its lease software solution and is in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard in 2019. The Company is currently evaluating the impact of adopting the new standard on its condensed consolidated financial statements. While the Company is unable to quantify the impact at this time, it expects the adoption of the new standard to result in a significant right of use asset and lease liability while expense recognition will be similar to the previously required straight-line expense treatment as the majority of its leases will remain operating in nature.
2. Acquisitions and Divestitures
All of the Company’s acquisitions of businesses have been accounted for under ASC 805,
Business Combinations
. Accordingly, the accounts of the acquired companies, after adjustments to reflect the fair values assigned to assets and liabilities, have been included in the Company’s condensed consolidated financial statements from their respective dates of acquisition. The results of operations of the acquired companies have been included in the Company’s condensed consolidated results since the date of each acquisition.
The Company did not incur any acquisition-related transaction costs in the
three months ended September 30, 2018
. The Company did incur
$0.5 million
in the
three months ended September 30, 2017
and
$1.5 million
and
$0.7 million
in the
nine months ended September 30, 2018
and
2017
, 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.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
2018 Acquisition
On July 23, 2018, the Company acquired Finger Lakes Instrumentation (“FLI”), a technology leader in the design, development and production of low-noise cooled CCD and high speed, high-sensitivity Scientific CMOS cameras for the astronomy and life science markets. Headquartered in Lima, NY, FLI operates in our Health & Sciences Technologies segment. FLI was acquired for an aggregate purchase price of
$23.6 million
, consisting of
$20.2 million
in cash and contingent consideration valued at
$3.4 million
as of the opening balance sheet date. The contingent consideration is based on the achievement of financial objectives during the
24
-month period following the close of the transaction. The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were
$11.9 million
and
$8.1 million
, respectively. The goodwill is deductible for tax purposes.
The Company made an initial allocation of the purchase price for the FLI acquisition as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities. As the Company continues to obtain additional information about these assets and liabilities, and continues to learn more about the newly acquired business, we will refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Company will make the appropriate adjustments to the purchase price allocation prior to the completion of the measurement period, as required.
2017 Acquisition
On December 8, 2017, the Company acquired the stock of thinXXS Microtechnology AG (“thinXXS”), a leader in the design, manufacture and sale of microfluidic components serving the point of care, veterinary and life science markets. The business was acquired to complement our existing CiDRA Precision Services business and expand on our microfluidic and nanofluidic capabilities. Headquartered in Zweibrücken, Germany, thinXXS operates in our Health & Science Technologies segment. thinXXS was acquired for cash consideration of
$38.2 million
and the assumption of
$1.2 million
of debt. The purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of the transaction were
$25.1 million
and
$10.6 million
, respectively. The goodwill is not deductible for tax purposes.
The Company made an initial allocation of the purchase price for the thinXXS acquisition as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities. These nonrecurring fair value measurements are classified as Level 3 in the fair value hierarchy. The Company is continuing to evaluate the valuation of certain income tax liabilities associated with the thinXXS acquisition and is in the process of finalizing the purchase price allocation. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period, as required. Only items identified as of the acquisition date will be considered for subsequent adjustment.
2017 Divestiture
The Company periodically reviews its operations for businesses which may no longer be aligned with its strategic objectives and focuses on its core business and customers. Any resulting gain or loss recognized due to divestitures is recorded within the Condensed Consolidated Statements of Operations. The Company concluded that the divestiture that took place during the year ended December 31, 2017 did not meet the criteria for reporting discontinued operations.
On October 31, 2017, the Company completed the sale of its Faure Herman subsidiary for
$21.8 million
in cash, which resulted in a pre-tax gain on the sale of
$9.3 million
that was recognized in the fourth quarter of 2017. There was
no
income tax expense associated with this transaction. The results of Faure Herman were reported within the Fluid & Metering Technologies segment through the date of sale.
3. Business Segments
The Company has
three
reportable business segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”).
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, injectors, and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food, chemical, general industrial, water and wastewater, agriculture and energy industries.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
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 designs, produces and distributes firefighting pumps, valves and controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry, engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.
Information on the Company’s business segments is presented below based on the nature of products and services offered. The Company evaluates performance based on several factors, of which sales, operating income and operating margin are the primary financial measures. Intersegment sales are accounted for at fair value as if the sales were to third parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
|
|
Fluid & Metering Technologies
|
|
|
|
|
|
|
|
External customers
|
$
|
239,119
|
|
|
$
|
220,897
|
|
|
$
|
714,135
|
|
|
$
|
658,675
|
|
Intersegment sales
|
94
|
|
|
56
|
|
|
211
|
|
|
230
|
|
Total segment sales
|
239,213
|
|
|
220,953
|
|
|
714,346
|
|
|
658,905
|
|
Health & Science Technologies
|
|
|
|
|
|
|
|
External customers
|
222,351
|
|
|
207,018
|
|
|
670,685
|
|
|
610,890
|
|
Intersegment sales
|
75
|
|
|
109
|
|
|
219
|
|
|
325
|
|
Total segment sales
|
222,426
|
|
|
207,127
|
|
|
670,904
|
|
|
611,215
|
|
Fire & Safety/Diversified Products
|
|
|
|
|
|
|
|
External customers
|
161,418
|
|
|
146,575
|
|
|
484,752
|
|
|
431,843
|
|
Intersegment sales
|
414
|
|
|
24
|
|
|
553
|
|
|
186
|
|
Total segment sales
|
161,832
|
|
|
146,599
|
|
|
485,305
|
|
|
432,029
|
|
Intersegment elimination
|
(583
|
)
|
|
(189
|
)
|
|
(983
|
)
|
|
(741
|
)
|
Total net sales
|
$
|
622,888
|
|
|
$
|
574,490
|
|
|
$
|
1,869,572
|
|
|
$
|
1,701,408
|
|
Operating income
|
|
|
|
|
|
|
|
Fluid & Metering Technologies
|
$
|
69,755
|
|
|
$
|
61,988
|
|
|
$
|
207,149
|
|
|
$
|
179,830
|
|
Health & Science Technologies
|
49,144
|
|
|
46,073
|
|
|
153,519
|
|
|
134,605
|
|
Fire & Safety/Diversified Products
|
44,726
|
|
|
36,199
|
|
|
130,162
|
|
|
106,022
|
|
Corporate office
|
(18,492
|
)
|
|
(17,756
|
)
|
|
(61,183
|
)
|
|
(53,149
|
)
|
Total operating income
|
145,133
|
|
|
126,504
|
|
|
429,647
|
|
|
367,308
|
|
Interest expense
|
10,958
|
|
|
11,064
|
|
|
33,098
|
|
|
33,920
|
|
Other (income) expense - net
|
934
|
|
|
1,653
|
|
|
(3,565
|
)
|
|
1,717
|
|
Income before income taxes
|
$
|
133,241
|
|
|
$
|
113,787
|
|
|
$
|
400,114
|
|
|
$
|
331,671
|
|
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Assets
|
|
|
|
Fluid & Metering Technologies
|
$
|
1,141,116
|
|
|
$
|
1,101,580
|
|
Health & Science Technologies
|
1,352,886
|
|
|
1,323,373
|
|
Fire & Safety/Diversified Products
|
769,615
|
|
|
744,515
|
|
Corporate office
|
291,190
|
|
|
230,160
|
|
Total assets
|
$
|
3,554,807
|
|
|
$
|
3,399,628
|
|
4. Revenue
IDEX is an applied solutions company specializing in the manufacture of fluid and metering technologies, health and science technologies and fire, safety and other diversified products built to customers’ specifications. The Company’s products include industrial pumps, compressors, flow meters, injectors, valves and related controls for use in a wide variety of process applications; precision fluidics solutions, including pumps, valves, degassing equipment, corrective tubing, fittings and complex manifolds, optical filters and specialty medical equipment and devices for use in life science applications; precision-engineered equipment for dispensing, metering and mixing paints; and engineered products for industrial and commercial markets, including fire and rescue, transportation equipment, oil and gas, electronics and communications. The Company’s revenue is accounted for under ASC 606,
Revenue from Contracts with Customers
, which we adopted on January 1, 2018 using the modified retrospective method.
Revenue is recognized when control of the promised products or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products or providing those services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.
Disaggregation of Revenue
We have a comprehensive offering of products, including technologies, built to customers’ specifications that are sold in niche markets throughout the world. We disaggregate our revenue from contracts with customers by reporting unit and geographical region for each of our segments as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region is based on the location of the customer. The following tables present our revenue disaggregated by reporting unit and geographical region.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Revenue by reporting unit for the
three and nine months ended
September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2018
|
|
Nine Months Ended
September 30, 2018
|
Energy
|
$
|
42,403
|
|
|
$
|
121,941
|
|
Valves
|
30,972
|
|
|
85,831
|
|
Water
|
63,989
|
|
|
188,000
|
|
Pumps
|
81,605
|
|
|
245,006
|
|
Agriculture
|
20,244
|
|
|
73,568
|
|
Intersegment elimination
|
(94
|
)
|
|
(211
|
)
|
Fluid & Metering Technologies
|
239,119
|
|
|
714,135
|
|
Scientific Fluidics & Optics
|
106,917
|
|
|
310,530
|
|
Sealing Solutions
|
48,787
|
|
|
154,123
|
|
Gast
|
33,574
|
|
|
92,989
|
|
Micropump
|
8,801
|
|
|
27,899
|
|
Material Processing Technologies
|
24,347
|
|
|
85,363
|
|
Intersegment elimination
|
(75
|
)
|
|
(219
|
)
|
Health & Science Technologies
|
222,351
|
|
|
670,685
|
|
Fire & Safety
|
102,589
|
|
|
298,741
|
|
Band-It
|
25,437
|
|
|
79,892
|
|
Dispensing
|
33,806
|
|
|
106,672
|
|
Intersegment elimination
|
(414
|
)
|
|
(553
|
)
|
Fire & Safety/Diversified Products
|
161,418
|
|
|
484,752
|
|
Total net sales
|
$
|
622,888
|
|
|
$
|
1,869,572
|
|
Revenue by geographical region for the
three and nine months ended
September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
FMT
|
|
HST
|
|
FSDP
|
|
IDEX
|
U.S.
|
$
|
131,403
|
|
|
$
|
99,474
|
|
|
$
|
78,902
|
|
|
$
|
309,779
|
|
Europe
|
46,895
|
|
|
66,762
|
|
|
36,824
|
|
|
150,481
|
|
Asia
|
28,358
|
|
|
46,634
|
|
|
30,265
|
|
|
105,257
|
|
Rest of world
(1)
|
32,557
|
|
|
9,556
|
|
|
15,841
|
|
|
57,954
|
|
Intersegment elimination
|
(94
|
)
|
|
(75
|
)
|
|
(414
|
)
|
|
(583
|
)
|
Total net sales
|
$
|
239,119
|
|
|
$
|
222,351
|
|
|
$
|
161,418
|
|
|
$
|
622,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
FMT
|
|
HST
|
|
FSDP
|
|
IDEX
|
U.S.
|
$
|
403,903
|
|
|
$
|
290,826
|
|
|
$
|
227,146
|
|
|
$
|
921,875
|
|
Europe
|
130,591
|
|
|
214,564
|
|
|
127,645
|
|
|
472,800
|
|
Asia
|
89,655
|
|
|
139,422
|
|
|
84,563
|
|
|
313,640
|
|
Rest of world
(1)
|
90,197
|
|
|
26,092
|
|
|
45,951
|
|
|
162,240
|
|
Intersegment elimination
|
(211
|
)
|
|
(219
|
)
|
|
(553
|
)
|
|
(983
|
)
|
Total net sales
|
$
|
714,135
|
|
|
$
|
670,685
|
|
|
$
|
484,752
|
|
|
$
|
1,869,572
|
|
(1)
Rest of world includes: North America (excluding U.S.), South America, Middle East, Australia and Africa.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Contract Balances
The timing of revenue recognition, billings and cash collections results in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (contract assets) and are included in Receivables on our Condensed Consolidated Balance Sheets. Amounts are billed in accordance with contractual terms or as work progresses in accordance with contractual terms. Unbilled amounts arise when the timing of billing differs from the timing of revenue recognized, such as when contract provisions require specific milestones to be met before a customer can be billed. Unbilled amounts primarily relate to performance obligations satisfied over time when the cost-to-cost method is utilized and the revenue recognized exceeds the amount billed to the customer as there is not yet a right to payment in accordance with contractual terms. Unbilled amounts are recorded as a contract asset when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract. Customer receivables are recorded at face amounts less an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. Management evaluates the aging of the customer receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future and records the appropriate provision.
The composition of Customer receivables was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
January 1,
2018
|
Billed receivables
|
$
|
312,406
|
|
|
$
|
285,800
|
|
Unbilled receivables
|
14,435
|
|
|
11,996
|
|
Total customer receivables
|
$
|
326,841
|
|
|
$
|
297,796
|
|
Advance payments and billings in excess of revenue recognized are included in Deferred revenue which is classified as current or noncurrent based on the timing of when we expect to recognize the revenue. The current portion is included in Accrued expenses and the noncurrent portion is included in Other noncurrent liabilities on our Condensed Consolidated Balance Sheets. Advance payments and billings in excess of revenue recognized represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations satisfied over time. Billings in excess of revenue recognized primarily relate to performance obligations satisfied over time when the cost-to-cost method is utilized and revenue cannot yet be recognized as the Company has not completed the corresponding performance obligation. We generally receive advance payments from customers related to maintenance services which we recognize ratably over the service term. Contract liabilities are derecognized when revenue is recognized and the performance obligation is satisfied.
The composition of Deferred revenue was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
January 1,
2018
|
Deferred revenue - current
|
$
|
10,271
|
|
|
$
|
11,031
|
|
Deferred revenue - noncurrent
|
3,271
|
|
|
3,297
|
|
Total deferred revenue
|
$
|
13,542
|
|
|
$
|
14,328
|
|
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For our contracts that require complex design, manufacturing and installation activities that are not separately identifiable from other promises in the contract and, therefore, not distinct, the entire contract is accounted for as a single performance obligation. For our contracts that include distinct products or services that are substantially the same and have the same pattern of transfer to the customer over time, they are recognized as a series of distinct products or services. Certain of our contracts have multiple performance obligations for which we allocate the transaction price to each performance obligation using an estimate of the standalone selling price of each distinct product or service in the contract. For product sales, each product sold to a customer
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
generally represents a distinct performance obligation. In such cases, the observable standalone sales are used to determine the standalone selling price. In certain cases, we may be required to estimate standalone selling price using the expected cost plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct product or service.
Our performance obligations are satisfied at a point in time or over time as work progresses. Performance obligations are supported by contracts with customers that provide a framework for the nature of the distinct products or services or bundle of products and services. We define service revenue as revenue from activities that are not associated with the design, development or manufacture of a product or the delivery of a software license.
Revenue from products and services transferred to customers at a point in time approximated
95%
in both the
three and nine months ended
September 30, 2018
. Revenue recognized at a point in time relates to the majority of our product sales. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is in line with shipping terms.
Revenue from products and services transferred to customers over time approximated
5%
in both the
three and nine months ended
September 30, 2018
. Revenue earned by certain business units within the Water, Energy, Material Processing Technologies (“MPT”) and Dispensing reporting units is recognized over time because control transfers continuously to our customers. When accounting for over-time contracts, we use an input measure to determine the extent of progress towards completion of the performance obligation. For certain business units within the Water, Energy and MPT reporting units, revenue is recognized over time as work is performed based on the relationship between actual costs incurred to date for each contract and the total estimated costs for such contract at completion of the performance obligation (i.e. the cost-to-cost method). We believe this measure of progress best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. Contract costs include labor, material and overhead. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. For certain business units within the Energy and Dispensing reporting units, revenue is recognized ratably over the contract term.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our estimates regularly. Due to uncertainties inherent in the estimation process, it is reasonably possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised. Such revisions to costs and income are recognized in the period in which the revisions are determined as a cumulative catch-up adjustment. The impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize provisions for estimated losses on uncompleted contracts in the period in which such losses are determined.
The Company records allowances for discounts, product returns and customer incentives at the time of sale as a reduction of revenue as such allowances can be reliably estimated based on historical experience and known trends. The Company also offers product warranties (primarily assurance-type) and accrues its estimated exposure for warranty claims at the time of sale based upon the length of the warranty period, warranty costs incurred and any other related information known to the Company.
5. Earnings Per Common Share
Earnings per common share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist of stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method, restricted stock and performance share units.
ASC 260,
Earnings Per Share,
concludes that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. The Company has determined that its outstanding shares of restricted stock are participating securities. Accordingly, EPS was computed using the two-class method prescribed by ASC 260.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
Basic weighted average shares outstanding reconciles to diluted weighted average shares outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Basic weighted average common shares outstanding
|
76,562
|
|
|
76,309
|
|
|
76,507
|
|
|
76,215
|
|
Dilutive effect of stock options, restricted stock and performance share units
|
1,147
|
|
|
1,214
|
|
|
1,210
|
|
|
1,031
|
|
Diluted weighted average common shares outstanding
|
77,709
|
|
|
77,523
|
|
|
77,717
|
|
|
77,246
|
|
Options to purchase approximately
0.3 million
and
zero
shares of common stock for the
three months ended September 30, 2018
and
2017
, respectively, and
0.3 million
and
0.4 million
shares of common stock for the
nine months ended September 30, 2018
and
2017
, respectively, were not included in the computation of diluted EPS because the effect of their inclusion would have been antidilutive.
6. Inventories
The components of inventories as of
September 30, 2018
and
December 31, 2017
were:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Raw materials and component parts
|
$
|
185,764
|
|
|
$
|
169,676
|
|
Work in process
|
37,094
|
|
|
33,668
|
|
Finished goods
|
64,268
|
|
|
56,380
|
|
Total inventories
|
$
|
287,126
|
|
|
$
|
259,724
|
|
Inventories are stated at the lower of cost or net realizable value. Cost, which includes material, labor and factory overhead, is determined on a FIFO basis.
7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the
nine months ended September 30, 2018
, by reportable business segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FMT
|
|
HST
|
|
FSDP
|
|
IDEX
|
Balance at December 31, 2017
|
$
|
586,064
|
|
|
$
|
740,032
|
|
|
$
|
378,062
|
|
|
$
|
1,704,158
|
|
Foreign currency translation
|
(2,423
|
)
|
|
(2,765
|
)
|
|
(3,259
|
)
|
|
(8,447
|
)
|
Acquisitions
|
—
|
|
|
11,920
|
|
|
—
|
|
|
11,920
|
|
Acquisition adjustments
|
—
|
|
|
1,152
|
|
|
—
|
|
|
1,152
|
|
Balance at September 30, 2018
|
$
|
583,641
|
|
|
$
|
750,339
|
|
|
$
|
374,803
|
|
|
$
|
1,708,783
|
|
ASC 350,
Goodwill and Other Intangible Assets,
requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. In the first
nine
months of
2018
, 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,
2017
, all reporting units had fair values in excess of their carrying values.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
|
|
At December 31, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
$
|
9,640
|
|
|
$
|
(7,789
|
)
|
|
$
|
1,851
|
|
|
12
|
|
$
|
9,633
|
|
|
$
|
(7,143
|
)
|
|
$
|
2,490
|
|
Trade names
|
116,895
|
|
|
(55,799
|
)
|
|
61,096
|
|
|
16
|
|
117,206
|
|
|
(50,604
|
)
|
|
66,602
|
|
Customer relationships
|
258,789
|
|
|
(81,485
|
)
|
|
177,304
|
|
|
14
|
|
317,316
|
|
|
(124,566
|
)
|
|
192,750
|
|
Unpatented technology
|
98,151
|
|
|
(34,015
|
)
|
|
64,136
|
|
|
12
|
|
91,166
|
|
|
(29,428
|
)
|
|
61,738
|
|
Other
|
700
|
|
|
(490
|
)
|
|
210
|
|
|
10
|
|
839
|
|
|
(573
|
)
|
|
266
|
|
Total amortized intangible assets
|
484,175
|
|
|
(179,578
|
)
|
|
304,597
|
|
|
|
|
536,160
|
|
|
(212,314
|
)
|
|
323,846
|
|
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
|
$
|
575,075
|
|
|
$
|
(179,578
|
)
|
|
$
|
395,497
|
|
|
|
|
$
|
627,060
|
|
|
$
|
(212,314
|
)
|
|
$
|
414,746
|
|
On June 22, 2018, the Company acquired the intellectual property assets of Phantom Controls (“Phantom”) for cash consideration of
$4.0 million
. The operational capabilities and innovative pump operation of Phantom’s technology complements our existing water-flow expertise of Hale, Akron Brass and Class 1 to improve fire ground safety and reduce operational complexity during mission critical response. This acquisition of intellectual property assets did not meet the definition of a business under ASU 2017-01 and thus the Company recorded the entire purchase price to the Unpatented technology class of intangible assets on the Condensed Consolidated Balance Sheets.
The Banjo trade name and the Akron Brass trade name are indefinite-lived intangible assets which are tested for impairment on an annual basis in accordance with ASC 350 or more frequently if events or changes in circumstances indicate that the assets might be impaired. In the first
nine
months of
2018
, there were no events or circumstances that would have required an interim impairment test. The Company uses the relief-from-royalty method, a form of the income approach, to determine the fair value of these trade names. The relief-from-royalty method is dependent on a number of significant management assumptions, including estimates of revenues, royalty rates and discount rates.
Amortization of intangible assets was
$8.8 million
and
$29.5 million
for the
three and nine months ended
September 30, 2018
, respectively. Amortization of intangible assets was
$11.5 million
and
$35.4 million
for the
three and nine months ended
September 30, 2017
, respectively. Based on the intangible asset balances as of
September 30, 2018
, amortization expense is expected to approximate
$9.0 million
for the remaining
three months
of
2018
,
$36.4 million
in
2019
,
$35.2 million
in
2020
,
$34.3 million
in
2021
and
$32.6 million
in
2022
.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
8. Accrued Expenses
The components of accrued expenses as of
September 30, 2018
and
December 31, 2017
were:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Payroll and related items
|
$
|
73,121
|
|
|
$
|
75,869
|
|
Management incentive compensation
|
18,962
|
|
|
24,320
|
|
Income taxes payable
|
25,753
|
|
|
28,033
|
|
Insurance
|
9,929
|
|
|
9,424
|
|
Warranty
|
5,852
|
|
|
6,281
|
|
Deferred revenue
|
10,271
|
|
|
11,031
|
|
Restructuring
|
6,391
|
|
|
4,180
|
|
Liability for uncertain tax positions
|
1,296
|
|
|
1,745
|
|
Accrued interest
|
10,443
|
|
|
1,759
|
|
Other
|
23,435
|
|
|
22,063
|
|
Total accrued expenses
|
$
|
185,453
|
|
|
$
|
184,705
|
|
9. Other Noncurrent Liabilities
The components of other noncurrent liabilities as of
September 30, 2018
and
December 31, 2017
were:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Pension and retiree medical obligations
|
$
|
85,743
|
|
|
$
|
99,646
|
|
Transition tax payable
|
25,510
|
|
|
27,877
|
|
Liability for uncertain tax positions
|
1,047
|
|
|
1,047
|
|
Deferred revenue
|
3,271
|
|
|
3,297
|
|
Liability for construction of new leased facility
|
11,616
|
|
|
—
|
|
Contingent consideration for acquisition
|
3,375
|
|
|
—
|
|
Other
|
24,063
|
|
|
23,818
|
|
Total other noncurrent liabilities
|
$
|
154,625
|
|
|
$
|
155,685
|
|
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
10. Borrowings
Borrowings at
September 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Revolving Facility
|
$
|
—
|
|
|
$
|
10,740
|
|
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
|
1,264
|
|
|
1,446
|
|
Total borrowings
|
851,264
|
|
|
862,186
|
|
Less current portion
|
536
|
|
|
258
|
|
Less deferred debt issuance costs
|
1,746
|
|
|
2,204
|
|
Less unaccreted debt discount
|
736
|
|
|
936
|
|
Total long-term borrowings
|
$
|
848,246
|
|
|
$
|
858,788
|
|
On June 13, 2016, the Company completed a private placement of a
$100 million
aggregate principal amount of
3.20%
Senior Notes due June 13, 2023 and a
$100 million
aggregate principal amount of
3.37%
Senior Notes due June 13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13
th
and December 13
th
. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay all, or any portion of the Notes provided that such portion is greater than
5%
of the aggregate principal amount of the Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the Company may repurchase the Notes by making an offer to all holders of the Notes, subject to certain conditions.
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 the 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.
IDEX CORPORATION
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 September 30, 2018, the applicable margin was
1.10%
. 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
September 30, 2018
, there was
no
balance outstanding under the Revolving Facility and
$9.0 million
of outstanding letters of credit, resulting in a net available borrowing capacity under the Revolving Facility at
September 30, 2018
of approximately
$691.0 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
September 30, 2018
, 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.
11. 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 types of cash flow hedges the Company enters into include foreign currency exchange contracts designed to minimize the earnings impact on certain intercompany loans and interest rate exchange agreements that effectively convert a portion of floating-rate debt to fixed-rate debt and are designed to reduce the impact of interest rate changes on future interest expense.
The effective portion of gains or losses on interest rate exchange agreements is reported in accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into net income in the same period or periods in which the hedged transaction affects net income. The remaining gain or loss in excess of the cumulative change in the present value of future cash flows or the hedged item, if any, is recognized in net income during the period of change. See Note 14 for the amount of loss reclassified into net income for interest rate contracts for the
three and nine months ended
September 30, 2018
and
2017
. As of
September 30, 2018
, the Company did not have any interest rate contracts outstanding.
In 2010 and 2011, the Company entered into
two
separate forward starting interest rate exchange agreements 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
$6.3 million
of the pre-tax amount included in Accumulated other comprehensive income (loss) in shareholders’ equity at
September 30, 2018
will be recognized in net income over the next 12 months as the underlying hedged transactions are realized.
At December 31, 2017, the Company had outstanding foreign currency exchange contracts with a combined notional value of
€180 million
that were not designated as hedges for accounting purposes and, as a result, the change in the fair value of these
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
foreign currency exchange contracts and the corresponding foreign currency gain or loss on the revaluation of the intercompany loans were both recorded through earnings within Other (income) expense - net in the Condensed Consolidated Statements of Operations each period as incurred.
In April 2018, the Company settled its outstanding foreign currency exchange contracts in conjunction with its repayment of the underlying intercompany loans and did not extend these foreign currency exchange contracts. Along with the repayment of the intercompany loans, the Company was required to make a capital contribution to one of its subsidiaries, which resulted in a
$2.2 million
stamp duty in Switzerland which was recorded within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
As a result of the foreign currency exchange contracts being settled in April 2018, the Company did not record a gain or loss on the foreign currency exchange contracts during the
three months ended
September 30, 2018
. The Company did record a gain of
$0.9 million
during the
nine months ended
September 30, 2018
and a gain of
$9.3 million
and
$14.8 million
, respectively, during the
three and nine months ended
September 30, 2017
. The foreign currency exchange gains were recorded within Other (income) expense - net in the Condensed Consolidated Statements of Operations. The Company did not record a gain or loss on the revaluation of intercompany loans during the
three months ended
September 30, 2018
due to these loans being settled in April 2018. The Company did record a foreign currency transaction loss of
$0.9 million
during the
nine months ended
September 30, 2018
and a foreign currency transaction loss of
$10.0 million
and
$15.2 million
, respectively during the
three and nine months ended
September 30, 2017
. The losses on the revaluation of the intercompany loans were recorded within Other (income) expense - net in the Condensed Consolidated Statements of Operations. For the
nine months ended
September 30, 2018
, the Company received
$6.6 million
in settlement of the foreign currency exchange contracts.
Fair values relating to derivative financial instruments reflect the estimated amounts that the Company would receive or pay to sell or buy the contracts based on quoted market prices of comparable contracts at each balance sheet date.
The following table sets forth the fair value amounts of derivative instruments held by the Company as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Assets
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Balance Sheet Caption
|
Foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
5,779
|
|
|
Other current assets
|
12. 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 the valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
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
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements
|
|
Balance at
September 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
$
|
8,081
|
|
|
$
|
8,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent consideration
|
$
|
3,375
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,375
|
|
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements
|
|
Balance at
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
$
|
6,742
|
|
|
$
|
6,742
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
$
|
5,779
|
|
|
$
|
—
|
|
|
$
|
5,779
|
|
|
$
|
—
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no transfers of assets or liabilities between Level 1 and Level 2 during the
three and nine months ended
September 30, 2018
or the year ended
December 31, 2017
.
The Company utilized a Monte Carlo Simulation during the earn-out period to determine the fair value of the contingent consideration associated with the acquisition of FLI. The
$3.4 million
represents management’s best estimate of the liability, based on a range of outcomes of FLI’s two-year operating results, from August 1, 2018 to July 31, 2020, and is expected to be paid during the third quarter of 2020. As of September 30, 2018, the
$3.4 million
of contingent consideration is included in Other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short term nature of these instruments. At
September 30, 2018
, the fair value of the outstanding indebtedness under our Revolving Facility,
3.2%
Senior Notes,
3.37%
Senior Notes,
4.5%
Senior Notes,
4.2%
Senior Notes and other borrowings, based on quoted market prices and current market rates for debt with similar credit risk and maturity, was approximately
$851.8 million
compared to the carrying value of
$850.5 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.
13. Restructuring
During the
three and nine months ended
September 30, 2018
, the Company recorded
$4.6 million
and
$8.3 million
, respectively, of restructuring costs as part of 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 and exit costs which were included in Restructuring expenses in the Condensed Consolidated Statements of Operations. Severance costs primarily consisted of severance benefits through payroll continuation, COBRA subsidies, outplacement services, conditional separation costs and employer tax liabilities, while exit costs primarily consisted of asset disposals or impairments and lease exit and contract termination costs.
Pre-tax restructuring expenses by segment for the
three and nine months ended
September 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Severance Costs
|
|
Exit Costs
|
|
Total
|
Fluid & Metering Technologies
|
$
|
809
|
|
|
$
|
18
|
|
|
$
|
827
|
|
Health & Science Technologies
|
2,951
|
|
|
165
|
|
|
3,116
|
|
Fire & Safety/Diversified Products
|
60
|
|
|
—
|
|
|
60
|
|
Corporate/Other
|
618
|
|
|
—
|
|
|
618
|
|
Total restructuring costs
|
$
|
4,438
|
|
|
$
|
183
|
|
|
$
|
4,621
|
|
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Severance Costs
|
|
Exit Costs
|
|
Total
|
Fluid & Metering Technologies
|
$
|
1,160
|
|
|
$
|
153
|
|
|
$
|
1,313
|
|
Health & Science Technologies
|
4,950
|
|
|
348
|
|
|
5,298
|
|
Fire & Safety/Diversified Products
|
427
|
|
|
—
|
|
|
427
|
|
Corporate/Other
|
1,213
|
|
|
—
|
|
|
1,213
|
|
Total restructuring costs
|
$
|
7,750
|
|
|
$
|
501
|
|
|
$
|
8,251
|
|
Restructuring accruals of
$6.4 million
and
$4.2 million
at
September 30, 2018
and
December 31, 2017
, respectively, are recorded in Accrued expenses on the Condensed Consolidated Balance Sheets. Severance benefits are expected to be paid within the next twelve months using cash from operations. The changes in the restructuring accrual for the
nine
months ended
September 30, 2018
are as follows:
|
|
|
|
|
|
Restructuring
|
Balance at January 1, 2018
|
$
|
4,180
|
|
Restructuring expenses
|
8,251
|
|
Payments, utilization and other
|
(6,040
|
)
|
Balance at September 30, 2018
|
$
|
6,391
|
|
14. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2018
|
|
Three Months Ended
September 30, 2017
|
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Cumulative translation adjustment
|
$
|
9,164
|
|
|
$
|
—
|
|
|
$
|
9,164
|
|
|
$
|
28,796
|
|
|
$
|
—
|
|
|
$
|
28,796
|
|
Pension and other postretirement adjustments
|
1,725
|
|
|
(455
|
)
|
|
1,270
|
|
|
2,075
|
|
|
(607
|
)
|
|
1,468
|
|
Reclassification adjustments for derivatives
|
1,610
|
|
|
(366
|
)
|
|
1,244
|
|
|
1,681
|
|
|
(627
|
)
|
|
1,054
|
|
Total other comprehensive income (loss)
|
$
|
12,499
|
|
|
$
|
(821
|
)
|
|
$
|
11,678
|
|
|
$
|
32,552
|
|
|
$
|
(1,234
|
)
|
|
$
|
31,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2018
|
|
Nine Months Ended
September 30, 2017
|
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
|
Pre-tax
|
|
Tax
|
|
Net of tax
|
Cumulative translation adjustment
|
$
|
(25,903
|
)
|
|
$
|
—
|
|
|
$
|
(25,903
|
)
|
|
$
|
97,160
|
|
|
$
|
—
|
|
|
$
|
97,160
|
|
Pension and other postretirement adjustments
|
5,396
|
|
|
(1,417
|
)
|
|
3,979
|
|
|
5,625
|
|
|
(1,753
|
)
|
|
3,872
|
|
Reclassification adjustments for derivatives
|
4,869
|
|
|
(1,105
|
)
|
|
3,764
|
|
|
5,004
|
|
|
(1,845
|
)
|
|
3,159
|
|
Total other comprehensive income (loss)
|
$
|
(15,638
|
)
|
|
$
|
(2,522
|
)
|
|
$
|
(18,160
|
)
|
|
$
|
107,789
|
|
|
$
|
(3,598
|
)
|
|
$
|
104,191
|
|
IDEX CORPORATION
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 (loss) to net income during the
three and nine months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Pension and other postretirement plans:
|
|
|
|
|
|
|
|
Amortization of service cost
|
$
|
1,725
|
|
|
$
|
2,075
|
|
|
$
|
5,396
|
|
|
$
|
5,625
|
|
Total before tax
|
1,725
|
|
|
2,075
|
|
|
5,396
|
|
|
5,625
|
|
Provision for income taxes
|
(455
|
)
|
|
(607
|
)
|
|
(1,417
|
)
|
|
(1,753
|
)
|
Total net of tax
|
$
|
1,270
|
|
|
$
|
1,468
|
|
|
$
|
3,979
|
|
|
$
|
3,872
|
|
Derivatives:
|
|
|
|
|
|
|
|
Reclassification adjustments
|
$
|
1,610
|
|
|
$
|
1,681
|
|
|
$
|
4,869
|
|
|
$
|
5,004
|
|
Total before tax
|
1,610
|
|
|
1,681
|
|
|
4,869
|
|
|
5,004
|
|
Provision for income taxes
|
(366
|
)
|
|
(627
|
)
|
|
(1,105
|
)
|
|
(1,845
|
)
|
Total net of tax
|
$
|
1,244
|
|
|
$
|
1,054
|
|
|
$
|
3,764
|
|
|
$
|
3,159
|
|
The Company recognizes the service cost component in both Selling, general and administrative expenses and Cost of sales in the Condensed Consolidated Statements of Operations depending on the functional area of the underlying employees included in the plans.
15. 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 under the program will be funded with future cash flow generation or borrowings available under the Revolving Facility. During the
nine months ended
September 30, 2018
, the Company repurchased a total of
357 thousand
shares at a cost of
$51.7 million
, of which
$1.0 million
was settled in
October
2018
. During the
nine months ended
September 30, 2017
, the Company repurchased a total of
222 thousand
shares at a cost of
$23.6 million
, of which
$1.0 million
was settled in
October
2017
. As of
September 30, 2018
, the amount of share repurchase authorization remaining was
$499.3 million
.
At
September 30, 2018
and
December 31, 2017
, 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
September 30, 2018
or
December 31, 2017
.
16. 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average fair value of grants
|
$40.83
|
|
$30.46
|
|
$38.14
|
|
$24.17
|
Dividend yield
|
1.14%
|
|
1.27%
|
|
1.07%
|
|
1.45%
|
Volatility
|
27.81%
|
|
29.35%
|
|
28.47%
|
|
29.41%
|
Risk-free interest rate
|
2.47% - 3.07%
|
|
1.24% - 2.80%
|
|
2.02% - 3.17%
|
|
0.83% - 3.04%
|
Expected life (in years)
|
5.81
|
|
5.83
|
|
5.83
|
|
5.83
|
IDEX CORPORATION
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of goods sold
|
$
|
91
|
|
|
$
|
67
|
|
|
$
|
388
|
|
|
$
|
341
|
|
Selling, general and administrative expenses
|
1,929
|
|
|
1,721
|
|
|
6,334
|
|
|
5,604
|
|
Total expense before income taxes
|
2,020
|
|
|
1,788
|
|
|
6,722
|
|
|
5,945
|
|
Income tax benefit
|
(385
|
)
|
|
(593
|
)
|
|
(1,219
|
)
|
|
(1,887
|
)
|
Total expense after income taxes
|
$
|
1,635
|
|
|
$
|
1,195
|
|
|
$
|
5,503
|
|
|
$
|
4,058
|
|
A summary of the Company’s stock option activity as of
September 30, 2018
, and changes during the
nine months ended
September 30, 2018
, are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Shares
|
|
Weighted
Average
Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2018
|
1,924,683
|
|
|
$
|
71.07
|
|
|
6.87
|
|
$
|
117,209,218
|
|
Granted
|
310,675
|
|
|
138.38
|
|
|
|
|
|
Exercised
|
(438,500
|
)
|
|
61.10
|
|
|
|
|
|
Forfeited
|
(57,876
|
)
|
|
97.29
|
|
|
|
|
|
Outstanding at September 30, 2018
|
1,738,982
|
|
|
$
|
84.74
|
|
|
6.92
|
|
$
|
114,648,578
|
|
Vested and expected to vest as of September 30, 2018
|
1,642,142
|
|
|
$
|
83.24
|
|
|
6.82
|
|
$
|
110,726,803
|
|
Exercisable at September 30, 2018
|
841,746
|
|
|
$
|
65.82
|
|
|
5.44
|
|
$
|
71,413,569
|
|
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
September 30, 2018
, and changes during the
nine months ended
September 30, 2018
, are presented as follows:
|
|
|
|
|
|
|
|
Restricted Stock
|
Shares
|
|
Weighted-Average
Grant Date Fair
Value
|
Unvested at January 1, 2018
|
182,023
|
|
|
$
|
83.37
|
|
Granted
|
41,570
|
|
|
138.57
|
|
Vested
|
(62,580
|
)
|
|
78.57
|
|
Forfeited
|
(10,760
|
)
|
|
95.64
|
|
Unvested at September 30, 2018
|
150,253
|
|
|
$
|
99.76
|
|
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.
IDEX CORPORATION
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of goods sold
|
$
|
77
|
|
|
$
|
46
|
|
|
$
|
316
|
|
|
$
|
265
|
|
Selling, general and administrative expenses
|
902
|
|
|
1,163
|
|
|
3,155
|
|
|
3,722
|
|
Total expense before income taxes
|
979
|
|
|
1,209
|
|
|
3,471
|
|
|
3,987
|
|
Income tax benefit
|
(177
|
)
|
|
(370
|
)
|
|
(620
|
)
|
|
(1,295
|
)
|
Total expense after income taxes
|
$
|
802
|
|
|
$
|
839
|
|
|
$
|
2,851
|
|
|
$
|
2,692
|
|
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
September 30, 2018
, and changes during the
nine months ended
September 30, 2018
, are presented in the following table:
|
|
|
|
|
|
|
|
Cash-Settled Restricted Stock
|
Shares
|
|
Weighted-Average
Fair Value
|
Unvested at January 1, 2018
|
94,730
|
|
|
$
|
131.97
|
|
Granted
|
28,925
|
|
|
138.08
|
|
Vested
|
(27,880
|
)
|
|
137.11
|
|
Forfeited
|
(6,835
|
)
|
|
150.66
|
|
Unvested at September 30, 2018
|
88,940
|
|
|
$
|
150.66
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of goods sold
|
$
|
381
|
|
|
$
|
327
|
|
|
$
|
896
|
|
|
$
|
963
|
|
Selling, general and administrative expenses
|
1,064
|
|
|
696
|
|
|
2,776
|
|
|
2,203
|
|
Total expense before income taxes
|
1,445
|
|
|
1,023
|
|
|
3,672
|
|
|
3,166
|
|
Income tax benefit
|
(158
|
)
|
|
(175
|
)
|
|
(368
|
)
|
|
(557
|
)
|
Total expense after income taxes
|
$
|
1,287
|
|
|
$
|
848
|
|
|
$
|
3,304
|
|
|
$
|
2,609
|
|
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.
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
Weighted average fair value of grants
|
$216.59
|
|
$115.74
|
Dividend yield
|
—%
|
|
—%
|
Volatility
|
17.42%
|
|
17.36%
|
Risk-free interest rate
|
2.40%
|
|
1.45%
|
Expected life (in years)
|
2.85
|
|
2.85
|
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
A summary of the Company’s performance share unit activity as of
September 30, 2018
, and changes during the
nine months ended
September 30, 2018
, are presented in the following table:
|
|
|
|
|
|
|
|
Performance Share Units
|
Shares
|
|
Weighted-Average
Grant Date Fair
Value
|
Unvested at January 1, 2018
|
136,870
|
|
|
$
|
113.81
|
|
Granted
|
52,375
|
|
|
216.59
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(8,095
|
)
|
|
139.17
|
|
Unvested at September 30, 2018
|
181,150
|
|
|
$
|
142.68
|
|
On
December 31, 2017
,
62,755
performance share units vested. Based on the Company’s relative total shareholder return rank during the
three
year period ended
December 31, 2017
, the Company achieved a
239%
payout factor and issued
143,897
shares in February 2018.
Total compensation cost for performance share units is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of goods sold
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Selling, general and administrative expenses
|
2,118
|
|
|
1,725
|
|
|
5,949
|
|
|
5,045
|
|
Total expense before income taxes
|
2,118
|
|
|
1,725
|
|
|
5,949
|
|
|
5,045
|
|
Income tax benefit
|
(418
|
)
|
|
(597
|
)
|
|
(1,123
|
)
|
|
(1,690
|
)
|
Total expense after income taxes
|
$
|
1,700
|
|
|
$
|
1,128
|
|
|
$
|
4,826
|
|
|
$
|
3,355
|
|
The Company’s policy is to recognize compensation cost on a straight-line basis, assuming forfeitures, over the requisite service period for the entire award. Classification of stock compensation cost within the Condensed Consolidated Statements of Operations is consistent with classification of cash compensation for the same employees.
As of
September 30, 2018
, there was
$15.3 million
of total unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of
1.4
years,
$5.9 million
of total unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of
1.1
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
1.1
years, and
$10.0 million
of total unrecognized compensation cost related to performance share units that is expected to be recognized over a weighted-average period of
1.0
years.
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
17. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
Service cost
|
$
|
156
|
|
|
$
|
520
|
|
|
$
|
224
|
|
|
$
|
520
|
|
Interest cost
|
669
|
|
|
341
|
|
|
687
|
|
|
332
|
|
Expected return on plan assets
|
(991
|
)
|
|
(276
|
)
|
|
(986
|
)
|
|
(277
|
)
|
Net amortization
|
664
|
|
|
312
|
|
|
641
|
|
|
418
|
|
Net periodic benefit cost
|
$
|
498
|
|
|
$
|
897
|
|
|
$
|
566
|
|
|
$
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
Service cost
|
$
|
665
|
|
|
$
|
1,592
|
|
|
$
|
732
|
|
|
$
|
1,496
|
|
Interest cost
|
1,975
|
|
|
1,053
|
|
|
2,008
|
|
|
957
|
|
Expected return on plan assets
|
(2,957
|
)
|
|
(848
|
)
|
|
(2,874
|
)
|
|
(811
|
)
|
Net amortization
|
2,034
|
|
|
964
|
|
|
1,924
|
|
|
1,195
|
|
Net periodic benefit cost
|
$
|
1,717
|
|
|
$
|
2,761
|
|
|
$
|
1,790
|
|
|
$
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
167
|
|
|
$
|
152
|
|
|
$
|
502
|
|
|
$
|
456
|
|
Interest cost
|
202
|
|
|
203
|
|
|
608
|
|
|
611
|
|
Net amortization
|
(185
|
)
|
|
(198
|
)
|
|
(553
|
)
|
|
(595
|
)
|
Net periodic benefit cost
|
$
|
184
|
|
|
$
|
157
|
|
|
$
|
557
|
|
|
$
|
472
|
|
The Company previously disclosed in its financial statements for the year ended
December 31, 2017
, that it expected to contribute approximately
$5.5 million
to its defined benefit plans and
$0.1 million
to its other postretirement benefit plans in
2018
. During the first
nine
months of
2018
, the Company contributed a total of
$12.6 million
to fund these plans and expects to contribute an additional
$0.8 million
in the remaining
three
months of
2018
. Included in the total of the
$12.6 million
is a discretionary contribution for
$10.3 million
to the U.S. pension plan made in the three months ended September 30, 2018.
18. Legal Proceedings
The Company and certain of its subsidiaries are involved in pending and threatened legal, regulatory and other proceedings arising in the ordinary course of business. These proceedings may pertain to matters such as product liability or contract disputes, and may also involve governmental inquiries, inspections, audits or investigations relating to issues such as tax matters, intellectual property, environmental, health and safety issues, governmental regulations, employment and other matters. Although the results of such legal proceedings cannot be predicted with certainty, the Company believes that the ultimate disposition of these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s business, financial condition, results of operations or cash flows.
19. Income Taxes
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes
decreased
to
$26.9 million
in the
third quarter
of
2018
from
$30.0 million
in the same period in
2017
. The effective tax rate
decreased
to
20.2%
for the
third quarter
of
2018
compared to
26.4%
during the same period in
2017
due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”), including the 14% decrease in the U.S. statutory income tax rate and the introduction of the Foreign Derived Intangible Income (“FDII”) deduction, as well as the excess tax benefits related to share-based compensation, offset by the removal of the domestic production activities deduction, the new Global Intangible Low-Taxed Income (“GILTI”) provision, increased limitation on the deductibility of executive compensation and the mix of global pre-tax income among jurisdictions.
The provision for income taxes
decreased
to
$87.7 million
in the
nine months ended September 30, 2018
from
$88.2 million
in the same period in
2017
. The effective tax rate
decreased
to
21.9%
for the
nine months ended September 30, 2018
compared to
26.6%
in the same period in
2017
due to the enactment of the Tax Act, including the 14% decrease in the U.S. statutory income tax rate and the introduction of the FDII deduction, as well as the excess tax benefits related to share-based compensation, offset by the removal of the domestic production activities deduction, the new GILTI provision, increased limitation on the deductibility of executive compensation and the mix of global pre-tax income among jurisdictions.
Because the changes included in the Tax Act are broad and complex, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While the Company is able to make reasonable estimates of the impact of the reduction in the corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in the Company’s interpretations and assumptions, additional guidance that may be issued by either the Internal Revenue Service or the U.S. Department of Treasury and actions the Company may take. The Company is continuing to gather additional information to determine the final impact. While the Company was able to make reasonable estimates of certain impacts (and therefore, recorded provisional adjustments), the Company’s accounting for the following elements of the Tax Act, for the
nine months ended
September 30, 2018
, is incomplete as follows:
Reduction of U.S. federal corporate tax rate
: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. The Company recorded a provisional decrease to its deferred tax liability of
$40.6 million
, with a corresponding adjustment to deferred income tax benefit of
$40.6 million
for the year ended December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the Tax Act which are still ongoing, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. For the
three and nine months ended
September 30, 2018
, the Company has not made adjustments to the deferred tax liability and corresponding deferred income tax benefit recorded at
December 31, 2017
.
Deemed Repatriation Transition Tax
: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits of the relevant subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of
$30.3 million
for the year ended
December 31, 2017
. During the first quarter, the IRS released Revenue Procedure 2018-17 and Notice 2018-26, the effects of which increased the provisional Transition Tax by
$0.1 million
. No adjustments were made to the Transition Tax during the second or
third quarter
of
2018
, therefore, as of
September 30, 2018
, the Company had a provisional Transition Tax obligation of
$30.4 million
. The IRS guidance discussed above also had the impact of increasing the 2017 income tax liability determined without regard to the Transition Tax by
$6.4 million
, which was recorded in the first quarter of
2018
. The Company is continuing to gather additional information to more precisely compute the amount of Transition Tax.
Removal of permanent reinvestment representation on certain undistributed foreign earnings
: As a result of the enactment of the Tax Act, the Company has decided to remove the Permanent Reinvestment Representation with respect to certain of its subsidiaries in Canada, Italy and Germany as of
December 31, 2017
. Under the mandatory repatriation provisions of the Tax Act, post-1986 undistributed earnings were taxed in the U.S. as if they were distributed before
December 31, 2017
. However, with the removal of the permanent reinvestment representation with respect to select subsidiaries in Canada, Italy and Germany, the non-creditable withholding taxes and any local country taxes associated with future dividends from these subsidiaries are required to be recorded as deferred tax liabilities as of the end of
2017
. The Company recorded a provisional increase in its
IDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)
deferred tax liability of
$9.2 million
, with a corresponding adjustment to deferred income tax expense of
$9.2 million
for the year ending
December 31, 2017
. During the second quarter the deferred tax liability was reduced by
$1.4 million
to
$7.8 million
. No adjustments were made to the deferred tax liability during the
third quarter
of
2018
. The Company is considering removal of the permanent reinvestment representation with respect to its remaining subsidiaries, which it estimates would result in an additional
$10.8 million
increase to its deferred tax liability.
Global intangible low taxed income
: The Tax Act creates a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the U.S. shareholder’s “net CFC tested income” over the net deemed intangible income return, which is currently defined as the excess of (1)
10%
of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. In January 2018, FASB released guidance on accounting for the GILTI tax. The guidance indicates that either accounting for deferred taxes related to GILTI tax inclusions or treating the GILTI tax as a period cost are both acceptable methods subject to an accounting policy election. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740.
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
$1.3 million
.