IDEX Corporation (IEX)

IEX 
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IDEX Corporation (IEX)

Q2 2011 Earnings Call

July 21, 2011 10:30 AM ET

Executives

Heath Mitts – Vice President and CFO

Larry Kingsley – Chairman and CEO

Mike Yates – Vice President and CAO

Analysts

Robert Barry – UBS

Allison Poliniak – Wells Fargo

Wendy Caplan – SunTrust

Scott Graham – Jefferies & Co.

Charlie Brady – BMO Capital Markets

Matt Summerville – KeyBanc

Brian Meyer – Robert W. Baird

Chris Wiggins – Oppenheimer

Mark Barbalato – Vertical Research Partners

Walt Liptak – Barrington

Presentation

Operator

Good morning. My name is Kristine, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the IDEX Corporation Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Heath Mitts, Vice President and Chief Financial Officer. Sir, you may begin your conference.

Heath Mitts

Thank you, Kristine. Good morning, everyone. And thank you for joining us for our discussion of IDEX second quarter 2011 financial highlights. Last night we issued a press release outlining our company’s financial and operating performance for the three-month period ending June 30, 2011. The press release, along with the presentation slides to be used during today’s webcast can be accessed on our company website at www.idexcorp.com.

Joining me today from IDEX management are Larry Kingsley, our Chairman and CEO; and Mike Yates, our Vice President and Chief Accounting Officer.

The format for our call today is as follows, we will walk through our view of the business as we complete the first half of 2011. We will then discuss our second quarter company results and our four business segments including an update of the recently closed CVI Melles Griot acquisition and finally, we’ll wrap up with updated outlook for 2011. Following our prepared remarks we will then open the call for your questions.

If you should need to exit for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll free number 800-642-1687 and entering conference ID 66065698 or simply log on to our company homepage for the webcast replay.

As we begin a brief reminder this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today’s press release and in IDEX’s filings with the Securities and Exchange Commission.

With that, I’ll now turn this call over to our Chairman and CEO, Larry Kingsley. Larry?

Larry Kingsley

Thanks, Heath, and I’m going to start on slide five. We had a good quarter. Demand continues to be strong and we’re executing well in this environment, most importantly though little over 80% of our exposure to markets that are growing nicely with secular trends that point towards continued expansion.

There are some areas of concern, namely, U.S. municipal spend and the soft market for our Dispensing equipment, but that’s consistent with prior expectations for the year. Our global expansion continues, emerging region growth has been just fantastic and as a function of good underlying economies but also very strong IDEX market penetration.

Our global margin profile is similar to the more developed western markets. So we are now realizing consistently strong margins irrespective of geographic location, as we indicated we would start to see in our last quarter call. And we’ve efficient -- effectively managed costs and have taken selective price actions that have now preserved variable margin for the full year, when you combine that with volume leverage and operating productivity. We’ve realized organic flow-through that’s incremental margin on incremental organic sales of nearly 40% through the first half of the year.

And on the acquisition front, we’re right in our sweets spot. We’ve deployed over $450 million of capital to target in strategic and proprietary transactions so far this year. We announced and completed the CVI Melles Griot transaction in the second quarter with current annual revenues of $185 million.

CVI tremendously enables our optics and photonics platform within the HST segment. And our balance sheet is in great shape and our pipeline of potential deals remains very strong providing us with the confidence that we can complete and integrate more strategic transactions this year in both the FMT and HST segments.

So with the continued expansion of the company, we’ve made forward investments in leadership positions to enable the new growth platforms. The team we have in place now, that’s corporate, segment and platform leadership absolutely have the ability to grow the enterprise.

I’m going to turn to slide six and we’re going to jump right into the results. Sales were up 20% that was up 8% organically. Our Q2 reported EPS was $0.60 and Q2 adjusted EPS was $0.62, that’s up $0.12 or 24% over the year ago quarter.

Q2 adjusted operating margin of 18.2% was up 130 basis points from the prior year, productivity was strong with solid operating leverage on the growth, you’ll see as we go through all the segment detail, just strong financial performance across the company with the exception of free cash flow though which was $46 million not stellar.

We would naturally expect free cash to be greater than our net income as you know. Year-to-date, we have increased our raw material and component inventory to avoid material inflation and to ensure that there were and are no disruptions from the supply chain. But that’s really only supports a portion of the increase in inventory, the remaining increase is not intended process driven or is it IDEX acceptable and the team is focused on driving improved performance.

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