Fitch Affirms IDEX's IDR at 'BBB+'; Outlook Stable
CHICAGO -- May 3, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term
ratings for IDEX Corporation (NYSE: IEX) at 'BBB+'. The Rating Outlook is
Stable. The ratings affect approximately $1.5 billion of total debt including
undrawn amounts under the revolving credit facility (RCF). A full list of
ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's expectations for modest operating
margin expansion from restructuring and modest organic growth. The demand
environment remains mixed, with organic sales benefitting from IDEX's
diversified revenue portfolio. Geographically, weakness in Europe is
offsetting stability in North America, while Asia is strengthening even as
demand remains choppy. IDEX's backlog grew in the most recent quarter and book
to bill remains greater than 1 time (x), supporting expectations for low- to
mid-single digit near-term revenue growth.
Profitability should modestly expand over the intermediate-term from
productivity initiatives and restructuring, including headcount reductions and
facilities consolidation. Heightened focus on cost efficiencies and more fully
integrating past acquisitions, spurred by the company's impairment charges in
two businesses during 2012, should strengthen productivity. Over the
longer-term, operating EBITDA margins are expected to remain within the 20% to
25% range, which is supported by IDEX's Fitch estimated 20.2% operating EBITDA
margin for 2009.
Credit protection measures should remain near current levels over the
longer-term with total leverage (total debt to operating EBITDA) below 2x and
interest coverage (operating EBITDA to interest expense) of exceeding 10x.
Fitch estimates total leverage for the latest 12 months (LTM) ended March 31,
2013 was approximately 1.8x and interest coverage was 10.6x, both
strengthening slightly from the comparable prior year period. Debt levels
should remain stable over the long-term, although temporary spikes to fund
acquisitions are expected and the pace of repayment of incremental issuances
remain a concern.
Cash deployment likely will be directed toward acquisitions, modest share
repurchases, and dividends. IDEX repurchased $35 million of shares in the
first quarter of 2013 under the company's Oct. 22, 2012 $200 million share
repurchase authorization. Fitch estimates IDEX has $175 million to $200
million remaining under share repurchase authorizations. In the absence of an
uptick in acquisition activity, Fitch anticipates the company will exhaust its
authorization in 2013. IDEX also recently increased its annual dividend by
15%, consistent with the company's commitment to returning 30% of net income
to shareholders via dividends.
Acquisition activity could accelerate from lower levels in 2012 and Fitch
believes deals will be mostly organically funded. IDEX uses recurring
acquisitions to augment its business and technology portfolio, targeting
businesses with attractive margins, strong niche market positions and
technologies supporting the company's capabilities in applied fluidics and
optics. Fitch expects annual acquisition spending to average in the $150
million to $200 million range over the longer-term, although acquisition
activity varies year-to-year.
In 2012, IDEX spent roughly $69 million for acquisitions, versus $445 million
spent in 2011 and $95 million in 2010. 2011 included almost $400 million to
purchase CVI MG (CVI), which significantly increased the company's optics and
photonics platform within the Health & Science segment. Acquisitions in the
first quarter of 2013 included an undisclosed amount for FTL Seals Technology,
which IDEX believes will augment the company's proprietary sealing solutions
Annual free cash flow (FCF) should exceed $200 million over the intermediate
term and Fitch expects annual FCF of more than $100 million through the
business cycle. Fitch's FCF forecasts reflect the impact of acquisitions,
modest organic sales growth, favorable incremental margins on higher volumes,
and cost savings from restructuring, all of which will drive higher
profitability. Forecasts incorporate expectations for minimal cash pension
contributions, a slight uptick in capital spending, and annual dividend growth
Pension plans were underfunded by nearly $74 million at the end of 2012,
essentially flat from the prior year despite a further decline in the discount
rate. IDEX plans to contribute $7.9 million to pension and benefit plans in
2013, although IDEX's liquidity and FCF offsets the underfunded position.
The ratings are unlikely to be upgraded in the absence of meaningfully higher
annual FCF and commitment to more conservative financial policies. Negative
rating actions could occur if: i) IDEX fails to return total leverage to
long-term levels following acquisition driven borrowings, signaling a weakened
FCF profile as a result of the deal or ii) acquisitions, share repurchases and
dividends meaningfully exceed annual FCF over a sustained period, resulting in
The ratings are supported by: i) consistent profitability and FCF through the
cycle, ii) solid revenue diversification, and iii) strong positions in a
variety of niche markets. Rating concerns include: i) acquisitive nature with
deals often funded by short-term debt, ii) exposure to municipal spending and
Europe overall, iii) lack of scale compared to some competitors in its key
IDEX's liquidity was adequate at March 31, 2013 and supported by: i) $341
million in cash (roughly 60% of which is located outside the U.S.) and ii) a
$700 million revolving credit facility expiring in 2016, the vast majority of
which was available. Annual FCF exceeding $100 million through the cycle also
supports liquidity. Total debt at March 31, 2013 was $822 million consisting
mostly of senior unsecured notes with various maturities, the closest of which
is $105 million due in 2015.
Fitch affirms IDEX's ratings as follows:
--IDR at 'BBB+';
--Senior unsecured bank facilities at 'BBB+';
--Senior unsecured debt at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Eric Ause, +1-312-606-2302
Craig Fraser, +1-212-908-0310
Brian Bertsch, +1-212-908-0549 (New York)
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