.
.
.
EXHIBIT 13
HISTORICAL DATA(1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000 1999
--------- --------- ---------- ---------- ------------ ---------
Results of Operations
Net sales $ 928,297 $ 797,920 $ 742,014 $ 726,947 $ 704,276 $ 655,041
Gross profit 370,795 309,320 281,438 263,722 277,952 256,484
SG&A expenses 221,411 199,458 181,269 164,893 149,639 140,495
Goodwill amortization - - - 14,165 11,797 11,312
Restructuring activity - - (203) 11,226 - -
Operating income 149,384 109,862 100,372 73,438 116,516 104,677
Other (expense) income - net (743) 899 (123) 731 1,031 568
Interest expense 14,764 14,091 16,354 20,738 16,521 18,020
Provision for income taxes 47,471 34,318 29,783 20,721 37,581 32,797
Income from continuing operations 86,406 62,352 54,112 32,710 63,445 54,428
Income from discontinued operations - - - - - -
Extraordinary items - - - - - -
Net income 86,406 62,352 54,112 32,710 63,445 54,428
Financial Position
Current assets $ 261,238 $ 224,496 $ 221,260 $ 214,903 $ 232,089 $ 213,715
Current liabilities 148,255 115,681 108,332 87,338 177,811(2) 91,634
Working capital 112,983 108,815 112,928 127,565 54,278(2) 122,081
Current ratio 1.8 1.9 2.0 2.5 1 .3(2) 2.3
Capital expenditures 21,097 20,318 19,335 21,639 20,739 18,338
Depreciation and amortization 31,529 30,055 30,105 44,297 36,704 34,835
Total assets 1,186,292 960,739 931,050 838,804 758,854 738,567
Total debt 225,317 176,546 241,051 291,820 241,886 268,589
Shareholders' equity 713,605 592,102 506,791 401,112 374,502 329,024
Performance Measures
Percent of net sales
Gross profit 40.0% 38.8% 37.9% 36.3% 39.5% 39.2%
SG&A expenses 23.9 25.0 24.4 22.7 21.2 21.4
Goodwill amortization - - - 1.9 1.7 1.7
Restructuring activity - - - 1.5 - -
Operating income 16.1 13.8 13.5 10.1 16.5 16.0
Income before income taxes 14.4 12.1 11.3 7.4 14.3 13.3
Income from continuing operations 9.3 7.8 7.3 4.5 9.0 8.3
Effective tax rate 35.5 35.5 35.5 38.8 37.2 37.6
Net income return on average assets 8.0 6.6 6.1 4.1 8.5 7.6
Debt as a percent of capitalization 24.0 23.0 32.2 42.1 39.2 44.9
Net income return on average shareholders' equity 13.2 11.3 11.9 8.4 18.0 17.7
Per Share Data(3)
Basic - income from continuing operations $ 1.73 $ 1.28 $ 1.14 $ .72 $ 1.42 $ 1.23
- net income 1.73 1.28 1.14 .72 1.42 1.23
Diluted - income from continuing operations 1.68 1.25 1.11 .70 1.38 1.21
- net income 1.68 1.25 1.11 .70 1.38 1.21
Cash dividends declared .45 .37 .37 .37 .37 .37
Shareholders' equity 14.04 11.97 10.40 8.70 8.25 7.40
Stock price - high 40.96 28.25 26.44 24.80 24.00 22.75
- low 26.53 17.35 17.13 16.60 15.17 14.42
- close 40.50 27.73 21.80 23.00 22.09 20.25
Price/earnings ratio at year end 24 22 20 33 16 17
Other Data(3)
Employees at year end 4,232 3,689 3,863 3,873 3,880 3,773
Shareholders at year end 6,000 5,700 4,700 5,500 5,200 5,600
Shares outstanding (in 000s):
Weighted average - basic 50,073 48,795 47,504 45,333 44,589 44,316
- diluted 51,348 49,973 48,725 46,571 45,948 45,128
At year end (net of treasury) 50,821 49,479 48,716 46,101 45,387 44,454
(1) See Notes to Consolidated Financial Statements for additional detail.
(2) Excluding short-term debt of $88,077, current liabilities were $89,734,
working capital was $142,355 and the current ratio was 2.6.
(3) All share and per share data have been restated to reflect the
three-for-two stock splits effected in the form of 50% stock dividends in
January 1995 and 1997, and May 2004.
17
1998 1997 1996 1995 1994 1993
- --------- --------- --------- --------- --------- ---------
$ 640,131 $ 552,163 $ 474,699 $ 395,480 $ 319,231 $ 239,704
252,846 222,357 187,074 157,677 126,951 96,903
132,627 110,588 93,217 78,712 66,743 52,950
10,676 8,174 6,241 4,196 3,025 1,889
- - - - - -
109,543 103,595 87,616 74,769 57,183 42,064
479 (693) (696) 524 281 728
22,359 18,398 17,476 14,301 11,939 9,168
33,267 31,029 25,020 21,845 16,181 11,187
54,396 53,475 44,424 39,147 29,344 22,437
10,182 5,151 5,774 6,178 4,266 2,889
(2,514) - - - - -
62,064 58,626 50,198 45,325 33,610 25,326
$ 195,900 $ 197,267 $ 191,599 $ 173,889 $ 140,450 $ 106,864
80,265 77,801 83,286 70,798 58,443 34,038
115,635 119,466 108,313 103,091 82,007 72,826
2.4 2.5 2.3 2.5 2.4 3.1
20,763 13,562 11,634 8,181 6,818 6,120
33,575 24,943 21,312 15,277 12,515 10,092
695,811 599,193 569,745 450,077 357,980 245,291
283,410 258,417 271,709 206,184 168,166 117,464
286,037 238,671 195,509 150,945 116,305 83,686
39.5% 40.3% 39.4% 39.9% 39.8% 40.4%
20.7 20.0 19.6 19.9 20.9 22.1
1.7 1.5 1.3 1.1 1.0 .8
- - - - - -
17.1 18.8 18.5 18.9 17.9 17.5
13.7 15.3 14.6 15.4 14.3 14.0
8.5 9.7 9.4 9.9 9.2 9.4
37.9 36.7 36.0 35.8 35.5 33.3
9.6 10.0 9.8 11.2 11.1 10.4
49.8 52.0 58.2 57.7 59.1 58.4
23.7 27.0 29.0 33.9 33.6 35.6
$ 1.23 $ 1.22 $ 1.03 $ .91 $ .69 $ .53
1.41 1.34 1.16 1.05 .79 .59
1.21 1.19 .99 .88 .67 .51
1.38 1.30 1.13 1.02 .77 .58
.36 .33 .29 .26 .06 -
6.47 5.44 4.51 3.51 2.71 1.95
25.83 24.46 18.42 19.67 13.00 10.67
13.00 15.50 13.25 12.25 10.09 6.50
16.33 23.25 17.75 18.09 12.50 10.59
14 20 16 18 16 18
3,803 3,326 3,093 2,680 2,305 1,828
7,000 7,000 6,100 5,300 4,400 4,300
43,998 43,776 43,227 42,993 42,900 42,594
45,078 44,999 44,669 44,414 43,997 43,464
44,199 43,875 43,389 43,043 42,929 42,870
Net Sales (in millions)
[BAR GRAPH]
<Table>
<Caption>
Net Sales
---------
2004 $928,297
2003 $797,920
2002 $742,014
2001 $726,947
2000 $704,276
1999 $655,041
1998 $640,131
1997 $552,163
1996 $474,699
1995 $395,480
1994 $319,231
1993 $239,704
</Table>
Since 1993, sales have grown at a compound annual rate of 13%. The 16% sales
increase in 2004 resulted from a 7% increase in base business activity, the
inclusion of acquisitions, and favorable currency translation.
Operating Margins
(continuing operations)
[BAR GRAPH]
<Table>
<Caption>
IDEX Value Line Industrial
Composite Index
---- ---------------------
2004 16.1% 11.5%
2003 13.8% 10.9%
2002 13.5% 10.3%
2001 10.1% 10.0%
2000 16.5% 12.5%
1999 16.0% 11.9%
1998 17.1% 11.6%
1997 18.8% 12.1%
1996 18.5% 11.5%
1995 18.9% 11.3%
1994 17.9% 10.4%
1993 17.5% 9.4%
</Table>
Advances in operational excellence are helping to improve the company's
operating margin.
Diluted Earnings per Share
(continuing operations)
[BAR GRAPH]
<Table>
<Caption>
Diluted Earnings per Share
--------------------------
2004 $1.68
2003 $1.25
2002 $1.11
2001 $0.70
2000 $1.38
1999 $1.21
1998 $1.21
1997 $1.19
1996 $0.99
1995 $0.88
1994 $0.67
1993 $0.51
</Table>
Since 1993, diluted earnings per share have grown at a compound annual rate of
11%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORICAL OVERVIEW AND OUTLOOK
IDEX Corporation (IDEX or the Company) sells a broad range of pump products,
dispensing equipment and other engineered products to a diverse customer base in
the United States and other countries around the world. Accordingly, our
businesses are affected by levels of industrial activity and economic conditions
in the U.S. and in other countries where our products are sold and by the
relationship of the U.S. dollar to other currencies. Levels of capacity
utilization and capital spending in certain industries and overall industrial
activity are among the factors that influence the demand for our products.
IDEX consists of three reporting groups: Pump Products, Dispensing
Equipment and Other Engineered Products.
The Pump Products Group produces a wide variety of pumps, compressors,
flow meters, injectors and valves, and related controls for the movement of
liquids, air and gases. The Dispensing Equipment Group produces highly
engineered equipment for dispensing, metering and mixing colorants, paints, inks
and dyes, hair colorants and other personal care products; refinishing
equipment; and centralized lubrication systems. The Other Engineered Products
Group produces firefighting pumps, rescue tools, lifting bags and other
components and systems for the fire and rescue industry; and engineered
stainless steel banding and clamping devices used in a variety of industrial
and commercial applications.
IDEX has a history of achieving above-average operating margins. Our
operating margins have exceeded the average operating margin of the companies
that comprise the Value Line Composite Index (VLCI) every year since 1988. We
view the VLCI operating performance statistics as a proxy for an average
industrial company. Our operating margins are influenced by, among other things,
utilization of facilities as sales volumes change and inclusion of newly
acquired businesses.
Some of our key 2004 financial highlights were as follows:
- Orders were a record $942.4 million, 18% higher than a year ago;
base business orders - excluding acquisitions and foreign currency
translation - were up 9% .
- Sales of $928.3 million set a new record and were up 16% from last
year; base business sales - excluding acquisitions and foreign
currency translation - were up 7%.
- Gross margins improved 120 basis points to 40.0% of sales, while
operating margins at 16.1% were 230 basis points higher than 2003.
- Net income rose 39% to $86.4 million.
- Diluted EPS of $1.68 was 43 cents ahead of last year.
- Operating cash flow rose 27% and reached an all time high of $142.3
million.
- Four strategic acquisitions were completed in 2004 - Vetter, Systec,
Scivex and Dinglee.
[PICTURE]
FROM LEFT TO RIGHT: CLINT KOOMAN (VICE
PRESIDENT -CONTROLLER), SUSAN FISHER
(DIRECTOR - INVESTOR RELATIONS), DOUG
LENNOX (VICE PRESIDENT - TREASURER)
We are pleased with our record results in 2004. The momentum that was
started in 2003 continued into 2004, as our business units delivered record
orders, sales, income, and cash flows and concluded with our 12th consecutive
quarter of year-over-year gross margin expansion. The year also marked our 10th
consecutive quarter of year-over-year earnings growth and our 9th consecutive
quarter of year-over-year organic sales growth. We are especially pleased with
the organic revenue growth of 12% during the fourth quarter - clear evidence
that our organic growth strategy is working. All three of our segments
experienced organic growth. Our recent performance reflects the improved
economy, as well as our operational excellence discipline and continuous drive
to innovate new products that meet critical-to-customer needs. We enter 2005
well positioned for continued growth and are using all the tools at our disposal
to drive revenues, profitability and cash generation.
The following forward-looking statements are qualified by the cautionary
statement under the Private Securities Litigation Reform Act set forth below.
We expect economic conditions to remain favorable as we continue to
leverage rapid process improvement to meet customer needs, drive earnings and
fund innovation to support our organic growth. As a short cycle business, we are
mindful that our financial performance is reliant on the current pace of
incoming orders. Although we have limited visibility on future business
conditions, we believe IDEX is well positioned for earnings expansion, based on
our lower cost levels resulting from our operational excellence discipline, our
investments in new products, applications and global markets, and our pursuit of
strategic acquisitions to complement our longer-term profitable growth.
19
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The " Historical Overview and Outlook" and the " Liquidity and Capital
Resources" sections of this management's discussion and analysis of our
operations contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act
of 1934, as amended. These statements may relate to, among other things, capital
expenditures, cost reductions, cash flow, and operating improvements and are
indicated by words or phrases such as " anticipate," "estimate," "plans,"
"expects," "projects," "should," "will," "management believes," "the Company
believes," "we believe," "the Company intends" and similar words or phrases.
These statements are subject to inherent uncertainties and risks that could
cause actual results to differ materially from those anticipated at the date of
this filing. The risks and uncertainties include, but are not limited to, the
following: economic and political consequences resulting from terrorist attacks
and wars; levels of industrial activity and economic conditions in the U.S. and
other countries around the world; pricing pressures and other competitive
factors, and levels of capital spending in certain industries - all of which
could have a material impact on our order rates and results, particularly in
light of the low levels of order backlogs we typically maintain; our ability to
make acquisitions and to integrate and operate acquired businesses on a
profitable basis; the relationship of the U.S. dollar to other currencies and
its impact on pricing and cost competitiveness; political and economic
conditions in foreign countries in which we operate; interest rates; capacity
utilization and the effect this has on costs; labor markets; market conditions
and material costs; and developments with respect to contingencies, such as
litigation and environmental matters. The forward-looking statements included
here are only made as of the date of this report, and we undertake no obligation
to publicly update them to reflect subsequent events or circumstances. Investors
are cautioned not to rely unduly on forward-looking statements when evaluating
the information presented here.
RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial position and results
of operations for each of the three years in the period ending December 31,
2004. For purposes of this discussion and analysis section, reference is made to
the table on page 20 and the Consolidated Statements of Operations on page 27.
PERFORMANCE IN 2004 COMPARED WITH 2003
Orders, sales, net income and earnings per share were higher in 2004 compared
with 2003. New orders in 2004 totaled $942.4 million and were 18% higher than
the prior year. Excluding the impact of the six acquisitions made since the
beginning of 2003 (Sponsler-June 2003; Classic-September 2003; Vetter-January
2004; Systec-April 2004; Scivex-May 2004 and Dinglee-July 2004) and foreign
currency translation, orders were 9% higher than a year ago.
Sales in 2004 of $928.3 million were 16% higher than the $797.9 million
recorded a year ago. Acquisitions and foreign currency translation accounted for
an improvement of 6% and 3% , respectively, while base business sales rose 7%.
Base business sales increased in all three of the Company's reporting groups.
Domestic base sales were up 10% over the prior year, while base sales to
international customers increased 2% in 2004. Base sales to international
customers represented 43% of the total, compared with 45% in 2003.
In 2004, the Pump Products Group contributed 58% of sales and 54% of
operating income, the Dispensing Equipment Group accounted for 18% of sales and
19% of operating income, and the Other Engineered Products Group represented 24%
of sales and 27% of operating income.
Pump Products Group sales of $542.3 million in 2004 increased $85.8
million, or 19%, compared with 2003. Acquisitions and foreign currency
translation accounted for an 8% and 2% sales improvement, respectively, while
base business activity provided a 9% increase. In 2004, base business sales
increased 12% domestically, while base international sales increased 6%. Base
business sales to customers outside the U.S. were 38% of total group sales in
2004, down from 40% in 2003.
<Table>
<Caption>
Net Sales by Group Dispensing Engineered
(in millions) Pump Products Equipment Products Combined
- -------------- ------------- ---------- ----------- --------
2004 $542,336 $170,198 $219,006 $931,540
2003 $456,516 $159,225 $185,022 $800,763
2002 $436,664 $138,702 $169,692 $745,058
2001 $427,037 $137,407 $164,815 $729,259
2000 $394,999 $166,362 $145,823 $707,184
1999 $372,440 $140,996 $144,486 $657,922
1998 $375,692 $122,844 $144,004 $642,540
1997 $265,918 $138,202 $150,455 $554,575
1996 $245,620 $ 80,169 $149,949 $475,738
1995 $228,909 $ 42,007 $125,118 $396,034
1994 $197,013 $ 37,890 $ 84,784 $319,687
1993 $180,906 $ 31,944 $ 27,364 $240,214
</Table>
In 2004, the improving economy as well as the company's drive for organic
growth, through both operational excellence and innovation, helped increase
sales in all three product segments.
<Table>
<Caption>
Operating Income by
Group Dispensing Engineered
(in millions) Pump Products Equipment Products Combined
- -------------- ------------- ---------- ----------- --------
2004 $93,356 $33,489 $47,120 $173,965
2003 $70,436 $25,724 $32,990 $129,150
2002 $71,945 $18,627 $25,638 $116,210
2001 $61,758 $13,957 $25,032 $100,747
2000 $73,726 $32,566 $27,498 $133,790
1999 $65,673 $25,614 $26,660 $117,947
1998 $74,812 $22,483 $24,596 $121,891
1997 $61,443 $25,636 $26,426 $113,505
1996 $55,129 $14,370 $26,595 $ 96,094
1995 $48,365 $11,739 $22,889 $ 82,993
1994 $40,303 $ 9,736 $14,954 $ 64,993
1993 $34,501 $ 6,761 $ 7,585 $ 48,847
</Table>
In 2004, operating income increased to $149.4 million, while the operating
margin rose 230 basis points to 16.1%. The increase reflects the impact of
volume leverage and a 120 basis point improvement in gross margin during the
year.
> 2004 SALES BY REGION
United States 56%
Europe 26%
Asia 8%
Canada/Latin America 7%
Rest of the World 3%
[> 2004 SALES BY REGION PAI CHART]
A more global market focus continues with 44% of total sales in 2004 to
customers outside the United States.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company and Business Group Financial Information
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, (1) 2004 2003 2002
- ------------------------------------ ----------- ---------- ---------
Pump Products Group
Net sales(2) $ 542,336 $ 456,516 $ 436,664
Operating income(3) (4) 93,356 70,436 71,945
Operating margins(3)(4) 17.2% 15.4% 16.5%
Identifiable assets $ 694,731 $ 551,183 $ 535,822
Depreciation and amortization(3) 16,464 16,141 16,913
Capital expenditures 13,968 12,887 9,348
Dispensing Equipment Group
Net sales(2) $ 170,198 $ 159,225 $ 138,702
Operating income(3) (4) 33,489 25,724 18,627
Operating margins(3)(4) 19.7% 16.2% 13.4%
Identifiable assets $ 214,140 $ 203,786 $ 192,258
Depreciation and amortization(3) 5,616 5,881 5,734
Capital expenditures 2,769 2,967 3,651
Other Engineered Products Group
Net sales(2) $ 219,006 $ 185,022 $ 169,692
Operating income(3) (4) 47,120 32 990 25,638
Operating margins(3)(4) 21.5% 17.8% 15.1%
Identifiable assets $ 246,410 $ 186,417 $ 186,860
Depreciation and amortization(3) 6,012 5,116 4,666
Capital expenditures 3,204 3,874 4,990
Company
Net sales $ 928,297 $ 797,920 $ 742,014
Operating income(3) (4) 149,384 109,862 100,372
Operating margins(3)(4) 16.1% 13.8% 13.5%
Total assets $ 1,186,292 $ 960,739 $ 931,050
Depreciation and amortization(3) 30,949 29,475 29,525
Capital expenditures 21,097 20,318 19,335
(1) Includes acquisitions of Scivex, Inc. (May 2004), Systec, L.L.C. (April
2004), Classic Engineering, Inc. (September 2003), Sponsler Co., Inc.
(June 2003), Wright Pump Corporation (October 2002), Rheodyne, L.L.C.
(July 2002) and Halox Technologies, Inc. (April 2002) in the Pump Products
Group; and Tianjin Dinglee Machine and Motor Co., Ltd (July 2004) and
Manfred Vetter GmbH (January 2004) in the Other Engineered Products Group
from dates of acquisition. See Note 11 of the Notes to Consolidated
Financial Statements.
(2) Group net sales include intersegment sales.
(3) IDEX discontinued goodwill and trademark amortization as of January 1,
2002, in accordance with Statement of Financial Accounting Standards No.
142, as further explained in Note 2 of the Notes to Consolidated Financial
Statements.
(4) Group operating income excluded net unallocated corporate operating
expenses and restructuring activity. IDEX took actions in 2002 to downsize
operations to lower its cost structure, as further explained in Note 6 of
the Notes to Consolidated Financial Statements. The restructuring activity
resulted in income of $203 in 2002, which was not assigned to the
individual group segments. Had the Company allocated the 2002
restructuring activity, it would have been assigned to the groups as
follows: Pump Products (income of $1,046), Dispensing Equipment (expense
of $121), and Other Engineered Products (expense of $722).
21
[PICTURE]
FROM LEFT TO RIGHT: DAVE WINDMULLER
(VICE PRESIDENT - GROUP EXECUTIVE OF DISPENSING
EQUIPMENT AND OTHER ENGINEERED PRODUCTS),
JOHN MCMURRAY (VICE PRESIDENT - GROUP EXECUTIVE
OF PUMP PRODUCTS AND OPERATIONAL EXCELLENCE)
Dispensing Equipment Group sales of $170.2 million increased by $11.0
million, or 7%, in 2004 compared with the prior year, due to favorable foreign
currency translation of 5% and a 2% increase in base business activity. Base
domestic sales increased 7% compared with 2003, while base international sales
decreased 2%. Base sales to customers outside the U.S. were 61% of total group
sales in 2004, down from 63% in 2003.
Other Engineered Products Group sales of $219.0 million increased by $34.0
million, or 18%, in 2004 compared with 2003. Acquisitions accounted for an
increase of 7%, foreign currency translation added 4% and base business activity
contributed 7%. In 2004, base sales increased 13% domestically, while base
international sales decreased 1%. Base business sales to customers outside the
U.S. were 39% of total group sales in 2004, down from 43% in 2003.
Gross profit of $370.8 million in 2004 was $61.5 million, or 20%, higher
than 2003. As a percent of sales, gross profit was 40.0% in 2004, which
represented a 120 basis point increase from 38.8% in 2003. The higher gross
profit margin primarily reflects reduced material costs from our global
sourcing, Six Sigma and Lean Manufacturing initiatives, volume leverage, and
price increases, all of which more than offset cost increases and additional
expenses.
Selling, general and administrative (SG&A) expenses increased to $221.4
million in 2004 from $199.5 million in 2003. This increase was partly due to the
inclusion of six acquisitions that incrementally added $10.0 million of cost.
This increase also reflects the deliberate reinvestment in the business to drive
organic growth as well as certain volume-related cost increases. As a percent of
net sales, SG&A expenses were 23.9%, down from 25.0% in 2003.
Operating income increased by $39.5 million, or 36%, to $149.4 million in
2004 from $109.9 million in 2003, primarily due to higher 2004 gross profit,
offset by increased SG&A expenses. Operating margins in 2004 were 16.1% of
sales, compared with 13.8% in 2003.
In the Pump Products Group, operating income of $93.4 million and
operating margin of 17.2% increased in 2004 compared with the $70.4 million and
15.4% recorded in 2003. Operating income for the Dispensing Equipment Group
increased to $33.5 million in 2004 from $25.7 million last year, and operating
margins improved to 19.7% from 16.2% recorded in 2003. Operating income in the
Other Engineered Products Group of $47.1 million and operating margin of 21.5%
increased from the $33.0 million and 17.8% achieved in 2003. The margin
improvement in all three segments was mostly attributable to the improved sales
volumes and other factors discussed above.
Other expense of $.7 million in 2004 was $1.6 million higher than $.9
million of income in 2003. In 2004, we incurred hurricane-related costs at one
of our business units as well as certain costs associated with the refinancing
of our credit facility. In 2003, we benefited from a foreign currency exchange
gain related to the anticipated funding of the Vetter acquisition in January
2004.
Interest expense increased to $14.8 million in 2004 from $14.1 million in
2003. The increase was principally due to higher debt levels resulting from our
recent acquisitions as well as a slightly higher interest rate environment.
The provision for income taxes increased to $47.5 million in 2004 from
$34.3 million in 2003. The effective tax rate was 35.5% for both periods.
Net income was $86.4 million, or $1.68 per share, compared with $62.4
million, or $1.25 per share, in 2003.
PERFORMANCE IN 2003 COMPARED WITH 2002
Orders, sales, net income and earnings per share were higher in 2003 compared
with 2002. New orders in 2003 totaled $797.8 million and were 6% higher than the
prior year. Excluding the impact of the five acquisitions made since the
beginning of 2002 (Halox-April 2002; Rheodyne-July 2002; Wright Pump-October
2002; Sponsler-June 2003; and Classic-September 2003) and foreign currency
translation, orders were essentially unchanged from 2002.
Sales in 2003 of $797.9 million were 8% higher than the $742.0 million
recorded in 2002. Acquisitions and foreign currency translation accounted for an
improvement of 2% and 5%, respectively, while base business sales rose by 1%.
Domestic sales increased by 1%, while international sales, net of foreign
currency translation, were 8% higher. For the year 2003, international sales
were 45% of total sales, up from 41% in 2002.
In 2003, the Pump Products Group contributed 57% of sales and 55% of
operating income, the Dispensing Equipment Group accounted for 20% of both sales
and operating income, and the Other Engineered Products Group represented 23% of
sales and 25% of operating income.
Pump Products Group sales of $456.5 million in 2003 increased by $19.9
million, or 5%, compared with 2002. Acquisitions and foreign currency
translation accounted for a 5% and 2% sales improvement, respectively, but this
was offset by a 2% decline in base business activity. In 2003, domestic sales
increased slightly and international sales increased by 12% compared with 2002.
Excluding acquisitions, base U.S. sales volume decreased by 4%, while base
international sales increased by 7%. Sales to customers outside the U.S. were
39% of total group sales in 2003, up from 37% in 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
[PICTURE]
FROM LEFT TO RIGHT:
DAVE KAMATH (CHIEF INFORMATION
OFFICER), DAN SALLIOTTE (VICE
PRESIDENT - STRATEGY AND BUSINESS
DEVELOPMENT), KIM BORS (VICE
PRESIDENT - HUMAN RESOURCES),
FRANK NOTARO (VICE PRESIDENT -
GENERAL COUNSEL AND SECRETARY),
TOM GIORDANO (VICE PRESIDENT -
SUPPLY CHAIN & LOGISTICS)
Dispensing Equipment Group sales of $159.2 million increased by $20.5
million, or 15%, in 2003 compared with the prior year, mainly due to favorable
foreign currency translation of 13% and a 2% increase in base business activity.
Domestic sales decreased by 5% compared with 2002, while international sales
increased by 32%. Sales to customers outside the U.S. were 62% of total group
sales in 2003, up from 54% in 2002.
Other Engineered Products Group sales of $185.0 million increased by $15.3
million, or 9%, in 2003 compared with 2002. Foreign currency translation and
increased base business activity provided an improvement of 5% and 10%,
respectively, but this was partially offset by a 6% decline due to the sale of a
product line. In 2003, domestic sales increased by 7% and international sales
increased by 29%. Sales to customers outside the U.S. were 43% of total group
sales in 2003, up from 38% in 2002.
Gross profit of $309.3 million in 2003 was $27.9 million higher than 2002.
As a percent of sales, gross profit was 38.8% in 2003, which represented an
increase from 37.9% in 2002. The higher gross profit margin primarily reflects
reduced material costs from our global sourcing activities and savings from Six
Sigma and Lean Manufacturing initiatives, which more than offset increased
research and development expenses.
SG&A expenses increased to $199.5 million in 2003 from $181.3 million in
2002. This increase was partly due to the inclusion of five acquisitions that
incrementally added $4.4 million of cost. This increase also reflects the
deliberate reinvestment in the business to drive organic growth, as well as
certain cost increases including pension, insurance, audit and legal expenses.
As a percent of net sales, SG&A expenses were 25.0%, up from 24.4% in 2002.
While 2003 SG&A expenses are up for the reasons noted, we do not believe this is
indicative of a significant negative trend.
We also generated income related to restructuring activity of $.2 million
in 2002. For more details on our restructuring programs, see " Restructuring
Actions" on page 24.
Operating income increased by $9.5 million, or 9%, to $109.9 million in
2003 from $100.4 million in 2002, primarily due to higher 2003 gross profit,
offset by increased SG&A expenses. Operating margins in 2003 were 13.8% of sales
compared with 13.5% in 2002.
As described in footnote 4 of the "Company and Business Group Financial
Information" table on page 20, each group's operating income and margins exclude
restructuring activity in 2002. In the Pump Products Group, operating income of
$70.4 million and operating margin of 15.4% decreased in 2003 compared with the
$71.9 million and 16.5% recorded in 2002. The decline in operating margin was
due to a number of factors including new product development, additional
sales/marketing resources, ERP implementation and lower volume in some of our
more profitable base businesses. Operating income for the Dispensing Equipment
Group increased to $25.7 million in 2003 from $18.6 million in 2002, and
operating margins improved to 16.2% from 13.4% recorded in 2002. The margin
increase was mainly due to increased sales volumes. Operating income in the
Other Engineered Products Group of $33.0 million and operating margin of 17.8%
increased from the $25.6 million and 15.1% achieved in 2002. The improvement in
margins was mostly attributable to improved sales volumes.
Other income of $.9 million in 2003 was $1.0 million higher than the $.1
million of expense in 2002. In 2003, we benefitted from a foreign currency
exchange gain associated with the anticipated funding of the Vetter acquisition
in January 2004.
Interest expense decreased to $14.1 million in 2003 from $16.4 million in
2002. The decrease was principally due to lower debt levels resulting from debt
paydowns from operating cash flow and a lower interest rate environment.
The provision for income taxes increased to $34.3 million in 2003 from
$29.8 million in 2002. The effective tax rate was 35.5% for both periods.
Net income was $62.4 million, or $1.25 per share, compared with $54.1
million, or $1.11 per share, in 2002.
23
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, working capital was $113.0 million and our current
ratio was 1.8 to 1. Cash flows from operating activities increased by $30.6
million, or 27%, to $142.3 million in 2004, mainly due to the improved operating
results discussed earlier and favorable working capital primarily due to $10.0
million of lower contributions to our pension plans in 2004.
Cash flows from operating activities were more than adequate to fund
capital expenditures of $21.1 million and $20.3 million in 2004 and 2003,
respectively. Capital expenditures were generally for machinery and equipment
that improved productivity and tooling to support IDEX's global sourcing
initiative, although a portion was for business system technology and
replacement of equipment and facilities. Management believes that IDEX has ample
capacity in its plant and equipment to meet expected needs for future growth in
the intermediate term.
In 2004, the Company acquired Vetter, Systec, Scivex and Dinglee at a cost
of $44.8 million, $22.4 million, $98.6 million and $4.1 million, respectively.
The Company also completed the acquisitions of Sponsler and Classic in 2003 at a
cost of $10.3 million and $3.7 million, respectively. In 2004, the Company also
paid $1.1 million in settlement of a purchase price contingency related to the
2003 acquisition of Classic. In February 2003, an $8.0 million payment of
deferred consideration was made in connection with the Rheodyne acquisition that
was consummated in July 2002. These payments were financed under the Company's
credit facilities.
In addition to the $150.0 million of 6.875% Senior Notes (Senior Notes)
due February 15, 2008, the Company also entered into a new $600.0 million
domestic multi-currency bank revolving credit facility (Credit Facility), which
expires on December 14, 2009. At December 31, 2004, the maximum amount available
under the Credit Facility was $600.0 million, of which $35.0 million was
borrowed with outstanding letters of credit totaling $4.2 million. The Credit
Facility contains a covenant that limits total debt outstanding to 3.25 times
operating cash flow, as defined in the agreement. Our total debt outstanding was
$225.3 million at December 31, 2004, and based on the covenant, total debt
outstanding was limited to $598.3 million. Interest is payable quarterly on the
outstanding balance at the bank agent's reference rate or, at the Company's
election, at LIBOR plus an applicable margin. The applicable margin is based on
the credit rating of our Senior Notes, and can range from 27 basis points to 75
basis points. Based on the Company's BBB rating at December 31, 2004, the
applicable margin was 55 basis points. We also pay an annual fee of 15 basis
points on the total Credit Facility.
In December 2001, we, and certain of our subsidiaries, entered into a
one-year, renewable agreement with a financial institution, under which we
collateralized certain receivables for borrowings (Receivables Facility). This
agreement was renewed on December 15, 2004 for another year. The Receivables
Facility provides for borrowings of up to $30.0 million, depending upon the
level of eligible receivables. At December 31, 2004, there were $25.0 million in
borrowings outstanding and included in long-term debt at an interest rate of
approximately 2.5% per annum.
We also have a one-year, renewable $30.0 million demand line of credit
(Short-Term Facility), which expires on May 20, 2005. Borrowings under the
Short-Term Facility are at LIBOR plus the applicable margin in effect under the
Credit Facility. At December 31, 2004, there were no borrowings outstanding
under the Short-Term Facility.
We believe the Company will generate sufficient cash flow from operations
for the next 12 months and over the long term to meet its operating
requirements, interest on all borrowings, required debt repayments, any
authorized share repurchases, planned capital expenditures, and annual dividend
payments to holders of common stock. In the event that suitable businesses are
available for acquisition upon terms acceptable to the Board of Directors, we
may obtain all or a portion of the financing for the acquisitions through the
incurrence of additional long-term debt.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Our contractual obligations and commercial commitments include rental payments
under operating leases, payments under capital leases, and other long-term
obligations arising in the ordinary course of business. There are no
identifiable events or uncertainties, including the lowering of our credit
rating, that would accelerate payment or maturity of any of these commitments or
obligations. The Company also has obligations with respect to its pension and
postretirement medical benefit plans. See Note 14 of the Notes to Consolidated
Financial Statements.
[BAR GRAPH]
<Table>
<Caption>
International Sales Percent of net sales Amount in millions
- ------------------- -------------------- ------------------
2004 44% $412,142
2003 45% $358,282
2002 41% $307,223
2001 42% $304,282
2000 41% $287,719
1999 39% $255,755
1998 39% $250,946
1997 44% $244,671
1996 43% $206,381
1995 37% $146,237
1994 34% $109,034
1993 29% $ 69,936
</Table>
A solid global distribution network, acquisitions with a high percentage of
foreign sales, and 24 manufacturing facilities outside the U.S. result in a high
level of international sales for IDEX.
<Table>
<Caption>
Assets and Total Debt
(in thousands) Assets Total Debt
- -------------- ------ ----------
2004 $1,187,864 $225,317
2003 $ 960,739 $176,546
2002 $ 931,050 $241,051
2001 $ 838,804 $291,820
2000 $ 758,854 $241,886
1999 $ 738,567 $268,589
1998 $ 695,811 $283,410
1997 $ 599,193 $258,417
1996 $ 569,745 $271,709
1995 $ 450,077 $206,184
1994 $ 357,980 $168,166
1993 $ 245,291 $117,464
</Table>
IDEX has continued to use strong cash flow to reduce its debt, while making
strategic acquisitions to complement organic growth.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
The following table summarizes our significant contractual obligations and
commercial commitments at December 31, 2004, and the future periods in which
such obligations are expected to be settled in cash. In addition, the table
reflects the timing of principal and interest payments on outstanding
borrowings. Additional detail regarding these obligations are provided in the
Notes to Consolidated Financial Statements, as referenced in the table:
PAYMENTS LESS MORE
DUE BY PERIOD THAN 1 1-3 3-5 THAN 5
(IN THOUSANDS) TOTAL YEAR YEARS YEARS YEARS
- ---------------- ----------- -------- -------- ---------- ----------
Borrowings
(Note 9) $ 225,317 $ 15,283 $ - $ 210,034 $ -
Operating
lease commitments (Note 13) 20,749 6,635 8,571 3,330 2,213
Capital lease obligations(1) 2,641 1,360 379 481 421
Purchase
Obligation(2) 65,428 60,206 5,137 85 -
----------- -------- -------- ---------- ---------
Total
contractual
obligations(3) $ 314,135 $ 83,484 $ 14,087 $ 213,930 $ 2,634
=========== ======== ======== ========== =========
(1) Comprised primarily of property leases
(2) Comprised primarily of inventory commitments
(3) Comprised of liabilities recorded on the balance sheet of $248,707, and
obligations not recorded on the balance sheet $65,428
RESTRUCTURING ACTIONS
IDEX took actions in 2002 and 2001 to downsize operations to lower its cost
structure. The restructuring affected all three business groups and reduced the
workforce, lowered costs, improved efficiencies and addressed excess capacity
that resulted from lower demand and more efficient processes. These steps were
necessary to appropriately size the Company's production capacity to match the
declining levels of demand for a broad range of products. The restructuring
actions affected multiple employee groups in approximately 20 locations across
11 business units. No business activities or product lines were abandoned. The
restructuring actions included the layoff of 508 employees with 250 terminations
resulting from the first quarter 2001 plan, 231 from the fourth quarter 2001
plan, and 27 from the second quarter 2002 plan. All costs of the restructuring
activities were charged to expense and included in "Restructuring activity" in
the Consolidated Statements of Operations. The restructuring charges included
employee severance, fringe benefits, outplacement fees, idle facility carrying
costs, lease termination costs, the loss on sale of equipment, and the loss on
disposal of two manufacturing facilities owned by the Company. Determination of
the restructuring charges was based on the estimated severance benefits paid to
terminated employees, the net book value of surplus assets less expected
proceeds, and estimated other costs. The restructuring plans were substantially
executed as originally planned.
The restructuring activity resulted in income of $.2 million in 2002. This
related to a reversal of $1.5 million of restructuring expenses initially
recorded, which more than offset the 2002 charges of $1.3 million. Of the $1.5
million reversal, $1.1 million was attributed to the sale of a manufacturing
facility for more than the value estimated at the time the restructuring plan
was adopted. For additional detail related to restructuring activity, see Note 6
of the Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
We believe that the application of the following accounting policies, which are
important to our financial position and results of operations, requires
significant judgments and estimates on the part of management. For a summary of
all of our accounting policies, including the accounting policies discussed
below, see Note 1 of the Notes to Consolidated Financial Statements.
Revenue recognition - We recognize revenue from product sales when title
passes and the risks of ownership have passed to the customer, based on the
terms of the sale. Our customary terms are FOB shipping point. We estimate and
record provisions for sales returns, sales allowances and original warranties in
the period the related products are sold, in each case based on our historical
experience. To the extent actual results differ from these estimated amounts,
results could be adversely affected.
Noncurrent assets -The Company evaluates the recoverability of certain
noncurrent assets utilizing various estimation processes. In particular, the
recoverability of December 31, 2004 balances for goodwill and intangible assets
of $713.6 million and $29.5 million, respectively, are subject to estimation
processes, which depend on the accuracy of underlying assumptions, including
future operating results. The Company evaluates the recoverability of each of
these assets based on estimated business values and estimated future cash flows
(derived from estimated earnings and cash flow multiples). The recoverability
of these assets depends on the reasonableness of these assumptions and how they
compare with the eventual operating performance of the specific businesses to
which the assets are attributed. To the extent actual business values or cash
flows differ from those estimated amounts, the recoverability of these
noncurrent assets could be affected.
Income taxes - Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting using tax rates
in effect for the years in which the differences are expected to reverse.
Federal income taxes are provided on that portion of the income of foreign
subsidiaries that is expected to be remitted to the United States and be
taxable. Management periodically estimates the Company's probable tax
obligations using historical experience in tax jurisdictions and informed
judgments. To the extent actual results differ from these estimated amounts,
results could be adversely affected.
Contingencies and litigation - We are currently involved in certain legal
and regulatory proceedings and, as required and where it is reasonably possible
to do so, have accrued our estimates of the probable costs for the resolution of
these matters. These estimates have been developed in consultation with outside
counsel and are based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies. It is possible, however,
that future operating results for any particular quarterly or annual period
could be materially affected by changes in our assumptions or the effectiveness
of our strategies related to these proceedings.
Defined benefit retirement plans - The plan obligations and related assets
of defined benefit retirement plans are presented in Note 14 of the Notes to
Consolidated Financial Statements. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using market quotations. Plan
obligations and the annual pension expense are determined by consulting
actuaries using a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate at which the obligations could be
effectively settled and the anticipated rate of future salary increases. Key
25
assumptions in the determination of the annual pension expense include the
discount rate, the rate of salary increases, and the estimated future return on
plan assets. To the extent actual amounts differ from these assumptions and
estimated amounts, results could be adversely affected.
REGISTRATION STATEMENT FILINGS FOR COMMON STOCK OFFERINGS
In March 2002, we filed a registration statement on Form S-3 with the U.S.
Securities and Exchange Commission (SEC) covering the secondary offering of
4,408,799 shares of common stock owned by IDEX Associates, L.P. In April 2002,
that registration statement was amended to also include the secondary offering
of 841,201 shares of IDEX common stock owned by KKR Associates, L.P., and the
primary offering of 2,250,000 shares of IDEX common stock. Also in April 2002,
we announced the pricing of this public offering at $24 per common share.
Subsequently, the overallotment option was exercised by the underwriter for the
sale of an additional 1,125,000 secondary shares owned by KKR Associates, L.P.,
bringing the total offering to 8,625,000 shares. The $50.8 million of net
proceeds we received was used to repay debt under the Credit Facility.
In September 2002, we filed a registration statement on Form S-3 with the
SEC covering the secondary offering of 2,025,000 shares of IDEX common stock
owned by KKR Associates, L.P. This offering, completed in January 2003, did not
increase the number of shares outstanding, and the Company did not receive any
proceeds from the offering.
The secondary shares covered by both of these registration statements had
been owned by KKR Associates, L.P. and IDEX Associates, L.P. since IDEX was
formed in January 1988.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP
106-2 provides guidance on the accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) on
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires disclosures regarding the effect of the federal subsidy
provided by the Act. The adoption of FSP 106-2 did not have a material impact on
the Company's results of operations, financial position, or cash flows.
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151, " Inventory Costs - an amendment of Accounting
Research Bulletin (ARB) No. 43, Chapter 4." This SFAS amends the guidance in ARB
No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). It
also requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this SFAS requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
Company will adopt this SFAS in 2005, but does not expect it to have a material
impact on its results of operations, financial condition, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment." This SFAS establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This SFAS focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The Company will
continue to evaluate the impact of adopting this SFAS in 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This SFAS eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The Company will continue to evaluate the impact of
adopting this SFAS in 2005.
In December 2004, the FASB issued FSP 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," and FSP 109-2, " Accounting for Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004."
FSP 109-1 provides a tax deduction on qualified production activities, while FSP
109-2 introduces a special one-time dividends-received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer, provided certain
criteria are met. The Company has adopted both of these staff positions in 2004
(see Note 12 of Notes to Consolidated Financial Statements).
MARKET RISK
We are subject to market risk associated with changes in interest rates and
foreign currency exchange rates. Interest rate exposure is limited to the $225.3
million of total debt outstanding at December 31, 2004. Approximately 32% of the
debt is priced at interest rates that float with the market. A 50 basis point
movement in the interest rate on the floating rate debt would result in an
approximate $.4 million annualized increase or decrease in interest expense and
cash flows. The remaining debt is fixed rate debt. We will, from time to time,
enter into interest rate swaps on our debt when we believe there is a financial
advantage for doing so. A treasury risk management policy, adopted by the Board
of Directors, describes the procedures and controls over derivative financial
and commodity instruments, including interest rate swaps. Under the policy, we
do not use derivative financial or commodity instruments for trading purposes,
and the use of these instruments is subject to strict approvals by senior
officers. Typically, the use of derivative instruments is limited to interest
rate swaps on the Company's outstanding long-term debt.
Our foreign currency exchange rate risk is limited principally to the euro
and British pound. We manage our foreign exchange risk principally through
invoicing our customers in the same currency as the source of our products. As a
result, the Company's exposure to any movement in foreign currency exchange
rates is immaterial to the Consolidated Statements of Operations.
At December 31, 2003, the Company had a foreign currency contract that it
entered into in anticipation of the funding of the January 2004 purchase of
Vetter. The increase in fair market value of this contract resulted in income of
$.5 million at December 31, 2003, and was included in "Other (expense) income -
net" in the Consolidated Statements of Operations.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, 2004 2003
- ----------------------------------------------------------------------- ------------- ----------
Assets
Current assets
Cash and cash equivalents $ 7,274 $ 8,552
Receivables - net 119,567 101,859
Inventories 126,978 105,304
Other current assets 7,419 8,781
------------- ----------
Total current assets 261,238 224,496
Property, plant and equipment - net 155,602 147,095
Goodwill - net 713,619 559,008
Intangible assets - net 29,545 19,401
Other noncurrent assets 26,288 10,739
------------- ----------
Total assets $ 1,186,292 $ 960,739
============= ==========
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 71,405 $ 56,252
Dividends payable 6,105 4,622
Accrued expenses 70,745 54,807
------------- ----------
Total current liabilities 148,255 115,681
Long-term debt 225,317 176,546
Other noncurrent liabilities 99,115 76,410
------------- ----------
Total liabilities 472,687 368,637
------------- ----------
Commitments and Contingencies (Note 13)
Shareholders' equity
Common stock, par value $.01 per share
Shares issued and outstanding: 2004 - 50,996,444; 2003 - 49,613,328 510 496
Additional paid-in capital 234,354 198,000
Retained earnings 439,137 375,629
Minimum pension liability adjustment (4,644) (12,481)
Accumulated translation adjustment 53,046 35,892
Treasury stock, at cost: 2004 - 175,650 shares; 2003 - 134,228 shares (4,209) (2,903)
Unearned compensation on restricted stock (4,589) (2,531)
------------- ----------
Total shareholders' equity 713,605 592,102
------------- ----------
Total liabilities and shareholders' equity $ 1,186,292 $ 960,739
============= ==========
See Notes to Consolidated Financial Statements.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 2004 2003 2002
- -------------------------------------------------- --------- --------- ---------
Net sales $ 928,297 $ 797,920 $ 742,014
Cost of sales 557,502 488,600 460,576
--------- --------- ---------
Gross profit 370,795 309,320 281,438
Selling, general and administrative expenses 221,411 199,458 181,269
Restructuring activity - - (203)
--------- --------- ---------
Operating income 149,384 109,862 100,372
Other (expense) income - net (743) 899 (123)
--------- --------- ---------
Income before interest expense and income taxes 148,641 110,761 100,249
Interest expense 14,764 14,091 16,354
--------- --------- ---------
Income before income taxes 133,877 96,670 83,895
Provision for income taxes 47,471 34,318 29,783
--------- --------- ---------
Net income $ 86,406 $ 62,352 $ 54,112
========= ========= =========
Earnings Per Common Share
Basic earnings per common share $ 1.73 $ 1.28 $ 1.14
========= ========= =========
Diluted earnings per common share $ 1.68 $ 1.25 $ 1.11
========= ========= =========
Share Data
Basic weighted average common shares outstanding 50,073 48,795 47,504
========= ========= =========
Diluted weighted average common shares outstanding 51,348 49,973 48,725
========= ========= =========
See Notes to Consolidated Financial Statements.
CONSOLIDATED SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COMMON UNREALIZE UNEARNED
STOCK AND MINIMUM GAINS COMPENSATION
ADDITIONAL PENSION ACCUMULATED (LOSSES) ON TOTAL
PAID-IN RETAINED LIABILITY TRANSLATION ON TREASURY RESTRICTED SHAREHOLDERS'
CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT DERIVATIVES STOCK STOCK EQUITY
---------- -------- ---------- ----------- ----------- -------- ------------ -----------
Balance, December 31, 2001 $ 124,966 $295,489 $ (1,783) $ (10,226) $ (140) $ (865) $ (6,329) $ 401,112
---------- -------- --------- ----------- --------- ------- --------- -----------
Net income 54,112 54,112
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income, net
of tax
Unrealized translation adjustment 19,466 19,466
Reversal of unrealized derivative
losses 140 140
Minimum pension adjustment (8,788) (8,788)
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income (8,788) 19,466 140 10,818
---------- -------- --------- ----------- --------- ------- --------- -----------
Comprehensive income 54,112 (8,788) 19,466 140 64,930
---------- -------- --------- ----------- --------- ------- --------- -----------
Issuance of 409,460 shares of
common stock from exercise of
stock options and deferred
compensation plans 7,061 7,061
Issuance of 2,250,000
shares of common stock 50,836 50,836
Amortization of
restricted common stock award 1,899 1,899
Restricted shares
surrendered for tax
withholdings (1,081) (1,081)
Cash dividends declared -
$.37 per common share
outstanding (17,966) (17,966)
---------- -------- --------- ----------- --------- ------- --------- -----------
Balance, December 31, 2002 182,863 331,635 (10,571) 9,240 - (1,946) (4,430) 506,791
---------- -------- --------- ----------- --------- ------- --------- -----------
Net income 62,352 62,352
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income, net
of tax
Unrealized translation adjustment 26,652 26,652
Minimum pension adjustment (1,910) (1,910)
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income (1,910) 26,652 24,742
---------- -------- --------- ----------- --------- ------- --------- -----------
Comprehensive income 62,352 (1,910) 26,652 87,094
---------- -------- --------- ----------- --------- ------- --------- -----------
Issuance of 809,079 shares of
common stock from exercise of
stock options and deferred
compensation plans 15,633 15,633
Amortization of
restricted common
stock award 1,899 1,899
Restricted shares
surrendered for tax
withholdings (957) (957)
Cash dividends declared -
$.37 per common share
outstanding (18,358) (18,358)
---------- -------- --------- ----------- --------- ------- --------- -----------
Balance, December 31, 2003 198,496 375,629 (12,481) 35,892 - (2,903) (2,531) 592,102
---------- -------- --------- ----------- --------- ------- --------- -----------
Net income 86,406 86,406
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income, net
of tax
Unrealized translation adjustment 17,154 17,154
Minimum pension adjustment 7,837 7,837
---------- -------- --------- ----------- --------- ------- --------- -----------
Other comprehensive income 7,837 17,154 24,991
---------- -------- --------- ----------- --------- ------- --------- -----------
Comprehensive income 86,406 7,837 17,154 111,397
---------- -------- --------- ----------- --------- ------- --------- -----------
Issuance of 1,238,247 shares of
common stock from exercise of
stock options and deferred
compensation plans 31,997 31,997
Issuance of 145,000
shares of restricted
common stock 4,371 (4,371) -
Amortization of
restricted common
stock award 2,313 2,313
Restricted shares
surrendered for tax
withholdings (1,306) (1,306)
Cash dividends declared -
$.45 per common share
outstanding (22,898) (22,898)
---------- -------- --------- ----------- --------- ------- --------- -----------
Balance, December 31, 2004 $ 234,864 $439,137 $ (4,644) $ 53,046 $ - $(4,209) $ (4,589) $ 713,605
========== ======== ========= =========== ========= ======= ========= ===========
29
CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------- --------- --------- ---------
Cash flows from operating activities
Net income $ 86,406 $ 62,352 $ 54,112
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 27,998 27,146 27,103
Amortization of intangible assets 638 430 523
Amortization of unearned compensation on
restricted stock 2,313 1,899 1,899
Amortization of debt issuance expenses 580 580 580
Deferred income taxes 10,782 10,487 9,592
Changes in:
Receivables - net (5,953) 6,867 1,006
Inventories (9,284) 4,624 6,246
Trade accounts payable 11,897 211 7,025
Accrued expenses 11,995 2,508 (310)
Other - net 4,923 (5,418) 1,709
--------- --------- ---------
Net cash flows from operating activities 142,295 111,686 109,485
--------- --------- ---------
Cash flows from investing activities
Additions to property, plant and equipment (21,097) (20,318) (19,335)
Acquisition of businesses (net of cash acquired) (170,983) (21,954) (74,928)
Proceeds from fixed asset disposals 527 3,436 3,934
--------- --------- ---------
Net cash flows from investing activities (191,553) (38,836) (90,329)
--------- --------- ---------
Cash flows from financing activities
Borrowings under credit facilities for acquisitions 170,983 21,954 74,928
Net repayments under credit facilities (124,953) (85,387) (132,195)
Net borrowings (repayments) of other long-term debt 1,665 (1,686) 2,759
Proceeds from issuance of common stock - - 50,836
Dividends paid (21,415) (18,284) (17,721)
Proceeds from stock option exercises 22,848 13,176 5,755
Other - net (1,148) (1,023) (1,538)
--------- --------- ---------
Net cash flows from financing activities 47,980 (71,250) (17,176)
--------- --------- ---------
Net (decrease) increase in cash (1,278) 1,600 1,980
Cash and cash equivalents at beginning of year 8,552 6,952 4,972
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,274 $ 8,552 $ 6,952
========= ========= =========
Supplemental cash flow information
Cash paid for:
Interest $ 14,022 $ 13,576 $ 16,232
Income taxes 23,617 18,774 21,022
Significant non-cash activities
Debt acquired with acquisition of businesses - - 2,136
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Business
IDEX Corporation (IDEX or the Company) is a manufacturer of a broad range of
pumps, metering products, dispensing equipment, and other engineered products
sold to a diverse customer base in a variety of industries in the U.S. and
internationally. Its products include industrial pumps, compressors, flow
meters, injectors and valves, and related controls for use in a wide variety of
process applications; precision-engineered equipment for dispensing, metering
and mixing paints, hair colorants and other personal care products; refinishing
equipment; centralized lubrication systems; and engineered products for
industrial and commercial markets, including fire and rescue, transportation
equipment, oil and gas, electronics, and communications. These activities are
grouped into three business segments: Pump Products, Dispensing Equipment and
Other Engineered Products.
Principles of Consolidation
The consolidated financial statements include the Company and its subsidiaries.
Significant intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The principal areas of estimation reflected
in the financial statements are revenue recognition, noncurrent assets, income
taxes, contingencies and litigation, and defined benefit retirement plans.
Revenue Recognition
IDEX recognizes revenue from product sales when title passes and the risks of
ownership have passed to the customer, based on the terms of the sale. Customary
terms are FOB shipping point. The Company estimates and records provisions for
sales returns, sales allowances and original warranties in the period the
related products are sold, in each case based on its historical experience.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three or fewer months to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost - which includes
labor, material and factory overhead - is determined on the first-in, first-out
(FIFO) basis or the last-in, first-out (LIFO) basis. Generally, a reserve for
excess inventory is recorded for inventory on hand in excess of one year of
historical usage, except for newly introduced products. An obsolescence reserve
is recorded for inventory made obsolete by marketplace, product or engineering
changes.
Debt Expenses
Expenses incurred in securing and issuing debt are amortized over the life of
the related debt.
Earnings Per Common Share
Earnings per common share (EPS) are computed by dividing net income by the
weighted average number of shares of common stock (basic) plus common stock
equivalents and unvested restricted shares (diluted) outstanding during the
year. Common stock equivalents consist of stock options and deferred
compensation units (DCUs) and have been included in the calculation of weighted
average shares outstanding using the treasury stock method. All prior share and
per share amounts have been restated to reflect the three-for-two stock split
effected in the form of a 50% stock dividend in May 2004.
Basic weighted average shares outstanding reconciles to diluted weighted
average shares outstanding as follows:
2004 2003 2002
------ ------ ------
Basic weighted average
common shares outstanding 50,073 48,795 47,504
Dilutive effect of
stock options, DCUs and
unvested restricted
shares 1,275 1,178 1,221
------ ------ ------
Diluted weighted average
common shares outstanding 51,348 49,973 48,725
====== ====== ======
Options to purchase approximately .1 and .9 million shares of common
stock as of December 31, 2004 and 2003, respectively, were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the Company's common stock and, therefore, the effect of
their inclusion would be antidilutive.
Stock Options
The Company uses the intrinsic-value method of accounting for stock option
awards as prescribed by Accounting Principles Board (APB) Opinion No. 25 and,
accordingly, does not recognize compensation expense for its stock option
awards in the Consolidated Statements of Operations.
The following table reflects pro forma net income and EPS had the Company
elected to adopt the fair value approach of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
2004 2003 2002
-------- -------- --------
Net income
As reported $ 86,406 $ 62,352 $ 54,112
Pro forma 81,024 57,563 49,682
Basic EPS
As reported 1.73 1.28 1.14
Pro forma 1.62 1.18 1.05
Diluted EPS
As reported 1.68 1.25 1.11
Pro forma 1.58 1.15 1.02
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
2004, 2003 and 2002, respectively: dividend yields of 1.55%, 1.84% and 1.54% ;
volatility of 29.6% , 32.6% and 34.1%; risk-free interest rates of 3.0% , 3.2%
and 4.5% ; and expected lives of 5.5 years.
Depreciation and Amortization
Depreciation is recorded using the straight-line method. The estimated useful
lives used in the computation of depreciation of tangible assets are as
follows:
Land improvements.................... 10 to 12 years
Buildings and improvements........... 3 to 30 years
Machinery and equipment
and engineering drawings............ 3 to 12 years
Office and transportation equipment.. 3 to 10 years
Certain identifiable intangible assets are amortized over their estimated
useful lives using the straight-line method. Cost in excess of net assets
acquired was amortized over a period of 30 to 40 years for periods prior to 2002
(see Note 2).
The carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the depreciation or amortization period or to the
unamortized balance is warranted. This evaluation is based on the
31
expected utilization of the long-lived assets and the projected, undiscounted
cash flows of the operations in which the long-lived assets are used.
Research and Development Expenditures
Costs associated with research and development are expensed in the year incurred
and included in " Cost of sales." Research and development expenses - which
include costs associated with developing new products and major improvements to
existing products - were $21,242, $17,261 and $12,738 in 2004, 2003 and 2002,
respectively.
Foreign Currency Translation
The functional currency of all operations outside the United States is the
respective local currency. All foreign currency balance sheet accounts have been
translated using the exchange rates in effect as of the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The gains and losses resulting from changes in exchange rates from
year to year have been reported in "Accumulated translation adjustment" in the
Consolidated Balance Sheets. The effect on the Consolidated Statements of
Operations of transaction gains and losses is insignificant for all years
presented.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
trade receivables and payables, approximate their fair values.
Concentration of Credit Risk
IDEX is not overly dependent on a single customer, the largest of which
accounted for less than 3% of net sales for all years presented.
New Accounting Pronouncements
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP
106-2 provides guidance on the accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) on
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires disclosures regarding the effect of the federal subsidy
provided by the Act. The adoption of FSP 106-2 did not have a material impact on
the Company's results of operations, financial position, or cash flows.
In November 2004, the FASB issued SFAS No. 151, " Inventory Costs - an
amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4." This SFAS
amends the guidance in ARB No. 43, Chapter 4, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). It also requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this SFAS requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company will adopt this SFAS in 2005, but does not
expect it to have a material impact on its results of operations, financial
condition, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment." This SFAS establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This SFAS focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The Company will
continue to evaluate the impact of adopting this SFAS in 2005.
In December 2004, the FASB issued SFAS No. 153," Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This SFAS eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The Company will continue to evaluate the impact of
adopting this SFAS in 2005.
In December 2004, the FASB issued FSP 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" and FSP 109-2, " Accounting for Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004."
FSP 109-1 provides a tax deduction on qualified production activities, while FSP
109-2 introduces a special one-time dividends-received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer, provided certain
criteria are met. The Company has adopted both of these staff positions in 2004
(see Note 12).
2. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the year ended December 31,
2004, by business group, were as follows:
OTHER
PUMP DISPENSING ENGINEERED
PRODUCTS EQUIPMENT PRODUCTS TOTAL
--------- ---------- ---------- ---------
Balance,
December 31, 2003 $ 338,292 $ 125,287 $ 95,429 $ 559,008
Goodwill acquired
during the year 103,409 - 39,535 142,944
Foreign currency
translation 1,400 5,754 4,513 11,667
--------- ---------- ---------- ---------
Balance,
December 31,2004 $ 443,101 $ 131,041 $ 139,477 $ 713,619
========= ========== ========== =========
The carrying value of identifiable intangible assets at December 31,
2004, was $29,545, which was split between amortizable and unamortizable assets
as follows:
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- ------------ --------
Amortized intangible assets
Patents $ 10,018 $ 4,808 $ 5,210
Other 725 168 557
-------- ------------ --------
Total amortized intangible assets 10,743 4,976 5,767
Unamortized trademark assets 26,173 2,395 23,778
-------- ------------ --------
Total intangible assets $ 36,916 $ 7,371 $ 29,545
======== ============ ========
Amortization expense in 2004 for the items listed above was $638, which is
consistent with the estimated amortization expense for the next five years.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." which established the accounting and reporting standards for goodwill
and intangible assets. SFAS No. 142 also eliminated the amortization of goodwill
and certain intangible assets to earnings, but instead required these assets be
reviewed periodically for impairment. IDEX adopted SFAS No. 142 on January 1,
2002. After reviewing the estimated fair market values, both in the aggregate
and at each individual reporting unit, no impairment to goodwill and other
intangible assets was recorded as of December 31, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet accounts at December 31, 2004 and 2003,
were as follows:
2004 2003
--------- --------
Receivables
Customers $ 120,696 $101,961
Other 3,131 3,692
--------- --------
Total 123,827 105,653
Less allowance for doubtful
accounts 4,260 3,794
--------- --------
Total receivables - net $ 119,567 $101,859
========= ========
Inventories
Raw materials $ 52,824 $ 38,998
Work in process 14,181 13,651
Finished goods 59,973 52,655
--------- --------
Total inventories $ 126,978 $105,304
========= ========
Inventories that were carried on a LIFO basis amounted to $104,957 and
$90,812 at December 31, 2004 and 2003, respectively. The excess of current cost
over LIFO inventory value and the impact of using the LIFO method on earnings
were not material.
2004 2003
--------- ---------
Property, plant and equipment, at cost
Land and improvements $ 15,474 $ 14,904
Buildings and improvements 95,984 82,007
Machinery and equipment 206,494 194,181
Office and transportation equipment 80,222 76,088
Engineering drawings 3,990 3,919
Construction in progress 5,650 5,887
--------- ---------
Total 407,814 376,986
Less accumulated depreciation
and amortization 252,212 229,891
--------- ---------
Total property, plant and
equipment - net $ 155,602 $ 147,095
========= =========
Goodwill
Cost in excess of net assets
acquired $ 798,923 $ 642,856
Less accumulated amortization 85,304 83,848
--------- ---------
Total goodwill - net $ 713,619 $ 559,008
========= =========
Intangible assets
Cost (at fair market value
on acquisition date) $ 36,916 $ 25,897
Less accumulated amortization 7,371 6,496
--------- ---------
Total intangible assets - net $ 29,545 $ 19,401
========= =========
Accrued expenses
Payroll and related items $ 38,316 $ 30,528
Taxes 14,676 11,072
Insurance 4,776 2,308
Other 12,977 10,899
--------- ---------
Total accrued expenses $ 70,745 $ 54,807
========= =========
Other noncurrent liabilities
Deferred income taxes $ 56,414 $ 31,345
Pension and retiree medical reserves 40,196 41,888
Other 2,505 3,177
--------- ---------
Total other noncurrent liabilities $ 99,115 $ 76,410
========= =========
4. COMMON AND PREFERRED STOCK
On April 22, 2004, the Company's Board of Directors authorized a three-for-two
common stock split effected in the form of a 50% stock dividend paid on May 28,
2004, to shareholders of record on May 14, 2004. Par value of common stock
remained at $.01 per share. All prior share and per share amounts have been
restated to reflect the stock split.
During 2004, the Company issued 145,000 shares of restricted stock as
compensation to key employees. These shares carry dividend and voting rights,
and the sale of these shares is restricted prior to the date of vesting. Of the
145,000 shares issued, 115,000 shares vest annually from one to five years after
the grant date, while the remaining 30,000 shares contain a cliff vesting
feature with half vesting four years and the remaining half five years after the
grant date.
During 2000, the Company issued 525,000 shares of restricted stock as
compensation to a key employee. These shares carry dividend and voting rights,
and the sale of these shares is restricted prior to the date of vesting, which
occurs annually from one to five years after the grant date.
All restricted shares were recorded at their fair market value on the date
of the grant, with a corresponding charge to shareholders' equity. The unearned
portion is being amortized as compensation expense on a straight-line basis over
the related vesting period.
On October 20, 1998, IDEX's Board of Directors authorized the repurchase
of up to 2.25 million shares of its common stock, either at market prices or on
a negotiated basis as market conditions warrant. At December 31, 2004, IDEX had
purchased a total of 9,750 shares under the program at a cost of approximately
$144.
At December 31, 2004 and 2003, the Company had 75 million shares of
authorized common stock with a par value of $.01 per share and 5 million shares
of preferred stock with a par value of $.01 per share authorized but unissued.
5. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
IDEX's operations have been aggregated (primarily on the basis of products,
production processes, distribution methods and management organizations) into
three reportable segments: Pump Products, Dispensing Equipment and Other
Engineered Products. The Pump Products Group designs, produces and distributes a
wide range of engineered industrial pumps, flow meters, compressors, injectors
and valves, and related controls for process applications. The Dispensing
Equipment Group designs, manufactures and markets precision-engineered equipment
for dispensing, metering and mixing paints, hair colorants and other personal
care products; refinishing equipment; and centralized lubrication systems. The
Other Engineered Products Group designs, produces and distributes engineered
equipment for industrial and commercial markets, including fire and rescue,
transportation equipment, oil and gas, electronics, and communications. IDEX is
not overly dependent on a single customer, the largest of which accounted for
less than 3% of net sales for all years presented.
Information on IDEX's business segments follows, and is based on the nature
of products and services offered. The Company evaluates performance based on
several factors, of which operating income is the primary financial measure. The
accounting policies of the business segments are described in Note 1.
Intersegment sales are accounted for at fair value as if the sales were to third
parties.
33
2004 2003 2002
---------- -------- --------
Net sales
Pump Products
External customers $ 539,101 $453,703 $433,623
Intersegment sales 3,235 2,813 3,041
---------- -------- --------
Total group sales 542,336 456,516 436,664
---------- -------- --------
Dispensing Equipment
External customers 170,195 159,224 138,701
Intersegment sales 3 1 1
---------- -------- --------
Total group sales 170,198 159,225 138,702
---------- -------- --------
Other Engineered Products
External customers 219,001 184,994 169,690
Intersegment sales 5 28 2
---------- -------- --------
Total group sales 219,006 185,022 169,692
---------- -------- --------
Intersegment elimination (3,243) (2,843) (3,044)
---------- -------- --------
Total net sales $ 928,297 $797,920 $742,014
========== ======== ========
Operating income(1)
Pump Products $ 93,356 $ 70,436 $ 71,945
Dispensing Equipment 33,489 25,724 18,627
Other Engineered Products 47,120 32,990 25,638
Restructuring activity - - 203
Corporate office and other (24,581) (19,288) (16,041)
---------- -------- --------
Total operating income $ 149,384 $109,862 $100,372
========== ======== ========
Assets
Pump Products $ 694,731 $551,183 $535,822
Dispensing Equipment 214,140 203,786 192,258
Other Engineered Products 246,410 186,417 186,860
Corporate office and other 31,011 19,353 16,110
---------- -------- --------
Total assets $1,186,292 $960,739 $931,050
========== ======== ========
Depreciation and amortization
Pump Products $ 16,464 $ 16,141 $ 16,913
Dispensing Equipment 5,616 5,881 5,734
Other Engineered Products 6,012 5,116 4,666
Corporate office and other(2) 2,857 2,337 2,212
---------- -------- --------
Total depreciation and amortization $ 30,949 $ 29,475 $ 29,525
========== ======== ========
Capital expenditures
Pump Products $ 13,968 $ 12,887 $ 9,348
Dispensing Equipment 2,769 2,967 3,651
Other Engineered Products 3,204 3,874 4,990
Corporate office and other 1,156 590 1,346
---------- -------- --------
Total capital expenditures $ 21,097 $ 20,318 $ 19,335
========== ======== ========
(1) Group operating income excludes net unallocated corporate operating
expenses and restructuring activity. IDEX took actions in 2002 to downsize
operations to lower its cost structure, as further explained in Note 6.
The restructuring activity resulted in income of $203 in 2002 and was not
assigned to the individual group segments. Had the Company allocated the
2002 restructuring activity, it would have been assigned to the groups as
follows: Pump Products (income of $1,046), Dispensing Equipment (expense
of $121) and Other Engineered Products (expense of $722).
(2) Excludes amortization of debt issuance expenses.
Information about the Company's operations in different geographical
regions for the years ended December 31, 2004, 2003 and 2002 is shown below. Net
sales were attributed to geographic areas based on location of the customer, and
no country outside the U.S. was greater than 10% of total revenues.
2004 2003 2002
-------- -------- ---------
Net sales
U.S. $516,155 $441,427 $ 434,791
Europe 244,153 213,905 186,466
Other countries 167,989 142,588 120,757
-------- -------- ---------
Total net sales $928,297 $797,920 $ 742,014
======== ======== =========
Long-lived assets
U.S. $656,469 $523,633 $ 528,942
Europe 258,725 207,308 176,948
Other countries 9,860 5,302 3,900
-------- -------- ---------
Total long-lived assets $925,054 $736,243 $ 709,790
======== ======== =========
6. RESTRUCTURING ACTIVITY
IDEX took actions in 2002 and 2001 to downsize operations to lower its cost
structure. These steps were necessary to appropriately size the Company's
production capacity to match the declining levels of demand for a broad range of
products. The restructuring actions affected multiple employee groups in
approximately 20 locations across 11 business units. No business activities or
product lines were abandoned. All costs of the restructuring actions were
charged to expense and included in "Restructuring activity" in the Consolidated
Statements of Operations. The restructuring charges included employee severance,
fringe benefits, outplacement fees, idle facility carrying costs, lease
termination costs, the loss on sale of equipment, and the loss on disposal of
two manufacturing facilities owned by the Company. Determination of the
restructuring charges was based on the estimated severance benefits paid to
terminated employees, the net book value of surplus assets less expected
proceeds, and estimated other costs.
In 2002, IDEX reversed $1,531 of accrued restructuring expenses previously
recorded. Of this reversal, $1,090 was attributable to the fact that the Company
was able to sell one manufacturing facility for more than the value estimated at
the time the restructuring plan was adopted.
The restructuring activity was separately identified in the Consolidated
Statements of Operations and resulted in the following activity for 2002:
2002
--------
Pretax charge $ 1,328
Reversal of previously recorded charges (1,531)
--------
Total pretax income (203)
Provision for income taxes 72
--------
Total income after taxes $ (131)
========
The cash requirements for the restructuring plans did not have a
significant impact on the Company's liquidity. The restructuring actions
resulted in the layoff of 508 employees, both hourly and salaried, across 11
business units, representing approximately 12% of the labor force. The
restructurings led to 27 and 481 employee term i-nations in 2002 and 2001,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
7. STOCK OPTIONS
Under various plans, the Company may grant stock options to employees and
non-employee directors at exercise prices equal to or exceeding the market
price at the date of grant. Therefore, no compensation cost has been recognized
in the Consolidated Statements of Operations for these plans. Substantially all
of the options become exercisable in five equal installments, beginning one year
from the date of grant, and generally expire 10 years from the date of grant.
The Company may grant additional options for up to .5 million shares.
The following table summarizes option activity under the plans:
WEIGHTED
AVERAGE
NUMBER OF OPTION
SHARES PRICE PER
UNDER OPTION SHARE
------------ ---------
Outstanding at December 31, 2001 4,490,763 $ 17.95
Granted 1,299,660 24.48
Exercised (518,918) 16.47
Forfeited (277,162) 20.63
---------- ---------
Outstanding at December 31, 2002 4,994,343 19.65
Granted 1,510,988 20.36
Exercised (813,900) 16.94
Forfeited (284,181) 21.47
---------- ---------
Outstanding at December 31, 2003 5,407,250 20.16
Granted 1,619,300 28.23
Exercised (1,249,628) 18.95
Forfeited (208,810) 22.00
---------- ---------
Outstanding at December 31, 2004 5,568,112 $ 22.70
========== =========
Exercisable at December 31, 2002 2,143,374 $ 17.66
========== =========
Exercisable at December 31, 2003 2,309,903 $ 19.14
========== =========
Exercisable at December 31, 2004 1,946,501 $ 19.90
========== =========
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR ENDED:
December 31, 2002 $ 8.33
==========
December 31, 2003 $ 5.90
==========
December 31, 2004 $ 8.04
==========
The following table summarizes information about options outstanding at
December 31, 2004:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
---------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER LIFE OF EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACT PRICE EXERCISABLE PRICE
- ------------ ----------- --------- -------- ----------- --------
$11.66-17.00 226,300 3.2 Years $ 16.05 225,850 $ 16.06
17.01-22.00 2,655,843 6.7 Years 19.04 1,208,242 18.69
22.01-35.74 2,685,969 8.2 Years 26.88 512,409 24.44
--------- -------- -------- ----------- --------
Total 5,568,112 7.3 Years $ 22.70 1,946,501 $ 19.90
========= ========= ======== =========== ========
8. COMPREHENSIVE INCOME
The tax effects of the components of other comprehensive income for 2004, 2003
and 2002 follow:
2004 2003 2002
--------- -------- ---------
Minimum pension adjustment
Pretax amount $ 12,118 $ (2,864) $ (13,732)
Tax (provision) benefit (4,281) 954 4,944
--------- -------- ---------
Aftertax amount $ 7,837 $ (1,910) $ (8,788)
========= ======== =========
Unrealized translation adjustment
Pretax amount $ 17,154 $ 26,652 $ 19,466
Tax provision - - -
--------- -------- ---------
Aftertax amount $ 17,154 $ 26,652 $ 19,466
========= ======== =========
Unrealized gains
on derivatives
Pretax amount $ - $ - $ 226
Tax provision - - (86)
--------- -------- ---------
Aftertax amount $ - $ - $ 140
========= ======== =========
9. DEBT
Debt at December 31, 2004 and 2003 consisted of the following:
2004 2003
---- ----
Long-term debt
Senior Notes $ 150,000 $ 150,000
Bank credit facilities,
including accrued interest 64,195 18,009
Other long-term debt 11,122 8,537
--------- ----------
Total long-term debt $ 225,317 $ 176,546
========= ==========
In February 1998, the Company sold $150 million of Senior Notes due
February 15, 2008 (Senior Notes), with a coupon interest rate of 6.875% and an
effective rate of 6.919% to maturity. Interest is payable semiannually. The
Senior Notes are redeemable at any time at the option of the Company in whole or
in part. At December 31, 2004, the fair market value of the Senior Notes was
approximately $161.3 million, based on the quoted market price.
The Company entered into a new $600 million domestic multicurrency bank
revolving credit facility (Credit Facility), which expires in December 2009. At
December 31, 2004, the Company had a total of $35 million, which approximated
fair value, drawn under the Credit Facility and outstanding letters of credit
totaling $4 million. The net available borrowings under the Credit Facility as
of December 31, 2004, were approximately $561 million.
Interest on the outstanding borrowings under the Credit Facility is
payable quarterly at a rate based on the bank agent's reference rate or, at the
Company's election, at a rate based on LIBOR plus 55 basis points per annum. The
weighted average interest rate on borrowings outstanding under the Credit
Facility was 3.1% per annum at December 31, 2004. A facility fee equal to 15
basis points per annum is payable quarterly on the total amount available under
the Credit Facility.
The Company and certain of its subsidiaries entered into a renewable,
one-year agreement in December 2001 (Receivables Facility) with a financial
institution, under which the Company collateralized certain of its receivables
for borrowings. This agreement was renewed in December 2004 for another year.
The Receivables Facility
35
provides for borrowings of up to $30 million depending upon the level of
eligible receivables. At December 31, 2004, $25 million, which approximated fair
value, was outstanding and included in bank credit facilities at an interest
rate of approximately 2.5% per annum.
The Company has a $30 million demand line of credit (Short-Term Facility),
which expires in May 2005. Borrowings under the Short-Term Facility are based on
LIBOR plus the applicable margin in effect under the Credit Facility. At
December 31, 2004, there were no borrowings under the Short-Term Facility.
At December 31, 2004, other long-term debt included debt at international
locations maintained for working capital purposes. Interest is payable on the
outstanding balances at rates ranging from 2.6% to 4.9% per annum.
Total debt outstanding at December 31, 2004 and 2003 included accrued
interest of $4.2 million and $4.0 million, respectively.
There are two financial covenants that the Company is required to
maintain. As defined in the agreement, the minimum interest coverage ratio
(operating cash flow to interest) is 3.0 to 1 and the maximum leverage ratio
(outstanding debt to operating cash flow) is 3.25 to 1. At December 31, 2004,
the Company was in compliance with both of these financial covenants.
10. DERIVATIVE INSTRUMENTS
At December 31, 2003, the Company had a foreign currency contract, which it
entered into in anticipation of the funding of the January 2004 purchase of
Vetter. The increase in fair market value of this contract resulted in income of
$.5 million at December 31, 2003 and was included in "Other (expense) income -
net" in the Consolidated Statements of Operations.
At December 31, 2001, the Company had two interest rate swaps, which
effectively converted $52.3 million of floating rate debt into fixed rate debt
at interest rates approximating 5.6%. The fair market value of the interest rate
swaps was a net expense of $140 at December 31, 2001, as reported in other
comprehensive income. Both of the interest rate swaps expired in March 2002.
Fair values relating to derivative financial instruments reflect the
estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date, based on quoted market prices of comparable
contracts. The net gain or loss on the interest rate swap contracts was not
material.
11. ACQUISITIONS
In 2004, the Company acquired Manfred Vetter GmbH (January 2004), Systec, L.L.C.
(April 2004), Scivex, L.L.C. (May 2004) and Tianjin Dinglee Machine and Motor
Co., Ltd (July 2004). Vetter, based in Zulpich, Germany, designs and
manufactures pneumatic lifting and sealing bags for vehicle and aircraft rescue,
environmental protection, industrial maintenance, and disaster recovery and
control. Vetter operates as part of the Hale business unit within the Other
Engineered Products Group. Systec, based in New Brighton, Minnesota, designs and
manufactures vacuum degassing products for the analytical chemistry
instrumentation market. Degassing of fluids is critical to the instrumentation
and analytical chemistry markets since dissolved gasses within a given fluid can
be detrimental to the accuracy of test results. Systec operates as part of our
Rheodyne business unit within the Pump Products Group. Scivex, which operates
Upchurch Scientific in Oak Harbor, Washington and Sapphire Engineering in
Pocasset, Massachusetts, is a leading provider of fluidic components and systems
for the analytical, biotechnology and diagnostics instrumentation markets.
Scivex is being operated as a stand-alone business unit in IDEX's Pump Products
Group. Dinglee, based in Tianjin, China, is a leading manufacturer of rescue
tools in the Chinese rescue tool market. Dinglee operates as part of our Hale
business unit within the Other Engineered Products Group. IDEX acquired Vetter,
Systec, Scivex and Dinglee for a purchase price of $44,813, $22,442, $98,553 and
$4,106, respectively, with financing provided by borrowings under the Credit
Facility. In addition, a purchase price contingency related to the acquisition
of Classic in September 2003 was settled in 2004, resulting in an additional
payment of $1,069. Goodwill and intangible assets recognized as part of these
transactions was $142,944 and $10,212, respectively.
In 2003, the Company acquired Sponsler Co., Inc. (June 2003) and Classic
Engineering, Inc. (September 2003). Sponsler, headquartered in Westminster,
South Carolina, is a manufacturer of precision turbine flow meters to meet all
flow applications, including low-flow and situations where viscosity, corrosive
media, extreme temperature or hazardous materials are factors. Classic,
headquartered in Jacksonville, Florida, is a supplier of fully integrated pump
and metering systems to chemical companies and municipal water treatment
facilities. It also designs, engineers and manufactures standard and custom
chemical-feed systems for the water, wastewater, chemical OEM, pulp and paper,
cement and general industrial markets. Within the Pump Products Group, Classic
is operated as part of Pulsafeeder, while Sponsler is operated as part of Liquid
Controls. IDEX acquired Sponsler and Classic for a purchase price of $10,251 and
$3,703, respectively, with financing provided by borrowings under the Credit
Facility. Goodwill and intangible assets recognized as part of these
acquisitions was $11,484 and $373, respectively. In February 2003, an $8.0
million payment of deferred consideration was made in connection with the
Rheodyne acquisition in July 2002.
In 2002, the Company acquired Halox Technologies, Inc. (April 2002),
Rheodyne, L.L.C. (July 2002) and Wright Pump Corporation (October 2002). Halox,
headquartered in Bridgeport, Connecticut, is a manufacturer of point-of-use
chlorine dioxide equipment. Its products generate chlorine dioxide for use in
water treatment and disinfectant applications. Rheodyne, headquartered in
Rohnert Park, California, is a manufacturer of injectors, valves, fittings and
accessories for the analytical instrumentation market and used by manufacturers
of high pressure liquid chromatography equipment. Wright Pump, headquartered in
Waukesha, Wisconsin, is a manufacturer of stainless-steel positive displacement
circumferential piston pumps and replacement parts for the sanitary pump market.
Within the Pump Products Group, Wright Pump is operated as part of Viking Pump,
Halox is operated as part of Pulsafeeder, and Rheodyne's activities are closely
coordinated with those of ISMATEC, Trebor, Scivex and Micropump. IDEX acquired
the above businesses for an aggregate purchase price of $74,928, with financing
provided by borrowings under the Credit Facility. The Company also acquired
$2,136 of debt in connection with the acquisitions. Goodwill and intangible
assets recognized as part of these acquisitions was $62,370 and $6,431,
respectively.
All acquisitions were accounted for as purchases, and operating results
include the acquisitions from the dates of purchase. In addition, in certain
instances, the acquisitions contain purchase price contingencies, which are
considered to be immaterial to the Company. IDEX does not consider any of the
acquisitions, individually or in aggregate, to be material to its results of
operations, financial condition, or cash flows for any of the years presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
12. INCOME TAXES
Pretax income for the years ended December 31, 2004, 2003, and 2002, was taxed
under the following jurisdictions:
2004 2003 2002
---------- ---------- ---------
Domestic $ 85,119 $ 66,402 $ 58,087
Foreign 48,758 30,268 25,808
---------- ---------- ---------
Total $ 133,877 $ 96,670 $ 83,895
========== ========== =========
The provision for income taxes for the years ended December 31, 2004,
2003, and 2002, was as follows:
2004 2003 2002
---------- ---------- ---------
Current
U.S. $ 21,921 $ 13,000 $ 12,891
State and local 326 738 448
Foreign 14,442 10,093 6,852
---------- ---------- ---------
Total current 36,689 23,831 20,191
---------- ---------- ---------
Deferred
U.S. 6,293 6,954 6,934
State and local 1,439 779 -
Foreign 3,050 2,754 2,658
---------- ---------- ---------
Total deferred 10,782 10,487 9,592
---------- ---------- ---------
Total provision
for income taxes $ 47,471 $ 34,318 $ 29,783
========== ========== =========
Deferred (prepaid) income taxes resulted from the following:
2004 2003 2002
---------- ---------- ---------
Employee and
retiree
benefit plans $ 5,995 $ 5,046 $ (59)
Depreciation and
amortization 5,559 8,334 6,603
Inventories (1,545) (785) (285)
Allowances and
accruals (560) (1,557) 3,560
Other 1,333 (551) (227)
---------- ---------- ---------
Total $ 10,782 $ 10,487 $ 9,592
========== ========== =========
Deferred tax assets (liabilities) related to the following at December 31,
2004 and 2003:
2004 2003
---------- ---------
Employee and retiree benefit $ 882 $ 11,144
plans
Depreciation and amortization (68,455) (55,776)
Inventories (4,660) (4,456)
Tax benefit carry forwards - 872
Allowances and accruals 5,666 4,922
Other 2,515 2,512
---------- ---------
Total $ (64,052) $ (40,782)
========== =========
The balance sheet at December 31, 2004, included a current deferred tax
liability of $7,638 in accrued expenses and a noncurrent deferred tax liability
of $56,414 in other noncurrent liabilities. The balance sheet at December 31,
2003, included a current deferred tax liability of $9,437 in accrued expenses
and a noncurrent deferred tax liability of $31,345 in other noncurrent
liabilities.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to pretax income. The computed
amount and the differences for the years ended December 31, 2004, 2003, and 2002
are shown in the following table.
2004 2003 2002
---------- ---------- ---------
Pretax income $ 133,877 $ 96,670 $ 83,895
========== ========== =========
Provision for income taxes:
Computed amount at
statutory rate of 35% $ 46,857 $ 33,835 $ 29,363
State and local income tax
(net of federal tax benefit) 1,147 986 291
Taxes on non-US earnings -net 2,319 960 674
U.S. business tax credits (2,674) - -
Extra-territorial income (ETI)
deduction (1,531) (945) (1,260)
Other 1,353 (518) 715
---------- ---------- ---------
Total provision for
income taxes $ 47,471 $ 34,318 $ 29,783
========== ========== =========
The Company has not provided an estimate for any U.S. or additional
foreign taxes on undistributed earnings of foreign subsidiaries that might be
payable if these earnings were repatriated. However, the Company believes that
U.S. foreign tax credits would, for the most part, eliminate any additional U.S.
tax and offset any additional foreign tax.
On October 22, 2004, the President signed the American Jobs Creation Act
of 2004 (the Act). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010.
In return, the Act also provides for a two-year phase out of the existing ETI
exclusion for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. The Company expects the net
effect of the phase-out of the ETI and the phase-in of this new deduction will
not result in a significant change to the effective tax rate for fiscal year
2005 and future years based on current earning levels.
Another provision of the Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of limitations and, as of
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not been remitted to the
U.S. Based on our analysis to date, it is reasonably possible that we might
repatriate foreign earnings of up to $73,000, with a related tax liability of
up to $7,300. We expect to be in a position to finalize our assessment by
December 31, 2005.
13. COMMITMENTS AND CONTINGENCIES
At December 31, 2004, total future minimum rental payments under noncancelable
operating leases, primarily for office facilities, warehouses and data
processing equipment, were $20,749. The future minimum rental commitments for
each of the next five years and thereafter are as follows: 2005 - $6,635; 2006 -
$5,160; 2007 - $3,412; 2008 - $1,913; 2009 - $1,417; thereafter - $2,212.
Rental expense totaled $10,401, $9,238 and $9,510 for the years ended
December 31, 2004, 2003 and 2002, respectively.
IDEX is a party to various legal proceedings involving employment,
contractual, product liability and other matters, none of which is expected to
have a material adverse effect on its results of operations, financial
condition, or cash flows.
37
14. RETIREMENT BENEFITS
The Company sponsors several qualified and nonqualified pension plans and other
postretirement plans for its employees. The following table provides a
reconciliation of the changes in the benefit obligations and fair value of plan
assets over the two-year period ended December 31, 2004, and a statement of the
funded status at December 31 for both years:
PENSION BENEFITS OTHER BENEFITS
2004 2003 2004 2003
-------- -------- -------- --------
Change in benefit obligation
Obligation at January 1 $ 84,517 $ 71,968 $ 18,657 $ 16,188
Service cost 4,430 3,765 414 330
Interest cost 5,103 4,703 1,088 1,066
Plan amendments 433 (15) 250 -
Benefits paid (6,466) (5,374) (692) (510)
Actuarial loss 4,490 9,470 373 1,583
Other 2,808 - - -
-------- -------- -------- --------
Obligation at December 31 $ 95,315 $ 84,517 $ 20,090 $ 18,657
======== ======== ======== ========
Change in plan assets
Fair value of plan assets at January 1 $ 62,248 $ 38,764 $ - $ -
Actual return on plan assets 7,102 7,668 - -
Employer contributions 10,411 20,444 692 510
Benefits paid (6,466) (5,374) (692) (510)
Other 2,174 746 - -
-------- -------- -------- --------
Fair value of plan assets at December 31 $ 75,469 $ 62,248 $ - $ -
======== ======== ======== ========
Funded status
Funded status at December 31 $(19,846) $(22,269) $(20,090) $(18,657)
Unrecognized loss 29,975 29,354 3,770 3,619
Unrecognized transition obligation 199 287 - -
Unrecognized prior service cost 2,420 2,411 (281) (533)
-------- -------- -------- --------
Net amount recognized at December 31 $ 12,748 $ 9,783 $(16,601) $(15,571)
======== ======== ======== ========
Recognized in the Consolidated Balance
Sheets
Prepaid benefit cost $ 22,010 $ 5,433 $ - $ -
Accrued benefit liability (17,154) (16,764) (16,601) (15,571)
Intangible asset 608 1,712 - -
Accumulated other comprehensive income 7,284 19,402 - -
-------- -------- -------- --------
Net amount recognized at December 31 $ 12,748 $ 9,783 $(16,601) $(15,571)
======== ======== ======== ========
The accumulated benefit obligation for all defined benefit pension plans
was $87,955 and $77,611 at December 31, 2004 and 2003, respectively. For plans
with an accumulated benefit obligation in excess of plan assets, the projected
benefit obligation, accumulated benefit obligation and fair value of plan assets
was $30,558, $28,487 and $11,163, respectively, at December 31, 2004, and
$67,847, $62,073 and $45,309, respectively, at December 31, 2003.
The assumptions used in the measurement of the Company's benefit
obligation at December 31, 2004 and 2003, were as follows:
U.S. PLANS NON-U.S. PLANS
2004 2003 2004 2003
---- ---- --------- ----
Discount rate 5.75% 6.00% 5.50-6.00% 5.50%
Expected return on plan assets 8.50% 8.50% 5.00-6.50% 6.50%
Rate of compensation increase 4.00% 4.00% 4.25% 4.25%
To develop the expected rate of return on plan assets, the Company
considered the historical returns and the future expectations for returns on
each asset class, as well as the target asset allocation of the pension
portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following tables provide the components of, and the assumptions used
to determine, the net periodic benefit cost for the plans in 2004, 2003, and
2002:
PENSION BENEFITS OTHER BENEFITS
2004 2003 2002 2004 2003 2002
-------- -------- -------- -------- -------- --------
Service cost $ 4,430 $ 3,765 $ 3,486 $ 413 $ 330 $ 346
Interest cost 5,103 4,703 4,209 1,088 1,066 1,054
Expected return on plan assets (5,597) (3,449) (3,903) - - -
Net amortization 3,227 3,216 848 67 (31) (29)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 7,163 $ 8,235 $ 4,640 $ 1,568 $ 1,365 $ 1,371
======== ======== ======== ======== ======== ========
U.S. PLANS NON-U.S. PLANS
2004 2003 2002 2004 2003 2002
---- ---- ---- --------- ---- ----
Discount rate 6.00% 6.75% 7.50% 5.50-6.00% 5.75% 6.00%
Expected return on plan assets 8.50% 8.50% 9.00% 6.50% 6.50% 7.50%
Rate of compensation increase 4.00% 4.00% 4.00% 4.25% 3.75% 4.00%
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market value of
assets are amortized over the average remaining service period of active
participants. Contributions to bargaining unit-sponsored multi-employer plans
and defined contribution plans were $6,404, $6,756 and $6,607 for 2004, 2003 and
2002, respectively.
For measurement purposes, a range of 9.5%-7.5% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 2004. The
rate was assumed to decrease gradually each year to a rate in the 6%-5% range
for 2008-2014, and remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A 1% increase in the assumed health care cost trend rates would
increase the service and interest cost components of the net periodic benefit
cost by $135 and the health care component of the accumulated postretirement
benefit obligation by $1,768. A 1% decrease in the assumed health care cost
trend rate would decrease the service and interest cost components of the net
periodic benefit cost by $116 and the health care component of the accumulated
postretirement benefit obligation by $1,534.
Plan Assets
The Company's pension plan weighted-average asset allocations at December 31,
2004 and 2003, by asset category, were as follows:
2004 2003
---- ----
Equity securities 66% 68%
Debt securities 33 31
Other 1 1
--- ---
Total 100% 100%
=== ===
39
Investment Policies and Strategies
The investment objectives of the Company's plan assets are to earn the highest
possible rate of return consistent with the tolerance for risk as determined
periodically by IDEX in its role as a fiduciary. The general guidelines of asset
allocation of fund assets are that "equities" will represent from 55% to 75% of
the market value of total fund assets with a target of 66%, and "fixed income"
obligations, including cash, will represent from 25% to 45% with a target of
34%. The term "equities" include common stock, convertible bonds and convertible
stock. The term "fixed income" includes preferred stock and/or contractual
payments with a specific maturity date. The Company strives to maintain asset
allocations within the designated ranges by conducting periodic reviews of fund
allocations and plan liquidity needs, and rebalancing the portfolio accordingly.
The total fund performance is monitored and results measured using a 3- to
5-year moving average against long-term absolute and relative return objectives
to meet actuarially determined forecasted benefit obligations. No restrictions
are placed on the selection of individual investments by the qualified
investment fund managers. The performance of the investment fund managers is
reviewed on a regular basis, using appointed professional independent advisors.
As of December 31, 2004 and 2003, there were no shares of the Company's stock
held in plan assets.
Cash Flows
The Company expects to contribute approximately $1.6 million to its pension
plans and $1.0 million to its other postretirement benefit plans in 2005.
Estimated Future Benefit Payments
The future estimated benefit payments for the next five years and the five years
thereafter are as follows: 2005 - $4,638; 2006 - $6,362; 2007 - $4,756; 2008 -
$5,099; 2009 - $5,816; 2010 to 2014 - $34,391.
15. QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2004 and 2003:
2004 QUARTERS 2003 QUARTERS
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $214,600 $233,590 $237,557 $242,550 $195,498 $207,147 $197,314 $197,961
Gross profit 85,730 93,923 94,989 96,153 74,303 82,123 76,178 76,716
Operating income 31,286 39,814 39,961 38,323 23,401 29,557 28,943 27,961
Net income 17,692 22,834 23,219 22,661 12,695 16,943 16,509 16,205
Basic EPS $ .36 $ .46 $ .46 $ .45 $ .26 $ .35 $ .34 $ .33
Basic weighted average shares
outstanding 49,475 50,060 50,293 50,462 48,437 48,576 48,992 49,178
Diluted EPS $ .35 $ .44 $ .44 $ .43 $ .26 $ .34 $ .33 $ .32
Diluted weighted average shares
outstanding 51,279 52,037 52,400 52,099 49,208 49,697 50,460 50,739
REPORTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of IDEX Corporation
We have audited the accompanying consolidated balance sheets of IDEX
Corporation and its subsidiaries (the Company) as of December 31, 2004 and 2003
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of IDEX Corporation and its
subsidiaries at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 14, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
As discussed in Note 2 of the Consolidated Financial Statements, in 2002
the Company changed its method of accounting for goodwill and intangible assets
to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
/s/ Deloitte & Touche LLP
- -----------------------------
Deloitte & Touche LLP
Chicago,Illinois
February 14, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of IDEX Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that IDEX
Corporation and its subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of IDEX Corporation and its subsidiaries as of December 31, 2004 and 2003
and the related consolidated statements of operations, consolidated
shareholders' equity, and consolidated cash flows for each of the three years in
the period ended December 31, 2004, and our report dated February 14, 2005
expressed an unqualified opinion on those financial statements and included a
paragraph related to the adoption of Statement of Financial Accounting Standards
No. 142, " Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
- -----------------------------
Deloitte & Touche LLP
Chicago, Illinois
February 14, 2005
41
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal control over financial reporting refers to the process designed by, or
under the supervision of, our Chief Executive Officer and Chief Financial
Officer, and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, and includes those policies and
procedures that:
Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining effective internal
control over financial reporting for the Company.
Management has used the framework set forth in the report entitled
"Internal Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission to assess the effectiveness of the
Company's internal control over financial reporting. Management has concluded
that the Company's internal control over financial reporting was effective as of
December 31, 2004. Deloitte & Touche LLP has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting dated February 14, 2005.
/s/ Dennis K. Williams
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Dennis K. Williams
Chairman of the Board, President and Chief Executive Officer
/s/ Dominic A. Romeo
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Dominic A. Romeo
Vice President and Chief Financial Officer
Northbrook,Illinois
February 14, 2005