Fitch Affirms IDEX's Ratings at 'BBB+'; Outlook Revised to Negative

Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term senior unsecured ratings for IDEX Corporation at 'BBB+' and revised the Rating Outlook to Negative from Stable. The rating action affects approximately $1.1 billion of total debt outstanding as of June 30, 2016. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The revision of the Outlook to Negative from Stable reflects IDEX's more aggressive acquisition posture following its announcement that it has agreed to acquire SFC Koenig AG, a manufacturer of metal-to-metal seal and flow control solutions, for $240 million. SFC Koenig will complement IDEX's sealing solutions platform within its Health and Science Technologies segment.

This acquisition will push IDEX's total acquisition spending thus far in 2016 to around $513 million, up from net acquisitions of $166 million in 2015. These acquisitions, together with ongoing share repurchases, are being financed with a combination of incremental borrowings, overseas cash and operating cash flow, and will likely cause total debt/EBITDA to remain above 2x in 2016 compared with 1.6x at the end of 2015, 2014 and 2013.

Moreover, Fitch believes that financial leverage could be sustained above 2x for an extended period, as it believes that management may maintain a level of acquisitions and share repurchases that exceeds FCF. In this case, Fitch would consider a negative rating action. On the other hand, should the company reduce debt levels, allowing leverage to return to historical levels in the mid to high-1x range, Fitch would consider restoring the Stable Outlook.

The ratings and Outlook incorporate a modest softening in IDEX's organic sales in the near term in the context of healthy operating trends over the past five years. IDEX benefits from a diversified customer and product portfolio and a focus on improving operational efficiency, which serve to moderate the effect of cyclical end-markets.

IDEX's organic sales growth turned negative in 2015 and the first half of 2016, though the pace of decline has gradually moderated. EBITDA margins are strong and were relatively steady at a 25.6% in the first half of 2016 due to the company's productivity initiatives but will likely be down modestly for the full-year due to the impact of recent acquisitions. By end-market, demand remains mixed, with weak demand in IDEX's energy, agricultural and North American industrial markets. This has been partly offset by stronger results in water services, scientific fluidics and sealing solutions.

IDEX uses recurring acquisitions to augment modest organic growth, targeting businesses with attractive margins, healthy cash flow, strong niche market positions and technologies primarily in adjacent markets. The strategy has been successful as management has proven its ability to effectively select and integrate acquisitions.

Fitch expects FCF after dividends will track at or above $200 million annually, with steady operating income over the near term, capital spending equal to approximately 2% of revenues, and a 30%-35% dividend payout ratio. FCF will be used for a combination of acquisitions and share repurchases, and Fitch believes that the total of the two could exceed FCF over the medium term, necessitating incremental borrowing.

The ratings and Outlook incorporate IDEX's:

--Diverse line of products sold in niche markets to a wide range of industries globally;

--Strong profit margins;

--Healthy cash flow, as FCF after dividends is projected to be more than $200 million annually.

Concerns include IDEX's:

--Small size relative to other diversified industrials and acquisitive posture;

--Lower organic sales growth due to weak demand in energy, agricultural and North American industrial end markets;

--The potential that financial leverage could remain elevated.

KEY ASSUMPTIONS

Fitch's key assumptions in its rating case for IDEX include:

--Revenues grow by 5%-6% in 2016 due primarily to acquisitions, flat organic growth, and a modestly negative impact from currency movements.

--Revenues grow at a 6% pace beyond 2016 due to low single digit organic growth plus acquisitions.

--EBITDA margins narrow modestly in 2016 from 25.9% in 2015, due in part to the impact of acquisitions, and are steady thereafter.

--Acquisitions of $300 million annually in 2017 and beyond.

--FCF after dividends is steady at $200 million or more annually.

RATING SENSITIVITIES

The following factors, individually or collectively, could lead to a Stable Outlook: A reduction in debt levels and/or improvement in operating performance that permits debt/EBITDA and funds from operations (FFO) adjusted leverage to move below 2.0x, and 3.0x, respectively, on a sustained basis.

The following factors, individually or collectively, could lead to a negative rating action: a material decline in EBITDA margins and/or cash deployment exceeds FCF over a sustained period leading to a prolonged increase in debt/EBITDA above 2.0x and FFO adjusted leverage above 3.0x; the FCF margin declines to below 8%-10%.

LIQUIDITY

IDEX has adequate liquidity, which as of June 30, 2016 consisted of $361.5 million of cash and cash equivalents, the bulk of which was held outside the U.S., a $700 million credit facility expiring in 2020 (close to $500 million available), and annual FCF at or above $200 million.

FULL LIST OF RATING ACTIONS

Fitch affirms IDEX's ratings as follows:

--Long-term IDR at 'BBB+';

--Senior unsecured bank facilities at 'BBB+';

--Senior unsecured debt at 'BBB+'.

The Rating Outlook is revised to Negative from Stable.

Date of Relevant Rating Committee: July 29, 2016

Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009746

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