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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 1-10235
IDEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3555336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 DUNDEE ROAD, NORTHBROOK, ILLINOIS 60062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 498-7070
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------------------------- --------------------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE AND CHICAGO STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock (based on the June 30, 2007
closing price of $38.54) held by non-affiliates of IDEX Corporation was
$3,101,853,013.
The number of shares outstanding of IDEX Corporation's common stock, par value
$.01 per share (the "Common Stock"), as of February 20, 2008 was 81,586,819 (net
of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2007 Annual Report to stockholders of IDEX Corporation ("the
2007 Annual Report") are incorporated by reference in Part II of this Form 10-K
and portions of the Proxy Statement of IDEX Corporation (the "2008 Proxy
Statement") with respect to the 2008 annual meeting of stockholders are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I.
Item 1. Business. 1
Item 1A. Risk Factors. 7
Item 1B. Unresolved Staff Comments. 9
Item 2. Properties. 9
Item 3. Legal Proceedings. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
PART II.
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. 10
Item 6. Selected Financial Data. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 23
Item 8. Financial Statements and Supplementary Data. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 56
Item 9A. Controls and Procedures. 56
Item 9B. Other Information. 56
PART III.
Item 10. Directors, Executive Officers and Corporate Governance. 56
Item 11. Executive Compensation. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. 57
Item 13. Certain Relationships and Related Transactions, and Director Independence. 57
Item 14. Principal Accountant Fees and Services. 57
PART IV.
Item 15. Exhibits and Financial Statement Schedules. 57
Schedule II - Valuation and Qualifying Accounts. 58
Signatures 59
Exhibit Index 60
PART I
ITEM 1. BUSINESS.
IDEX Corporation ("IDEX" or the "Company"), a Delaware Corporation
incorporated on September 24, 1987, is an applied solutions company specializing
in fluid and metering technologies, health and science technologies, dispensing
equipment and fire, safety and other diversified products. The Company
manufactures an extensive array of engineered industrial products sold to
customers in a variety of industries around the world. We believe that each of
our business units is a leader in its niche market. We also believe that our
consistent financial performance has been attributable to the manufacture of
quality products designed and engineered by us, coupled with our ability to
identify and successfully consummate and integrate strategic acquisitions. IDEX
consists of four reportable business segments. The Fluid & Metering Technologies
Segment consists of the following business units: Banjo, Liquid Controls,
Pulsafeeder, Quadro Engineering ("Quadro"), Versa-Matic, Viking Pump ("Viking")
and Warren Rupp. The Health & Science Technologies Segment includes HST Core,
Gast Manufacturing ("Gast") and Micropump. The Dispensing Equipment Segment is
comprised of FAST & Fluid Management and Fluid Management. The Fire &
Safety/Diversified Products Segment includes Hale-Fire Suppression and
Hale-Hydraulic Equipment, as well as the BAND-IT engineered clamping business.
FLUID & METERING TECHNOLOGIES SEGMENT
The Fluid & Metering Technologies Segment designs, produces and distributes
positive displacement pumps and flow meters, injectors, and other fluid-handling
pump modules and systems. Our application-specific pump and metering solutions
serve a diverse range of growing end markets including: industrial
infrastructure (fossil fuels, refined and alternative fuels, water and
wastewater), chemical processing, agricultural, food & beverage, pulp & paper,
transportation, plastics & resins, electronics & electrical, construction &
mining, pharmaceutical and bio-pharmaceutical, machinery and numerous other
specialty niche markets. The segment accounted for 42% of both sales and
operating income in 2007, with approximately 42% of sales to customers outside
the U.S.
Banjo. Banjo, acquired in October 2006, is a provider of special purpose,
severe-duty pumps, valves, fittings and systems used in liquid handling. Banjo
is based in Crawfordsville, Indiana and its products are used in agricultural
and industrial applications. Approximately 9% of Banjos' 2007 sales were to
customers outside the U.S.
Liquid Controls. Liquid Controls is a leading manufacturer of positive
displacement flow meters and electronic registration and control products.
Applications for its products include mobile and stationary metering
installations for wholesale and retail distribution of petroleum and liquefied
petroleum gas, aviation refueling, and industrial metering and dispensing of
liquids and gases. Liquid Controls is headquartered in Lake Bluff, Illinois,
with additional operations in Italy and India. Corken ("Corken"), a subsidiary
of Liquid Controls based in Oklahoma City, Oklahoma, is a leading producer of
positive-displacement rotary vane pumps, single and multistage regenerative
turbine pumps, and small horsepower reciprocating piston compressors. Sponsler
Co., Inc. ("Sponsler"), headquartered in Westminster, South Carolina, operates
as part of Liquid Controls and is a manufacturer of a line of precision turbine
flow meters to meet all flow applications, including low-flow applications where
viscosity, corrosive media, extreme temperature or hazardous materials are
factors. Toptech Systems, Inc. ("Toptech"), a subsidiary of Liquid Controls
based in Longwood, Florida was acquired in December 2006. Toptech is a leading
provider of terminal automation systems used in the custody transfer and control
of high-value fluids and gases. Toptech's products include terminal automation
hardware and software used by customers in the oil, gas and refined-fuels
markets to control and manage inventories, as well as transactional data and
invoicing. In February 2007, the Company acquired Faure Herman SA ("Faure
Herman"), a leading provider of ultrasonic and helical turbine flow meters used
in the custody transfer and control of high value fluids and gases. Based in La
Ferte Bernard, France, Faure Herman operates as part of the Liquid Controls
business. Approximately 53% of Liquid Controls' 2007 sales were to customers
outside the U.S.
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Pulsafeeder. Pulsafeeder is a leading manufacturer of metering pumps,
special-purpose rotary pumps, peristaltic pumps, electronic controls and
dispensing equipment. Pulsafeeder's products are used to introduce precise
amounts of fluids into processes to manage water quality and chemical
composition, and its markets include water and wastewater treatment, power
generation, pulp and paper, chemical and hydrocarbon processing and swimming
pools. Pulsafeeder is headquartered in Rochester, New York, with additional
operations in Punta Gorda, Florida. Knight Equipment, Inc. ("Knight") is
operated as part of Pulsafeeder, with headquarters in Lake Forest, California.
Knight is a leading manufacturer of pumps and dispensing equipment for
industrial laundries, commercial dishwashing and chemical metering. Classic
Engineering, Inc. ("Classic") operates as part of Pulsafeeder. Classic, based in
Rochester, New York, is a supplier of fully integrated pump and metering systems
to chemical companies and municipal water treatment facilities. Classic also
designs, engineers and manufactures a line of standard and custom chemical-feed
systems for the water and wastewater, chemical OEM, pulp and paper, cement, and
general industrial markets. In 2007, approximately 34% of Pulsafeeder's sales
were to customers outside the U.S.
Quadro. Quadro, acquired in June 2007, is a leading provider of particle
control solutions for the pharmaceutical and bio-pharmaceutical markets. Based
in Waterloo, Ontario, Canada, Quadro's core capabilities include fine milling,
emulsification and special handling of liquid and solid particulates for
laboratory, pilot phase and production scale processing within the
pharmaceutical and bio-pharmaceutical markets. Approximately 50% of Quadro's
2007 sales were to customers outside the U.S.
Viking Pump. Viking produces internal and external gear pumps, strainers
and reducers, and related controls. These products are used for transferring and
metering thin and viscous liquids. Markets served by Viking include chemical,
petroleum, pulp and paper, plastics, paints, inks, tanker trucks, compressor,
construction, food and beverage, personal care, pharmaceutical and biotech.
Viking is based in Cedar Falls, Iowa, with additional operations in Canada and
Ireland. Johnson Pump UK LTD ("Johnson") manufactures rotary lobe pumps that
serve multiple sanitary and industrial applications. Located in Eastbourne,
England, Johnson operates as part of Viking. Wrightech Corporation ("Wrightech")
is headquartered in Muskego, Wisconsin. Wrightech, which operates as part of
Viking, is a small manufacturer of stainless-steel centrifugal and positive
displacement pumps and replacement parts for the sanitary product marketplace.
This market includes beverage, food processing, pharmaceutical, cosmetics and
other industries that require sanitary processing. Approximately 40% of Viking's
2007 sales were to customers outside the U.S.
Warren Rupp/Versa-Matic. Warren Rupp, based in Mansfield, Ohio, is a
leading producer of air-operated and motor-driven double-diaphragm pumps. Warren
Rupp's products are used for abrasive and semisolid materials as well as for
applications where product degradation is a concern or where electricity is not
available or should not be used. This business serves markets including
chemical, paint, food processing, electronics, construction, utilities, mining
and industrial maintenance. Versa-Matic, headquartered in Export, Pennsylvania,
is a manufacturer and distributor of air-operated double-diaphragm pumps and
replacement parts. Blagdon Pump, located in the United Kingdom, is operated as
part of Versa-Matic. Warren Rupp/Versa-Matic's sales to customers outside the
U.S. in 2007 were approximately 54%.
HEALTH & SCIENCE TECHNOLOGIES SEGMENT
The Health & Science Technologies Segment designs, produces and
distributes a wide range of precision fluidics solutions from very high
precision, low-flow rate pumping solutions required in analytical
instrumentation, clinical diagnostics and drug discovery to high performance
molded and extruded, biocompatible medical devices and implantables. Through
this platform, the Company is also expanding its capability in air compressors
used in medical, dental and industrial applications, as well as its expertise in
precision gear and peristaltic pump technologies that meet OEM's exacting
specifications. The segment accounted for 24% of sales and 21% of operating
income in 2007, with approximately 39% of sales to customers outside the U.S.
Gast. Gast is a leading manufacturer of air-moving products, including air
motors, low- and medium-range vacuum pumps, vacuum generators, regenerative
blowers and fractional horsepower compressors. Gast's products are used in a
variety of long-life applications requiring a quiet, clean source of moderate
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vacuum or pressure. Gast's primary markets served are medical equipment,
environmental equipment, computers and electronics, printing machinery, paint
mixing machinery, packaging machinery, graphic arts and industrial
manufacturing. Gast is based in Benton Harbor, Michigan, with additional
facilities in England. In February 2006, IDEX acquired JUN-AIR International A/S
("JUN-AIR"), a provider of low-decibel, ultra-quiet vacuum compressors suitable
for medical, dental and laboratory applications. Based in Norresundby, Denmark,
JUN-AIR operates as part of Gast. Approximately 32% of Gast's 2007 sales were to
customers outside the U.S.
HST Core. HST Core consists of the following components: Rheodyne, Scivex
and Eastern Plastics. Rheodyne is a leading manufacturer of injectors, valves,
fittings and accessories for the analytical instrumentation market. Its products
are used by manufacturers of high pressure liquid chromatography equipment
servicing the pharmaceutical, biotech, life science, food and beverage, and
chemical markets. Rheodyne is based in Rohnert Park, California, and its
activities are closely coordinated with those of Scivex and Eastern Plastics.
Scivex is a leading provider of fluidic components and systems for the
analytical, biotech and diagnostic instrumentation markets. Its fluidic
components and sub-assemblies include: fittings, precision-dispensing pumps and
valves, tubing and integrated tubing assemblies, filter sensors and other micro-
and nano-fluidic components. Markets served by Scivex include pharmaceutical,
drug discovery, chemical, biochemical processing, genomics/proteomics research,
environmental labs, food/agriculture, medical lab, personal care, and
plastics/polymer/rubber production. Scivex operates Upchurch Scientific and
Upchurch Medical in Oak Harbor, Washington and Sapphire Engineering in Pocasset,
Massachusetts. In October 2007, the Company acquired Isolation Technologies, a
leading developer of advanced column hardware and accessories for the High
Performance Liquid Chromatography (HPLC) market. HPLC instruments are used in a
variety of analytical chemistry applications, with primary commercial
applications including drug discovery and quality control measurements for
pharmaceutical and food/beverage testing. Headquartered in Hopedale, MA,
Isolation Technologies will operate as part of Sapphire Engineering. Eastern
Plastics, acquired in May 2006, is a provider of high-precision integrated
fluidics and associated engineered plastics solutions. Eastern Plastics products
are used in a broad set of end markets including medical diagnostics, analytical
instrumentation, and laboratory automation. Eastern Plastics is based in
Bristol, Connecticut. Approximately 32% of HST Core's 2007 sales were to
customers outside the U.S.
Micropump. Micropump is a leader in small, precision-engineered,
magnetically and electromagnetically driven rotary gear, piston and centrifugal
pumps. Micropump's products are used in low-flow abrasive and corrosive
applications. Micropump serves markets including printing machinery, medical
equipment, paints and inks, chemical processing, pharmaceutical, refining,
laboratory, electronics, pulp and paper, water treatment and textiles. Micropump
is based in Vancouver, Washington, and also has operations in England. Ismatec
SA ("Ismatec"), a leading manufacturer of peristaltic metering pumps, analytical
process controllers, and sample preparation systems, is headquartered near
Zurich, Switzerland and operates as part of Micropump and provides Micropump
with entry into scientific R&D markets including pharmaceutical, medical,
biotech and institutional laboratory. Trebor International ("Trebor") operates
as part of Micropump and is headquartered in Salt Lake City, Utah. Trebor is a
leader in high-purity fluid handling products, including air-operated diaphragm
pumps and deionized water-heating systems. Its products are used in the
manufacturing of semiconductors, disk drives and flat panel displays.
Approximately 70% of Micropump's 2007 sales were to customers outside the U.S.
DISPENSING EQUIPMENT SEGMENT
The Dispensing Equipment Segment produces precision equipment for
dispensing, metering and mixing colorants, paints, hair colorants and other
personal care products. This equipment is used in a variety of retail and
commercial industries around the world. This segment provides equipment, systems
and services for applications such as tinting paints and coatings, and
industrial and automotive refinishing. The segment accounted for 13% of sales
and 14% of operating income in 2007, with approximately 63% of sales to
customers outside the U.S.
3
FAST & Fluid Management - Europe & Asia. Fast & Fluid Management-Europe &
Asia (collectively, "F&FM"). F&FM is a leading European and Asian manufacturer
of precision-designed tinting, mixing, dispensing and measuring equipment for
auto refinishing and architectural paints. Equipment is supplied to retail and
commercial stores, home centers and automotive body shops. F&FM is headquartered
in Sassenheim, The Netherlands, with additional operations in Italy, Australia,
Poland, China, France, Spain and the United Kingdom. Over 95% of F&FM's sales in
2007 were to customers outside the U.S.
Fluid Management. Fluid Management is a leading American manufacturer of
precision-designed tinting, mixing, dispensing and measuring equipment for
architectural paints and personal care products. Fluid Management's markets
include retail and commercial paint stores, hardware stores, home centers,
department stores and point-of-purchase dispensers and mixing equipment for the
personal care, and health and beauty industry. Fluid Management is based in
Wheeling, Illinois with additional operations located in Canada and Brazil.
Approximately 13% of Fluid Management's 2007 sales were to customers outside the
U.S.
FIRE & SAFETY/DIVERSIFIED PRODUCTS SEGMENT
The Fire & Safety/Diversified Products Segment produces firefighting
pumps and controls, 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.
The three business units that comprise this segment are Hale-Fire Suppression,
Hale-Hydraulic Equipment and Band-It. The segment accounted for 21% of sales and
23% of operating income in 2007, with approximately 49% of sales to customers
outside the U.S.
Band-It. Band-It is a leading producer of high-quality stainless steel
banding, buckles and clamping systems. The Band-It brand is highly recognized
worldwide. Band-It's products are used for securing exhaust system heat and
sound shields, industrial hose fittings, traffic signs and signals, electrical
cable shielding, identification and bundling, and numerous other industrial and
commercial applications. Band-It's markets include transportation equipment, oil
and gas, general industrial maintenance, electronics, electrical,
communications, aerospace, utility, municipal and subsea marine. Band-It is
based in Denver, Colorado, with additional manufacturing operations in the
United Kingdom and Singapore. In 2007, approximately 44% of Band-It's sales were
to customers outside the U.S.
Hale-Fire Suppression. Hale-Fire Suppression Group (FSG) consists of the
following business units: Hale, Godiva and Class 1. FSG produces truck-mounted
and portable fire pumps; stainless steel valves; foam and compressed air foam
systems; pump modules and pump kits; electronic controls and information
systems; conventional and networked electrical systems and mechanical components
for fire, rescue and specialty vehicle markets. FSG's markets include public and
private fire and rescue organizations. FSG is based in Ocala, Florida, with
additional operations located in Conshohocken, Pennsylvania, as well as England.
In 2007, approximately 31% of FSG's sales were to customers outside the U.S.
Hale-Hydraulic Equipment. Hale-Hydraulic Equipment Group (HEG) consists
of the following business units: Hurst, Lukas, Airshore, Dinglee and Vetter. HEG
produces hydraulic, battery, gas and electric-operated rescue equipment;
hydraulic re-railing equipment; hydraulic tools for industrial applications;
recycling cutters; pneumatic lifting and sealing bags for vehicle and aircraft
rescue, environmental protection and disaster control; and shoring equipment for
vehicular or structural collapse. HEG's markets include public and private fire
and rescue organizations. HEG is based in Ocala, Florida, with additional
operations located in Shelby, North Carolina; Erlangen, Germany; Tianjin, China
and Zulpich, Germany. In 2007, approximately 74% of HEG's sales were to
customers outside the U.S.
4
GENERAL ASPECTS APPLICABLE TO THE COMPANY'S BUSINESS SEGMENTS
COMPETITORS
The Company's businesses participate in highly competitive markets. We
believe that the principal points of competition in our markets are product
quality, price, design and engineering capabilities, product development,
conformity to customer specifications, quality of post-sale support, timeliness
of delivery, and effectiveness of our distribution channels.
Principal competitors of the businesses in the Fluid and Metering
Technologies Segment are the Blackmer division of Dover Corporation (with
respect to rotary gear pumps, and pumps and small horsepower compressors used in
liquified petroleum gas distribution facilities); Milton Roy, a division of
United Technologies Corporation (with respect to metering pumps and controls);
Roper Industries and Tuthill Corporation (with respect to rotary gear pumps);
Wilden Pump and Engineering Co., a division of Dover Corporation (with respect
to air-operated double-diaphragm pumps).
For Health and Science Technologies, Thomas Industries, a division of
Gardner Denver (with respect to vacuum pumps and compressors); and Valco
Instruments Co. (with respect to fluid injectors and valves) are the key
competitors.
The principal competitor of the Dispensing Equipment Segment is Corob
S.p.A. (with respect to dispensing and mixing equipment for the paint industry).
The Fire & Safety/Diversified Products Segment's principal competitors
are A.J. Gerrard & Company, a division of Illinois Tool Works Inc. (with respect
to stainless steel bands, buckles and tools), Waterous Company, a division of
American Cast Iron Pipe Company (with respect to truck-mounted firefighting
pumps) and Holmatro, Inc (with respect to rescue tools).
EMPLOYEES
At December 31, 2007, the Company had 5,009 employees. Approximately 10%
were represented by labor unions with various contracts expiring through June
2010. Management believes that the Company's relationship with their employees
is good. The Company historically has been able to satisfactorily renegotiate
its collective bargaining agreements, with its last work stoppage in March 1993.
SUPPLIERS
The Company manufactures many of the parts and components used in its
products. Substantially all materials, parts and components purchased by the
Company are available from multiple sources.
INVENTORY AND BACKLOG
The Company regularly and systematically adjusts production schedules and
quantities based on the flow of incoming orders. Backlogs typically are limited
to 1 to 1 1/2 months of production. While total inventory levels also may be
affected by changes in orders, the Company generally tries to maintain
relatively stable inventory levels based on its assessment of the requirements
of the various industries served.
SEGMENT INFORMATION
For segment financial information for the years 2007, 2006, and 2005, see
the table titled "Company and Business Segment Financial Information" presented
on page 17 in Part II. Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 10 of the "Notes to
Consolidated Financial Statements" on page 40 in Part II. Item 8. Financial
Statements and Supplementary Data.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names of the executive officers of the
Company, their ages, years of service, the positions held by them, and their
business experience during the past 5 years.
YEARS OF
NAME AGE SERVICE POSITION
------------------------------- ---- --------- ---------------------------------------------------------------
Lawrence D. Kingsley........... 45 3 Chairman of the Board and Chief Executive Officer
Dominic A. Romeo............... 48 4 Vice President and Chief Financial Officer
Kimberly K. Bors............... 47 5 Vice President-Human Resources
John L. McMurray............... 57 15 Vice President-Group Executive of Fluid & Metering Technologies
Heath A. Mitts................. 37 2 Vice President-Corporate Finance
Frank J. Notaro................ 44 10 Vice President-General Counsel and Secretary
Daniel J. Salliotte............ 41 3 Vice President-Strategy and Business Development
Michael J. Yates............... 42 2 Vice President-Controller
Mr. Kingsley was appointed Chairman of the Board by the Board of
Directors, effective April 4, 2006. He was appointed to the position of
President and Chief Executive Officer in March 2005. Prior to that, Mr. Kingsley
was Chief Operating Officer since joining the Company in August 2004. Prior to
joining IDEX, Mr. Kingsley served as Corporate Vice President and Group
Executive responsible for the Sensors and Controls businesses at Danaher
Corporation, an industrial and consumer products manufacturing company. Prior to
his departure from Danaher, he served as President, Industrial Controls Group
from April 2002 to July 2004.
Mr. Romeo has been Vice President and Chief Financial Officer of the
Company since January 2004. Prior to joining IDEX, Mr. Romeo was Vice
President-Chief Financial Officer of Honeywell Aerospace, a segment of Honeywell
International, from August 2001 to January 2004.
Ms. Bors has been Vice President-Human Resources of the Company since
January 2003.
Mr. McMurray has been Vice President-Group Executive of Fluid & Metering
Technologies since August 2003. Prior to that, Mr. McMurray was Vice
President-Operational Excellence since October 2000.
Mr. Mitts has been Vice President-Corporate Finance since September 2005.
Prior to joining IDEX, Mr. Mitts was Chief Financial Officer of PerkinElmer's
Asia operations, based out of Singapore, from February 2002 to September 2005.
Mr. Notaro has served as Vice President-General Counsel and Secretary
since March 1998.
Mr. Salliotte has been Vice President-Strategy and Business Development
of the Company since October 2004. From May 2003 to October 2004, Mr. Salliotte
was a transaction advisor on behalf of two private equity firms located in
Bloomfield, Michigan - Quantum Value Management LLC and Oxford Investment Group.
From April 1998 to May 2003, Mr. Salliotte worked at SPX Corporation, a
multi-industrial corporation headquartered in Charlotte, North Carolina.
Mr. Yates has been Vice President-Controller since October 2005. Prior to
joining IDEX, Mr. Yates was a Senior Manager at PricewaterhouseCoopers LLP from
November 1999 to October 2005.
The Company's executive officers are elected at a meeting of the Board of
Directors immediately following the annual meeting of stockholders, and they
serve until the next annual meeting of the Board, or until their successors are
duly elected.
6
PUBLIC FILINGS
Copies of the Company's annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports are
made available free of charge at www.idexcorp.com as soon as reasonably
practicable after being filed electronically with the SEC.
ITEM 1A. RISK FACTORS.
For an enterprise as diverse and complex as the Company, a wide range
of factors could materially affect future developments and performance. In
addition to the factors affecting specific business operations identified in
connection with the description of these operations and the financial results of
these operations elsewhere in this report, the most significant factors
affecting our operations include the following:
CHANGES IN U.S. OR INTERNATIONAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE
PROFITABILITY OF ANY OF OUR BUSINESSES.
In 2007, 54% of the Company's revenue was derived from domestic operations
while 46% was international. The Company's largest markets include life
sciences, fire and rescue, paint and coatings, petroleum LPG and chemical
processing. A slowdown in the economy and in particular any of these specific
end markets could directly affect the Company's revenue stream and
profitability.
POLITICAL CONDITIONS IN FOREIGN COUNTRIES IN WHICH WE OPERATE COULD ADVERSELY
AFFECT OUR BUSINESS.
In the year ended December 31, 2007, approximately 46% of our total sales
were to customers outside the U.S. We expect international operations and export
sales to continue to contribute to earnings for the foreseeable future. Both the
sales from international operations and export sales are subject in varying
degrees to risks inherent in doing business outside the United States. Such
risks include the following:
- possibility of unfavorable circumstances arising from host country
laws or regulations;
- risks of economic instability;
- currency exchange rate fluctuations and restrictions on currency
repatriation;
- potential negative consequences from changes to taxation policies;
- the disruption of operations from labor and political disturbances;
- changes in tariff and trade barriers and import or export licensing
requirements; and,
- insurrection or war.
We cannot predict the impact such future, largely unforeseeable events
might have on the Company's operations.
AN INABILITY TO CONTINUE TO DEVELOP NEW PRODUCTS CAN LIMIT THE COMPANY'S REVENUE
AND PROFITABILITY.
The Company's organic growth in 2007 and 2006 was 6% and 9%, respectively.
Approximately 23% of our revenue was derived from new products developed over
the past three years. Our ability to continue to grow organically is tied to our
ability to continue to develop new products.
OUR GROWTH STRATEGY INCLUDES ACQUISITIONS AND WE MAY NOT BE ABLE TO MAKE
ACQUISITIONS OF SUITABLE CANDIDATES OR INTEGRATE ACQUISITIONS SUCCESSFULLY.
Our historical growth has included, and our future growth is likely to
continue to include, in large part our acquisition strategy and the successful
integration of acquired businesses into our existing operations. We intend to
continue to seek additional acquisition opportunities both to expand into new
markets and to enhance our position in existing markets throughout the world. We
cannot be assured, however, that we will be able to successfully identify
suitable candidates, negotiate appropriate acquisition terms, obtain financing
which may be needed to consummate such acquisitions, complete proposed
acquisitions,
7
successfully integrate acquired businesses into our existing operations or
expand into new markets. In addition, we cannot assure you that any acquisition,
once successfully integrated, will perform as planned, be accretive to earnings,
or prove to be beneficial to our operations and cash flow.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. In addition, prior acquisitions have resulted, and future
acquisitions could result, in the incurrence of substantial additional
indebtedness and other expenses. Once integrated, acquired operations may not
achieve levels of revenues, profitability or productivity comparable with those
achieved by our existing operations, or otherwise perform as expected.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE. THIS COMPETITION COULD LIMIT THE
VOLUME OF PRODUCTS THAT WE SELL AND REDUCE OUR OPERATING MARGINS.
Most of our products are sold in competitive markets. We believe that the
principal points of competition in our markets are product quality, price,
design and engineering capabilities, product development, conformity to customer
specifications, quality of post-sale support, timeliness of delivery, and
effectiveness of our distribution channels. Maintaining and improving our
competitive position will require continued investment by us in manufacturing,
engineering, quality standards, marketing, customer service and support, and our
distribution networks. We cannot be assured that we will be successful in
maintaining our competitive position. Our competitors may develop products that
are superior to our products, or may develop methods of more efficiently and
effectively providing products and services or may adapt more quickly than us to
new technologies or evolving customer requirements. Pricing pressures also could
cause us to adjust the prices of certain of our products to stay competitive. We
cannot be assured that we will be able to compete successfully with our existing
competitors or with new competitors. Failure to continue competing successfully
could adversely affect our business, financial condition, results of operations
and cash flow.
WE ARE DEPENDENT ON THE AVAILABILITY OF RAW MATERIALS, PARTS AND COMPONENTS USED
IN OUR PRODUCTS.
While we manufacture many of the parts and components used in our products,
we require substantial amounts of raw materials and purchase some parts and
components from suppliers. The availability and prices for raw materials, parts
and components may be subject to curtailment or change due to, among other
things, suppliers' allocations to other purchasers, interruptions in production
by suppliers, changes in exchange rates and prevailing price levels. Any change
in the supply of, or price for, these raw materials or parts and components
could materially affect our business, financial condition, results of operations
and cash flow.
SIGNIFICANT MOVEMENTS IN FOREIGN CURRENCY EXCHANGE RATES MAY HARM OUR FINANCIAL
RESULTS.
We are exposed to fluctuations in foreign currency exchange rates,
particularly with respect to the Euro, the Canadian Dollar and the British
Pound. Any significant change in the value of the currencies of the countries in
which we do business against the U.S. Dollar could affect our ability to sell
products competitively and control our cost structure, which could have a
material adverse effect on our business, financial condition, results of
operations and cash flow. For additional detail related to this risk, see Part
II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
AN UNFAVORABLE OUTCOME WITH REGARDS TO ANY OF OUR PENDING CONTINGENCIES OR
LITIGATION COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOW.
We currently are 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 quarter or annual period could be materially affected by
changes in our assumptions or the effectiveness of our strategies related to
these proceedings.
8
WE COULD BE ADVERSELY AFFECTED BY RAPID CHANGES IN INTEREST RATES.
Our profitability may be adversely affected during any period of an
unexpected or rapid increase in interest rates. At December 31, 2007, we had
$454.7 million of total debt outstanding, of which approximately 67% was priced
at interest rates that float with the market. A 50-basis point increase in the
interest rate on the floating rate debt would result in an approximate $1.5
million annualized increase in interest expense and decrease in cash flows. For
additional detail related to this risk, see Part II. Item 7A. Quantitative and
Qualitative Disclosure About Market Risk.
OUR INTANGIBLE ASSETS ARE A SIGNIFICANT PORTION OF OUR TOTAL ASSETS AND A
WRITE-OFF OF OUR INTANGIBLE ASSETS COULD CAUSE A MAJOR IMPACT ON THE COMPANY'S
NET WORTH.
Our total assets reflect substantial intangible assets, primarily goodwill
and identifiable intangible assets. At December 31, 2007, goodwill and
intangible assets totaled $977.0 million and $191.8 million, respectively. These
intangible assets and goodwill result from our acquisitions, representing the
excess of cost over the fair value of the tangible assets we have acquired.
Annually, or when certain events occur that require a more current valuation, we
assess whether there has been an impairment in the value of our intangible
assets or goodwill. If future operating performance at one or more of our
business units were to fall significantly below current levels, we could
reflect, under current applicable accounting rules, a non-cash charge to
operating earnings for an impairment. Any determination requiring the write-off
of a significant portion of the intangible assets or goodwill could have a
material negative effect on our results of operations and total capitalization.
As of December 31, 2007, we have determined that no impairment existed.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.
As of December 31, 2007, we had 5,009 employees. Approximately 10% of our
employees are represented by unions with various contracts expiring through June
2010. We cannot assure you that we will be successful in negotiating new
collective bargaining agreements, or that such negotiations will not result in
significant increases in the cost of labor or that a breakdown in such
negotiations will not result in the disruption of our operations. In addition,
our closures of certain facilities may create the risk of strikes or work
stoppages at those and other facilities.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company has received no written comments regarding its periodic or
current reports from the staff of the Securities and Exchange Commission that
were issued 180 days or more preceding the end of its 2007 calendar year and
that remain unresolved.
ITEM 2. PROPERTIES.
The Company's principal plants and offices have an aggregate floor space
area of approximately 3.6 million square feet, of which 2.3 million square feet
(65%) is located in the U.S. and approximately 1.3 million square feet (35%) is
located outside the U.S., primarily in Italy (10%), Germany (6%), the U.K. (4%)
and The Netherlands (3%). These facilities are considered to be suitable and
adequate for their operations. Management believes we can meet the expected
demand increase over the near term with our existing facilities, especially
given our operational improvement initiatives that usually increase capacity.
The Company's executive office occupies approximately 26,000 square feet of
leased space in Northbrook, Illinois.
Approximately 2.9 million square feet (80%) of the principal plant and
office floor area is owned by the Company, and the balance is held under lease.
Approximately 1.4 million square feet (39%) of the principal plant and office
floor area is held by business units in the Fluid & Metering Technologies
Segment; 0.8 million square feet (21%) is held by business units in the Health &
Science Technologies Segment; 0.6 million square feet (16%) is held by business
units in the Dispensing Equipment Segment;
9
and 0.7 million square feet (20%) is held by business units in the Fire &
Safety/Diversified Products Segment.
ITEM 3. LEGAL PROCEEDINGS.
The Company and five of its subsidiaries have been named as defendants in
a number of lawsuits claiming various asbestos-related personal injuries,
allegedly as a result of exposure to products manufactured with components that
contained asbestos. Such components were acquired from third party suppliers,
and were not manufactured by any of the subsidiaries. To date, all of the
Company's settlements and legal costs, except for costs of coordination,
administration, insurance investigation and a portion of defense costs, have
been covered in full by insurance subject to applicable deductibles. However,
the Company cannot predict whether and to what extent insurance will be
available to continue to cover such settlements and legal costs, or how insurers
may respond to claims that are tendered to them.
Claims have been filed in Alabama, California, Connecticut, Delaware,
Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York,
Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah,
Virginia, Washington, West Virginia and Wyoming. Most of the claims resolved to
date have been dismissed without payment. The balance have been settled for
various insignificant amounts. Only one case has been tried, resulting in a
verdict for the Company's business unit.
No provision has been made in the financial statements of the Company,
other than for insurance deductibles in the ordinary course, and the Company
does not currently believe the asbestos-related claims will have a material
adverse effect on the Company's business, financial position, results of
operations or cash flow.
The Company is also party to various other legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on its business, financial condition, results of operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Information regarding the prices of, and dividends on, the Common Stock,
and certain related matters, is incorporated herein by reference to "Shareholder
Information" on the inner back cover of the 2007 Annual Report.
The principal market for the Common Stock is the New York Stock Exchange,
but the Common Stock is also listed on the Chicago Stock Exchange. As of
February 20, 2008, Common Stock was held by approximately 7,000 shareholders and
there were 81,586,819 shares of Common Stock outstanding, net of treasury
shares.
The following table provides information about Company purchases of
equity securities that are registered by the Company pursuant to Section 12 of
the Exchange Act during the quarter ended December 31, 2007:
10
TOTAL NUMBER OF MAXIMUM NUMBER OF
SHARES PURCHASED AS SHARES THAT MAY
PART OF PUBLICLY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS (1) OR PROGRAMS (1)
---------------------- ---------------- -------------- ------------------- -----------------
October 1, 2007 to
October 31, 2007 - - - 1,485,375
November 1, 2007 to
November 30, 2007 - - - 1,485,375
December 1, 2007 to
December 31, 2007 - - - 1,485,375
(1) On October 20, 1998, IDEX's Board of Directors authorized the repurchase of
up to 1.5 million shares of its common stock, either at market prices or on
a negotiated basis as market conditions warrant.
The following table compares total shareholder returns over the last five
years to the Standard & Poor's (the "S&P") 500 Index, the S&P 600 Small Cap
Industrial Machinery Index and the Russell 2000 Index assuming the value of the
investment in IDEX Common Stock and each index was $100 on December 31, 2002.
Total return values for IDEX Common Stock, the S&P 500 Index, S&P 600 Small Cap
Industrial Machinery Index and the Russell 2000 Index were calculated on
cumulative total return values assuming reinvestment of dividends. The
shareholder return shown on the graph below is not necessarily indicative of
future performance.
[PERFORMANCE GRAPH]
12/02 12/03 12/04 12/05 12/06 12/07
------- ------- ------- ------- ------- -------
IDEX Corporation $100.00 $127.19 $185.82 $188.58 $217.48 $248.66
S&P 500 Index 100.00 126.38 137.75 141.88 161.20 166.89
S&P Industrial Machinery Index 100.00 134.30 170.30 183.65 219.28 243.26
Russell 2000 Index 100.00 145.37 170.08 175.73 205.61 199.96
11
ITEM 6. SELECTED FINANCIAL DATA. (1)
2007 2006 2005 2004 2003
----------- ----------- ----------- ---------- ---------
RESULTS OF OPERATIONS
Net sales $ 1,358,631 $1,154,940 $ 1,011,253 $ 901,072 $ 775,655
Gross profit 568,449 477,407 413,967 363,390 305,403
Selling, general and administrative expenses 313,366 260,201 232,935 214,092 191,914
Operating income 255,083 217,206 181,032 149,298 113,489
Other (income) expense--net (3,434) (1,040) (557) 688 (949)
Interest expense 23,353 16,353 14,370 14,764 14,036
Provision for income taxes 79,300 68,171 58,644 47,511 35,664
Income from continuing operations 155,864 133,722 108,575 86,335 64,738
Income/(loss) from discontinued operations-net of tax (719) 12,949 1,228 71 (2,386)
Net income 155,145 146,671 109,803 86,406 62,352
FINANCIAL POSITION
Current assets $ 637,138 $ 417,908 $ 350,971 $ 265,122 $ 229,238
Current liabilities 198,953 187,252 153,296 149,006 116,485
Working capital 438,185 230,656 197,675 116,116 112,753
Current ratio 3.2 2.2 2.3 1.8 2.0
Capital expenditures 24,498 21,198 22,532 20,835 20,220
Depreciation and amortization 38,038 29,956 26,254 27,557 26,261
Total assets 1,989,594 1,670,821 1,244,180 1,186,292 960,739
Total borrowings 454,731 361,980 160,043 225,317 176,546
Shareholders' equity 1,162,723 979,272 823,010 713,605 592,102
PERFORMANCE MEASURES
Percent of net sales:
Gross profit 41.8% 41.3% 40.9% 40.3% 39.4%
SG&A expenses 23.0 22.5 23.0 23.7 24.8
Operating income 18.8 18.8 17.9 16.6 14.6
Income before income taxes 17.3 17.5 16.5 14.9 12.9
Income from continuing operations 11.5 11.6 10.7 9.6 8.4
Effective tax rate 33.7 33.8 35.1 35.5 35.5
Return on average assets(2) 8.5 9.2 8.9 8.0 6.7
Borrowings as a percent of capitalization 28.1 26.9 16.3 24.0 23.0
Return on average shareholders' equity(2) 14.6 14.8 14.1 13.2 11.5
PER SHARE DATA(3)
Basic--income from continuing operations $ 1.93 $ 1.68 $ 1.41 $ 1.15 $ .89
--net income 1.92 1.84 1.42 1.15 .85
Diluted--income from continuing operations 1.90 1.65 1.37 1.12 .87
--net income 1.89 1.81 1.39 1.12 .83
Cash dividends declared .48 .40 .32 .30 .25
Shareholders' equity 14.25 12.16 10.39 9.36 7.98
Stock price--high 44.99 35.65 30.22 27.31 18.83
--low 30.41 26.00 24.33 17.69 11.57
--close 36.13 31.61 27.41 27.00 18.49
Price/earnings ratio at year end 19 19 20 24 22
OTHER DATA
Employees at year end 5,009 4,863 4,263 4,232 3,689
Shareholders at year end 7,000 6,700 6,700 6,000 5,700
Shares outstanding (in 000s) (3):
Weighted average--basic 80,666 79,527 77,088 75,110 73,193
--diluted 82,086 80,976 79,080 77,022 74,960
At year end (net of treasury) 81,579 80,546 79,191 76,232 74,219
12
(1) For additional detail, see Notes to Consolidated Financial Statements in
Part II. Item 8. Financial Statements and Supplementary Data.
(2) Return calculated based on income from continuing operations.
(3) All share and per share data has been restated to reflect the three-for-two
stock splits effected in the form of a 50% stock dividend in May of 2007
and 2004.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
HISTORICAL OVERVIEW AND OUTLOOK
IDEX Corporation is an applied solutions company specializing in fluid and
metering technologies, health and science technologies, dispensing equipment,
and fire, safety and other diversified products built to its customers'
specifications. Our products are sold in niche markets to a wide range of
industries throughout the world. Accordingly, our businesses are affected by
levels of industrial activity and economic conditions in the U.S. and in other
countries where we do business 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.
The Company consists of four reporting segments: Fluid & Metering
Technologies, Health & Science Technologies, Dispensing Equipment and Fire &
Safety/Diversified Products.
The Fluid & Metering Technologies Segment produces pumps, flow meters, and
related controls for the movement of liquids and gases in a diverse range of end
markets from industrial infrastructure to food and beverage. The Health &
Science Technologies Segment produces a wide variety of small-scale, highly
accurate pumps, valves, fittings and medical devices, as well as compressors
used in medical, dental and industrial applications. The Dispensing Equipment
Segment produces highly engineered equipment for dispensing, metering and mixing
colorants, paints, inks and dyes, as well as refinishing equipment. The
13
Fire & Safety/Diversified Products Segment produces firefighting pumps, rescue
tools, lifting bags and other components and systems for the fire and rescue
industry, as well as engineered stainless steel banding and clamping devices
used in a variety of industrial and commercial applications.
The Company has a history of achieving above-average operating margins.
Our operating margins have exceeded the average operating margin for 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 2007 financial highlights were as follows:
- Sales of $1.36 billion rose 18%; organic sales - excluding acquisitions and
foreign currency translation-were up 6%.
- Gross margins improved 50 basis points to 41.8% of sales, while operating
margins at 18.8% were flat compared to 2006.
- Income from continuing operations increased 17% to $155.9 million.
- Diluted EPS from continuing operations of $1.90 was 25 cents ahead of the
same period for 2006.
- Net income increased 6% to $155.1 million.
- Diluted EPS of $1.89 was 8 cents ahead of the same period of 2006.
Growth in the Fluid and Metering Technologies Segment was driven by strong
global demand in the process control and infrastructure-related end markets. In
the Health and Science Technologies Segment, strong growth in the core health
and science end markets was adversely impacted by declines in specific pneumatic
and industrial OEM customers. Performance in the Dispensing Equipment Segment
was driven by strong demand for replenishment orders in the U.S. large retail
channel market and solid performance in Europe. Despite softness in our fire
suppression business, our Fire & Safety/Diversified Products Segment performed
well as a result of product innovation and international growth.
The following forward-looking statements are qualified by the cautionary
statement under the Private Securities Litigation Reform Act set forth above.
For 2008, the Company expects performance in the Fluid and Metering
Technologies Segment to be driven by continued strong global investment in the
infrastructure-related markets and process control industries. Within the Health
and Science Technologies Segment, the strength of the core analytical
instrumentation, IVD and biotechnology markets as well as new OEM platforms will
continue to be offset by the residual effect of two maturing OEM contracts.
Growth in the Dispensing Equipment Segment will be fueled by anticipated
replenishment programs for large U.S. retailers and continued paint channel
expansion in global markets, partially offset by softness in the North American
housing market. We expect our Fire and Safety/Diversified Products Segment to
continue to perform well, driven by growth in demand for innovative band
clamping applications and global expansion of our rescue tools business, offset
in part by continued weakness in the North American fire suppression market.
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 ended December
31, 2007. For purposes of this discussion and analysis section, reference is
made to the table on page 17 and the Consolidated Statements of Operations in
Part II. Item 8. Financial Statements and Supplementary Data on page 25.
In the third quarter of 2006, the Company sold Lubriquip, its lubricant
dispensing business that operated as part of the Company's Dispensing Equipment
Segment. In the third quarter of 2007, the Company sold Halox, its chemical and
electrochemical systems product line operating as part of Pulsafeeder in the
Company's Fluid & Metering Technologies Segment. Financial information for all
periods presented has been restated to present the operating results of both
Lubriquip and Halox as a discontinued operation.
14
PERFORMANCE IN 2007 COMPARED WITH 2006
Sales in 2007 of $1,358.6 million were 18% higher than the $1,154.9
million recorded a year ago. Organic sales rose 6%, seven acquisitions (JUN-AIR
- February 2006; Eastern Plastics - May 2006; Banjo - October 2006; Toptech -
December 2006; Faure Herman - February 2007; Quadro - June 2007 and Isolation
Technologies - October 2007) made since the beginning of 2006 accounted for an
improvement of 9%, while foreign currency translation accounted for 3%. Organic
sales increased in all four of the Company's reporting segments. Both domestic
and international organic sales were up over 6% versus the prior year. Sales to
customers outside the U.S. represented 46% of total sales for 2007 and 45% for
2006.
In 2007, Fluid & Metering Technologies contributed 42% of sales and
operating income; Health & Science Technologies accounted for 24% of sales and
21% of operating income; Dispensing Equipment accounted for 13% of sales and 14%
of operating income; and Fire & Safety/Diversified Products represented 21% of
sales and 23% of operating income.
Fluid & Metering Technologies sales of $570.3 million in 2007 rose $134.8
million, or 31%, compared with 2006. The acquisition of Quadro, Faure Herman,
Toptech and Banjo accounted for 20% of the increase, organic growth increased
9%, while foreign currency translation accounted for 2%. In 2007, organic sales
grew approximately 7% domestically and 13% internationally. Sales to customers
outside the U.S. were approximately 42% of total segment sales for 2007 and 41%
for 2006.
Health & Science Technologies sales of $327.2 million increased $22.3
million, or 7%, in 2007 compared with last year. The acquisition of Isolation
Technologies, EPI and JUN-AIR accounted for 6% of the increase while organic
volume contributed 1%. In 2007, organic sales increased 3% domestically and
decreased 1% internationally. Sales to customers outside the U.S. were
approximately 39% of total segment sales in 2007 and 2006.
Dispensing Equipment sales of $177.9 million increased $18.2 million, or
11%, in 2007 compared with the prior year. Organic sales increased 6%, while
foreign currency translation accounted for 5%. Organic domestic sales increased
17% compared with 2006, while organic international sales were essentially flat.
Sales to customers outside the U.S. were 63% of total segment sales in 2007,
down from 65% in 2006.
Fire & Safety/Diversified Products sales of $288.4 million increased $28.3
million, or 11%, in 2007 compared with 2006. Organic sales activity increased
7%, while foreign currency translation accounted for 4%. In 2007, organic sales
increased 4% domestically, while organic international sales increased 10%.
Sales to customers outside the U.S. were 49% of total segment sales for 2007 and
46% for 2006.
Gross profit of $568.4 million in 2007 was $91.0 million, or 19%, higher
than 2006. As a percent of sales, gross profit was 41.8% in 2007, which
represented a 50 basis-point increase from 41.3% in 2006. The improved gross
profit margin is primarily attributable to strategic sourcing and other
operational excellence initiatives.
Selling, general and administrative (SG&A) expenses increased to $313.4
million in 2007 from $260.2 million in 2006. This increase reflects $33.1
million for acquisitions, $16.1 million for volume-related expenses, and a $1.7
million increase from severance-related and field service expenses as well as a
$2.3 million increase from bad debt expense associated with the bankruptcy of a
fire suppression customer. As a percent of net sales, SG&A expenses were 23.0%,
an increase of 50 basis points compared with the 22.5% achieved in 2006.
15
Operating income increased $37.9 million, or 17%, to $255.1 million in
2007 from $217.2 million in 2006, primarily due to higher 2007 gross profit,
offset by increased SG&A expenses. Operating margins in 2007 were 18.8% of
sales, flat with the prior year. Operating margin improvement was offset by the
impact of acquisitions, foreign currency translation and severance-related and
field service expenses as well as bad debt expense associated with the
bankruptcy of a fire suppression customer.
In the Fluid & Metering Technologies Segment, operating income of $121.4
million and operating margins of 21.3% in 2007 were up from the $89.9 million
and 20.6% recorded in 2006 principally due to the impact of acquisitions,
foreign currency translation and increased volume. Operating income for the
Health & Science Technologies Segment of $60.9 million was up from the $58.2
million recorded in 2006 principally due to volume. Operating margins for Health
& Science Technologies of 18.6% in 2007 were down from 19.1% in 2006, primarily
due to product mix and severance related expenses. Operating income for the
Dispensing Equipment Segment of $39.4 million was up slightly from the $38.0
million recorded in 2006, principally due to improved market conditions in
Europe and the impact of our operational excellence initiatives. Operating
margins for Dispensing Equipment of 22.1% in 2007 were down from 23.8% in 2006,
primarily due to foreign currency translation and severance-related and field
service expenses. Operating income in the Fire & Safety/Diversified Products
Segment of $66.5 million was higher than the $62.7 million recorded in 2006,
primarily due to increased volume. Operating margins within Fire &
Safety/Diversified Products of 23.1% in 2007 was down from 24.1% in 2006,
primarily due to severance-related and bad debt expenses.
16
COMPANY AND BUSINESS SEGMENT FINANCIAL INFORMANTION (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2007(1) 2006 2005
------------------------------- ----------- ----------- ------------
Fluid & Metering Technologies
Net sales (2) .......................... $ 570,307 $ 435,532 $ 383,163
Operating income (3) ................... 121,449 89,899 72,596
Operating margin (3) ................... 21.3% 20.6% 18.9%
Identifiable assets .................... $ 704,494 $ 613,203 $ 307,838
Depreciation and amortization .......... 16,797 10,524 9,824
Capital expenditures ................... 11,407 5,487 8,204
Health & Science Technologies
Net sales (2) .......................... $ 327,170 $ 304,892 $ 235,499
Operating income (3) ................... 60,924 58,229 43,133
Operating margin (3) ................... 18.6% 19.1% 18.3%
Identifiable assets .................... $ 548,678 $ 520,991 $ 391,991
Depreciation and amortization .......... 11,156 9,043 5,917
Capital expenditures ................... 5,342 4,726 5,525
Dispensing Equipment
Net sales (2) .......................... $ 177,948 $ 159,794 $ 158,111
Operating income (3) ................... 39,398 38,021 37,772
Operating margin (3) ................... 22.1% 23.8% 23.9%
Identifiable assets .................... $ 238,770 $ 217,081 $ 196,157
Depreciation and amortization .......... 3,151 3,861 4,376
Capital expenditures ................... 2,832 2,362 3,383
Fire & Safety/Diversified Products
Net sales (2) .......................... $ 288,424 $ 260,080 $ 238,992
Operating income (3) ................... 66,516 62,664 56,593
Operating margin (3) ................... 23.1% 24.1% 23.7%
Identifiable assets .................... $ 317,641 $ 306,400 $ 256,632
Depreciation and amortization .......... 5,676 6,086 5,712
Capital expenditures ................... 3,532 6,060 4,365
Company
Net sales .............................. $ 1,358,631 $ 1,154,940 $ 1,011,253
Operating income ....................... 255,083 217,206 181,032
Operating margin ....................... 18.8% 18.8% 17.9%
Total assets ........................... $ 1,989,594 $ 1,670,821 $ 1,244,180
Depreciation and amortization .......... 38,038 29,956 26,254
Capital expenditures ................... 26,496 21,198 22,532
(1) Data includes acquisition of Quadro (June 2007), Faure Herman (February
2007), Toptech (December 2006) and Banjo (October 2006) in the Fluid &
Metering Technologies Segment, Isolation Technologies (October 2007), EPI
(May 2006) and JUN-AIR (February 2006) in the Health & Science Technologies
Segment and Airshore (January 2006) in the Fire & Safety/Diversified
Products Segment from the dates of acquisition.
(2) Segment net sales include intersegment sales.
(3) Segment operating income and margin excludes unallocated corporate
operating expenses.
Other income of $3.4 million in 2007 was $2.4 million higher than the $1.0
million in 2006, due to favorable foreign currency translation and higher
interest income.
Interest expense increased to $23.4 million in 2007 from $16.4 million in
2006. The increase was principally due to higher debt levels as a result of
acquisitions.
The provision for income taxes increased to $79.3 million in 2007 from
$68.2 million in 2006. The effective tax rate decreased to 33.7% in 2007 from
33.8% in 2006, due to changes in the mix of global pre-tax income among taxing
jurisdictions.
17
Income from continuing operations for 2007 was $155.9 million, 17% higher
than the $133.7 million earned in 2006. Diluted earnings per share from
continuing operations for 2007 of $1.90 increased $0.25, or 15%, compared with
the same period of 2006.
Loss from discontinued operations for 2007 was $0.7 million, or $0.01 per
share, compared to income from discontinued operations of $12.9 million, or
$0.16 per share, in the comparable period of 2006. The 2007 loss includes $0.7
million loss from operations and a $0.1 million loss from the sale of Halox,
offset by a $0.1 million income adjustment from the sale of Lubriquip. The 2006
income includes an after tax gain of $16.7 million from the sale of Lubriquip
and $0.3 million of income from operations, partially offset by a $4.1 million
loss from the write-down of the carrying value of Halox to its estimated fair
market value.
Net income for 2007 was $155.1 million, 6% higher than the $146.7 million
earned in the same period of 2006. Diluted earnings per share in 2007 of $1.89,
increased $0.08, or 4%, compared with the same period last year.
PERFORMANCE IN 2006 COMPARED WITH 2005
Sales in 2006 of $1,154.9 million were 14% higher than the $1,011.3
million recorded a year ago. Organic sales rose 9%, while the five acquisitions
(Airshore - January 2006; JUN-AIR - February 2006; Eastern Plastics - May 2006;
Banjo - October 2006 and Toptech - December 2006) made since the beginning of
2006 accounted for an improvement of 5%. Organic sales increased in all four of
the Company's reporting segments. Domestic organic sales were up over 8% versus
the prior year, while organic sales to international customers increased 9% in
2006. Sales to customers outside the U.S. represented 45% of total sales for
both 2006 and 2005.
In 2006, Fluid & Metering Technologies contributed 38% of sales and 36% of
operating income; Health & Science Technologies accounted for 26% of sales and
24% of operating income; Dispensing Equipment accounted for 14% of sales and 15%
of operating income; and Fire & Safety/Diversified Products represented 22% of
sales and 25% of operating income.
Fluid & Metering Technologies sales of $435.5 million in 2006 rose $52.4
million, or 14%, compared with 2005, reflecting 10% organic growth and an
additional 4% impact related to the acquisitions of Banjo and Toptech. In 2006,
organic sales grew approximately 10% domestically and over 9% internationally.
Sales to customers outside the U.S. were approximately 41% of total segment
sales for 2006 and 42% for 2005.
Health & Science Technologies sales of $304.9 million increased $69.4
million, or 29%, in 2006 compared with last year. The acquisition of EPI and
JUN-AIR accounted for 16% of the increase while organic volume contributed 13%.
In 2006, organic sales increased 8% domestically and 24% internationally. Sales
to customers outside the U.S. were approximately 39% of total segment sales in
2006, compared with 33% in 2005.
Dispensing Equipment sales of $159.8 million increased $1.7 million, or
1%, in 2006 compared with the prior year. Organic domestic sales increased 5%
compared with 2005, while organic international sales decreased 1%. Sales to
customers outside the U.S. were 65% of total segment sales in 2006, down from
66% in 2005.
Fire & Safety/Diversified Products sales of $260.1 million increased $21.1
million, or 9%, in 2006 compared with 2005. Organic activity increased 8%, while
foreign currency translation accounted for 1%. In 2006, organic sales increased
9% domestically, while organic international sales increased 7%. Sales to
customers outside the U.S. were 46% of total segment sales for both 2006 and
2005.
18
Gross profit of $477.4 million in 2006 was $63.4 million, or 15%, higher
than 2005. As a percent of sales, gross profit was 41.3% in 2006, which
represented a 40 basis-point increase from 40.9% in 2005. The improved gross
profit margin was primarily attributable to strategic sourcing and other
operational excellence initiatives.
SG&A expenses increased to $260.2 million in 2006 from $232.9 million in
2005. This increase reflects acquisitions, volume-related expenses, the
implementation of Statement of Financial Accounting Standard (SFAS) No. 123(R),
"Share-Based Payment" and the reinvestment in the business to drive organic
growth. As a percent of net sales, SG&A expenses were 22.5%, an improvement of
50 basis points compared with the 23.0% achieved in 2005.
Operating income increased $36.2 million, or 20%, to $217.2 million in
2006 from $181.0 million in 2005, primarily due to higher 2006 gross profit,
offset by increased SG&A expenses. Operating margins in 2006 were 18.8% of
sales, an improvement of 90 basis points compared with the 17.9% achieved in
2005.
In the Fluid & Metering Technologies Segment, operating income of $89.9
million and operating margins of 20.6% in 2006 were up from the $72.6 million
and 18.9% recorded in 2005 principally due to volume and the impact of our
operational excellence initiatives. Operating income for the Health & Science
Technologies Segment of $58.2 million was up from the $43.1 million recorded in
2005 principally due to volume. Operating margins for Health & Science
Technologies of 19.1% in 2006 were up from 18.3% in 2005. Operating income for
the Dispensing Equipment Segment of $38.0 million was up slightly from the $37.8
million recorded in 2005. Operating margins for Dispensing Equipment of 23.8% in
2006 were down slightly from 23.9% in 2005, primarily due to product mix.
Operating income in the Fire & Safety/Diversified Products Segment of $62.7
million was higher than the $56.6 million recorded in 2005, primarily due to
increased volume. Operating margins within Fire & Safety/Diversified Products of
24.1% in 2006 was up from 23.7% in 2005, primarily due to product mix.
Other income of $1.0 million in 2006 was $.4 million higher than the $.6
million in 2005. In 2006, we benefited from an increase in interest income,
partially offset by unfavorable foreign currency translation.
Interest expense increased to $16.4 million in 2006 from $14.4 million in
2005. The increase was principally due to higher debt levels as a result of
acquisitions and higher interest rates.
The provision for income taxes increased to $68.2 million in 2006 from
$58.6 million in 2005. The effective tax rate decreased to 33.8% in 2006 from
35.1% in 2005, due to changes in the mix of global pre-tax income among taxing
jurisdictions.
Income from continuing operations for 2006 was $133.7 million, 23% higher
than the $108.6 million earned in 2005. Diluted earnings per share from
continuing operations for 2006 of $1.65 increased $0.28, or 20%, compared with
the same period of 2005.
Income from discontinued operations for 2006 was $12.9 million, or $0.16
per share, compared to $1.2 million, or $0.02 per share, in the comparable
period of the prior year. The 2006 income includes an after tax gain of $16.7
million from the sale of Lubriquip, the Company's lubricant dispensing business
and $.3 million of income from operations, partially offset by a $4.1 million
loss from the write-down of the carrying value of Halox to its estimated fair
market value. The 2005 income includes income from operations of $1.2 million.
Net income for 2006 was $146.7 million, 34% higher than the $109.8 million
earned in the same period of 2005. Diluted earnings per share in 2006 of $1.81,
which included $.16 from discontinued operations, increased $0.42, or 31%,
compared with the same period last year.
19
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2007, working capital was $438.2 million and the Company's
current ratio was 3.2 to 1. Cash flows from operating activities of continuing
operations increased $38.0 million, or 24%, to $198.1 million in 2007 mainly due
to the improved operating results discussed above.
Cash flows from continuing operations were more than adequate to fund
capital expenditures of $24.5 million and $21.2 million in 2007 and 2006,
respectively. Capital expenditures were generally for machinery and equipment
that improved productivity and tooling to support the global sourcing
initiatives, although a portion was for business system technology and
replacement of equipment and facilities. Management believes that the Company
has ample capacity in its plants and equipment to meet expected needs for future
growth in the intermediate term.
The Company acquired Faure Herman in February 2007 for cash consideration
of $24.3 million and the assumption of approximately $1.6 million in debt,
Quadro in June 2007 for cash consideration of $32.2 million and Isolation
Technologies in October 2007 for cash consideration of $29.7 million.
Approximately $12.9 million, $11.3 million and $29.9 million, respectively, of
the cash payments for the acquisitions were financed by borrowings under the
Company's credit facility.
The Company acquired Airshore in January 2006 for cash consideration of
$12.6 million, JUN-AIR in February 2006 for cash consideration of $15.3 million
and the assumption of approximately $7.1 million in debt, Eastern Plastics in
May 2006 for cash consideration of $92.4 million, Banjo in October 2006 for a
purchase price of $184.5 million, primarily financed by borrowings under the
Company's credit facilities and Toptech in December 2006 for a purchase price of
$55.0 million, primarily financed by borrowings under the Company's credit
facilities.
On January 1, 2008 the Company completed the acquisition of ADS, LLC
("ADS"), for cash consideration of approximately $160.0 million. Approximately
$140.0 million of the purchase price is recorded as restricted cash on the
Company's Consolidated Balance Sheet as of December 31, 2007. Approximately
$160.0 million of the cash payment for the acquisition was financed by
borrowings under the Company's credit facility.
The Company maintains a $600.0 million unsecured domestic multi-currency
bank revolving credit facility ("Credit Facility"), which expires December 21,
2011. With $292.0 million outstanding under the facility at December 31, 2007,
and outstanding letters of credit totaling $5.8 million, the maximum amount
available under the Credit Facility was $302.2 million. Interest is payable
quarterly on the outstanding borrowings at the bank agent's reference rate.
Interest on borrowings based on LIBOR plus an applicable margin is payable on
the maturity date of the borrowing, or quarterly from the effective date for
borrowings exceeding three months. The applicable margin is based on the
Company's senior, unsecured, long-term debt rating and can range from 24 basis
points to 50 basis points. Based on the Company's BBB rating at December 31,
2007, the applicable margin was 40 basis points. An annual Credit Facility fee,
also based on the Company's credit rating, is currently 10 basis points and is
payable quarterly.
In February 1998, the Company sold $150.0 million of unsecured 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. On February 15, 2008 the Senior Notes were repaid using
proceeds available under the Company's Credit Facility. The Company has
classified the Senior Notes as a long-term borrowing at December 31, 2007
because of the Company's ability and intent at December 31, 2007 to refinance
this obligation on a long-term basis via the availability under the Credit
Facility.
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, 2007,
the Company was in compliance with both of these financial covenants.
20
We also have a one-year, renewable $30.0 million demand line of credit
("Short-Term Facility"), which expires on December 12, 2008. Borrowings under
the Short-Term Facility are at LIBOR plus the applicable margin in effect under
the Credit Facility. At December 31, 2007, there were no borrowings outstanding
under this facility.
We believe for the next 12 months that cash flow from operations and our
availability under the Credit Facility will be sufficient to meet our 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 borrowings.
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, which are not included in the table below.
See Note 14 of the Notes to Consolidated Financial Statements in Part II. Item
8. Financial Statements and Supplementary Data.
The following table summarizes our significant contractual obligations
and commercial commitments at December 31, 2007, 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 is provided in the
Notes to Consolidated Financial Statements in Part II. Item 8. Financial
Statements and Supplementary Data, as referenced in the table:
LESS MORE
THAN 1-3 3-5 THAN
PAYMENTS DUE BY PERIOD TOTAL 1 YEAR YEARS YEARS 5 YEARS
(IN THOUSANDS)
--------------------------------------- --------- -------- -------- --------- -------
Borrowings (Note 5)(1) ................ $ 549,767 $ 33,434 $ 48,385 $ 466,331 $ 1,617
Operating lease commitments (Note 6)... 20,879 7,287 8,705 2,763 2,124
Capital lease obligations(2)........... 6,123 848 1,866 787 2,622
Purchase obligations(3)................ 62,119 58,260 3,811 33 15
FIN 48 obligations..................... 5,938 1,725 2,965 31 1,217
--------- --------- -------- --------- -------
Total contractual obligations(4)....... $ 644,826 $ 101,554 $ 65,732 $ 469,945 $ 7,595
========= ========= ======== ========= =======
(1) Includes interest payments based on contractual terms and current interest
rates for variable debt.
(2) Comprised primarily of property leases.
(3) Comprised primarily of inventory commitments.
(4) Comprised of liabilities recorded on the balance sheet of $465,509, and
obligations not recorded on the balance sheet of $179,317.
CRITICAL ACCOUNTING POLICIES
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 in
Part II. Item 8. Financial Statements and Supplementary Data.
21
Revenue recognition-- The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable, and collectibility of the sales price is reasonably
assured. For product sales, delivery does not occur until the products have been
shipped and risk of loss has been transferred to the customer. Revenue from
services is recognized when the services are provided or ratably over the
contract term. Some arrangements with customers may include multiple
deliverables, including the combination of products and services. In such cases
the Company has identified these as separate elements in accordance with
Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables" and recognizes revenue consistent with the policy for each
separate element based on the fair value of each accounting unit. The Company
records allowances for discounts, product returns and customer incentives at the
time of sale as a reduction of revenue as such allowances can be reliably
estimated based on historical experience and known trends. The Company also
offers product warranties and accrues its estimated exposure for warranty claims
at the time of sale based upon the length of the warranty period, warranty costs
incurred and any other related information known to the Company.
Share-Based Compensation--The Company adopted SFAS No. 123 (R), "Share
Based Payment" effective January 1, 2006, and applies the Binomial lattice
option-pricing model to determine the fair value of options. The Binomial
lattice option-pricing model incorporates certain assumptions, such as the
expected volatility, risk-free interest rate, expected dividend yield and
expected life of options, in order to arrive at a fair value estimate. As a
result, share-based compensation expense, as calculated and recorded under SFAS
No. 123 (R), could have been impacted if other assumptions were used.
Furthermore, if the Company used different assumptions in future periods,
share-based compensation expense could be impacted in future periods. See Note
13 of the Notes to Consolidated Financial Statements for additional information
in Part II. Item 8. Financial Statements and Supplementary Data.
Inventory--The Company states inventory at the lower of cost or market.
Cost includes material, labor and overhead and is determined by the last-in,
first-out basis or first-in, first-out basis. We make adjustments to reduce the
cost of inventory to its net realizable value, if required, at the business unit
level for estimated excess, obsolescence or impaired balances. Factors
influencing these adjustments include changes in market demand, product life
cycle and engineering changes.
Goodwill, Long-Lived and Intangible assets--The Company evaluates the
recoverability of certain noncurrent assets utilizing various estimation
processes. An impairment of a long-lived asset exists when the asset's carrying
amount exceeds its fair value, and is recorded when the carrying amount is not
recoverable through future operations. An intangible asset or goodwill
impairment exists when the carrying amount of intangible assets and goodwill
exceeds its fair value. Assessments of possible impairments of goodwill,
long-lived or intangible assets are made when events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable through future operations. Additionally, testing for possible
impairment of recorded goodwill and indefinite-lived intangible asset balances
is performed annually. The amount and timing of impairment charges for these
assets require the estimation of future cash flows and the fair market value of
the related assets.
Income taxes--The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income
tax assets and liabilities are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities based on currently enacted tax laws. The Company's tax balances
are based on management's interpretation of the tax regulations and rulings in
numerous taxing jurisdictions. Future tax authority rulings and changes in tax
laws and future tax planning strategies could affect the actual effective tax
rate and tax balances recorded by the Company.
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
22
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 the defined benefit retirement plans are presented in Note 14 of the Notes to
Consolidated Financial Statements in Part II. Item 8. Financial Statements and
Supplementary Data. 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 with actuaries using a
number of assumptions provided by the Company. Key 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.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements.
This statement is effective for fiscal periods beginning after November 15,
2007, and does not require any new fair value measurements. On February 6, 2008,
the FASB announced it will issue a FASB Staff Position (FSP) to allow a one-year
deferral of adoption of this statement for non-financial assets and
non-financial liabilities that are recognized at fair value on a nonrecurring
basis. Management is currently evaluating the requirements of SFAS No. 157, and
has not yet determined the impact on the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is in
the process of evaluating the impact this pronouncement may have on its results
of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), "Business
combinations", which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal
year that begins after December 15, 2008. We will adopt this statement for
acquisitions consummated after its effective date.
In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51". SFAS No. 160
establishes accounting and reporting standards for noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. Minority interests will
be recharacterized as noncontrolling interests and classified as a component of
equity. It also establishes a single method of accounting for changes in a
parent's ownership interest in a subsidiary and requires expanded disclosures.
SFAS No. 160 is effective for fiscal years beginning on or after December 15,
2008. The Company is currently assessing the impact of SFAS No. 160 on its
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is subject to market risk associated with changes in interest
rates and foreign currency exchange rates. The Company's interest rate exposure
is primarily related to the $454.7 million of total debt outstanding at December
31, 2007. Approximately 67% 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
23
approximate $1.5 million annualized increase or decrease in interest expense and
cash flows. The remaining debt is fixed rate debt. We may, 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. The Company did not
enter into any interest rate swaps in 2007 or 2006.
Our foreign currency exchange rate risk is limited principally to the Euro,
British Pound and Canadian Dollar. We manage our foreign exchange risk
principally through invoicing our customers in the same currency as the source
of our products. The effect of transaction gains and losses is reported within
"Other income/expense-net" on the Consolidated Statements of Operations.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
IDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
AS OF DECEMBER 31,
2007 2006
----------- -----------
ASSETS
Current assets
Cash and cash equivalents ............................................. $ 102,757 $ 77,941
Restricted cash (Note 1) .............................................. 140,005 --
Receivables - net ..................................................... 193,326 166,485
Inventories ........................................................... 177,435 160,687
Assets held for sale .................................................. -- 829
Other current assets .................................................. 23,615 11,966
----------- -----------
Total current assets ............................................... 637,138 417,908
Property, plant and equipment - net ........................................ 172,999 165,949
Goodwill ................................................................... 977,019 912,600
Intangible assets - net .................................................... 191,766 171,363
Other noncurrent assets .................................................... 10,672 3,001
----------- -----------
Total assets ....................................................... $ 1,989,594 $ 1,670,821
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable ................................................ $ 84,209 $ 75,444
Accrued expenses ...................................................... 99,125 95,170
Short-term borrowings ................................................. 5,830 8,210
Liabilities held for sale ............................................. -- 373
Dividends payable ..................................................... 9,789 8,055
----------- -----------
Total current liabilities .......................................... 198,953 187,252
Long-term borrowings ....................................................... 448,901 353,770
Deferred income taxes ...................................................... 124,472 100,316
Other noncurrent liabilities ............................................... 54,545 50,211
----------- -----------
Total liabilities .................................................. 826,871 691,549
----------- -----------
Commitments and contingencies (Note 6)
Shareholders' equity
Preferred stock:
Authorized: 5,000,000 shares, $.01 per share par value; Issued: None -- --
Common stock:
Authorized: 150,000,000 shares, $.01 per share par value
Issued: 81,736,244 shares at December 31, 2007 and
80,669,121 shares at December 31, 2006 ............................. 817 538
Additional paid-in capital ............................................ 346,450 317,417
Retained earnings ..................................................... 753,519 638,579
Treasury stock at cost: 156,986 shares at December 31, 2007 and
123,383 shares at December 31, 2006 ................................ (4,443) (3,248)
Accumulated other comprehensive income ................................ 66,380 25,986
----------- -----------
Total shareholders' equity ......................................... 1,162,723 979,272
----------- -----------
Total liabilities and shareholders' equity ......................... $ 1,989,594 $ 1,670,821
=========== ===========
See Notes to Consolidated Financial Statements.
25
IDEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
2007 2006 2005
----------- ----------- -----------
Net sales .................................................................... $ 1,358,631 $ 1,154,940 $ 1,011,253
Cost of sales ................................................................ 790,182 677,533 597,286
----------- ----------- -----------
Gross profit ................................................................. 568,449 477,407 413,967
Selling, general and administrative expenses ................................. 313,366 260,201 232,935
----------- ----------- -----------
Operating income ............................................................. 255,083 217,206 181,032
Other income - net ........................................................... 3,434 1,040 557
Interest expense ............................................................. 23,353 16,353 14,370
----------- ----------- -----------
Income from continuing operations before income taxes ........................ 235,164 201,893 167,219
Provision for income taxes ................................................... 79,300 68,171 58,644
----------- ----------- -----------
Income from continuing operations ............................................ 155,864 133,722 108,575
Income (loss) from discontinued operations, net of tax ....................... (719) 294 1,228
Net gain on sale of discontinued operations, net of tax ...................... -- 12,655 --
----------- ----------- -----------
Income (loss) from discontinued operations, net of tax ....................... (719) 12,949 1,228
----------- ----------- -----------
Net income ................................................................... $ 155,145 $ 146,671 $ 109,803
=========== =========== ===========
Basic earnings per common share:
Continuing operations ........................................................ $ 1.93 $ 1.68 $ 1.41
Discontinued operations ...................................................... (0.01) 0.16 0.01
----------- ----------- -----------
Net income ................................................................... $ 1.92 $ 1.84 $ 1.42
=========== =========== ===========
Diluted earnings per common share:
Continuing operations ........................................................ $ 1.90 $ 1.65 $ 1.37
Discontinued operations ...................................................... (0.01) 0.16 0.02
----------- ----------- -----------
Net income ................................................................... $ 1.89 $ 1.81 $ 1.39
=========== =========== ===========
Share data:
Basic weighted average common shares outstanding ............................. 80,666 79,527 77,088
Diluted weighted average common shares outstanding ........................... 82,086 80,976 79,080
See Notes to Consolidated Financial Statements.
26
IDEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
----------------------
COMMON STOCK CUMULATIVE TOTAL
AND ADDITIONAL RETAINED TRANSLATION TREASURY UNEARNED SHAREHOLDERS'
PAID-IN CAPITAL EARNINGS ADJUSTMENT PENSIONS STOCK COMPENSATION EQUITY
--------------- --------- ------------ -------- -------- ------------ -------------
BALANCE, JANUARY 1, 2005 ............... $ 234,864 $ 439,137 $ 53,046 $ (4,644) $ (4,209) $ (4,589) $ 713,605
--------------- --------- ------------ -------- -------- ------------ -------------
Net income ............................. -- 109,803 -- -- -- -- 109,803
Other comprehensive income,
net of tax ........................... -- -- -- -- -- -- --
Cumulative translation
adjustment ........................... -- -- (27,886) -- -- -- (27,886)
Minimum pension adjustment............. -- -- -- (1,240) -- -- (1,240)
-------------
Other comprehensive loss ............. -- -- -- -- -- -- (29,126)
-------------
Comprehensive income ................ -- -- -- -- -- -- 80,677
-------------
Issuance of 2,772,510 shares
of common stock from
exercise of stock options
and deferred compensation
plans ............................... 52,683 -- -- -- -- -- 52,683
Issuance of 264,225 shares
of unvested common stock ............ 3,410 -- -- -- 3,735 (7,145) --
Amortization of unvested
common stock award ..... -- -- -- -- -- 2,837 2,837
Unvested shares surrendered
for tax withholdings ................ -- -- -- -- (1,887) -- (1,887)
Cash dividends declared--$.32
per common share outstanding ........ -- (24,905) -- -- -- -- (24,905)
--------------- --------- ------------ -------- -------- ------------ -------------
BALANCE, DECEMBER 31, 2005 ............. 290,957 524,035 25,160 (5,884) (2,361) (8,897) 823,010
--------------- --------- ------------ -------- -------- ------------ -------------
Net income ............................. -- 146,671 -- -- -- -- 146,671
Reclassification due to
adoption of SFAS 123 (R) ............ (8,897) -- -- -- -- 8,897 --
Other comprehensive income,
net of tax .......... -- -- -- -- -- -- --
Cumulative translation
adjustment .......................... -- -- 27,135 -- -- -- 27,135
Minimum pension
adjustment .......................... -- -- -- 707 -- -- 707
-------------
Other comprehensive
income .............................. -- -- -- -- -- -- 27,842
-------------
Comprehensive income ................ -- -- -- -- -- -- 174,513
-------------
Issuance of 1,286,985 shares
of common stock from
exercise of stock options
and deferred compensation
plans ............................... 25,197 -- -- -- -- -- 25,197
Share-based compensation ............... 10,698 -- -- -- -- -- 10,698
Unvested shares surrendered for tax
withholdings ........................ -- -- -- -- (887) -- (887)
Cash dividends declared--$.40
per common share outstanding ........ -- (32,127) -- -- -- -- (32,127)
Cumulative effect of change
in accounting for
adoption of SFAS No. 158 ............ -- -- -- (21,132) -- -- (21,132)
--------------- --------- ------------ -------- -------- ------------ -------------
BALANCE, DECEMBER 31, 2006 ............. $ 317,955 $ 638,579 $ 52,295 $(26,309) $ (3,248) $ -- $ 979,272
--------------- --------- ------------ -------- -------- ------------ -------------
Net income ............................. -- 155,145 -- -- -- -- 155,145
Other comprehensive
income, net of tax .................. -- -- -- -- -- -- --
Cumulative translation
adjustment .......................... -- -- 34,460 -- -- -- 34,460
Adjustment to pension and
other benefit liabilities ........... -- -- -- 5,934 -- -- 5,934
-------------
Other comprehensive income ........... -- -- -- -- -- -- 40,394
-------------
Comprehensive income ................ -- -- -- -- -- -- 195,539
-------------
Cumulative effect of change
in accounting for
uncertainties in income
taxes (FIN 48--See Note 8) ........... -- (1,204) -- -- -- -- (1,204)
Issuance of 892,438 shares of
common stock from exercise of
stock options and deferred
compensation plans .................. 16,742 -- -- -- -- -- 16,742
Share-based compensation ............... 12,570 -- -- -- -- -- 12,570
Unvested shares surrendered
for tax withholding ................. -- -- -- -- (1,195) -- (1,195)
Cash dividends declared--$.48
per common share outstanding ........ -- (39,001) -- -- -- -- (39,001)
--------------- --------- ------------ -------- -------- ------------ -------------
BALANCE, DECEMBER 31, 2007 ............. $ 347,267 $ 753,519 $ 86,755 $(20,375) $ (4,443) $ -- $ 1,162,723
--------------- --------- ------------ -------- -------- ------------ -------------
See Notes to Consolidated Financial Statements.
27
IDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
2007 2006 2005
---------- --------- ---------
Cash flows from operating activities of continuing operations
Net income ..................................................................... $ 155,145 $ 146,671 $ 109,803
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (income) from discontinued operations ................................. 719 (294) (1,228)
Gain on sale of business ................................................... -- (12,655) --
Gain on sale of fixed assets ............................................... (371) (1,435) --
Depreciation and amortization .............................................. 28,316 25,825 25,546
Amortization of intangible assets .......................................... 9,722 4,131 708
Amortization of debt issuance expenses ..................................... 460 456 686
Share-based compensation expense ........................................... 12,570 10,698 2,837
Deferred income taxes ...................................................... 2,449 1,313 4,316
Excess tax benefit from share-based compensation ........................... (5,390) (5,792) --
Changes in (net of the effect from acquisitions):
Receivables ........................................................... (8,714) (14,421) (18,222)
Inventories ........................................................... (3,502) (7,203) (3,344)
Trade accounts payable ................................................ 808 (724) 38
Accrued expenses ...................................................... 4,141 15,837 21,628
Other - net ................................................................ 1,754 (2,289) 145
---------- --------- ---------
Net cash flows provided by operating activities of continuing
operations ......................................................... 198,107 160,118 142,913
Cash flows from investing activities of continuing operations
Purchases of property, plant and equipment ................................. (24,498) (21,198) (22,532)
Acquisition of businesses, net of cash acquired............................. (86,207) (359,844) (1,191)
Proceeds from the sale of discontinued businesses........................... 326 30,579 --
Proceeds from fixed assets disposals ....................................... 288 3,761 86
Changes in restricted cash ................................................. (140,005) -- --
Other - net ................................................................ 1,500 (1,153) --
---------- --------- ---------
Net cash flows used in investing activities of continuing
operations ......................................................... (248,596) (347,855) (23,637)
Cash flows from financing activities of continuing operations
Borrowings under credit facilities for acquisitions ........................ 209,132 285,000 --
Borrowings under credit facilities ......................................... 46,947 245,687 10,000
Payments under credit facilities ........................................... (166,423) (337,168) (71,776)
Dividends paid ............................................................. (37,267) (30,393) (24,689)
Distributions (to) from discontinued operations ............................ (664) 80 1,438
Proceeds from stock option exercises ....................................... 13,996 17,214 37,503
Excess tax benefit from share-based compensation ........................... 5,390 5,792 --
Other - net ................................................................ (241) (1,779) (1,887)
---------- --------- ---------
Net cash flows provided by (used in) financing activities of
continuing operations .............................................. 70,870 184,433 (49,411)
Cash flows from discontinued operations
Net cash (used in) provided by operating activities of
discontinued operations ................................................... (869) (101) 1,975
Net cash used in investing activities of discontinued
operations ................................................................ -- (321) (462)
Net cash provided by (used in) financing activities of
discontinued operations ............................................ 867 335 (1,438)
---------- --------- ---------
Net cash flows (used in) provided by discontinued operations .......... (2) (87) 75
Effect of exchange rate changes on cash and cash equivalents ................... 4,435 4,044 76
---------- --------- ---------
Net increase in cash ........................................................... 24,814 653 70,016
Cash and cash equivalents at beginning of year ................................. 77,943 77,290 7,274
---------- --------- ---------
Cash and cash equivalents at end of period ..................................... 102,757 77,943 77,290
---------- --------- ---------
Less-cash at end of period-discontinued......................................... -- 2 89
---------- --------- ---------
Cash and cash equivalents at end of period-continuing operations ............... $ 102,757 $ 77,941 $ 77,201
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest ................................................................... $ 22,974 $ 15,605 $ 13,953
Income taxes ............................................................... 78,052 61,896 35,916
Significant non-cash activities:
Debt acquired with acquisition of business ................................. 1,571 7,102 --
Capital expenditures included in accounts payable .......................... 561 640 --
Non-cash capital expenditures .............................................. 1,437 -- --
See Notes to Consolidated Financial Statements.
28
IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
IDEX Corporation ("IDEX" or the "Company") is an applied solutions company
specializing in fluid and metering technologies, health and science
technologies, dispensing equipment, and fire, safety and other diversified
products built to its customers' specifications. Its products are sold in niche
markets to a wide range of industries throughout the world. Its products include
industrial pumps, compressors, flow meters, injectors and valves, and related
controls for use in a wide variety of process applications; precision fluidics
solutions, including pumps, valves, degassing equipment, corrective tubing,
fittings, and complex manifolds, as well as specialty medical equipment and
devices used in life science applications; precision-engineered equipment for
dispensing, metering and mixing paints, and personal care products; refinishing
equipment; 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 four business segments:
Fluid & Metering Technologies, Health & Science Technologies, Dispensing
Equipment, and Fire & Safety/Diversified Products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
subsidiaries. All intercompany transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles 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 sales returns and allowances,
inventory, goodwill and intangible assets, income taxes, product warranties,
contingencies and litigation, share-based compensation and defined benefit
retirement plans.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility of the sales price is reasonably assured. For product sales,
delivery does not occur until the products have been shipped and risk of loss
has been transferred to the customer. Revenue from services is recognized when
the services are provided or ratably over the contract term. Some arrangements
with customers may include multiple deliverables, including the combination of
products and services. In such cases the Company has identified these as
separate elements in accordance with Emerging Issues Task Force Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" and recognizes revenue
consistent with the policy for each separate element based on the fair value of
each accounting unit. The Company records allowances for discounts, product
returns and customer incentives at the time of sale as a reduction of revenue as
such allowances can be reliably estimated based on historical experience and
known trends. The Company also offers product warranties and accrues its
estimated exposure for warranty claims at the time of sale based upon the length
of the warranty period, warranty costs incurred and any other related
information known to the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three
29
or fewer months to be cash and cash equivalents.
RESTRICTED CASH
On December 31, 2007, the Company deposited cash in an escrow account in
accordance with the planned acquisition of ADS, which took place on January 1,
2008 (see Note 15).
INVENTORIES
Inventories are stated at the lower of cost or market. Cost, which
includes material, labor and factory overhead, is determined on the first-in,
first-out basis or the last-in, first-out basis. A reserve for excess inventory
is recorded for inventory on hand in excess of anticipated or historical usage.
An obsolescence reserve is recorded for inventory made obsolete by marketplace,
product or engineering changes.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment upon the occurrence of
events or changes in circumstances that indicate that the carrying value of the
assets may not be recoverable, as measured by comparing their net book value to
the projected undiscounted future cash flows generated by their use. Impaired
assets are recorded at their estimated fair value using a discounted cash flow
analysis.
GOODWILL AND INTANGIBLE ASSETS
The Company reviews the carrying value of goodwill and indefinite-lived
intangible assets in the fourth quarter of each year, or upon the occurrence of
events or changes in circumstances that indicate that the carrying value of the
goodwill or intangible assets may not be recoverable, in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". The Company evaluates the recoverability of each of these
assets based on the estimated market value of each business unit and the
estimated future cash flows from each of the business units.
BORROWING EXPENSES
Expenses incurred in securing and issuing debt are amortized over the life
of the related borrowing and are included in interest expense in the
Consolidated Statements of Operations.
EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") is computed by dividing net income by
the weighted average number of shares of common stock (basic) plus common stock
equivalents and unvested 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.
Basic weighted average shares outstanding reconciles to diluted weighted
average shares outstanding as follows:
(in thousands) 2007 2006 2005
--------------------------------------------------------------------- ------ ------ ------
Basic weighted average common shares outstanding..................... 80,666 79,527 77,088
------ ------ ------
Dilutive effect of stock options, DCUs and unvested shares........... 1,420 1,449 1,992
====== ====== ======
Diluted weighted average common shares outstanding................... 82,086 80,976 79,080
Options to purchase approximately 1.7 million, 1.8 million and .3 million
shares of common stock as of December 31, 2007, 2006 and 2005 respectively, were
not included in the computation of diluted EPS
30
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 have
been antidilutive.
STOCK OPTIONS
Prior to January 1, 2006, the Company accounted for its share-based
compensation using the intrinsic value method of Accounting Principles Bulletin
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company provided pro forma disclosure in accordance with
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," as if the fair-value method of SFAS No. 123, "Accounting for
Stock-Based Compensation," had been applied to share-based compensation. In
accordance with APB Opinion No. 25, no share-based compensation cost was
reflected in the Company's net income prior to January 1, 2006 for grants of
stock options to employees because the Company granted stock options with an
exercise price equal to the market value of the stock on the date of grant. The
reported share-based compensation expense, net of related tax effects, for
periods prior to January 1, 2006 represents the amortization of unvested stock
grants.
Had the Company used the fair-value based accounting method for stock
compensation expense prescribed by SFAS Nos. 123 and 148 for the twelve months
ended December 31, 2005, the Company's consolidated income from continuing
operations and EPS from continuing operations would have been reduced to the
pro-forma amounts as follows:
2005
---------
Income from continuing operations - as reported........................... $ 108,575
Add: Total share-based employee compensation included in reported
Income from continuing operations, net of related tax effects......... 1,804
Deduct: Total share-based compensation expense determined under
fair- value based method for all awards, net of related tax effects.... (8,591)
---------
Income from continuing operations - pro forma............................. $ 101,788
=========
EPS from continuing operations:
Basic - as reported..................................................... $ 1.41
Share - based compensation.............................................. (0.09)
---------
Basic - pro forma....................................................... $ 1.32
=========
Diluted - as reported................................................... $ 1.37
Share - based compensation.............................................. (0.08)
---------
Diluted - pro forma..................................................... $ 1.29
=========
Effective January 1, 2006, the Company adopted the fair-value recognition
provisions of SFAS No. 123(R), "Share-Based Payment," using the modified
prospective transition method and, therefore, has not restated results for prior
periods. Under this transition method, share-based compensation expense for the
twelve months ended December 31, 2007 and 2006, includes compensation expense
for all share-based compensation awards granted prior to, but not yet vested as
of December 31, 2005, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123. Share-based compensation expense
for all share-based compensation awards granted after December 31, 2005, is
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123(R). The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting period of four years. See Note 13 for a further
discussion on share-based compensation.
31
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, with depreciation and
amortization provided using the straight-line method over the following
estimated useful lives:
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. The estimated useful lives used in
the computation of amortization of identifiable intangible assets are as
follows:
Patents 5 to 17 years
Trade names 3 to 20 years
Customer relationships 8 to 30 years
Non-compete agreements 2 to 5 years
Unpatented technology and other 8 to 20 years
RESEARCH AND DEVELOPMENT EXPENDITURES
Costs associated with research and development are expensed in the period
incurred and are included in "Cost of sales" within the Consolidated Statements
of Operations. Research and development expenses from continuing operations --
which include costs associated with developing new products and major
improvements to existing products -- were $28.1 million, $24.8 million and $23.8
million in 2007, 2006 and 2005, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of substantially all operations outside the
United States is the respective local currency. Accordingly,
those 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 other comprehensive income" in the Consolidated Balance
Sheets. The effect of transaction gains and losses is reported within "other
income" or "other expense" on the Consolidated Statements of Operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, trade receivables, accounts payable, accrued expenses and borrowings
approximate their fair values.
CONCENTRATION OF CREDIT RISK
The Company is not dependent on a single customer, the largest of which
accounted for less than 2% of net sales for all years presented.
32
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. This statement is effective
for fiscal periods beginning after November 15, 2007, and does not require any
new fair value measurements. On February 6, 2008, the FASB announced it will
issue a FASB Staff Position (FSP) to allow a one-year deferral of adoption of
this statement for non-financial assets and non-financial liabilities that are
recognized at fair value on a nonrecurring basis. Management is currently
evaluating the requirements of SFAS No. 157, and has not yet determined the
impact on the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is in
the process of evaluating the impact this pronouncement may have on its results
of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R) (revised 2007),
"Business Combinations", which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any controlling interest;
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is to be applied
prospectively to business combinations for which the acquisition date is on or
after an entity's fiscal year that begins after December 15, 2008. We will adopt
this statement for acquisitions consummated after its effective date.
In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51". SFAS No. 160
establishes accounting and reporting standards for noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. Minority interests will
be recharacterized as noncontrolling interests and classified as a component of
equity. It also establishes a single method of accounting for changes in a
parent's ownership interest in a subsidiary and requires expanded disclosures.
SFAS No. 160 is effective for fiscal years beginning on or after December 15,
2008. The Company is currently assessing the impact of SFAS No. 160 on its
consolidated financial statements.
2. RESTATEMENT OF FINANCIAL STATEMENTS
In January 2006, the Company adopted the provisions of SFAS No. 123(R),
"Share-Based Payment." Subsequent to the issuance of the Company's 2006
consolidated financial statements, the Company's management determined that the
Company had incorrectly continued to record unearned compensation related to the
issuance of unvested stock awards in Shareholders' Equity within the
Consolidated Balance Sheets and the Consolidated Statements of Shareholders'
Equity. Additionally, the Company did not record an entry as of January 1, 2006
to eliminate the Unearned Compensation balance as of December 31, 2005 against
Additional paid-in capital.
The following is a summary of the effect of the immaterial restatement on
the Company's 2006 Consolidated Balance Sheets and Consolidated Statements of
Shareholders' Equity. The adjustment has no impact on consolidated Shareholders'
Equity but rather only the components listed below.
33
2006 2006
----------- -----------
(in thousands) AS REPORTED ADJUSTMENT AS RESTATED
-------------------------------- ----------- ---------- -----------
Additional paid-in capital...... $ 326,968 $ (9,551) $ 317,417
Unearned compensation........... $ (9,551) $ 9,551 $ ---
The Company has corrected its presentation for the year ended December 31,
2006 in this 2007 Annual Report on Form 10-K. Specifically, the Company has
corrected the previous presentation of the December 31, 2006 balances within the
Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity.
In December 2006, the Company adopted the provisions of SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans." The transition adjustment related to the adoption of SFAS No. 158 was
$21.1 million. Subsequent to the issuance of the Company's 2006 consolidated
financial statements, the Company's management determined that the Company had
incorrectly included the transition adjustment within Other comprehensive income
and Comprehensive income for the year ended December 31, 2006 in its
Consolidated Statements of Shareholders' Equity in the 2006 Annual Report on
Form 10-K. The transition adjustment should have been presented as an adjustment
to the ending balance of Accumulated other comprehensive income within the 2006
Consolidated Statement of Shareholders' Equity.
The following is a summary of the effect of the adjustment on the
Company's 2006 Consolidated Statement of Shareholders' Equity. The adjustment
has no impact on Consolidated Shareholders' Equity but rather only the
components listed below.
2006 2006
----------- -----------
(in thousands) AS REPORTED ADJUSTMENT AS RESTATED
------------------------------ ----------- ---------- -----------
Other comprehensive income.... $ 6,710 $ 21,132 $ 27,842
Comprehensive income.......... $ 153,381 $ 21,132 $ 174,513
The Company has corrected its presentation for the year ended December 31,
2006 in this 2007 Annual Report on Form 10-K.
In previously issued financial statements the Company incorrectly
presented borrowings and payments under credit facilities as net repayments in
the financing activities section of the Consolidated Statements of Cash Flows.
Accordingly, such presentation in the accompanying financial statements for the
year ended December 31, 2006 and 2005 have been restated to separate line items,
borrowings under credit facilities and payments under credit facilities. This
correction does not affect net cash used in financing activities of continuing
operations as previously presented.
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet accounts at December 31, 2007 and
2006 were as follows:
2007 2006
--------- ---------
RECEIVABLES (in thousands)
Customers..................................... $ 192,311 $ 166,201
Other......................................... 6,761 3,829
--------- ---------
Total........................................ 199,072 170,030
Less allowance for doubtful accounts.......... 5,746 3,545
--------- ---------
Total receivables -- net..................... $ 193,326 $ 166,485
========= =========
34
INVENTORIES
Raw materials and components parts............ $ 88,159 $ 63,360
Work in process............................... 22,670 16,420
Finished goods................................ 66,606 80,907
--------- ---------
Total inventories............................ $ 177,435 $ 160,687
========= =========
Inventories that were carried on a LIFO basis amounted to $148.4 million
and $133.7 million at December 31, 2007 and 2006, respectively. All other
inventory was valued on the FIFO method. The excess of current cost over LIFO
inventory value amounted to $4.2 million and $3.1 million at December 31, 2007
and 2006, respectively.
2007 2006
--------- ---------
PROPERTY, PLANT AND EQUIPMENT (in thousands)
Land and improvements................................ $ 18,117 $ 17,307
Buildings and improvements........................... 113,783 109,408
Machinery and equipment.............................. 229,390 213,750
Office and transportation equipment.................. 92,910 85,806
Engineering drawings................................. 2,375 2,327
Construction in progress............................. 9,431 6,056
--------- ---------
Total............................................... 466,006 434,654
Less accumulated depreciation and amortization...... 293,007 268,705
--------- ---------
Total property, plant and equipment -- net......... $ 172,999 $ 165,949
========= =========
ACCRUED EXPENSES
Payroll and related items............................ $ 38,461 $ 32,897
Management incentive compensation.................... 11,109 15,279
Income taxes payable................................. 7,299 10,897
Deferred income taxes................................ 3,162 1,359
Insurance............................................ 11,903 10,338
Other................................................ 27,191 24,400
--------- ---------
Total accrued expenses.............................. $ 99,125 $ 95,170
========= =========
OTHER NONCURRENT LIABILITIES
Pension and retiree medical obligations.............. $ 43,464 $ 44,414
Liability for uncertain tax positions (FIN 48)....... 4,998 --
Other................................................ 6,083 5,797
--------- ---------
Total other noncurrent liabilities.................. $ 54,545 $ 50,211
========= =========
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended
December 31, 2007 and 2006, by business segment, were as follows:
35
FLUID & HEALTH & FIRE & SAFETY/
METERING SCIENCE DISPENSING DIVERSIFIED
(in thousands) TECHNOLOGIES TECHNOLOGIES EQUIPMENT PRODUCTS TOTAL
-------------------------------- ------------ ------------ ---------- -------------- ---------
BALANCE AT JANUARY 1, 2006...... 177,223 261,616 120,517 132,043 691,399
Acquisitions.................... 132,646 69,300 --- 7,679 209,625
Foreign currency translation.... 1,254 1,305 7,940 6,156 16,655
Purchase price adjustments...... --- 1,580 --- --- 1,580
Divestiture (Note 12)........... (6,659) --- --- --- (6,659)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2006... 304,464 333,801 128,457 145,878 912,600
Acquisitions (Note 11).......... 25,511 17,915 --- --- 43,426
Foreign currency translation.... 3,810 1,538 8,933 5,829 20,110
Purchase price adjustments...... 1,077 (194) --- --- 883
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2007... $ 334,862 $ 353,060 $ 137,390 $ 151,707 $ 977,019
========= ========= ========= ========= =========
The following table provides the gross carrying value and accumulated
amortization for each major class of intangible asset at December 31, 2007 and
2006:
AT DECEMBER 31, 2007 AT DECEMBER 31, 2006
------------------------ ------------------------
GROSS GROSS
CARRYING ACCUMULATED AVERAGE CARRYING ACCUMULATED
(in thousands) AMOUNT AMORTIZATION LIFE AMOUNT AMORTIZATION
-------------------------------------------------- --------- ------------ ------- --------- ------------
Amortizable intangible assets:
Patents........................................ $ 8,154 $ (5,074) 11 $ 8,508 $ (5,171)
Trade names.................................... 37,716 (3,259) 17 30,081 (1,224)
Customer relationships......................... 76,959 (6,288) 17 64,796 (1,609)
Non-compete agreements......................... 4,474 (2,141) 4 4,087 (702)
Unpatented technology.......................... 14,804 (892) 16 4,727 (127)
Other.......................................... 6,283 (1,070) 10 6,457 (560)
--------- --------- --------- --------
Total amortizable intangible assets 148,390 (18,724) 118,656 (9,393)
Banjo trade name............................... 62,100 -- 62,100 --
--------- --------- --------- --------
$ 210,490 $ (18,724) $ 180,756 $ (9,393)
========= ========= ========= ========
The Banjo trade name is an indefinite lived intangible asset which is
tested for impairment on an annual basis. Amortization of intangible assets was
$9.7 million, $4.1 million and $.7 million in 2007, 2006 and 2005, respectively.
Amortization expense for each of the next five years is estimated to be
approximately $11.1 million annually.
5. BORROWINGS
Borrowings at December 31, 2007 and 2006 consisted of the following:
2007 2006
--------- ---------
(in thousands)
Credit Facility.................. $ 292,000 $ 194,000
Senior Notes..................... 150,000 150,000
Other borrowings................. 12,731 17,980
--------- ---------
Total borrowings................ 454,731 361,980
Less current portion............. 5,830 8,210
--------- ---------
Total long-term borrowings...... $ 448,901 $ 353,770
========= =========
The Company maintains a $600 million unsecured domestic, multi-currency
bank revolving credit facility ("Credit Facility"), which expires on December
21, 2011. At December 31, 2007 there was $292 million outstanding under the
Credit Facility and outstanding letters of credit totaled approximately $6
mil-
36
lion. The net available borrowings under the Credit Facility as of December 31,
2007, was approximately $302 million.
Interest is payable quarterly on the outstanding borrowings at the bank
agent's reference rate. Interest on borrowings based on LIBOR plus an applicable
margin is payable on the maturity date of the borrowing, or quarterly from the
effective date for borrowings exceeding three months. The applicable margin is
based on the Company's senior, unsecured, long-term debt rating and can range
from 24 basis points to 50 basis points. Based on the Company's BBB rating at
December 31, 2007, the applicable margin was 40 basis points. An annual Credit
Facility fee, also based on the Company's credit rating, is currently 10 basis
points and is payable quarterly.
The Company also has a $30 million demand line of credit ("Short-Term
Facility"), which expires on December 12, 2008. Borrowings under the Short-Term
Facility are based on LIBOR plus an applicable margin. At December 31, 2007,
there were no borrowings under the Short-Term Facility.
In February 1998, the Company sold $150 million of unsecured 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. On February 15, 2008 the Senior Notes were repaid using
proceeds available under the Company's Credit Facility. The Company has
classified the Senior Notes as a long-term borrowing at December 31, 2007
because of the Company's ability and intent at December 31,2007 to refinance
this obligation on a long-term basis via the availability under the Credit
Facility.
At December 31, 2007, other borrowings included capital leases as well as
debt at international locations maintained for working capital purposes.
Interest is payable on the outstanding debt balances at the international
locations at rates ranging from 3.7% to 6.6% per annum.
There are two financial covenants that the Company is required to maintain
in connection with the Credit Facility. 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, 2007, the Company was in compliance with both of these financial
covenants.
Total borrowings at December 31, 2007 have scheduled maturities as follows
(in thousands):
2008............................. $ 155,830
2009............................. 1,157
2010............................. 1,010
2011............................. 292,477
2012............................. 497
Thereafter....................... 3,760
---------
Total borrowings................ $ 454,731
=========
6. COMMITMENTS AND CONTINGENCIES
At December 31, 2007, total future minimum rental payments under
noncancelable operating leases, primarily for office facilities, warehouses and
data processing equipment, were $20.9 million. The future minimum rental
commitments for each of the next five years and thereafter are as follows: 2008
-- $7.3 million; 2009 -- $5.3 million; 2010 -- $3.4 million; 2011 -- $1.9
million; 2012 -- $.9 million; thereafter -- $2.1 million.
Rental expense from continuing operations totaled $11.6 million, $9.8
million and $8.9 million for the years ended December 31, 2007, 2006, and 2005,
respectively.
37
The Company 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.
7. COMMON AND PREFERRED STOCK
On April 4, 2007, the Company's Board of Directors authorized a
three-for-two common stock split effected in the form of a 50% dividend payable
on May 21, 2007, to shareholders of record on May 7, 2007. 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.
The Company issued 134,000 and 155,000 shares of unvested shares as
compensation to key employees in 2007 and 2006, respectively. All unvested
shares issued in 2007 contain a cliff vesting feature and vest three or four
years after the grant date. Of the 155,000 shares issued in 2006, 44,000 shares
vest ratably over four years from the grant date, while the remaining 111,000
shares contain a cliff vesting feature and vest three or four years after the
grant date.
All unvested shares carry dividend and voting rights, and the sale of the
shares is restricted prior to the date of vesting.
On October 20, 1998, the Company's Board of Directors authorized the
repurchase of up to 1.5 million shares of the Company's common stock, either at
market prices or on a negotiated basis as market conditions warrant. Since the
inception of this program, the Company has purchased a total of 14,625 shares at
a cost of approximately $144 thousand.
At December 31, 2007 and 2006, the Company had 150 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. No preferred stock was
issued as of December 31, 2007 and 2006.
8. INCOME TAXES
Pretax income for the years ended December 31, 2007, 2006, and 2005, was
taxed in the following jurisdictions:
(in thousands) 2007 2006 2005
----------------------------- -------- -------- --------
Domestic .................... $163,573 $140,630 $114,275
Foreign ..................... 71,591 61,263 52,944
-------- -------- --------
Total ...................... $235,164 $201,893 $167,219
======== ======== ========
The provision for income taxes for the years ended December 31, 2007,
2006, and 2005, was as follows:
(in thousands) 2007 2006 2005
------------------------------------------ -------- -------- --------
Current
U.S ..................................... $ 49,909 $ 46,656 $ 36,729
State and local ......................... 5,522 3,946 1,738
Foreign ................................. 21,420 16,256 15,861
-------- -------- --------
Total current .......................... 76,851 66,858 54,328
Deferred
U.S ..................................... 4,577 592 2,563
State and local ......................... 444 24 (164)
Foreign ................................. (2,572) 697 1,917
-------- -------- --------
Total deferred ......................... 2,449 1,313 4,316
-------- -------- --------
Total provision for income taxes ...... $ 79,300 $ 68,171 $ 58,644
======== ======== ========
38
Deferred tax assets (liabilities) related to the following at December 31,
2007 and 2006:
(in thousands) 2007 2006
------------------------------------------------ --------- ---------
Employee and retiree benefit plans ............. $ 17,204 $ 20,221
Depreciation and amortization .................. (138,161) (119,700)
Inventories .................................... (3,551) (5,523)
Allowances and accruals ........................ 8,789 6,726
Other .......................................... 697 (354)
--------- ---------
Total ......................................... $(115,022) $ (98,630)
========= =========
The deferred tax assets and liabilities recognized in the Company's
Consolidated Balance Sheets as of December 31, 2007 and 2006 were:
(in thousands) 2007 2006
------------------------------------------------------------- --------- ---------
Deferred tax asset -- other current assets .................. $ 7,141 $ 2,682
Deferred tax asset -- other noncurrent assets ............... 5,471 363
--------- ---------
Total deferred tax assets ................................... 12,612 3,045
Deferred tax liability -- accrued expenses .................. (3,162) (1,359)
Noncurrent deferred tax liability -- deferred income taxes... (124,472) (100,316)
--------- ---------
Total deferred tax liabilities .............................. (127,634) (101,675)
--------- ---------
Net deferred tax liabilities ............................... $(115,022) $ (98,630)
========= =========
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, 2007, 2006, and 2005
are shown in the following table:
(in thousands) 2007 2006 2005
----------------------------------------------------------- --------- --------- ---------
Pretax income ............................................. $ 235,164 $ 201,893 $ 167,219
========= ========= =========
Provision for income taxes:
Computed amount at statutory rate of 35% .................. $ 82,307 $ 70,663 $ 58,527
State and local income tax (net of federal tax benefit)... 3,878 2,576 1,023
Taxes on non-U.S. earnings-net of foreign tax credits ..... (407) (2,670) (620)
U.S. business tax credits ................................. (679) (1,210) (1,455)
Extra-territorial income deduction ........................ -- (910) (1,214)
Domestic activities production deduction .................. (2,450) (797) (1,528)
Revaluation of deferred taxes for non-U.S. rate changes ... (4,535) -- --
Other ..................................................... 1,186 519 3,911
--------- --------- ---------
Total provision for income taxes ...................... $ 79,300 $ 68,171 $ 58,644
========= ========= =========
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 since the Company considers these
amounts to be permanently invested.
We adopted the provision of FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes ("FIN 48") an interpretation of FASB Statement No.
109 on January 1, 2007. In accordance with FIN No. 48, the Company recognized a
cumulative-effect adjustment of $1.2 million, increasing its liability for
unrecognized tax benefits, interest, and penalties and reducing the January 1,
2007 balance of retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
39
(in thousands) 2007
--------------------------------------------------------- -------
Unrecognized tax benefits balance at January 1, 2007 .... $ 5,485
Gross increases for tax positions of prior years ........ 2,943
Gross decreases for tax positions of prior years ........ (432)
Settlements ............................................. (1,952)
Lapse of statute of limitations ......................... (106)
-------
Unrecognized tax benefits balance at December 31, 2007... $ 5,938
=======
We recognize interest and penalties related to uncertain tax positions in
income tax expense. As of January 1, 2007 and December 31, 2007, we had
approximately $.9 million and $1.0 million, respectively, of accrued interest
related to uncertain tax positions, respectively. As of both January 1, 2007 and
December 31, 2007, we had approximately $.2 million of accrued penalties related
to uncertain tax positions.
Total amount of unrecognized tax benefits that would affect our effective
tax rate if recognized is $2.5 million for December 31, 2007 and $4.9 million as
of January 1, 2007. The tax years 2004-2007 remain open to examination by major
taxing jurisdictions. Due to the potential for resolution of Federal, state and
foreign examinations, and the expiration of various statutes of limitation, it
is reasonably possible that the Company's gross unrecognized tax benefits
balance may change within the next twelve months by a range of zero to $1.7
million.
At December 31, 2007 the Company had state and foreign net operating loss
carry forwards of approximately $19.6 million and $1.5 million, respectively. If
unutilized, the state net operating loss will expire between 2012 and 2027. The
Company recorded a valuation allowance against the deferred tax asset
attributable to the state net operating loss of $0.7 million. The foreign net
operating loss has no expiration date.
9. COMPREHENSIVE INCOME
The components of Accumulated other comprehensive income for 2007, 2006
and 2005 follow:
(in thousands) 2007 2006 2005
--------------------------------- -------- -------- --------
Pension liability adjustments
Pretax amount .................. $ 10,097 $ 821 $ (1,748)
Tax benefit (provision) ........ (4,163) (114) 508
-------- -------- --------
Aftertax amount ................ $ 5,934 $ 707 $ (1,240)
======== ======== ========
Cumulative translation adjustment
Pretax amount .................. $ 34,460 $ 27,135 $(27,886)
Tax provision .................. -- -- --
-------- -------- --------
Aftertax amount ................ $ 34,460 $ 27,135 $(27,886)
======== ======== ========
Amounts in 2006 and 2005 reflect the change in minimum pension liability
prior to the adoption of SFAS No. 158. The SFAS No. 158 transition amount has
been included as an adjustment to Accumulated other comprehensive income in
2006.
10. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company's operations have been aggregated into four reportable
segments: Fluid & Metering Technologies, Health & Science
40
Technologies, Dispensing Equipment and Fire & Safety/Diversified Products. The
Fluid & Metering Technologies Segment consists of the following business units:
Banjo, Liquid Controls, Pulsafeeder, Quadro, Versa-Matic, Viking and Warren
Rupp. The Health & Science Technologies Segment includes HST Core, Gast and
Micropump. The Dispensing Equipment Segment consists of FAST & FM- Europe & Asia
and Fluid Management. The Fire & Safety/Diversified Products Segment includes
Hale-Fire Suppression Group and Hale-Hydraulics Equipment Group, as well as the
BAND-IT engineered clamping business.
Information on the Company's business segments from continuing operations
is presented below, 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. Intersegment sales are accounted for at
fair value as if the sales were to third parties.
(in thousands) 2007 2006 2005
----------- ----------- -----------
NET SALES
Fluid & Metering Technologies:
External customers .................. $ 568,622 $ 433,845 $ 381,625
Intersegment sales .................. 1,685 1,687 1,538
----------- ----------- -----------
Total segment sales ................ 570,307 435,532 383,163
Health & Science Technologies:
External customers .................. 323,639 301,223 232,531
Intersegment sales .................. 3,531 3,669 2,968
----------- ----------- -----------
Total segment sales ................ 327,170 304,892 235,499
Dispensing Equipment:
External customers .................. 177,948 159,794 158,111
Intersegment sales .................. -- -- --
----------- ----------- -----------
Total segment sales ................ 177,948 159,794 158,111
Fire & Safety/Diversified Products:
External customers .................. 288,422 260,078 238,986
Intersegment sales .................. 2 2 6
----------- ----------- -----------
Total segment sales ................ 288,424 260,080 238,992
Intersegment eliminations ............ (5,218) (5,358) (4,512)
----------- ----------- -----------
Total net sales .................... $ 1,358,631 $ 1,154,940 $ 1,011,253
=========== =========== ===========
OPERATING INCOME (1)
Fluid & Metering Technologies ......... $ 121,449 $ 89,899 $ 72,596
Health & Science Technologies ......... 60,924 58,229 43,133
Dispensing Equipment .................. 39,398 38,021 37,772
Fire & Safety/Diversified Products .... 66,516 62,664 56,593
Corporate office and other (2) ........ (33,204) (31,607) (29,062)
----------- ----------- -----------
Total operating income ............ $ 255,083 $ 217,206 $ 181,032
=========== =========== ===========
ASSETS
Fluid & Metering Technologies ......... $ 704,494 $ 613,203 $ 307,838
Health & Science Technologies ......... 548,678 520,991 391,991
Dispensing Equipment .................. 238,770 217,081 196,157
Fire & Safety/Diversified Products .... 317,641 306,400 256,632
Corporate office and other (2) ........ 180,011 13,146 91,562
----------- ----------- -----------
Total assets ....................... $ 1,989,594 $ 1,670,821 $ 1,244,180
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
Fluid & Metering Technologies ......... $ 16,797 $ 10,524 $ 9,824
Health & Science Technologies ......... 11,156 9,043 5,917
Dispensing Equipment .................. 3,151 3,861 4,376
Fire & Safety/Diversified Products .... 5,676 6,086 5,712
Corporate office and other ............ 1,258 442 425
----------- ----------- -----------
Total depreciation and amortization $ 38,038 $ 29,956 $ 26,254
=========== =========== ===========
CAPITAL EXPENDITURES
Fluid & Metering Technologies ......... $ 11,407 $ 5,487 $ 8,204
41
Health & Science Technologies ......... 5,342 4,726 5,525
Dispensing Equipment .................. 2,832 2,362 3,383
Fire & Safety/Diversified Products .... 3,532 6,060 4,365
Corporate office and other ............ 3,383 2,563 1,055
----------- ----------- -----------
Total capital expenditures ........ $ 26,496 $ 21,198 $ 22,532
=========== =========== ===========
(1) Segment operating income excludes net unallocated corporate operating
expenses.
(2) Includes intersegment eliminations.
Information about the Company's operations in different geographical
regions for the years ended December 31, 2007, 2006 and 2005 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.
(in thousands) 2007 2006 2005
-------------------------------- ---------- ---------- ----------
NET SALES
U.S ........................... $ 734,877 $ 632,239 $ 557,469
Europe ........................ 340,543 285,208 252,749
Other countries ............... 283,211 237,493 201,035
---------- ---------- ----------
Total net sales .............. $1,358,631 $1,154,940 $1,011,253
========== ========== ==========
LONG-LIVED ASSETS --
PROPERTY, PLANT AND EQUIPMENT
U.S ........................... $ 110,371 $ 110,340 $ 94,805
Europe ........................ 54,401 48,966 43,713
Other countries ............... 8,227 6,643 3,967
---------- ---------- ----------
Total long-lived assets ...... $ 172,999 $ 165,949 $ 142,485
========== ========== ==========
11. ACQUISITIONS
On February 14, 2007, the Company acquired Faure Herman SA ("Faure
Herman"), a leading provider of ultrasonic and helical turbine flow meters used
in the custody transfer and control of high value fluids and gases.
Headquartered in La Ferte Bernard, France, Faure Herman has sales offices in
Europe and North America, with annual revenues of approximately $22 million.
Faure Herman operates as part of the Company's Liquid Controls business within
its Fluid & Metering Technologies Segment. The Company acquired Faure Herman for
an aggregate purchase price of $25.9 million, consisting of $24.3 million in
cash and the assumption of approximately $1.6 million of debt. Approximately
$12.9 million of the cash payment was financed by borrowings under the Company's
Credit Facility. Goodwill and intangible assets recognized as part of this
transaction were $13.4 million and $7.7 million, respectively. The $13.4 million
of goodwill is not deductible for tax purposes.
On June 12, 2007, the Company acquired Quadro Engineering ("Quadro"), a
leading provider of particle control solutions for the pharmaceutical and
bio-pharmaceutical markets. Quadro's core capabilities include fine milling,
emulsification and special handling of liquid and solid particulates for
laboratory, pilot phase and production scale processing within the
pharmaceutical and bio-pharmaceutical markets. Headquartered in Waterloo,
Ontario, Canada, Quadro operates as a standalone unit within the Company's Fluid
& Metering Technologies Segment. The Company acquired Quadro for a purchase
price of $32.2 million, consisting entirely of cash. Approximately $11.3 million
of the cash payment was financed by borrowings under the Company's Credit
Facility. Goodwill and intangible assets recognized as part of this transaction
were $12.1 million and $10.9 million, respectively. Of the $12.1 million of
goodwill, approximately $8.9 million is expected to be deductible for tax
purposes.
On October 18, 2007, the Company acquired Isolation Technologies, a
leading developer of advanced column hardware and accessories for the High
Performance Liquid Chromatography (HPLC) market. HPLC instruments are used in a
variety of analytical chemistry applications, with primary commercial
applications including drug discovery and quality control measurements for
pharmaceutical and
42
food/beverage testing. Headquartered in Hopedale, MA, Isolation Technologies
operates as part of HST Core in the Company's Health and Science Technologies
Segment. The Company acquired Isolation Technologies for a purchase price of
$29.7 million, consisting entirely of cash. Approximately $29.7 million of the
cash payment was financed by borrowings under the Company's Credit Facility.
Goodwill and intangible assets recognized as part of this transaction were $17.9
million and $8.7 million, respectively. The $17.9 million of goodwill is
deductible for tax purposes.
The purchase price for Faure Herman, Quadro and Isolation Technologies,
including transaction costs, has been allocated to the assets acquired and
liabilities assumed based on estimated fair values at the date of the
acquisitions. The Company is in the process of finalizing appraisals of tangible
and intangible assets and is continuing to evaluate the initial purchase price
allocations, as of the acquisition date, which will be adjusted as additional
information relative to the fair values of the assets and liabilities becomes
known.
On January 12, 2006, the Company acquired the assets of Airshore
International ("Airshore"), based in British Columbia, Canada. Airshore, with
annual revenue of approximately $5 million, provides stabilization struts for
collapsed buildings and vehicles, high-and-low pressure lifting bags and
forcible entry tools for the fire and rescue markets. Airshore operates as part
of HEG in the Fire & Safety/Diversified Products Segment. The Company acquired
Airshore for a purchase price of $12.6 million, consisting entirely of cash.
Goodwill and intangible assets recognized as part of this transaction were $7.7
million and $4.0 million, respectively. The $7.7 million of goodwill is
deductible for tax purposes.
On February 28, 2006, the Company acquired the stock of JUN-AIR
International A/S ("JUN-AIR"), based in Norresundby, Denmark. JUN-AIR, with
annual revenue of approximately $22 million, is a provider of low decibal, ultra
quiet vacuum compressors suitable to medical, dental and laboratory
applications. JUN-AIR operates as part of Gast in the Health & Science
Technologies Segment. The Company acquired JUN-AIR for an aggregate purchase
price of $22.4 million, consisting of $15.3 million in cash and debt of
approximately $7.1 million. Goodwill and intangible assets recognized as part of
this transaction were $9.6 million and $3.7 million, respectively. The $9.6
million of goodwill is not deductible for tax purposes.
On May 2, 2006, the Company acquired the stock of Eastern Plastics, Inc.
("Eastern Plastics"), a provider of high-precision integrated fluidics and
associated engineered plastics solutions. Based in Bristol, Connecticut with
annual revenues of approximately $30 million, Eastern Plastics products are used
in a broad set of end markets including medical diagnostics, analytical
instrumentation, and laboratory automation. The Company acquired Eastern
Plastics for a purchase price of $92.4 million, consisting entirely of cash.
Eastern Plastics operates as a part of HST Core in the Health & Science
Technologies Segment. Goodwill and intangible assets recognized as part of this
transaction were $59.3 million and $19.1 million, respectively. The $59.3
million of goodwill is deductible for tax purposes.
On October 3, 2006, the Company acquired the stock of Banjo Corporation
("Banjo"), a provider of special purpose, severe duty pumps, valves, fittings
and systems used in liquid handling. Based in Crawfordsville, Indiana, with
annual revenues of approximately $44 million, Banjo's products are used in
agricultural and industrial applications. The Company acquired Banjo for a
purchase price of $184.5 million, primarily with financing provided by
borrowings under the Company's Credit Facility. Banjo operates as a stand-alone
business in the Fluid & Metering Technologies Segment. Goodwill and intangible
assets recognized as part of this transaction were $102.1 million and $99.5
million, respectively. The $102.1 million of goodwill is not deductible for tax
purposes.
On December 1, 2006, the Company acquired the stock of Toptech Systems,
Inc. ("Toptech"), a leading provider of terminal automation systems used in the
custody transfer and control of high-value fluids and gases. Based in Longwood,
Florida, with annual revenues of approximately $22 million, Toptech's products
include terminal automation hardware and software used by customers in the oil,
gas and refined fuels markets to control and manage inventories, as well as
transactional data and invoicing. The Company acquired Toptech for a purchase
price of $55.0 million, primarily financed by borrowings under the Company's
Credit Facility. Toptech operates as part of the Liquid Controls business in its
Fluid
43
& Metering Technologies Segment. Goodwill and intangible assets recognized as
part of this transaction were $31.6 million and $20.6 million, respectively. The
$31.6 million of goodwill is deductible for tax purposes.
The results of operations for these acquisitions have been included within
the Company's financial results from the date of the acquisition. The Company
does not consider these acquisitions to be material to its results of operations
for any of the periods presented.
12. DISCONTINUED OPERATIONS
On July 11, 2006, the Company sold Lubriquip, its lubricant dispensing
business that operated as part of the Company's Dispensing Equipment Segment,
resulting in an after-tax gain of $16.7 million.
The Company completed the sale of Halox on August 13, 2007. In September
2006, the Company recorded a $6.2 million write-down ($4.1 million after-tax) of
the carrying value of Halox to its estimated fair market value.
Summarized results of the Company's discontinued operations were as
follows:
DECEMBER 31,
(in thousands) 2007 2006 2005
-------------------------------------------------------------- -------- -------- --------
Revenue ...................................................... $ 1,428 $ 18,149 $ 32,022
======== ======== ========
Income (loss) from discontinued operations before income taxes (1,106) 525 1,709
Income tax benefit (provision) ............................... 387 (231) (481)
-------- -------- --------
Sub-total .................................................... (719) 294 1,228
Net gain on sale of discontinued operations, net of tax ...... -- 12,655 --
-------- -------- --------
Income (loss) from discontinued operations ................... $ (719) $ 12,949 $ 1,228
======== ======== ========
Total assets and liabilities of discontinued operations held for sale at
December 31, 2006 were as follows:
(in thousands) DECEMBER 31,2006
------------------------------------ ----------------
Cash and cash equivalents .......... $ 2
Receivables, net ................... 424
Inventory .......................... 272
Other current assets ............... 20
Property, plant and equipment, net.. 111
----------------
Assets held for sale ............... $ 829
================
Accounts payable ................... $ 154
Other liabilities .................. 219
----------------
Liabilities held for sale .......... $ 373
================
13. SHARE-BASED COMPENSATION
As of December 31, 2007, the Company has two share-based compensation
plans for executives, non-employee directors, and certain key employees which
authorize the granting of stock options, unvested shares, unvested share units,
and other types of awards consistent with the purpose of the plans. The number
of shares authorized for issuance under the Company's plans as of December 31,
2007 totals 3.4 million, of which .2 million shares were available for future
issuance. Stock options granted under these plans are generally non-qualified,
and are granted with an exercise price equal to the market price of the
44
Company's stock at the date of grant. Substantially all of the options issued to
employees prior to 2005 become exercisable in five equal installments, while all
options issued to employees in 2005 and after become exercisable in four equal
installments, beginning one year from the date of grant, and generally expire 10
years from the date of grant. Stock options granted to non-employee directors
cliff vest after one or two years. Unvested share and unvested share unit awards
generally cliff vest after four years for employees, and two to three years for
non-employee directors.
Prior to January 1, 2006, the Company accounted for its share-based
compensation using the intrinsic value method of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company provided pro forma disclosure in accordance with
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," as if the fair value method of SFAS 123 had been applied to
share-based compensation. In accordance with APB Opinion No. 25, no share-based
compensation cost was reflected in the Company's net income prior to January 1,
2006 for grants of stock options to employees because the Company granted stock
options with an exercise price equal to the market value of the stock on the
date of grant. The reported share-based compensation expense, net of related tax
effects, in periods prior to January 1, 2006 represents the amortization of
unvested share grants.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123 (R) using the modified prospective method, and thus
did not restate any prior period amounts. Under this method, compensation cost
in the twelve months ending December 31, 2007 and 2006 includes the portion
vesting in the period for (1) all share-based payments granted prior to, but not
vested as of December 31, 2005, based on the grant date fair value estimated
using the Black-Scholes option-pricing model in accordance with the original
provisions of SFAS No. 123 and (2) all share-based payments granted subsequent
to December 31, 2005, based on the grant date fair value estimated using the
Binomial lattice option-pricing model. Weighted average option fair values and
assumptions for the period specified are disclosed in the following table:
YEARS ENDED DECEMBER 31,
2007 2006 2005
------------- ------------ --------
Weighted average fair value of grants......... $ 9.55 $ 9.61 $ 8.34
Dividend yield................................ 1.37% 1.21% 1.50%
Volatility.................................... 30.59% 30.76% 30.00%
Risk-free interest rate....................... 4.23% - 4.92% 4.71% - 5.00% 4.3%
Expected life (in years)...................... 4.64 4.93 5.5
The assumptions are as follows:
- The Company estimated volatility using its historical share price
performance over the contractual term of the option.
- The Company uses historical data to estimate the expected life of
the option. The expected life assumption for the years ended
December 31, 2007 and 2006 is an output of the Binomial lattice
option-pricing model, which incorporates vesting provisions, rate of
voluntary exercise and rate of post-vesting termination over the
contractual life of the option to define expected employee behavior.
- The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant for periods within the
contractual life of the option. For the years ended December 31,
2007 and 2006, we present the range of risk-free one-year forward
rates, derived from the U.S. treasury yield curve, utilized in the
Binomial lattice option-pricing model.
- The expected dividend yield is based on the Company's current
dividend yield as the best estimate of projected dividend yield for
periods within the contractual life of the option.
45
Results of prior periods do not reflect any restated amounts and the Company
had no cumulative effect adjustment upon adoption of SFAS No. 123 (R) under the
modified prospective method. The Company's policy is to recognize compensation
cost on a straight-line basis over the requisite service period for the entire
award. Additionally, the Company's general policy is to issue new shares of
common stock to satisfy stock option exercises or grants of unvested shares.
Total compensation cost for stock options was as follows:
(In thousands) 2007 2006
---------------------------------------------- ------- -------
Cost of goods sold ........................... $ 999 $ 1,008
Selling, general and administrative expenses.. 7,330 6,591
------- -------
Total expense before income taxes ............ 8,329 7,599
Income tax benefit ........................... (3,032) (2,606)
------- -------
Total expense after income taxes ............. $ 5,297 $ 4,993
======= =======
Total compensation cost for unvested shares is as follows:
(In thousands) 2007 2006 2005
-------------------------------------------- ------- ------- -------
Cost of goods sold ........................... $ 28 $ 13 $ --
Selling, general and administrative expenses.. 4,213 3,086 2,837
------- ------- -------
Total expense before income taxes ............ 4,241 3,099 2,837
Income tax benefit ........................... (827) (493) (415)
------- ------- -------
Total expense after income taxes ............. $ 3,414 $ 2,606 $ 2,422
======= ======= =======
Recognition of compensation cost was consistent with recognition of cash
compensation for the same employees. Compensation cost capitalized as part of
inventory was immaterial.
As of December 31, 2007, there was $14.2 million of total unrecognized
compensation cost related to stock options that is expected to be recognized
over a weighted-average period of 1.4 years. As of December 31, 2007, there was
$8.0 million of total unrecognized compensation cost related to unvested shares
that is expected to be recognized over a weighted-average period of 1.3 years.
A summary of the Company's stock option activity as of December 31, 2007,
and changes during the year ended December 31, 2007 is presented in the
following table:
WEIGHTED WEIGHTED-AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC
STOCK OPTIONS SHARES PRICE CONTRACTUAL TERM VALUE
--------------------------------------------------------- --------- --------- ---------------- ------------
Outstanding at January 1, 2007 ........ 5,414,838 $ 20.77
Granted ................................................. 1,063,166 34.71
Exercised ............................................... (877,304) 16.06
Forfeited/Expired ....................................... (192,003) 25.97
---------- ---------- ----------------
Outstanding at December 31, 2007 ........................ 5,408,697 $ 24.09 6.89 $ 65,507,723
---------- ---------- ---------------- ------------
Vested and expected to vest at December 31, 2007......... 5,147,617 $ 23.71 6.80 $ 64,216,335
---------- ---------- ---------------- ------------
Exercisable at December 31, 2007 ........................ 2,637,245 $ 19.14 5.74 $ 44,818,366
========== ========== ================ ============
The intrinsic value for stock options outstanding and exercisable is
defined as the difference between the market value of the Company's common stock
as of the end of the period, and the grant price. The total intrinsic value of
options exercised during the twelve months ending December 31, 2007 and 2006,
was
46
$17.3 million and $18.6 million, respectively. During the year ending December
31, 2007 and 2006, cash received from options exercised was $14.0 million and
$17.2 million, respectively, while the actual tax benefit realized for the tax
deductions from stock options exercised totaled $6.3 million and $6.8 million,
respectively.
A summary of the Company's unvested share activity as of December 31,
2007, and changes during the year ending December 31, 2007 is presented in the
following table:
WEIGHTED-AVERAGE
GRANT DATE FAIR
UNVESTED SHARES SHARES VALUE
------------------------------ -------- ----------------
Nonvested at January 1, 2007 ... 509,321 $ 26.55
Granted ........................ 133,759 34.38
Vested ......................... (82,875) 35.40
Forfeited ...................... (8,541) 29.00
--------
Nonvested at December 31, 2007.. 551,664 28.71
========
Generally, unvested share grants accrue dividends and their fair value is
equal to the market price of the Company's stock at the date of the grant.
14. RETIREMENT BENEFITS
The Company adopted SFAS No. 158 effective December 31, 2006, which amends
certain requirements of SFAS Nos. 87, 88, 106 and 132(R). Under SFAS No. 158,
companies are required to report the plan's funded status on their balance
sheets. The difference between the plan's funded status and its current balance
sheet position is recognized, net of tax, as a component of accumulated other
comprehensive income.
The Company sponsors several qualified and nonqualified pension plans
and other postretirement plans for its employees. The Company uses a measurement
date of December 31 for its U.S., French and Canadian defined benefit pension
plans and a September 30 measurement date for its other non-U.S. defined benefit
pension plans. In 2008, all plans with a September 30th measurement date will be
transitioned to the December 31 measurement date as required under SFAS No. 158.
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, 2007, and a statement of the funded status at December 31 for both
years:
47
PENSION BENEFITS OTHER BENEFITS
2007 2006 2007 2006
------------------- ------------------- -------- --------
(in thousands) U.S. NON-U.S. U.S. NON-U.S.
---------------------------------------- -------- -------- -------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Obligation at January 1 ................ $ 76,922 $ 32,413 $ 78,627 $ 23,373 $ 23,338 $ 23,319
Service cost ........................... 1,876 874 2,128 726 611 478
Interest cost .......................... 4,288 1,626 4,359 1,235 1,230 1,211
Plan amendments ........................ -- -- 705 -- -- --
Benefits paid .......................... (7,388) (869) (6,516) (895) (1,230) (1,140)
Actuarial loss (gain) .................. (4,191) (2,183) 1,035 962 (2,433) (521)
Currency translation ................... -- 2,026 -- 3,151 374 (9)
Divestitures ........................... -- -- (4,178) -- -- --
Acquisitions ........................... -- 465 -- -- -- --
Curtailments/settlements ............... -- (176) (1,633) -- -- --
Other .................................. -- 535 2,395 3,861 -- --
-------- -------- -------- -------- -------- --------
Obligation at December 31 .............. $ 71,507 $ 34,711 $ 76,922 $ 32,413 $ 21,890 $ 23,338
======== ======== ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 . $ 64,457 $ 16,852 $ 65,236 $ 12,264 $ -- $ --
Actual return on plan assets ........... 3,531 852 7,312 1,048 -- --
Employer contributions ................. 3,012 923 4,950 1,921 1,230 1,140
Benefits paid .......................... (7,388) (869) (6,516) (895) (1,230) (1,140)
Currency translation ................... -- 459 -- 1,849 -- --
Divestitures ........................... -- -- (4,892) -- -- --
Settlements ............................ -- -- (1,633) -- -- --
Other .................................. -- 84 -- 665 -- --
-------- -------- -------- -------- -------- --------
Fair value of plan assets at December 31 $ 63,612 $ 18,301 $ 64,457 $ 16,852 $ -- $ --
======== ======== ======== ======== ======== ========
Funded status at December 31 ........... $ (7,895) $(16,410) $(12,465) $(15,561) $(21,890) $(23,338)
Contributions after measurement date ... -- 233 -- -- -- --
-------- -------- -------- -------- -------- --------
Net amount recognized at December 31 ... $ (7,895) $(16,177) $(12,465) $(15,561) $(21,890) $(23,338)
======== ======== ======== ======== ======== ========
COMPONENTS ON THE CONSOLIDATED
BALANCE SHEETS
Noncurrent assets ...................... $ -- $ -- $ 12 $ -- $ -- $ --
Current liabilities .................... (659) (671) (2,978) (517) (1,168) (1,302)
Noncurrent liabilities ................. (7,236) (15,506) (9,499) (15,044) (20,722) (22,036)
-------- -------- -------- -------- -------- --------
Net liability at December 31 ........... $ (7,895) $(16,177) $(12,465) $(15,561) $(21,890) $(23,338)
======== ======== ======== ======== ======== ========
The accumulated benefit obligation for all defined benefit pension plans
was $99.9 million and $102.5 million at December 31, 2007 and 2006,
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 $26.5 million, $25.3 million and $4.1 million,
respectively, at December 31, 2007, and $28.2 million, $26.7 million and $3.3
million, respectively, at December 31, 2006. For plans with a projected benefit
obligation in excess of plan assets, the projected benefit obligation and fair
value of plan assets were $104.3 million and $79.9 million, respectively at
December 31, 2007 and $107.4 million and $79.3 million, respectively at December
31, 2006.
48
The assumptions used in the measurement of the Company's benefit
obligation at December 31, 2007 and 2006, were as follows:
U.S. PLANS NON-U.S. PLANS
2007 2006 2007 2006
------- ------ ------- ------
Discount rate ................. 6.40% 5.80% 5.48% 4.80%
Rate of compensation increase.. 4.00% 4.00% 3.92% 3.72%
The pretax amounts recognized in Accumulated other comprehensive income
(loss) as of December 31, 2007 are as follows:
PENSION BENEFITS OTHER BENEFITS
2007 2006 2007 2006
---------------- ---------------- ------- -------
NON- NON-
U.S. U.S. U.S. U.S
------- ------- ------- ------- ------- -------
(in thousands)
Initial net obligation ......... $ 46 $ -- $ 93 $ -- $ -- $ --
Prior service cost (credit)..... 894 -- 1,423 -- (364) (363)
Net loss ....................... 19,111 8,453 23,746 10,751 2,743 5,330
------- ------- ------- ------- ------- -------
Total .......................... $20,051 $ 8,453 $25,262 $10,751 $ 2,379 $ 4,967
======= ======= ====== ======= ======= =======
The amounts in Accumulated other comprehensive income as of December 31,
2007, that are expected to be recognized as components of net periodic benefit
cost during 2008 are as follows:
NON-U.S. OTHER POST-
U.S. PENSION PENSION BENEFIT RETIREMENT
(in thousands) BENEFIT PLANS PLANS BENEFIT PLANS TOTAL
----------------------------- ------------- --------------- ------------- ---------
Initial net obligation ...... $ 46 $ -- $ -- $ 46
Prior service cost (credit).. 281 -- (20) 261
Net loss .................... 1,669 404 182 2,255
------------- --------------- ------------- ---------
Total ....................... $ 1,996 $ 404 $ 162 $ 2,562
============= =============== ============= =========
The following tables provide the components of, and the assumptions used
to determine, the net periodic benefit cost for the plans in 2007, 2006 and
2005:
PENSION BENEFITS
2007 2006 2005
----------------- ----------------- -----------------
NON- NON- NON-
(in thousands) U.S. U.S. U.S. U.S. U.S. U.S.
--------------------------- ------- ------- ------- ------- ------- -------
Service cost .............. $ 1,876 $ 874 $ 2,128 $ 726 $ 4,261 $ 593
Interest cost ............. 4,288 1,626 4,359 1,235 4,107 1,124
Expected return on plan
assets .................... (5,242) (1,075) (5,175) (829) (5,271) (664)
Net amortization .......... 2,730 715 3,587 540 2,463 309
Other ..................... -- -- 2,186 -- 504 --
------- ------- ------- ------- ------- -------
Net periodic benefit cost.. $ 3,652 $ 2,140 $ 7,085 $ 1,672 $ 6,064 $ 1,362
======= ======= ======= ======= ======= =======
49
OTHER BENEFITS
(in thousands) 2007 2006 2005
------ ------ ------
Service cost ................... $ 611 $ 478 $ 410
Interest cost .................. 1,230 1,211 1,194
Expected return on plan assets.. -- -- --
Net amortization ............... 227 373 212
Other .......................... -- -- --
------ ------ ------
Net periodic benefit cost ...... $2,068 $2,062 $1,816
====== ====== ======
U.S. PLANS NON-U.S. PLANS
2007 2006 2005 2007 2006 2005
------- ------ ------ ------ ------ ------
Discount rate 5.80% 5.50% 5.75% 4.80% 4.79% 5.70%
Expected return on plan assets 8.50% 8.50% 8.50% 6.00% 5.81% 5.75%
Rate of compensation increase 4.00% 4.00% 4.00% 3.72% 3.85% 4.25%
The following table provides pretax amounts recognized in Accumulated
other comprehensive income (loss):
PENSION BENEFITS OTHER BENEFITS
2007 2007
---------------- -------------
NON-
(in thousands) U.S. U.S.
--------------------------------------------- ------- -------
Net gain in current year .................... $ 2,481 $ 1,583 $ 2,361
Amortization of transition obligation ....... 46 -- --
Amortization of prior service cost (credit).. 529 -- (14)
Amortization of net loss .................... 2,155 715 241
------- ------- ------------
Total ....................................... $ 5,211 $ 2,298 $ 2,588
======= ======= ============
The discount rate for our U.S. Plans is derived by matching the plan's
cash flows to a yield curve that provides the equivalent yields on zero-coupon
bonds for each maturity. The discount rate selected is the rate that produces
the same present value of cash flows. For non-U.S. plans, the discount rate is
based on the duration of plan liabilities and yields available on corporate AA
bonds in the local market place at the measurement date.
In selecting the expected rate of return on plan assets, the Company
considers the historical returns and expected returns on plan assets. The
expected returns are evaluated using asset return class, variance and
correlation assumptions based on the plan's target asset allocation and current
market conditions.
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 or the market value of
assets are amortized over the average remaining service period of active
participants. Costs of bargaining unit-sponsored multi-employer plans and
defined contribution plans were $9.4 million, $7.8 million and $7.4 million for
2007, 2006 and 2005, respectively.
For measurement purposes, a 9% weighted average annual rate of increase in
the per capita cost of covered health care benefits was assumed for 2007. The
rate was assumed to decrease gradually each year to a rate of 5% for 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
50
by $.2 million and the health care component of the accumulated postretirement
benefit obligation by $2.0 million. 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 $.2 million and the health care component of the
accumulated postretirement benefit obligation by $1.7 million.
PLAN ASSETS
The Company's pension plan weighted average asset allocations at December
31, 2007 and 2006, by asset category, were as follows:
2007 2006
----- -----
Equity securities ....... 61% 60%
Fixed income securities.. 35 39
Other ................... 4 1
----- -----
Total .................. 100% 100%
===== =====
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 the Company 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" includes 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, 2007 and 2006, there were
no shares of the Company's stock held in plan assets.
CASH FLOWS
The Company expects to contribute approximately $1.8 million to its
defined benefit plans, $9.4 million to its defined contribution plans and $1.2
million to its other postretirement benefit plans in 2008.
ESTIMATED FUTURE BENEFIT PAYMENTS
The future estimated benefit payments for the next five years and the five
years thereafter are as follows: 2008 -- $6.6 million; 2009 -- $6.9 million;
2010 -- $7.5 million; 2011 -- $8.1 million; 2012-$8.8 million; 2013 to 2017 --
$50.4 million.
15. SUBSEQUENT EVENT
On January 1, 2008 the Company completed the acquisition of ADS for cash
consideration of approximately $160 million. ADS is a leading provider of
metering technology and flow monitoring services for the water and wastewater
markets. Headquartered in Huntsville, Alabama, with regional sales and service
offices throughout the United States and Australia, ADS had 2007 revenues of
approximately $70 million. ADS will operate as a standalone unit within the
Company's Fluid and Metering Technologies Segment.
51
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited quarterly results of
operations for the years ended December 31, 2007 and 2006. All periods have been
presented to reflect discontinued operations (see Note 12).
2007 QUARTERS 2006 QUARTERS
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales .................. $ 333,268 $ 344,482 $ 334,884 $ 345,997 $ 266,388 $ 296,573 $ 289,848 $ 302,131
Gross profit ............... 139,664 147,534 137,665 143,586 110,133 122,921 118,765 125,588
Operating income ........... 61,552 68,865 63,148 61,518 47,778 55,984 54,413 59,031
Income from continuing
operations .............. 36,831 41,835 38,817 38,381 29,581 34,619 33,333 36,189
Income (loss) from
discontinued
operations, net of tax... (164) (205) (405) 55 497 337 12,663 (548)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ................. $ 36,667 $ 41,630 $ 38,412 $ 38,436 $ 30,078 $ 34,956 $ 45,996 $ 35,641
========= ========= ========= ========= ========= ========= ========= =========
Basic EPS from continuing
operations .............. $ .46 $ .52 $ .48 $ .47 $ .37 $ .44 $ .42 $ .45
Basic EPS from
discontinued operations.. -- -- -- -- .01 -- .16 --
--------- --------- --------- --------- --------- --------- --------- ---------
Basic EPS .................. $ .46 $ .52 $ .48 $ .47 $ .38 $ .44 $ .58 $ .45
========= ========= ========= ========= ========= ========= ========= =========
Basic weighted average
shares outstanding....... 80,264 80,595 80,832 80,975 78,956 79,521 79,689 79,940
Diluted EPS from
continuing operation..... $ .45 $ .51 $ .47 $ .47 $ .37 $ .43 $ .41 $ .45
Diluted EPS from
discontinued operation... -- -- -- -- -- -- .16 (.01)
--------- --------- --------- --------- --------- --------- --------- ---------
Diluted EPS ................ $ .45 $ .51 $ .47 $ .47 $ .37 $ .43 $ .57 $ .44
========= ========= ========= ========= ========= ========= ========= =========
Diluted weighted average
shares outstanding....... 81,677 82,046 82,311 82,363 80,786 81,043 80,957 81,279
52
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 subsidiaries (the "Company") as of December 31, 2007 and 2006,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2007.
Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits 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 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
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2007, 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 27, 2008 expressed an unqualified opinion on the Company's internal
control over financial reporting.
As discussed in Note 1, effective January 1, 2006, the Company changed its
method of accounting for stock-based compensation as a result of adopting
Statement of Financial Accounting Standards No. 123(R), "Share Based Payment."
As discussed in Note 14, effective December 31, 2006, the Company changed its
method of accounting for pensions and other postretirement benefits as a result
of adopting Statement of Financial Accounting Standards No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans."
[DELOITTE & TOUCHE LLP]
Deloitte & Touche LLP
Chicago, Illinois
February 27, 2008
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of IDEX Corporation
We have audited the internal control over financial reporting of IDEX
Corporation and subsidiaries (the "Company") as of December 31, 2007, 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, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
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 accounting principles generally accepted in the United States of America. 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 accounting principles generally accepted in the United States of
America, 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, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
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 financial
statements and financial statement schedule as of and for the year ended
December 31, 2007, of the Company and our report dated February 27, 2008,
expressed an unqualified opinion on those financial statements and financial
statement schedule.
[DELOITTE & TOUCHE LLP]
Deloitte & Touche LLP
Chicago, Illinois
February 27, 2008
54
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, 2007.
The effectiveness of the Company's internal control over financial
reporting as of December 31, 2007, has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
[/s/ Lawrence D. Kingsley]
Lawrence D. Kingsley
Chairman of the Board and Chief Executive Officer
[/s/ Domini c A. Romeo]
Dominic A. Romeo
Vice President and Chief Financial Officer
Northbrook, Illinois
February 27, 2008
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on the foregoing, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
The information set forth under the captions "Report of Independent
Registered Public Accounting Firm" and "Management's Report on Internal Control
Over Financial Reporting" on pages 53 - 55 of Part II. Item 8. Financial
Statements and Supplementary Data is incorporated herein by reference.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
During the fourth quarter of 2007, the Company implemented a new ERP
system at one of our larger business units. The Company believes that effective
internal control over financial reporting was maintained during and after this
conversion.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information under the headings "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," and the information under the
subheading "Information Regarding the Board of Directors and Committees," in the
Company's 2008 Proxy Statement is incorporated herein by reference. Information
regarding executive officers of the Company is located in Part I. Item 1. of
this report under the caption "Executive Officers of the Registrant."
The Company has adopted a Code of Business Conduct and Ethics applicable
to the Company's directors, officers (including the Company's principal
executive officer and principal financial & accounting officer) and employees.
The Code of Business Conduct and Ethics, along with the Audit Committee Charter,
Nominating and Corporate Governance Committee Charter, Compensation Committee
Charter and Corporate Governance Guidelines are available on the Company's
website at www.idexcorp.com.
56
In the event that we amend or waive any of the provisions of the Code of
Business Conduct and Ethics applicable to our principal executive officer or
principal financial & accounting officer, we intend to disclose the same on the
Company's website.
ITEM 11. EXECUTIVE COMPENSATION.
Information under the heading "Executive Compensation" in the Company's
2008 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS.
Information under the heading "Security Ownership" and the information
under the subheading "Equity Compensation Plans" in the Company's
2008 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
No certain relationships exist. Information under the heading "Information
Regarding the Board of Directors and Committees" in the Company's 2008 Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information under the heading "Principal Accountant Fees and Services" in
the Company's 2008 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(A) 1. Financial Statements
Consolidated financial statements filed as part of this report are listed
under Part II. Item 8. "Financial Statements and Supplementary Data" of this
Annual Report on Form 10-K.
2007 FORM
10-K PAGE
---------
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 58
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the
Consolidated Financial Statements of IDEX or the Notes thereto.
3. Exhibits
The exhibits filed with this report are listed on the "Exhibit Index."
(B) Exhibit Index
Reference is made to the Exhibit Index beginning on page 60 hereof.
57
IDEX CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(IN THOUSANDS)
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES(1) DEDUCTIONS (2) OTHER (3) YEAR
-------------------------------------------------------- --------- ------------ -------------- ---------- ----------
Allowance for Doubtful Accounts
Year Ended December 31, 2007:
Deducted from assets to which they apply:
Allowance for Doubtful Accounts ...................... $ 3,545 $ 2,636 $ 625 $ 190 $ 5,746
Year Ended December 31, 2006:
Deducted from assets to which they apply:
Allowance for Doubtful Accounts ...................... 3,684 553 746 54 3,545
Year Ended December 31, 2005:
Deducted from assets to which they apply:
Allowance for Doubtful Accounts ...................... 4,106 866 658 (630) 3,684
-----------
(1) Includes provision for doubtful accounts, sales returns and sales
discounts granted to customers.
(2) Represents uncollectible accounts, net of recoveries. mi mill
(3) Represents acquisition, divestiture, translation and reclassification
adjustments.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IDEX CORPORATION
By: /s/ DOMINIC A. ROMEO
------------------------------------------
Dominic A. Romeo
Vice President and Chief Financial Officer
Date: February 27, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- ------------------------------------------------- ------------------
/S/ LAWRENCE D. KINGSLEY Chairman of the Board and Chief Executive Officer February 27, 2008
--------------------------
Lawrence D. Kingsley (Principal Executive Officer)
/S/ DOMINIC A. ROMEO Vice President and Chief Financial Officer February 27, 2008
--------------------------
Dominic A. Romeo (Principal Financial and Accounting Officer)
/S/ BRADLEY J. BELL Director February 27, 2008
--------------------------
Bradley J. Bell
/S/ RUBY R. CHANDY Director February 27, 2008
--------------------------
Ruby R. Chandy
/S/ FRANK S. HERMANCE Director February 27, 2008
--------------------------
Frank S. Hermance
/S/ NEIL A. SPRINGER Director February 27, 2008
--------------------------
Neil A. Springer
/S/ MICHAEL T. TOKARZ Director February 27, 2008
--------------------------
Michael T. Tokarz
59
EXHIBIT INDEX
Exhibit
Number Description
------- --------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of IDEX Corporation (formerly
HI, Inc.) (incorporated by reference to Exhibit No. 3.1 to the
Registration Statement on Form S-1 of IDEX, et al., Registration No.
33-21205, as filed on April 21, 1988)
3.1(a) Amendment to Restated Certificate of Incorporation of IDEX
Corporation (formerly HI, Inc.) (incorporated by reference to
Exhibit No. 3.1(a) to the Quarterly Report of IDEX on Form 10-Q for
the quarter ended March 31, 1996, Commission File No. 1-10235)
3.1(b) Amendment to Restated Certificate of Incorporation of IDEX
Corporation (formerly HI, Inc.) (incorporated by reference to
Exhibit No. 3.1(b) to the Current Report of IDEX on Form 8-K March
24, 2005, Commission File No. 1-10235)
3.2 Amended and Restated By-Laws of IDEX Corporation (incorporated by
reference to Exhibit No. 3.2 to Post-Effective Amendment No. 2 to
the Registration Statement on Form S-1 of IDEX, et al., Registration
No. 33-21205, as filed on July 17, 1989)
3.2(a) Amended and Restated Article III, Section 13 of the Amended and
Restated By-Laws of IDEX Corporation (incorporated by reference to
Exhibit No. 3.2(a) to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-1 of IDEX, et al., Registration No.
33-21205, as filed on February 12, 1990)
4.1 Restated Certificate of Incorporation and By-Laws of IDEX
Corporation (filed as Exhibits No. 3.1 through 3.2 (a))
4.4 Specimen Certificate of Common Stock of IDEX Corporation
(incorporated by reference to Exhibit No. 4.3 to the Registration
Statement on Form S-2 of IDEX, et al., Registration No. 33-42208, as
filed on September 16, 1991)
4.5 Credit Agreement, dated as of December 21, 2006, among IDEX
Corporation, Bank of America N.A. as Agent and Issuing Bank, and the
Other Financial Institutions Party Hereto (incorporated by reference
to Exhibit 10.1 to the Current Report of IDEX on Form 8-K dated
December 22, 2006, Commission File No. 1-10235)
4.6 Credit Lyonnais Uncommitted Line of Credit, dated as of December 3,
2001 (incorporated by reference to Exhibit 4.6 to the Annual Report
of IDEX on Form 10-K for the year ended December 31, 2001,
Commission File No. 1-10235)
*4.6(a) Amendment No. 8 dated as of December 12, 2007 to the Credit
Lyonnais Uncommitted Line of Credit Agreement dated December 3, 2001
10.1** Revised and Restated IDEX Management Incentive Compensation Plan for
Key Employees Effective January 1, 2003
10.2** Form of Indemnification Agreement of IDEX Corporation (incorporated
by reference to Exhibit No. 10.23 to the Registration Statement on
Form S-1 of IDEX, et al., Registration No. 33-28317, as filed on
April 26, 1989)
10.3** IDEX Corporation Amended and Restated Stock Option Plan for Outside
Directors adopted by resolution of the Board of Directors dated as
of January 25, 2000 (incorporated by reference to Exhibit No. 10.1
of the Quarterly Report of IDEX on Form 10-Q for the quarter ended
March 31, 2000, Commission File No. 10-10235)
10.3(a)** First Amendment to IDEX Corporation Amended and Restated Stock
Option Plan for Outside Directors, adopted by resolution of the
Board of Directors dated as of November 20, 2003 (incorporated by
reference to Exhibit 10.6 (a) to the Annual Report of IDEX on Form
10-K for the year ended December 31, 2003)
60
EXHIBIT INDEX
10.4** Non-Qualified Stock Option Plan for Non-Officer Key Employees of
IDEX Corporation (incorporated by reference to Exhibit No. 10.15 to
the Annual Report of IDEX on Form 10-K for the year ended December
31, 1992, Commission File No. 1-102351)
10.5** Third Amended and Restated 1996 Stock Option Plan for Non-Officer
Key Employees of IDEX Corporation dated January 9, 2003
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 of IDEX, Registration No. 333-104768, as filed
on April 25, 2003)
10.6** Non-Qualified Stock Option Plan for Officers of IDEX Corporation
(incorporated by reference to Exhibit No. 10.16 to the Annual Report
of IDEX on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-102351)
10.7** First Amended and Restated 1996 Stock Plan for Officers of IDEX
Corporation (incorporated by reference to Exhibit No. 10.1 to the
Quarterly Report of IDEX on Form 10-Q for the quarter ended March
31, 1998, Commission File No. 1-102351)
10.8** 2001 Stock Plan for Officers dated March 27, 2001 (incorporated by
reference to Exhibit No. 10.2 to the Quarterly Report of IDEX on
Form 10-Q for the quarter ended March 31, 2001, Commission File No.
1-10235)
10.9** IDEX Corporation Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit No. 10.17 to the Annual Report
of IDEX on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-102351)
10.10** Second Amended and Restated IDEX Corporation Directors Deferred
Compensation Plan (incorporated by reference to Exhibit No. 10.14(b)
to the Annual Report of IDEX on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-10235)
10.11** IDEX Corporation 1996 Deferred Compensation Plan for Officers
(incorporated by reference to Exhibit No. 4.8 to the Registration
Statement on Form S-8 of IDEX, et al., Registration No. 333-18643,
as filed on December 23, 1996)
10.11(a)** First Amendment to the IDEX Corporation 1996 Deferred
Compensation Plan for Officers, dated March 23, 2004 (incorporated
by reference to Exhibit No. 10.1 to the Quarterly Report of IDEX on
Form 10-Q for the quarter ended March 31, 2004)
10.12** IDEX Corporation 1996 Deferred Compensation Plan for Non-Officer
Presidents (incorporated by reference to Exhibit No. 4.7 to the
Registration Statement on Form S-8 of IDEX, et al., Registrant No.
333-18643, as filed on December 23, 1996)
10.13** Letter Agreement between IDEX Corporation and John L. McMurray,
dated April 24, 2000 (incorporated by reference to Exhibit No.
10.17(a) to the Annual Report of IDEX on Form 10-K for the year
ended December 31, 2001, Commission File No. 1-10235)
10.14** Letter Agreement between IDEX Corporation and Dominic A. Romeo,
dated December 1, 2003 (incorporated by reference to Exhibit No.
10.21 to the Annual Report of IDEX on Form 10-K for the year ended
December 31, 2005)
10.15** Unvested Stock Award Agreement between IDEX Corporation and Dominic
A. Romeo, dated January 14, 2004 (incorporated by reference to
Exhibit No. 10.22 to the Annual Report of IDEX on Form 10-K for the
year ended December 31, 2003)
10.16** Employment Agreement between IDEX Corporation and Lawrence D.
Kingsley, dated July 21, 2004 (incorporated by reference to Exhibit
No. 10.1 to the Quarterly Report of IDEX on Form 10-Q for the
quarter ended September 30, 2004)
61
EXHIBIT INDEX
10.16(a)** First Amendment to Employment Agreement between IDEX
Corporation and Lawrence D. Kingsley, dated March 22, 2005
(incorporated by reference to Exhibit 10.20 (a) to the Current
Report of IDEX on Form 8-K dated March 24, 2005, Commission File No.
1-10235)
10.17** Unvested Stock Award Agreement between IDEX Corporation and Lawrence
D. Kingsley, dated August 23, 2004 (incorporated by reference to
Exhibit No. 10.01 to the Periodic Report of IDEX on Form 8-K filed
on August 26, 2004)
10.18** Unvested Stock Award Agreement between IDEX Corporation and Lawrence
D. Kingsley, dated March 22, 2005 (incorporated by reference to
Exhibit No. 10.25 to the Current Report of IDEX on Form 8-K filed
dated March 24, 2005, Commission File No. 1-10235)
10.19** Form Stock Option Agreement (incorporated by reference to Exhibit
10.23 to the Current Report of IDEX on Form 8-K dated March 24,
2005, Commission File No. 1-10235)
10.20** Form Unvested Stock Agreement (incorporated by reference to Appendix
A of the Proxy Statement of IDEX Corporation, dated February 25,
2005, Commission File No. 1-10235)
10.21** IDEX Corporation Incentive Award Plan (incorporated by reference to
Exhibit 10.24 to the Current Report of IDEX on Form 8-K dated March
24, 2005, Commission File No. 1-10235)
10.22** Letter Agreement between IDEX Corporation and Frank J. Notaro, dated
April 24, 2000
10.23** Definitive agreement to acquire Nova Technologies Corporation, dated
November 13, 2007, (incorporated by reference to exhibit 10.1 to the
Current Report of IDEX on Form 8-K dated November 16, 2007,
Commission File No. 1-10235)
*12 Ratio of Earnings to Fixed Charges
*13 The portions of IDEX Corporation's 2007 Annual Report to
Shareholders, which are specifically incorporated by reference.
*21 Subsidiaries of IDEX
*23 Consent of Deloitte & Touche LLP
*31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
or Rule 15d-14(a)
*31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
or Rule 15d-14(a)
*32.1 Certification pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code
*32.2 Certification pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code
--------------
* Filed herewith
** Management contract or compensatory plan or agreement.
62