IDEX Corporation

$IEX - NYSE - Heavy Machinery
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Press Release $IEX IDEX Corporation

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Fitch Affirms IDEX's IDR at 'BBB+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term ratings for IDEX Corporation (NYSE: IEX) at 'BBB+'. The Rating Outlook is Stable. The ratings affect approximately $1.5 billion of total debt including undrawn amounts under the revolving credit facility (RCF). A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's expectations for modest operating margin expansion from restructuring and modest organic growth. The demand environment remains mixed, with organic sales benefitting from IDEX's diversified revenue portfolio. Geographically, weakness in Europe is offsetting stability in North America, while Asia is strengthening even as demand remains choppy. IDEX's backlog grew in the most recent quarter and book to bill remains greater than 1 time (x), supporting expectations for low- to mid-single digit near-term revenue growth.

Profitability should modestly expand over the intermediate-term from productivity initiatives and restructuring, including headcount reductions and facilities consolidation. Heightened focus on cost efficiencies and more fully integrating past acquisitions, spurred by the company's impairment charges in two businesses during 2012, should strengthen productivity. Over the longer-term, operating EBITDA margins are expected to remain within the 20% to 25% range, which is supported by IDEX's Fitch estimated 20.2% operating EBITDA margin for 2009.

Credit protection measures should remain near current levels over the longer-term with total leverage (total debt to operating EBITDA) below 2x and interest coverage (operating EBITDA to interest expense) of exceeding 10x. Fitch estimates total leverage for the latest 12 months (LTM) ended March 31, 2013 was approximately 1.8x and interest coverage was 10.6x, both strengthening slightly from the comparable prior year period. Debt levels should remain stable over the long-term, although temporary spikes to fund acquisitions are expected and the pace of repayment of incremental issuances remain a concern.

Cash deployment likely will be directed toward acquisitions, modest share repurchases, and dividends. IDEX repurchased $35 million of shares in the first quarter of 2013 under the company's Oct. 22, 2012 $200 million share repurchase authorization. Fitch estimates IDEX has $175 million to $200 million remaining under share repurchase authorizations. In the absence of an uptick in acquisition activity, Fitch anticipates the company will exhaust its authorization in 2013. IDEX also recently increased its annual dividend by 15%, consistent with the company's commitment to returning 30% of net income to shareholders via dividends.

Acquisition activity could accelerate from lower levels in 2012 and Fitch believes deals will be mostly organically funded. IDEX uses recurring acquisitions to augment its business and technology portfolio, targeting businesses with attractive margins, strong niche market positions and technologies supporting the company's capabilities in applied fluidics and optics. Fitch expects annual acquisition spending to average in the $150 million to $200 million range over the longer-term, although acquisition activity varies year-to-year.

In 2012, IDEX spent roughly $69 million for acquisitions, versus $445 million spent in 2011 and $95 million in 2010. 2011 included almost $400 million to purchase CVI MG (CVI), which significantly increased the company's optics and photonics platform within the Health & Science segment. Acquisitions in the first quarter of 2013 included an undisclosed amount for FTL Seals Technology, which IDEX believes will augment the company's proprietary sealing solutions capabilities.

Annual free cash flow (FCF) should exceed $200 million over the intermediate term and Fitch expects annual FCF of more than $100 million through the business cycle. Fitch's FCF forecasts reflect the impact of acquisitions, modest organic sales growth, favorable incremental margins on higher volumes, and cost savings from restructuring, all of which will drive higher profitability. Forecasts incorporate expectations for minimal cash pension contributions, a slight uptick in capital spending, and annual dividend growth of 15%.

Pension plans were underfunded by nearly $74 million at the end of 2012, essentially flat from the prior year despite a further decline in the discount rate. IDEX plans to contribute $7.9 million to pension and benefit plans in 2013, although IDEX's liquidity and FCF offsets the underfunded position.

RATINGS SENSITIVITIES

The ratings are unlikely to be upgraded in the absence of meaningfully higher annual FCF and commitment to more conservative financial policies. Negative rating actions could occur if: i) IDEX fails to return total leverage to long-term levels following acquisition driven borrowings, signaling a weakened FCF profile as a result of the deal or ii) acquisitions, share repurchases and dividends meaningfully exceed annual FCF over a sustained period, resulting in reduced liquidity.

The ratings are supported by: i) consistent profitability and FCF through the cycle, ii) solid revenue diversification, and iii) strong positions in a variety of niche markets. Rating concerns include: i) acquisitive nature with deals often funded by short-term debt, ii) exposure to municipal spending and Europe overall, iii) lack of scale compared to some competitors in its key markets.

IDEX's liquidity was adequate at March 31, 2013 and supported by: i) $341 million in cash (roughly 60% of which is located outside the U.S.) and ii) a $700 million revolving credit facility expiring in 2016, the vast majority of which was available. Annual FCF exceeding $100 million through the cycle also supports liquidity. Total debt at March 31, 2013 was $822 million consisting mostly of senior unsecured notes with various maturities, the closest of which is $105 million due in 2015.

Fitch affirms IDEX's ratings as follows:

--IDR at 'BBB+';

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

--Senior unsecured debt at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790437

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson
Craig Fraser, +1-212-908-0310
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Source: Fitch Ratings

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