EX-13 10 c83337exv13.txt PORTIONS OF 2003 ANNUAL REPORT TO SHAREHOLDERS . . . EXHIBIT 13 Historical Data (1) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2003 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- --------- Results of Operations Net sales $ 797,920 $ 742,014 $ 726,947 $ 704,276 $ 655,041 $ 640,131 Gross profit 309,320 281,438 263,722 277,952 256,484 252,846 SG&A expenses 199,458 181,269 164,893 149,639 140,495 132,627 Goodwill amortization -- -- 14,165 11,797 11,312 10,676 Restructuring activity -- (203) 11,226 -- -- -- Operating income 109,862 100,372 73,438 116,516 104,677 109,543 Other income (expense) - net 899 (123) 731 1,031 568 479 Interest expense 14,091 16,354 20,738 16,521 18,020 22,359 Provision for income taxes 34,318 29,783 20,721 37,581 32,797 33,267 Income from continuing operations 62,352 54,112 32,710 63,445 54,428 54,396 Income from discontinued operations -- -- -- -- -- 10,182 Extraordinary items -- -- -- -- -- (2,514) Net income 62,352 54,112 32,710 63,445 54,428 62,064 Financial Position Current assets $ 224,496 $ 221,260 $ 214,903 $ 232,089 $ 213,715 $ 195,900 Current liabilities 115,681 108,332 87,338 177,811(2) 91,634 80,265 Working capital 108,815 112,928 127,565 54,278(2) 122,081 115,635 Current ratio 1.9 2.0 2.5 1.3(2) 2.3 2.4 Capital expenditures 20,318 19,335 21,639 20,739 18,338 20,763 Depreciation and amortization 30,055 30,105 44,297 36,704 34,835 33,575 Total assets 960,739 931,050 838,804 758,854 738,567 695,811 Total debt 176,546 241,051 291,820 241,886 268,589 283,410 Shareholders' equity 592,102 506,791 401,112 374,502 329,024 286,037 Performance Measures Percent of net sales Gross profit 38.8% 37.9% 36.3% 39.5% 39.2% 39.5% SG&A expenses 25.0 24.4 22.7 21.2 21.4 20.7 Goodwill amortization -- -- 1.9 1.7 1.7 1.7 Restructuring activity -- -- 1.5 -- -- -- Operating income 13.8 13.5 10.1 16.5 16.0 17.1 Income before income taxes 12.1 11.3 7.4 14.3 13.3 13.7 Income from continuing operations 7.8 7.3 4.5 9.0 8.3 8.5 Effective tax rate 35.5 35.5 38.8 37.2 37.6 37.9 Net income return on average assets 6.6 6.1 4.1 8.5 7.6 9.6 Debt as a percent of capitalization 23.0 32.2 42.1 39.2 44.9 49.8 Net income return on average shareholders' equity 11.3 11.9 8.4 18.0 17.7 23.7 Per Share Data (3) Basic -- income from continuing operations $ 1.92 $ 1.71 $ 1.08 $ 2.13 $ 1.84 $ 1.85 -- net income 1.92 1.71 1.08 2.13 1.84 2.12 Diluted -- income from continuing operations 1.87 1.67 1.05 2.07 1.81 1.81 -- net income 1.87 1.67 1.05 2.07 1.81 2.07 Cash dividends declared .56 .56 .56 .56 .56 .545 Shareholders' equity 17.95 15.60 13.05 12.38 11.10 9.71 Stock price -- high 42.37 39.66 37.20 36.00 34.13 38.75 -- low 26.02 25.70 24.90 22.75 21.63 19.50 -- close 41.59 32.70 34.50 33.13 30.38 24.50 Price/earnings ratio at year end 22 20 33 16 17 14 Other Data (3) Employees at year end 3,689 3,863 3,873 3,880 3,773 3,803 Shareholders at year end 5,700 4,700 5,500 5,200 5,600 7,000 Shares outstanding (in 000s): Weighted average -- basic 32,530 31,669 30,222 29,726 29,544 29,332 -- diluted 33,315 32,483 31,047 30,632 30,085 30,052 At year end (net of treasury) 32,986 32,477 30,734 30,258 29,636 29,466
(1) See Notes to Consolidated Financial Statements for additional detail. (2) Excluding short-term debt of $88,077, current liabilities were $89,734, working capital was $142,355 and the current ratio was 2.6. (3) All share and per share data have been restated to reflect the three-for-two stock splits effected in the form of 50% stock dividends in January 1995 and 1997.
1997 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- ------------- $ 552,163 $ 474,699 $ 395,480 $ 319,231 $ 239,704 $ 215,778 222,357 187,074 157,677 126,951 96,903 88,312 110,588 93,217 78,712 66,743 52,950 49,326 8,174 6,241 4,196 3,025 1,889 1,422 -- -- -- -- -- -- 103,595 87,616 74,769 57,183 42,064 37,564 (693) (696) 524 281 728 602 18,398 17,476 14,301 11,939 9,168 9,809 31,029 25,020 21,845 16,181 11,187 9,763 53,475 44,424 39,147 29,344 22,437 18,594 5,151 5,774 6,178 4,266 2,889 1,552 -- -- -- -- -- (3,441) 58,626 50,198 45,325 33,610 25,326 16,705 $ 197,267 $ 191,599 $ 173,889 $ 140,450 $ 106,864 $ 107,958 77,801 83,286 70,798 58,443 34,038 31,276 119,466 108,313 103,091 82,007 72,826 76,682 2.5 2.3 2.5 2.4 3.1 3.5 13,562 11,634 8,181 6,818 6,120 5,657 24,943 21,312 15,277 12,515 10,092 8,758 599,193 569,745 450,077 357,980 245,291 240,175 258,417 271,709 206,184 168,166 117,464 139,827 238,671 195,509 150,945 116,305 83,686 58,731 40.3 % 39.4 % 39.9 % 39.8 % 40.4 % 40.9 % 20.0 19.6 19.9 20.9 22.1 22.9 1.5 1.3 1.1 1.0 .8 .7 -- -- -- -- -- -- 18.8 18.5 18.9 17.9 17.5 17.4 15.3 14.6 15.4 14.3 14.0 13.1 9.7 9.4 9.9 9.2 9.4 8.6 36.7 36.0 35.8 35.5 33.3 34.4 10.0 9.8 11.2 11.1 10.4 8.9 52.0 58.2 57.7 59.1 58.4 70.4 27.0 29.0 33.9 33.6 35.6 34.9 $ 1.83 $ 1.54 $ 1.37 $ 1.03 $ .79 $ .66 2.01 1.74 1.58 1.18 .89 .59 1.78 1.49 1.32 1.00 .77 .65 1.95 1.69 1.53 1.15 .87 .59 .495 .44 .387 .093 -- -- 8.16 6.76 5.26 4.06 2.93 2.07 36.69 27.63 29.50 19.50 16.00 10.63 23.25 19.88 18.38 15.13 9.75 7.38 34.88 26.63 27.13 18.75 15.88 10.63 20 16 18 16 18 18 3,326 3,093 2,680 2,305 1,828 1,864 7,000 6,100 5,300 4,400 4,300 4,200 29,184 28,818 28,662 28,600 28,396 28,353 29,999 29,779 29,609 29,331 28,976 28,389 29,250 28,926 28,695 28,619 28,580 28,353
Net Sales (in millions) [BAR GRAPH]
Net Sales --------- 2003 $797,920 2002 $742,014 2001 $726,947 2000 $704,276 1999 $655,041 1998 $640,131 1997 $552,163 1996 $474,699 1995 $395,480 1994 $319,231 1993 $239,704 1992 $215,778
Sales have grown at a 12.6% compound annual rate since 1992. Operating Margins (continuing operations) [BAR GRAPH]
IDEX Value Line Industrial Composite Index ---- --------------------- 2003 13.7% 10.3% 2002 13.5% 10.4% 2001 10.1% 10.0% 2000 16.5% 12.5% 1999 16.0% 11.9% 1998 17.1% 11.6% 1997 18.8% 12.1% 1996 18.5% 11.5% 1995 18.9% 11.3% 1994 17.9% 10.4% 1993 17.5% 9.4% 1992 17.4% 8.4%
While IDEX's strong operating margins have been negatively affected by weak economic conditions since 2001, advances in operational excellence initiatives helped improve them in 2002 and 2003. Diluted Earnings per Share (continuing operations) [BAR GRAPH]
Diluted Earnings per Share -------------------------- 2003 $1.87 2002 $1.67 2001 $1.05 2000 $2.07 1999 $1.81 1998 $1.81 1997 $1.78 1996 $1.49 1995 $1.32 1994 $1.00 1993 $0.77 1992 $0.65
Weak economic conditions since 2001 reduced the compound annual growth rate since 1992 to 10.1%. The growth initiatives under way will improve IDEX's long-term profitability. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HISTORICAL OVERVIEW AND OUTLOOK IDEX sells a broad range of pump products, dispensing equipment and other engineered products to a diverse customer base in the United States and other countries around the world. Accordingly, our businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where our products are sold and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are among the factors that influence the demand for our products. IDEX has a history of achieving above-average operating margins. Our operating margins have exceeded the average operating margin of the companies that comprise the Value Line Composite Index (VLCI) every year since 1988. We view the VLCI operating performance statistics as a proxy for an average industrial company. Our operating margins are influenced by, among other things, utilization of facilities as sales volumes change and inclusion of newly acquired businesses. Newly acquired businesses may have lower operating margins than the Company's operating margins and, prior to 2002, those margins were further reduced by amortization of goodwill and intangible assets. Beginning in 2002, we were no longer required to amortize to earnings these assets with indefinite lives in accordance with new accounting rules. Instead, these assets are reviewed periodically for impairment. For 2003, we reported higher orders, sales, operating income, net income and earnings per share compared with the prior year. New orders in 2003 totaled $797.8 million, 6% higher than 2002. Excluding the impact of the Halox (April 2002), Rheodyne (July 2002), Wrightech (October 2002), Sponsler (June 2003) and Classic Engineering (September 2003) acquisitions and foreign currency translation, orders were essentially unchanged from 2002. At December 31, 2003, the Company had a typical unfilled order backlog of slightly over one month's sales. Given the economic environment, we are proud of our financial and operating performance in 2003. Together, our business units delivered record orders, sales and cash flows, while earnings improved. For the year, earnings per share were up 12%, and we reported our 6th consecutive quarter of year-over-year improvement in the fourth quarter. Organic revenue growth in our dispensing equipment and engineered products businesses more than offset the slight weakness in the industrial pump segment of the business. In addition, we continued to drive our operational excellence initiatives, established a strategic base of operations in China, and completed two acquisitions in 2003 and another in early January 2004. We continue to use all the tools at our disposal to drive growth, profitability and cash generation, positioning IDEX to deliver even stronger performance as the economy improves. The following forward-looking statements are qualified by the cautionary statement under the Private Securities Litigation Reform Act set forth below. While economic conditions in 2003 improved modestly from 2002, it is clear that we have not as yet seen a broad-based economic recovery. As a short-cycle business, our 2004 financial performance depends on the current pace of incoming orders, and we have limited visibility on future business conditions. We believe IDEX is well positioned for earnings improvement as the economy improves. This is based on our lower cost levels resulting from our restructuring actions in previous years; our operational excellence initiatives of Global Sourcing, Six Sigma, Kaizen and Lean Manufacturing; eBusiness; and our use of strong cash flow to cut debt and interest expense. With the belief that innovation will define the winning companies of the future, we are increasing our emphasis on new products and global markets, while pursuing strategic acquisitions to help drive our longer term profitable growth. FROM LEFT TO RIGHT, SEATED: Susan Fisher (Director - Investor Relations), Wayne Sayatovic (Senior Vice President - Finance and Chief Financial Officer), Clint Kooman (Vice President - Controller) FROM LEFT TO RIGHT, STANDING: Doug Lennox (Vice President - Treasurer), Dom Romeo (Vice President and Chief Financial Officer-elect) 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 IDEX Corporation 2003 Annual Report 19 of which could have a material impact on our order rates and results, particularly in light of the low levels of order backlogs we typically maintain; our ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which we operate; interest rates; capacity utilization and the effect this has on costs; labor markets; market conditions and material costs; and developments with respect to contingencies, such as litigation and environmental matters. The forward-looking statements included here are only made as of the date of this report, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here. RESULTS OF OPERATIONS For purposes of this discussion and analysis section, reference is made to the table on page 20 and the Consolidated Statements of Operations on page 27. IDEX consists of three reporting groups: Pump Products, Dispensing Equipment and Other Engineered Products. The Pump Products Group produces a wide variety of pumps, compressors, flow meters, injectors and valves and related controls for the movement of liquids, air and gases. The Dispensing Equipment Group produces highly engineered equipment for dispensing, metering and mixing colorants, paints, inks and dyes, hair colorants and other personal care products; refinishing equipment; and centralized lubrication systems. The Other Engineered Products Group produces firefighting pumps, rescue tools 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. PERFORMANCE IN 2003 COMPARED WITH 2002 Orders, sales, net income and earnings per share were higher in 2003 compared with 2002. New orders in 2003 totaled $797.8 million and were 6% higher than the prior year. Excluding the impact of the five acquisitions made since the beginning of 2002 and foreign currency translation, orders were essentially unchanged from last year. Sales in 2003 of $797.9 million were 8% higher than the $742.0 million recorded a year ago. Acquisitions and foreign currency translation accounted for an improvement of 2% and 5%, respectively, while base business sales rose by 1%. Domestic sales increased by 1%, while international sales, net of foreign currency translation, were 8% higher. For the year, international sales were 45% of total sales, up from 41% in 2002. In 2003, the Pump Products Group contributed 57% of sales and 55% of operating income, the Dispensing Equipment Group accounted for 20% of both sales and operating income, and the Other Engineered Products Group represented 23% of sales and 25% of operating income. Pump Products Group sales of $456.5 million in 2003 increased by $19.9 million, or 5%, compared with 2002. Acquisitions and foreign currency translation accounted for a 5% and 2% sales improvement, respectively, but this was offset by a 2% decline in base business activity. In 2003, domestic sales increased slightly and international sales increased by 12% compared with last year. Excluding acquisitions, base U.S. sales volume decreased by 4%, while base international sales increased by 7%. Sales to customers outside the U.S. were 39% of total group sales in 2003, up from 37% in 2002. Dispensing Equipment Group sales of $159.2 million increased by $20.5 million, or 15%, in 2003 compared with the prior year, mainly due to favorable foreign currency translation of 13% and a 2% increase in base business activity. Domestic sales decreased by 5% compared with 2002, while international sales increased by 32%. Sales to customers outside the U.S. were 62% of total group sales in 2003, up from 54% in 2002. Other Engineered Products Group sales of $185.0 million increased by $15.3 million, or 9%, in 2003 compared with 2002. Foreign currency translation and increased base business activity provided an improvement of 5% and 10%, respectively, but this was partially offset by a 6% decline due to the sale of a product line. In 2003, domestic sales increased by 7% and international sales increased by 29%. Sales to customers outside the U.S. were 43% of total group sales in 2003, up from 38% in 2002.
Net Sales by Group Dispensing Engineered (in millions) Pump Products Equipment Products Combined -------------- ------------- ---------- ----------- -------- 2003 $456,516 $159,225 $185,022 $800,763 2002 $436,664 $138,702 $169,692 $745,058 2001 $427,037 $137,407 $164,815 $729,259 2000 $394,999 $166,362 $145,823 $707,184 1999 $372,440 $140,996 $144,486 $657,922 1998 $375,692 $122,844 $144,004 $642,540 1997 $265,918 $138,202 $150,455 $554,575 1996 $245,620 $ 80,169 $149,949 $475,738 1995 $228,909 $ 42,007 $125,118 $396,034 1994 $197,013 $ 37,890 $ 84,784 $319,687 1993 $180,906 $ 31,944 $ 27,364 $240,214 1992 $156,172 $ 31,200 $ 28,856 $216,228
[BAR GRAPH] In 2003, acquisitions helped increase Pump Products' sales, while new products were largely responsible for Other Engineered Products growth.
Operating Income by Group Dispensing Engineered (in millions) Pump Products Equipment Products Combined -------------- ------------- ---------- ----------- -------- 2003 $70,436 $25,724 $32,990 $129,150 2002 $71,945 $18,627 $25,638 $116,210 2001 $61,758 $13,957 $25,032 $100,747 2000 $73,726 $32,566 $27,498 $133,790 1999 $65,673 $25,614 $26,660 $117,947 1998 $74,812 $22,483 $24,596 $121,891 1997 $61,443 $25,636 $26,426 $113,505 1996 $55,129 $14,370 $26,595 $ 96,094 1995 $48,365 $11,739 $22,889 $ 82,993 1994 $40,303 $ 9,736 $14,954 $ 64,993 1993 $34,501 $ 6,761 $ 7,585 $ 48,847 1992 $31,252 $ 6,251 $ 7,887 $ 45,390
[BAR GRAPH] Although newly acquired companies generally have lower operating margins, our rapid integration program helps raise them over time to the IDEX average. 2003 Sales by Region [PIE CHART] 55% United States 27% Europe 11% Asia/Rest of World 7% Canada/Latin America A more global market focus continues with 45% of 2003 sales coming from customers outside the United States. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY AND BUSINESS GROUP FINANCIAL INFORMATION (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,(1) 2003 2002 2001 ----------------------------------- ---- ---- ---- Pump Products Group Net sales(2) $ 456,516 $ 436,664 $ 427,037 Operating income(3)(4) 70,436 71,945 61,758 Operating margins(3)(4) 15.4% 16.5% 14.5% Identifiable assets $ 551,183 $ 535,822 $ 462,275 Depreciation and amortization(3) As reported 16,141 16,913 24,124 Goodwill and trademarks - - 7,745 Capital expenditures 12,887 9,348 10,251 Dispensing Equipment Group Net sales(2) $ 159,225 $ 138,702 $ 137,407 Operating income(3)(4) 25,724 18,627 13,957 Operating margins(3)(4) 16.2% 13.4% 10.2% Identifiable assets $ 203,786 $ 192,258 $ 180,361 Depreciation and amortization(3) As reported 5,881 5,734 9,719 Goodwill and trademarks - - 3,897 Capital expenditures 2,967 3,651 5,129 Other Engineered Products Group Net sales(2) $ 185,022 $ 169,692 $ 164,815 Operating income(3)(4) 32,990 25,638 25,032 Operating margins(3)(4) 17.8% 15.1% 15.2% Identifiable assets $ 186,417 $ 186,860 $ 181,032 Depreciation and amortization(3) As reported 5,116 4,666 7,920 Goodwill and trademarks - - 2,932 Capital expenditures 3,874 4,990 5,987 Company Net sales $ 797,920 $ 742,014 $ 726,947 Operating income(3)(4) 109,862 100,372 73,438 Operating margins(3)(4) 13.8% 13.5% 10.1% Total assets $ 960,739 $ 931,050 $ 838,804 Depreciation and amortization(3) As reported 29,475 29,525 43,933 Goodwill and trademarks - - 14,574 Capital expenditures 20,318 19,335 21,639
(1) Includes acquisition of Classic Engineering, Inc. (September 2003), Sponsler Co., Inc. (June 2003), Wrightech Corporation (October 2002), Rheodyne, L.P. (July 2002), Halox Technologies, Inc. (April 2002), Versa-Matic Tool, Inc. (June 2001) and Liquid Controls L.L.C. (January 2001) in the Pump Products Group; and Class 1, Inc. (January 2001) in the Other Engineered Products Group from dates of acquisition. See Note 10 of the Notes to Consolidated Financial Statements. (2) Group net sales include intersegment sales. (3) IDEX discontinued goodwill and trademark amortization as of January 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142, as further explained in Note 2 of the Notes to Consolidated Financial Statements. (4) IDEX took actions in 2002 and 2001 to downsize operations to lower its cost structure, as further explained in Note 7 of the Notes to Consolidated Financial Statements. Group operating income in these years excluded net unallocated corporate operating expenses and restructuring activity. The restructuring activity resulted in income of $203 in 2002 and a charge of $11,226 in 2001, which were not assigned to the individual group segments. Had the company allocated the 2002 restructuring activity, it would have been assigned to the groups as follows: Pump Products (income of $1,046), Dispensing Equipment (expense of $121) and Other Engineered Products (expense of $722). Had the company allocated the 2001 restructuring charge, it would have been assigned to the groups as follows: Pump Products ($7,769), Dispensing Equipment ($1,894) and Other Engineered Products ($1,563). IDEX Corporation 2003 Annual Report 21 Gross profit of $309.3 million in 2003 was $27.9 million higher than 2002. As a percent of sales, gross profit was 38.8% in 2003, which represented an increase from 37.9% in 2002. The higher gross profit margin primarily reflects reduced material costs from our increased global sourcing activities and savings from Six Sigma, Kaizen and Lean Manufacturing initiatives, which more than offset increased research and development expenses. Selling, general and administrative (SG&A) expenses increased to $199.5 million in 2003 from $181.3 million in 2002. This increase was partly due to the inclusion of five acquisitions that incrementally added $4.4 million of cost. This increase also reflects the deliberate reinvestment in the business to drive organic growth, as well as certain cost increases including pension, insurance, audit and legal expenses. As a percent of net sales, SG&A expenses were 25.0%, up from 24.4% in 2002. While 2003 SG&A expenses are up for the reasons noted, we do not believe this is indicative of a significant negative trend. We also generated income related to restructuring activity of $.2 million in 2002. For more details on our restructuring programs, see "Restructuring Actions" on page 24. Operating income increased by $9.5 million, or 9%, to $109.9 million in 2003 from $100.4 million in 2002, primarily due to higher 2003 gross profit, offset by increased SG&A expenses. Operating margins in 2003 were 13.8% of sales, compared with 13.5% in 2002. As described in footnote 4 of the "Company and Business Group Financial Information" table on page 20, each group's operating income and margins exclude restructuring activity in 2002 and 2001. In the Pump Products Group, operating income of $70.4 million and operating margin of 15.4% decreased in 2003 compared with $71.9 million and 16.5% recorded in 2002. The decline in operating margin was due to a number of factors including new product development, additional sales/marketing resources, ERP implementation and reduced volume in some of our more profitable base businesses. Operating income for the Dispensing Equipment Group increased to $25.7 million from $18.6 million last year, and operating margins improved to 16.2% from 13.4% recorded in 2002. The margin increase was mainly due to increased volumes. Operating income in the Other Engineered Products Group of $33.0 million and operating margin of 17.8% increased from $25.6 million and 15.1% achieved in 2002. The improvement in margins was mostly attributable to improved sales volumes. Other income of $.9 million in 2003 was $1.0 million higher than the $.1 million of expense in 2002. In 2003, we benefitted from a foreign currency exchange gain associated with the anticipated funding of the Manfred Vetter acquisition in early January 2004. Interest expense decreased to $14.1 million in 2003 from $16.4 million in 2002. The decrease was principally due to lower debt levels resulting from debt paydowns from operating cash flow and a lower interest rate environment. The provision for income taxes increased to $34.3 million in 2003 from $29.8 million in 2002. The effective tax rate was 35.5% for both periods. Net income was $62.4 million, or $1.87 per share, compared with $54.1 million, or $1.67 per share, in 2002. PERFORMANCE IN 2002 COMPARED WITH 2001 Orders, sales, net income and earnings per share were higher in 2002 compared with 2001. New orders in 2002 totaled $749.8 million and were 5% higher than the prior year. Excluding the impact of the four acquisitions made since mid-2001 and foreign currency translation, orders were 1% higher than in 2001. Sales in 2002 of $742.0 million were 2% higher than the $726.9 million recorded in the prior year. Acquisitions and foreign currency translation accounted for an improvement of 3% and 1%, respectively, but this was offset by a 2% decline in the base businesses. Domestic sales increased by 3%, while international sales, net of foreign currency translation, decreased by 2%. For the year, international sales were 41% of total sales, down slightly from 42% in 2001. In 2002, the Pump Products Group contributed 58% of sales and 62% of operating income, the Dispensing Equipment Group accounted for 19% of sales and 16% of operating income, and the Other Engineered Products Group represented 23% of sales and 22% of operating income. Pump Products Group sales of $436.7 million in 2002 increased by $9.6 million, or 2%, compared with 2001. Acquisitions accounted for a 5% sales improvement, but this was partially offset by a 3% decline in base business activity. In 2002, domestic and international sales increased by 3% and 1%, respectively, compared with last year. Excluding acquisitions, base business sales volume in both the U.S. and internationally decreased by 3%. Sales to customers outside the U.S. were 37% of total group sales in 2002, unchanged from 2001. Dispensing Equipment Group sales of $138.7 million increased by $1.3 million, or 1%, in 2002 compared with the prior year. Domestic by sales increased by 7% compared with 2001, while international sales decreased by 4%. Sales to customers outside the U.S. were 54% of total group sales in 2002, down from 57% in 2001. Other Engineered Products Group sales of $169.7 million increased by $4.9 million, or 3%, in 2002 compared with 2001. In 2002, domestic sales increased by 1%, while international sales grew by 6%. Sales to customers outside the U.S. were 42% of total group sales in 2002, up slightly from 41% in 2001. Gross profit of $281.4 million in 2002 was $17.7 million higher than in 2001. As a percent of sales, gross profit was 37.9% in 2002, compared with 36.3% in 2001. The higher gross profit margin primarily reflected reduced material costs from our increased Global Sourcing activities, benefits from our Kaizen, Lean and Six Sigma activities plus savings from actions to consolidate certain production facilities. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FROM LEFT TO RIGHT, SEATED: Chuck Hemann (Director - eBusiness), Dennis Metcalf (Vice President - Corporate Development), Kim Bors (Vice President - Human Resources) FROM LEFT TO RIGHT, STANDING: Frank Notaro (Vice President - General Counsel and Secretary), Dave Kamath (Chief Information Officer) SG&A expenses increased to $181.3 million in 2002 from $164.9 million in 2001. This increase was due primarily to including four acquisitions that incrementally added $5.2 million of cost, and increased spending on corporate initiatives and new product/market development. The increased corporate initiative costs included both implementation and training expenses for programs such as Six Sigma, Lean, Kaizen and Global Sourcing, as well as eBusiness. The goal of these efforts is to increase the company's organic sales and profit growth. As a percent of net sales, SG&A expenses were 24.4%, up from 22.7% in 2001. In accordance with the new accounting rules, we discontinued amortization of goodwill and trademarks as of January 1, 2002. As a result, we did not record any goodwill and trademark amortization expense in 2002 compared with $14.6 million in 2001. We also generated income related to restructuring activity of $.2 million in 2002 compared with a restructuring charge in 2001 of $11.2 million. For more details on our restructuring programs, see "Restructuring Actions" on page 24. Operating income increased by $26.9 million, or 37%, to $100.4 million in 2002 from $73.4 million in 2001. This was due primarily to the absence of goodwill and trademark amortization in 2002, the restructuring charge recorded in 2001 and higher 2002 gross profit. This increase was partially offset by increased SG&A expenses in 2002. Operating margins in 2002 were 13.5% compared with 10.1% in 2001. As described in footnote 4 of the "Company and Business Group Financial Information" table on page 20, each group's operating income and margins exclude restructuring activity. In the Pump Products Group, operating income of $71.9 million and operating margins of 16.5% in 2002, compared with $61.8 million and 14.5% in 2001. Operating income for the Dispensing Equipment Group increased to $18.6 million from $14.0 million last year, and operating margins improved to 13.4% from 10.2% in 2001. Operating income in the Other Engineered Products Group of $25.6 million and operating margins of 15.1% compared with the $25.0 million and 15.2% achieved in 2001. In the Pump Products Group, 2001 operating income and margins excluding goodwill and trademark amortization of $7.7 million, or 1.8% of sales, were $69.5 million and 16.3%, respectively. In the Dispensing Equipment Group, operating income and margins in 2001 were $17.9 million and 13.0%, respectively, excluding goodwill and trademark amortization of $3.9 million, or 2.8% of sales. Operating income and margins in the Other Engineered Products Group in 2001 were $27.9 million and 17.0%, respectively, excluding goodwill and trademark amortization of $2.9 million, or 1.8% of sales. The expenses related to the corporate initiatives of eBusiness (including ERP implementation), Six Sigma, Lean, Kaizen, and Global Sourcing are allocated to the reporting units in each segment based on expected usage. The businesses in the Pump Products and Dispensing Equipment segments have been more successful than those in the Other Engineered Products segment at offsetting the SG&A cost increases resulting from the corporate initiatives, new product/market development, and other cost increases, with efficiencies related to the initiatives as well as other operational improvements. The Other Engineered Products Group also was affected by higher than normal costs associated primarily with ERP implementations and a reserve established for a patent infringement suit. Interest expense decreased to $16.4 million in 2002 from $20.7 million in 2001. The decrease was due principally to lower debt levels as a result of debt paydowns from operating cash flow and proceeds from a common stock offering, and a lower interest rate environment. The provision for income taxes increased to $29.8 million in 2002 from $20.7 million in 2001. The effective tax rate decreased to 35.5% in 2002 from 38.8% in 2001. This was due primarily to the discontinuation of goodwill and trademark amortization in 2002, a portion of which was nondeductible for tax purposes. Net income was $54.1 million, or $1.67 per share, compared with $32.7 million, or $1.05 per share, in 2001. When adjusted to exclude goodwill and trademark amortization of $11.4 million, or $.37 per share, net income and earnings per share in 2001 were $44.1 million and $1.42 per share, respectively. IDEX Corporation 2003 Annual Report 23 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, working capital was $108.8 million and our current ratio was 1.9-to-1. Cash flows from operating activities increased by $2.2 million, or 2%, to $111.7 million in 2003, mainly due to the improved operating results discussed above, offset by increased contributions to our pension plans of $17.4 million from 2002. Cash flows from operating activities were more than adequate to fund capital expenditures of $20.3 million and $19.3 million in 2003 and 2002, respectively. Capital expenditures were generally for machinery and equipment that improved productivity and tooling to support IDEX's Global Sourcing initiative, although a portion was for business system technology and replacement of equipment and facilities. Management believes that IDEX has ample capacity in its plant and equipment to meet expected needs for future growth in the intermediate term. In February 2003, an $8.0 million payment of deferred consideration was made in connection with the Rheodyne acquisition that was consummated in July 2002. The company also completed the acquisitions of Sponsler in June 2003 and Classic Engineering in September 2003 at a cost of $10.3 million and $3.7 million, respectively. These payments were financed under the company's credit facility. In addition to the $150 million of 6.875% Senior Notes (Senior Notes) due February 15, 2008, the company also has a $300 million domestic multi-currency bank revolving credit facility (Credit Facility), which expires June 8, 2006. At December 31, 2003, the maximum amount available under the Credit Facility was $300.0 million, of which $14.0 million was borrowed with outstanding letters of credit totaling $4.0 million. The Credit Facility contains a covenant that limits total debt outstanding to three times operating cash flow, as defined in the agreement. Our total debt outstanding was $176.5 million at December 31, 2003, and based on the covenant, total debt outstanding was limited to $426.0 million. Interest is payable quarterly on the outstanding balance at the agent bank's reference rate or at LIBOR plus an applicable margin and a utilization fee if the total borrowings exceed certain levels. The applicable margin is based on the credit rating of our Senior Notes, and can range from 25 basis points to 100 basis points. The utilization fee can range from zero to 25 basis points. On March 27, 2003, Standard & Poor's upgraded its corporate credit and senior unsecured debt ratings on IDEX to BBB from BBB-. As a result of this change, at December 31, 2003, the applicable margin was 57.5 basis points and the utilization fee was zero. We also pay an annual fee of 17.5 basis points on the total Credit Facility. In December 2001, we, and certain of our subsidiaries, entered into a one-year, renewable agreement with a financial institution, under which we collateralized certain receivables for borrowings (Receivables Facility). This agreement was renewed in December 2003 for another year. The Receivables Facility provides for borrowings of up to $25.0 million, depending upon the level of eligible receivables. At December 31, 2003, there were no borrowings outstanding under the Receivables Facility. We also have a $30.0 million demand line of credit (Short-Term Facility), which expires May 21, 2004. Borrowings under the Short-Term Facility are at LIBOR plus the applicable margin in effect under the Credit Facility. At December 31, 2003, there were no borrowings outstanding under the Short-Term Facility. We believe the company will generate sufficient cash flow from operations for the next 12 months and over the long term to meet its operating requirements, interest on all borrowings, required debt repayments, any authorized share repurchases, planned capital expenditures, and annual dividend payments to holders of common stock. Since we began operations in January 1988 and through December 31, 2003, we have borrowed approximately $906.0 million under our various credit agreements to complete 24 acquisitions. During the same period we generated, principally from operations, cash flow of $894.0 million to reduce indebtedness. In the event that suitable businesses are available for acquisition upon terms acceptable to the Board of Directors, we may obtain all or a portion of the financing for the acquisitions through the incurrence of additional long-term debt. [BAR GRAPH]
International Sales Percent of net sales Amount in millions ------------------- -------------------- ------------------ 2003 45% $356,493 2002 41% $307,223 2001 42% $304,282 2000 41% $287,719 1999 39% $255,755 1998 39% $250,946 1997 44% $244,671 1996 43% $206,381 1995 37% $146,237 1994 34% $109,034 1993 29% $ 69,936 1992 31% $ 66,012
A solid global distribution network, acquisitions with a high percentage of foreign sales, and 23 manufacturing facilities outside the U.S. give IDEX a high level of international sales. [BAR GRAPH]
Assets and Total Debt (in thousands) Assets Total Debt -------------- ------ ---------- 2003 $960,739 $176,546 2002 $931,050 $241,051 2001 $838,804 $291,820 2000 $758,854 $241,886 1999 $738,567 $268,589 1998 $695,811 $283,410 1997 $599,193 $258,417 1996 $569,745 $271,709 1995 $450,077 $206,184 1994 $357,980 $168,166 1993 $245,291 $117,464 1992 $240,175 $139,827
IDEX has continued to use strong cash flow to reduce its debt, while making strategic acquisitions to complement organic growth. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. We have no off-balance sheet arrangements or material long-term purchase obligations. 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 following table summarizes our significant contractual obligations and commercial commitments at December 31, 2003, and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings. Additional detail regarding these obligations are provided in the Notes to Consolidated Financial Statements, as referenced in the table:
PAYMENTS LESS MORE DUE BY PERIOD THAN 1-3 3-5 THAN (IN THOUSANDS) TOTAL 1 YEAR YEARS YEARS 5 YEARS -------------- ----- ------ ----- ----- ------- Borrowings (Note 9) $ 176,546 $ 12,546 $ 14,000 $ 150,000 $ - Operating lease commitments (Note 5) 23,631 6,869 8,769 4,036 3,957 Capital lease obligations(1) 3,183 3,180 3 - - Purchase obligations(2) 29,101 25,690 3,253 158 - ---------- ---------- ---------- ---------- ---------- Total contractual obligations(3) $ 232,461 $ 48,285 $ 26,025 $ 154,194 $ 3,957 ========== ========== ========== ========== ==========
(1) Comprised primarily of property leases (2) Comprised primarily of inventory commitments (3) Comprised of liabilities recorded on the balance sheet of $203,360, and obligations not recorded on the balance sheet $29,101 The company also has obligations with respect to its pension and postretirement medical benefit plans. See Note 14 of the Notes to Consolidated Financial Statements. RESTRUCTURING ACTIONS IDEX took actions in 2002 and 2001 to downsize operations to lower its cost structure. The restructuring affected all three business groups and reduced the workforce, lowered costs, improved efficiencies and addressed excess capacity that resulted from lower demand and more efficient processes. These steps were necessary to appropriately size the company's production capacity to match the declining levels of demand for a broad range of products. The restructuring actions affected multiple employee groups in approximately 20 locations across 11 of our business units. No business activities or product lines were abandoned. The restructuring actions included the layoff of 508 employees with 250 terminations resulting from the first quarter 2001 plan, 231 from the fourth quarter 2001 plan, and 27 from the second quarter 2002 plan. All costs of the restructuring activities were charged to expense and included in the single caption "Restructuring activity" in the Consolidated Statements of Operations. The restructuring charges included employee severance, fringe benefits, outplacement fees, idle facility carrying costs, lease termination costs, the loss on sale of equipment and the loss on disposal of two manufacturing facilities owned by the company. Determination of the restructuring charges was based on the estimated severance benefits paid to terminated employees, the net book value of surplus assets less expected proceeds, and estimated other costs. The restructuring plans have been executed substantially as originally planned. The restructuring activity resulted in income of $.2 million in 2002. This related to a reversal of $1.5 million of restructuring expenses initially recorded, which more than offset the 2002 charges of $1.3 million. Of the $1.5 million reversal, $1.1 million was attributed to the sale of a manufacturing facility for more than the value estimated at the time the restructuring plan was adopted. For additional detail related to restructuring activity, see Note 7 of Notes to Consolidated Financial Statements. CRITICAL ACCOUNTING ESTIMATES We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 of the Notes to Consolidated Financial Statements. Revenue recognition - We recognize revenue from product sales when title passes and the risks of ownership have passed to the customer, based on the terms of the sale. Our customary terms are FOB shipping point. We estimate and record provisions for sales returns, sales allowances and original warranties in the period the related products are sold, in each case based on our historical experience. To the extent actual results differ from these estimated amounts, results could be adversely affected. Noncurrent assets - The company evaluates the recoverability of certain noncurrent assets utilizing various estimation processes. In particular, the recoverability of December 31, 2003 balances for goodwill and intangible assets of $559.0 million and $19.4 million, respectively, are subject to estimation processes, which depend on the accuracy of underlying assumptions, including future operating results. The company evaluates the recoverability of each of these assets based on estimated business values and estimated future cash flows (derived from estimated earnings and cash flow multiples). The recoverability of these assets depends on the reasonableness of these assumptions and how they compare with the eventual operating performance of the specific businesses to which the assets are attributed. To the extent actual business values or cash flows differ from those estimated amounts, the recoverability of these noncurrent assets could be affected. Income taxes - Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Federal income taxes are provided on that portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. The management of the company, along with third-party advisors, periodically estimates the company's probable tax obligations using historical experience in tax jurisdictions and informed judgments. To the extent actual results differ from these estimated amounts, results could be adversely affected. IDEX Corporation 2003 Annual Report 25 Contingencies and litigation - We are currently involved in certain legal and regulatory proceedings and, as required and where it is reasonably possible to do so, have accrued our estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future operating results for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Defined benefit retirement plans - The plan obligations and related assets of defined benefit retirement plans are presented in Note 14 of the Notes to Consolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by consulting actuaries using a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate at which the obligation could be effectively settled and the anticipated rate of future salary increases. 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. REGISTRATION STATEMENT FILINGS FOR COMMON STOCK OFFERINGS In March 2002, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) covering the secondary offering of 2,939,199 shares of common stock owned by IDEX Associates, L.P. In April 2002, that registration statement was amended to also include the secondary offering of 560,801 shares of IDEX common stock owned by KKR Associates, L.P., and the primary offering of 1,500,000 shares of IDEX common stock. Also in April 2002, we announced the pricing of this public offering at $36 per common share. Subsequently, the overallotment option was exercised by the underwriter for the sale of an additional 750,000 secondary shares owned by KKR Associates, L.P., bringing the total offering to 5,750,000 shares. The $50.8 million of net proceeds we received was used to repay debt under the Credit Facility. This increased the amount available for borrowing under the facility, which we will continue to use for general corporate purposes, including acquisitions. In September 2002, we filed a registration statement on Form S-3 with the SEC covering the secondary offering of 1,350,000 shares of IDEX common stock owned by KKR Associates, L.P. This offering, completed in January 2003, did not increase the number of IDEX shares outstanding, and the company did not receive any proceeds from the offering. The secondary shares covered by both of these registration statements had been owned by KKR Associates, L.P. and IDEX Associates, L.P. since IDEX was formed in January 1988. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The company adopted this interpretation effective January 1, 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which was revised in December 2003. This interpretation addresses consolidation requirements of variable interest entities. The effective date for the company will be March 31, 2004. The company does not expect this interpretation to have a material impact on its results of operations, financial condition, or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The company adopted this SFAS effective September 30, 2003. This SFAS had no impact on the company's results of operations, financial condition, or cash flows. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This revised SFAS modifies the financial statement disclosures for defined benefit plans. These modifications increase disclosure of plan assets, benefit obligations, cash flows, benefit costs and other related information. The implementation of SFAS No. 132 (Revised) was effective for the company on December 31, 2003. The company has included SFAS No. 132 (Revised) disclosures in Note 14 of the Notes to Consolidated Financial Statements. MARKET RISK We are subject to market risk associated with changes in interest rates and foreign currency exchange rates. Interest rate exposure is limited to the $176.5 million of total debt outstanding at December 31, 2003. Approximately 13% of the debt is priced at interest rates that float with the market. A 50 basis point movement in the interest rate on the floating rate debt would result in an approximate $.1 million annualized increase or decrease in interest expense and cash flows. The remaining debt is fixed rate debt. We will, from time to time, enter into interest rate swaps on our debt when we believe there is a financial advantage for doing so. A treasury risk management policy, adopted by the Board of Directors, describes the procedures and controls over derivative financial and commodity instruments, including interest rate swaps. Under the policy, we do not use derivative financial or commodity instruments for trading purposes, and the use of these instruments is subject to strict approvals by senior officers. Typically, the use of derivative instruments is limited to interest rate swaps on the company's outstanding long-term debt. Our foreign currency exchange rate risk is limited principally to the euro and British pound. We manage our foreign exchange risk principally through invoicing our customers in the same currency as the source of our products. As a result, the company's exposure to any movement in foreign currency exchange rates is immaterial to the Consolidated Statements of Operations. At December 31, 2003, the company had a foreign currency contract that it entered into in anticipation of the funding of the January 2004 purchase of Manfred Vetter. The increase in fair market value of this contract resulted in income of $.5 million at December 31, 2003, and was included in "Other income (expense) - net" in the Consolidated Statements of Operations. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, 2003 2002 ------------------ ---- ---- Assets Current assets Cash and cash equivalents $ 8,552 $ 6,952 Receivables - net 101,859 101,494 Inventories 105,304 105,580 Other current assets 8,781 7,234 ---------- ----------- Total current assets 224,496 221,260 Property, plant and equipment - net 147,095 148,246 Goodwill - net 559,008 530,663 Intangible assets - net 19,401 19,377 Other noncurrent assets 10,739 11,504 ---------- ----------- Total assets $ 960,739 $ 931,050 ========== =========== Liabilities and Shareholders' Equity Current liabilities Trade accounts payable $ 56,252 $ 61,153 Dividends payable 4,622 4,548 Accrued expenses 54,807 42,631 ---------- ----------- Total current liabilities 115,681 108,332 Long-term debt 176,546 241,051 Other noncurrent liabilities 76,410 74,876 ---------- ----------- Total liabilities 368,637 424,259 ---------- ----------- Commitments and Contingencies (Note 5) Shareholders' equity Common stock, par value $.01 per share Shares issued and outstanding: 2003-33,075,552; 2002-32,536,166 331 325 Additional paid-in capital 198,165 182,538 Retained earnings 375,629 331,635 Minimum pension liability adjustment (12,481) (10,571) Accumulated translation adjustment 35,892 9,240 Treasury stock, at cost: 2003-89,485 shares; 2002-59,350 shares (2,903) (1,946) Unearned compensation on restricted stock (2,531) (4,430) ---------- ----------- Total shareholders' equity 592,102 506,791 ---------- ----------- Total liabilities and shareholders' equity $ 960,739 $ 931,050 ========== ===========
See Notes to Consolidated Financial Statements. IDEX Corporation 2003 Annual Report 27 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 -------------------------------- ---- ---- ---- Net sales $ 797,920 $ 742,014 $ 726,947 Cost of sales 488,600 460,576 463,225 --------- --------- ------------ Gross profit 309,320 281,438 263,722 Selling, general and administrative expenses 199,458 181,269 164,893 Goodwill amortization - - 14,165 Restructuring activity - (203) 11,226 --------- --------- ------------ Operating income 109,862 100,372 73,438 Other income (expense) - net 899 (123) 731 --------- --------- ------------ Income before interest expense and income taxes 110,761 100,249 74,169 Interest expense 14,091 16,354 20,738 --------- --------- ------------ Income before income taxes 96,670 83,895 53,431 Provision for income taxes 34,318 29,783 20,721 --------- --------- ------------ Net income $ 62,352 $ 54,112 $ 32,710 ========= ========= ============ Earnings Per Common Share Basic earnings per common share $ 1.92 $ 1.71 $ 1.08 ========= ========= ============ Diluted earnings per common share $ 1.87 $ 1.67 $ 1.05 ========= ========= ============ Share Data Basic weighted average common shares outstanding 32,530 31,669 30,222 ========= ========= ============ Diluted weighted average common shares outstanding 33,315 32,483 31,047 ========= ========= ============
See Notes to Consolidated Financial Statements. CONSOLIDATED SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MINIMUM UNREALIZED UNEARNED COMMON STOCK PENSION ACCUMULATED GAINS COMPENSATION AND ADDITIONAL RETAINED LIABILITY TRANSLATION (LOSSES) ON TREASURY ON RESTRICTED PAID-IN CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT DERIVATIVES STOCK STOCK --------------- -------- ---------- ----------- ----------- -------- ------------- Balance, December 31, 2000 $ 115,583 $ 279,907 $ (2,127) $ (10,489) $ - $ (144) $ (8,228) --------------- --------- ---------- ----------- ----------- -------- ------------- Net income 32,710 --------- Other comprehensive income, net of tax Unrealized translation adjustment 263 Cumulative effect of change in accounting principle 204 Unrealized derivative losses (344) Minimum pension adjustment 344 ---------- Other comprehensive income 344 263 (140) ---------- ----------- ----------- Comprehensive income 32,710 344 263 (140) --------- ---------- ----------- ----------- Issuance of 498,462 shares of common stock from exercise of stock options, and deferred compensation plans 9,383 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (721) Cash dividends declared - $.56 per common share outstanding (17,128) --------------- --------- ---------- ----------- ----------- -------- ------------- Balance, December 31, 2001 124,966 295,489 (1,783) (10,226) (140) (865) (6,329) --------------- --------- ---------- ----------- ----------- -------- ------------- Net income 54,112 --------- Other comprehensive income, net of tax Unrealized translation adjustment 19,466 Reversal of unrealized derivative losses 140 Minimum pension adjustment (8,788) ---------- Other comprehensive income (8,788) 19,466 140 ---------- ----------- ----------- Comprehensive income 54,112 (8,788) 19,466 140 --------- ---------- ----------- ----------- Issuance of 272,973 shares of common stock from exercise of stock options, and deferred compensation plans 7,061 Issuance of 1,500,000 shares of common stock 50,836 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (1,081) Cash dividends declared - $.56 per common share outstanding (17,966) --------------- --------- ---------- ----------- ----------- -------- ------------- Balance, December 31, 2002 182,863 331,635 (10,571) 9,240 - (1,946) (4,430) --------------- --------- ---------- ----------- ----------- -------- ------------- Net income 62,352 --------- Other comprehensive income, net of tax Unrealized translation adjustment 26,652 Minimum pension adjustment 1,910) ---------- Other comprehensive income (1,910) 26,652 ---------- ----------- Comprehensive income 62,352 (1,910) 26,652 --------- ---------- ----------- Issuance of 539,386 shares of common stock from exercise of stock options, and deferred compensation plans 15,633 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (957) Cash dividends declared - $.56 per common share outstanding (18,358) --------------- --------- ---------- ----------- ----------- -------- ------------- Balance, December 31, 2003 $ 198,496 $ 375,629 $ (12,481) $ 35,892 $ - $ (2,903) $ (2,531) =============== ========= ========== =========== =========== ======== =============
TOTAL SHAREHOLDERS' EQUITY ------------- Balance, December 31, 2000 $ 374,502 ------------- Net income 32,710 ------------- Other comprehensive income, net of tax Unrealized translation adjustment 263 Cumulative effect of change in accounting principle 204 Unrealized derivative losses (344) Minimum pension adjustment 344 ------------- Other comprehensive income 467 ------------- Comprehensive income 33,177 ------------- Issuance of 498,462 shares of common stock from exercise of stock options, and deferred compensation plans 9,383 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (721) Cash dividends declared - $.56 per common share outstanding (17,128) ------------- Balance, December 31, 2001 401,112 ------------- Net income 54,112 ------------- Other comprehensive income, net of tax Unrealized translation adjustment 19,466 Reversal of unrealized derivative losses 140 Minimum pension adjustment (8,788) ------------- Other comprehensive income 10,818 ------------- Comprehensive income 64,930 ------------- Issuance of 272,973 shares of common stock from exercise of stock options, and deferred compensation plans 7,061 Issuance of 1,500,000 shares of common stock 50,836 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (1,081) Cash dividends declared - $.56 per common share outstanding (17,966) ------------- Balance, December 31, 2002 506,791 ------------- Net income 62,352 ------------- Other comprehensive income, net of tax Unrealized translation adjustment 26,652 Minimum pension adjustment (1,910) ------------- Other comprehensive income 24,742 ------------- Comprehensive income 87,094 ------------- Issuance of 539,386 shares of common stock from exercise of stock options, and deferred compensation plans 15,633 Amortization of restricted common stock award 1,899 Restricted shares surrendered for tax withholdings (957) Cash dividends declared - $.56 per common share outstanding (18,358) ------------- Balance, December 31, 2003 $ 592,102 =============
See Notes to Consolidated Financial Statements. IDEX Corporation 2003 Annual Report 29 CONSOLIDATED CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 -------------------------------- ---- ---- ---- Cash flows from operating activities Net income $ 62,352 $ 54,112 $ 32,710 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 27,146 27,103 26,354 Amortization of goodwill and other intangible assets 430 523 15,680 Amortization of unearned compensation on restricted stock 1,899 1,899 1,899 Amortization of debt issuance expenses 580 580 364 Deferred income taxes 10,487 9,592 (152) Changes in: Receivables - net 6,867 1,006 24,008 Inventories 4,624 6,246 22,232 Trade accounts payable 211 7,025 (7,207) Accrued expenses 2,508 (310) (4,356) Other - net (5,418) 1,709 (5,319) ---------- ---------- ---------- Net cash flows from operating activities 111,686 109,485 106,213 ---------- ---------- ---------- Cash flows from investing activities Additions to property, plant and equipment (20,318) (19,335) (21,639) Acquisition of businesses (net of cash acquired) (21,954) (74,928) (132,295) Proceeds from fixed asset disposals 3,436 3,934 1,808 ---------- ---------- ---------- Net cash flows from investing activities (38,836) (90,329) (152,126) ---------- ---------- ---------- Cash flows from financing activities Borrowings under credit facilities for acquisitions 21,954 74,928 132,295 Net repayments under credit facilities (85,387) (132,195) (77,858) Net (repayments) borrowings of other long-term debt (1,686) 2,759 (3,470) Proceeds from issuance of common stock - 50,836 - Dividends paid (18,284) (17,721) (17,061) Proceeds from stock option exercises 13,176 5,755 9,001 Other - net (1,023) (1,538) (437) ---------- ---------- ---------- Net cash flows from financing activities (71,250) (17,176) 42,470 ---------- ---------- ---------- Net increase (decrease) in cash 1,600 1,980 (3,443) Cash and cash equivalents at beginning of year 6,952 4,972 8,415 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 8,552 $ 6,952 $ 4,972 ========== ========== ========== Supplemental cash flow information Cash paid for: Interest $ 13,576 $ 16,232 $ 20,818 Income taxes 18,774 21,022 23,482 Significant non-cash activities Debt acquired with acquisition of businesses - 2,136 2,931
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. SIGNIFICANT ACCOUNTING POLICIES Business IDEX Corporation ("IDEX" or the "Company") is a manufacturer of a broad range of pumps, metering products, dispensing equipment, and other engineered products sold to a diverse customer base in a variety of industries in the U.S. and internationally. Its products include industrial pumps, compressors, flow meters, injectors and valves, and related controls for use in a wide variety of process applications; precision-engineered equipment for dispensing, metering and mixing paints, hair colorants and other personal care products; refinishing equipment; centralized lubrication systems; and engineered products for industrial and commercial markets, including fire and rescue, transportation equipment, oil and gas, electronics, and communications. These activities are grouped into three business segments: Pump Products, Dispensing Equipment and Other Engineered Products. Principles of Consolidation The consolidated financial statements include the Company and its subsidiaries. Significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of estimation reflected in the financial statements are revenue recognition noncurrent assets, income taxes, contingencies and litigation, and defined benefit retirement plans. Revenue Recognition IDEX recognizes revenue from product sales when title passes and the risks of ownership have passed to the customer, based on the terms of the sale. Customary terms are FOB shipping point. The Company estimates and records provisions for sales returns, sales allowances and original warranties in the period the related products are sold, in each case based on its historical experience. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three or fewer months to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost - which includes labor, material and factory overhead - is determined on the first-in, first-out (FIFO) basis or the last-in, first-out (LIFO) basis. Generally, for other than newly introduced products, a reserve for excess inventory is recorded for inventory on hand in excess of one year of historical usage. An obsolescence reserve is recorded for inventory made obsolete by marketplace, product or engineering changes. Debt Expenses Expenses incurred in securing and issuing debt are amortized over the life of the related debt. Earnings Per Common Share Earnings per common share (EPS) are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents and unvested restricted shares (diluted) outstanding during the year. Common stock equivalents consist of stock options and deferred compensation equivalent 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:
2003 2002 2001 ---- ---- ---- Basic weighted average common shares outstanding 32,530 31,669 30,222 Dilutive effect of stock options, DCUs and unvested restricted shares 785 814 825 ------ ------ ------ Diluted weighted average common shares outstanding 33,315 32,483 31,047 ====== ====== ======
Options to purchase approximately $.9 million shares of common stock as of December 31, 2003, were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the Company's common stock and, therefore, the effect of their inclusion would be antidilutive. Stock Options The Company uses the intrinsic-value method of accounting for stock option awards as prescribed by Accounting Principles Bulletin No. 25 and, accordingly, does not recognize compensation expense for its stock option awards in the Consolidated Statements of Operations. The following table reflects pro forma net income and net income per share had the Company elected to adopt the fair value approach of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation".
2003 2002 2001 ---- ---- ---- Net income As reported $62,352 $54,112 $32,710 Pro forma 57,563 49,682 28,904 Basic EPS As reported 1.92 1.71 1.08 Pro forma 1.77 1.57 .96 Diluted EPS As reported 1.87 1.67 1.05 Pro forma 1.73 1.53 .93
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2003, 2002 and 2001, respectively: dividend yield of 1.84%, 1.54% and 1.98%; volatility of 32.6%, 34.1% and 34.2%; risk-free interest rates of 3.2%, 4.5% and 4.9%; and expected lives of 5.5 years. Depreciation and Amortization Depreciation is recorded using the straight-line method. The estimated useful lives used in the computation of depreciation of tangible assets are as follows: Land improvements ................................ 10 to 12 years Buildings and improvements ....................... 3 to 30 years Machinery and equipment and engineering drawings .................... 3 to 12 years Office and transportation equipment .............. 3 to 10 years
Certain identifiable intangible assets are amortized over their estimated useful lives using the straight-line method. Cost in excess of net assets acquired was amortized over a period of 30 to 40 years for periods prior to 2002 (see Note 2). The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation or amortization period or to the unamortized balance is warranted. This evaluation is based on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are used. IDEX Corporation 2003 Annual Report 31 Research and Development Expenditures Costs associated with research and development are expensed in the year incurred and included in "Cost of sales". Research and development expenses - which include costs associated with developing new products and major improvements to existing products - were $17,261, $12,738 and $10,127 in 2003, 2002 and 2001, respectively. Foreign Currency Translation The functional currency of all operations outside the United States is the respective local currency. All foreign currency balance sheet accounts have been translated using the exchange rates in effect as of the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from changes in exchange rates from year to year have been reported in "Accumulated translation adjustment" in the Consolidated Balance Sheet. The effect on the Consolidated Statements of Operations of transaction gains and losses is insignificant for all years presented. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and trade receivables and payables, approximate their fair values. Concentration of Credit Risk IDEX is not overly dependent on a single customer, the largest of which accounted for about 2% of the Company's net sales for all years presented. Reclassifications Certain amounts in the prior years' financial statements have been reclassified to conform to the current year presentation. New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted this interpretation effective January 1, 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which was revised in December 2003. This interpretation addresses consolidation requirements of variable interest entities. The effective date for the Company will be March 31, 2004. The Company does not expect that this interpretation will have a material impact on its results of operations, financial condition, or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company adopted this SFAS effective September 30, 2003. This SFAS had no impact on the Company's results of operations, financial condition, or cash flows. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This revised SFAS modifies the financial statement disclosures for defined benefit plans. These modifications increase disclosure of plan assets, benefit obligations, cash flows, benefit costs and other related information. The implementation of SFAS No. 132 (Revised) was effective for the Company on December 31, 2003. The Company has included SFAS No. 132 (Revised) disclosures in Note 14 of the Notes to Consolidated Financial Statements. 2. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the year ended December 31, 2003, by business group, were as follows:
OTHER PUMP DISPENSING ENGINEERED PRODUCTS EQUIPMENT PRODUCTS TOTAL --------- ---------- ---------- --------- Balance as of December 31, 2002 $ 323,881 $ 113,504 $ 93,278 $ 530,663 Goodwill acquired during the year 11,484 - - 11,484 Goodwill related to sale of business - - (383) (383) Foreign currency translation 2,927 11,783 2,534 17,244 --------- ---------- ---------- --------- Balance as of December 31, 2003 $ 338,292 $ 125,287 $ 95,429 $ 559,008 ========= ========== ========== =========
The carrying value of indentifiable intangible assets as of December 31, 2003, was $19,401, which was split between amortizable and unamortizable assets as follows:
GROSS NET CARRYING ACCUMULATED CARRYING AMOUNT AMORTIZATION AMOUNT ------ ------------ ------ Amortized intangible assets Patents $ 8,080 $ 4,078 $ 4,002 Other 993 353 640 ------------ ---------------- ----------- Total amortized intangible assets 9,073 4,431 4,642 Unamortized trademark assets 14,759 - 14,759 ------------ ---------------- ----------- Total intangible assets $ 23,832 $ 4,431 $ 19,401 ============ ================ ===========
Amortization expense in 2003 for the items listed above was $430, which is consistent with the estimated amortization expense for the next five years. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which establishes the accounting and reporting standards for goodwill and intangible assets. SFAS No. 142 also eliminated the amortization of goodwill and certain intangible assets to earnings, but instead required these assets be reviewed periodically for impairment. IDEX adopted SFAS No. 142 on January 1, 2002. After reviewing the estimated fair market values, both in the aggregate and at each individual reporting unit, no impairment to goodwill and other intangible assets was recorded as of December 31, 2003. Had the new pronouncement been adopted on January 1, 2001, IDEX's pro forma net income and EPS for 2001, compared with 2002 and 2003, would have been as follows:
2003 2002 2001 ---- ---- ---- Net income Reported net income $ 62,352 $ 54,112 $ 32,710 Goodwill amortization - - 11,175 Trademark amortization - - 258 ------------- --------------- ----------- Adjusted net income $ 62,352 $ 54,112 $ 44,143 ============= =============== =========== Basic EPS Reported net income $ 1.92 $ 1.71 $ 1.08 Goodwill amortization - - .37 Trademark amortization - - .01 ------------- --------------- ----------- Adjusted net income $ 1.92 $ 1.71 $ 1.46 ============= =============== =========== Diluted EPS Reported net income $ 1.87 $ 1.67 $ 1.05 Goodwill amortization - - .36 Trademark amortization - - .01 ------------- --------------- ----------- Adjusted net income $ 1.87 $ 1.67 $ 1.42 ============= =============== =========== Weighted average shares outstanding Basic 32,530 31,669 30,222 ============= =============== =========== Diluted 33,315 32,483 31,047 ============= =============== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 3. BALANCE SHEET COMPONENTS The components of certain balance sheet accounts at December 31, 2003 and 2002, were as follows:
2003 2002 ---- ---- Receivables Customers $101,961 $101,861 Other 3,692 2,722 -------- -------- Total 105,653 104,583 Less allowance for doubtful accounts 3,794 3,089 -------- -------- Total receivables - net $101,859 $101,494 ======== ======== Inventories Raw materials $ 38,998 $ 41,985 Work in process 13,651 11,960 Finished goods 52,655 51,635 -------- -------- Total inventories $105,304 $105,580 ======== ========
Inventories that were carried on a LIFO basis amounted to $90,812 and $91,743 at December 31, 2003 and 2002, respectively. The excess of current cost over LIFO inventory value and the impact of using the LIFO method on earnings were not material.
2003 2002 ---- ---- Property, plant and equipment, at cost Land and improvements $ 14,904 $ 12,772 Buildings and improvements 82,007 77,830 Machinery and equipment 194,181 185,288 Office and transportation equipment 76,088 65,450 Engineering drawings 3,919 4,011 Construction in progress 5,887 4,202 ---------------- ------------- Total 376,986 349,553 Less accumulated depreciation and amortization 229,891 201,307 ---------------- ------------- Total property, plant and equipment - net $ 147,095 $ 148,246 ================ ============= Goodwill Cost in excess of net assets acquired $ 642,856 $ 612,146 Less accumulated amortization 83,848 81,483 ---------------- ------------- Total goodwill - net $ 559,008 $ 530,663 ================ ============= Intangible assets Cost (at fair market value on acquisition date) $ 25,897 $ 25,415 Less accumulated amortization 6,496 6,038 ---------------- ------------- Total intangible assets - net $ 19,401 $ 19,377 ================ ============= Accrued expenses Payroll and related items $ 30,528 $ 27,802 Taxes 11,072 657 Insurance 2,308 3,447 Other 10,899 10,725 ---------------- ------------- Total accrued expenses $ 54,807 $ 42,631 ================ ============= Other noncurrent liabilities Pension and retiree medical reserves $ 41,888 $ 47,495 Deferred income taxes 31,345 24,228 Other 3,177 3,153 ---------------- ------------- Total other noncurrent liabilities $ 76,410 $ 74,876 ================ =============
4. COMMON AND PREFERRED STOCK In January 2004, the Company issued 20,000 shares of restricted stock as compensation to a key employee. These shares carry dividend and voting rights. Sales of these shares are restricted prior to the date of vesting, with half vesting four years and the remaining half vesting five years after the grant date. The restricted shares were recorded at their fair market value on the date of the grant, with a corresponding charge to shareholders' equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. During 2000, the Company issued 350,000 shares of restricted stock as compensation to a key employee. These shares carry dividend and voting rights. Sales of these shares are restricted prior to the date of vesting, occurring annually from one to five years after the grant date. The restricted shares were recorded at their fair market value on the date of the grant, with a corresponding charge to shareholders' equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. On October 20, 1998, IDEX's Board of Directors authorized the repurchase of up to 1.5 million shares of its common stock, either at market prices or on a negotiated basis as market conditions warrant. At December 31, 2003, IDEX had purchased a total of 6,500 shares under the program at a cost of approximately $144. At December 31, 2003 and 2002, the Company had 75 million shares of authorized common stock with a par value of $.01 per share and 5 million shares of preferred stock with a par value of $.01 per share authorized but unissued. 5. COMMITMENTS AND CONTINGENCIES At December 31, 2003, total future minimum rental payments under noncancelable operating leases, primarily for office facilities, warehouses and data processing equipment, were $23,631. The future minimum rental commitments for each of the next five years and thereafter are as follows: 2004 - $6,869; 2005 - $5,360; 2006 -$3,409; 2007 - $2,073; 2008 - $1,963; thereafter - $3,957. Rental expense totaled $9,238, $9,510 and $8,500 for the years ended December 31, 2003, 2002 and 2001, respectively. IDEX is a party to various legal proceedings involving employment, contractual, product liability and other matters, none of which is expected to have a material adverse effect on its results of operations, financial condition, or cash flows. 6. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION IDEX's operations have been aggregated (primarily on the basis of products, production processes, distribution methods and management organizations) into three reportable segments: Pump Products, Dispensing Equipment and Other Engineered Products. The Pump Products Group designs, produces and distributes a wide range of engineered industrial pumps, flow meters, compressors, injectors and valves, and related controls for process applications. The Dispensing Equipment Group designs, manufactures and markets precision-engineered equipment for dispensing, metering and mixing paints, hair colorants and other personal care products; refinishing equipment; and centralized lubrication systems. The Other Engineered Products Group designs, produces and distributes engineered equipment for industrial and commercial markets, including fire and rescue, transportation equipment, oil and gas, electronics, and communications. IDEX is not overly dependent on a single customer, the largest of which accounted for just over 2% of net sales in 2003. Information on IDEX's business segments is presented below, based on the nature of products and services offered. IDEX evaluates performance based on several factors, of which operating income is the primary financial measure. The accounting policies of the business segments are described in Note 1. Intersegment sales are accounted for at fair value as if the sales were to third parties. IDEX Corporation 2003 Annual Report 33
2003 2002 2001 ---- ---- ---- Net sales Pump Products External customers $ 453,703 $ 433,623 $ 424,727 Intersegment sales 2,813 3,041 2,310 ---------- ---------- ---------- Total group sales 456,516 436,664 427,037 ---------- ---------- ---------- Dispensing Equipment External customers 159,224 138,701 137,406 Intersegment sales 1 1 1 ---------- ---------- ---------- Total group sales 159,225 138,702 137,407 ---------- ---------- ---------- Other Engineered Products External customers 184,994 169,690 164,814 Intersegment sales 28 2 1 ---------- ---------- ---------- Total group sales 185,022 169,692 164,815 ---------- ---------- ---------- Intersegment elimination (2,843) (3,044) (2,312) ---------- ---------- ---------- Total net sales $ 797,920 $ 742,014 $ 726,947 ========== ========== ========== Operating income(1)(2) Pump Products $ 70,436 $ 71,945 $ 61,758 Dispensing Equipment 25,724 18,627 13,957 Other Engineered Products 32,990 25,638 25,032 Restructuring activity - 203 (11,226) Corporate office and other (19,288) (16,041) (16,083) ---------- ---------- ---------- Total operating income $ 109,862 $ 100,372 $ 73,438 ========== ========== ========== Assets Pump Products $ 551,183 $ 535,822 $ 462,275 Dispensing Equipment 203,786 192,258 180,361 Other Engineered Products 186,417 186,860 181,032 Corporate office and other 19,353 16,110 15,136 ---------- ---------- ---------- Total assets $ 960,739 $ 931,050 $ 838,804 ========== ========== ========== Depreciation and amortization(1) Pump Products $ 16,141 $ 16,913 $ 24,124 Dispensing Equipment 5,881 5,734 9,719 Other Engineered Products 5,116 4,666 7,920 Corporate office and other(3) 2,337 2,212 2,170 ---------- ---------- ---------- Total depreciation and amortization $ 29,475 $ 29,525 $ 43,933 ========== ========== ========== Capital expenditures Pump Products $ 12,887 $ 9,348 $ 10,251 Dispensing Equipment 2,967 3,651 5,129 Other Engineered Products 3,874 4,990 5,987 Corporate office and other 590 1,346 272 ---------- ---------- ---------- Total capital expenditures $ 20,318 $ 19,335 $ 21,639 ========== ========== ==========
(1) IDEX discontinued goodwill and trademark amortization as of January 1, 2002, in accordance with SFAS No. 142, as further explained in Note 2. (2) IDEX took actions in 2002 and 2001 to downsize operations to lower its cost structure, as further explained in Note 7. Group operating income in these years excluded net unallocated corporate operating expenses and restructuring activity. The restructuring activity resulted in income of $203 in 2002 and a charge of $11,226 in 2001 and were not assigned to the individual group segments. Had the Company allocated the 2002 restructuring activity, it would have been assigned to the groups as follows: Pump Products (income of $1,046), Dispensing Equipment (expense of $121) and Other Engineered Products (expense of $722). Had the Company allocated the 2001 restructuring charge, it would have been assigned to the groups as follows: Pump Products ($7,769), Dispensing Equipment ($1,894) and Other Engineered Products ($1,563). (3) Excludes amortization of debt issuance expenses. Information about the Company's operations in different geographical regions for the years ended December 31, 2003, 2002 and 2001 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.
2003 2002 2001 ---- ---- ---- Net sales U.S $441,427 $434,791 $422,084 Europe 213,905 186,466 173,747 Other countries 142,588 120,757 131,116 -------- -------- -------- Total net sales $797,920 $742,014 $726,947 ======== ======== ======== Long-lived assets U.S $523,633 $528,942 $489,734 Europe 207,308 176,948 130,280 Other countries 5,206 3,900 3,887 -------- -------- -------- Total long-lived assets $736,147 $709,790 $623,901 ======== ======== ========
7. RESTRUCTURING ACTIVITY IDEX took actions in 2002 and 2001 to downsize operations to lower its cost structure. These steps were necessary to appropriately size the Company's production capacity to match the declining levels of demand for a broad range of products. The restructuring actions affected multiple employee groups in approximately 20 locations across 11 of our operating business units. No business activities or product lines were abandoned. All costs of the restructuring actions were charged to expense and included in "Restructuring activity" in the Consolidated Statements of Operations. The restructuring charges included employee severance, fringe benefits, outplacement fees, idle facility carrying costs, lease termination costs, the loss on sale of equipment, and the loss on disposal of two manufacturing facilities owned by the Company. Determination of the restructuring charges was based on the estimated severance benefits paid to terminated employees, the net book value of surplus assets less expected proceeds, and estimated other costs. In 2002, IDEX reversed $1,531 of accrued restructuring expenses previously recorded. Of this reversal, $1,090 was attributable to the fact that the Company was able to sell one manufacturing facility for more than the value estimated at the time the restructuring plan was adopted. The restructuring activity was separately identified in the Consolidated Statements of Operations and resulted in the following activity for 2002 and 2001:
2002 2001 ---- ---- Pretax charge $ 1,328 $ 11,226 Reversal of previously recorded charges (1,531) - ------- -------- Total pretax (income) charge (203) 11,226 Provision (benefit) for income taxes 72 (4,154) ------- -------- Total (income) charge after taxes $ (131) $ 7,072 ======= ========
The Consolidated Balance Sheets at December 31, 2002 and 2001, included accrued restructuring costs of $480 and $5,479, respectively, in "Accrued expenses". The cash requirements for the restructuring plans did not have a significant impact on the Company's liquidity. The restructuring actions resulted in the layoff of 508 employees, both hourly and salaried, across 11 business units, representing approximately 12% of our labor force. The restructurings led to 27 and 481 employee terminations in 2002 and 2001, respectively. As of December 31, 2003, all planned employee terminations have been completed. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 8. STOCK OPTIONS Under various plans, the Company may grant stock options to employees and non-employee directors at exercise prices equal to or exceeding the market price at the date of grant. Therefore, no compensation cost has been recognized in the Consolidated Statements of Operations for these plans. Substantially all of the options become exercisable in five equal installments, beginning one year from the date of grant, and generally expire 10 years from the date of grant. The Company may grant additional options for up to 1.3 million shares. The following table summarizes option activity under the plans:
WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICE UNDER OPTION PER SHARE ------------ --------- Outstanding at December 31, 2000 3,253,459 $ 25.10 Granted 796,650 28.33 Exercised (886,367) 21.09 Forfeited (169,900) 29.08 --------------- --------------- Outstanding at December 31, 2001 2,993,842 26.92 Granted 866,440 36.72 Exercised (345,945) 24.71 Forfeited (184,775) 30.95 --------------- --------------- Outstanding at December 31, 2002 3,329,562 29.48 Granted 1,007,325 30.54 Exercised (542,600) 25.41 Forfeited (189,454) 32.20 --------------- --------------- Outstanding at December 31, 2003 3,604,833 $ 30.24 =============== =============== Exercisable at December 31, 2001 1,256,382 $ 25.27 =============== =============== Exercisable at December 31, 2002 1,428,916 $ 26.49 =============== =============== Exercisable at December 31, 2003 1,539,935 $ 28.71 =============== ===============
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR ENDED: December 31, 2001 $ 9.30 =============== December 31, 2002 $ 12.49 =============== December 31, 2003 $ 8.85 ===============
The following table summarizes information about options outstanding at December 31, 2003:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER LIFE OF EXERCISE NUMBER EXERCISE PRICES OUTSTANDING CONTRACT PRICE EXERCISABLE PRICE ------ ----------- -------- ----- ----------- ----- $15.50 - 25.00 409,246 3.7 years $23.18 371,338 $23.02 25.01 - 30.00 2,206,872 7.6 years 28.50 766,069 27.73 30.01 - 39.45 988,715 7.5 years 37.06 402,528 35.82 ----------- --------- ------ --------- ------ TOTAL 3,604,833 7.1 years $30.24 1,539,935 $28.71 =========== ========= ====== ========= ======
9. DEBT Debt at December 31, 2003 and 2002 consisted of the following:
2003 2002 ---- ---- Long-term debt Senior Notes $150,000 $150,000 Bank credit facilities, including accrued interest 18,009 81,507 Other long-term debt 8,537 9,544 -------- -------- Total long-term debt $176,546 $241,051 ======== ========
In February 1998, the Company sold $150 million of Senior Notes due February 15, 2008 (Senior Notes), with a coupon interest rate of 6.875% and an effective rate of 6.919% to maturity. Interest is payable semiannually. The Senior Notes are redeemable at any time at the option of the Company in whole or in part. At December 31, 2003, the fair market value of the Senior Notes was approximately $228 million, based on the quoted market price. The Company has a $300 million domestic multi-currency bank revolving credit facility (Credit Facility), which expires June 8, 2006. At December 31, 2003, the Company had a total of $14 million drawn under the Credit Facility and outstanding letters of credit totaling $4 million. The net available borrowings under the Credit Facility as of December 31, 2003, were approximately $282 million. Interest on the outstanding borrowings under the Credit Facility is payable quarterly at a rate based on the bank agent's reference rate or, at the Company's election, at a rate based on LIBOR plus 57.5 basis points per annum. A utilization fee is added to the interest rate. The weighted average interest rate on borrowings outstanding under the Credit Facility was 3.2% per annum at December 31, 2003. A facility fee equal to 17.5 basis points per annum is payable quarterly on the total amount available under the Credit Facility. The Company and certain of its subsidiaries entered into a renewable, one-year agreement in December 2001 (Receivables Facility) with a financial institution, under which the Company collateralized certain of its receivables for borrowings. This agreement was renewed in December 2003 for another year. The Receivables Facility provides for borrowings of up to $25 million depending upon the level of eligible receivables. At December 31, 2003, there were no borrowings outstanding under the Receivables Facility. The Company has a $30 million demand line of credit (Short-Term Facility), which expires May 21, 2004. Borrowings under the Short-Term Facility are based on LIBOR plus the applicable margin in effect under the Credit Facility. At December 31, 2003, there were no borrowings under the Short-Term Facility. At December 31, 2003, other long-term debt included debt acquired in connection with recent acquisitions and other debt at international locations maintained for working capital purposes. Interest is payable on the outstanding balances at rates ranging from 2.8% to 4.9% per annum. Total debt outstanding at December 31, 2003 and 2002 included accrued interest of $4.0 million and $4.1 million, respectively. IDEX Corporation 2003 Annual Report 35 The indenture for the Senior Notes permits the payment of cash dividends only to the extent that no default exists under the notes, and limits the amount of cash dividends in accordance with specified formulas. At December 31, 2003, under the most restrictive of these provisions, the Company had approximately $154.3 million available for the payment of cash dividends in 2004. 10. ACQUISITIONS In January 2004, the Company acquired Manfred Vetter GmbH, based in Zulpich, Germany. Vetter is a world leader in the design and manufacture of pneumatic lifting and sealing bags for vehicle and air rescue, environmental protection, industrial maintenance, and disaster recovery and control. Vetter is operated as part of Hale Products. In 2003, the Company acquired Sponsler Co., Inc. (June 2003) and Classic Engineering, Inc. (September 2003). Both companies are operated as part of the Pump Products Group. Sponsler, headquartered in Westminster, South Carolina, is a manufacturer of precision turbine flow meters to meet all flow applications, including low-flow and situations where viscosity, corrosive media, extreme temperature or hazardous materials are factors. Classic Engineering, Inc., headquartered in Jacksonville, Florida, is a supplier of fully integrated pump and metering systems to chemical companies and municipal water treatment facilities. It also engineers, designs and manufactures standard and custom chemical-feed systems for the water, wastewater, chemical OEM, pulp and paper, cement and general industrial markets. Classic is operated as part of Pulsafeeder, while Sponsler is operated as part of Liquid Controls. IDEX acquired Sponsler and Classic for a purchase price of $10,251 and $3,703, respectively, with financing provided by borrowings under the Credit Facility. Goodwill and intangible assets recognized as part of these aquisitions was $11,484 and $373, respectively. In February 2003, an $8.0 million payment of deferred consideration was made in connection with the Rheodyne acquisition that was consummated in July 2002. In 2002, the Company acquired Halox Technologies, Inc. (April 2002), Rheodyne, L.P. (July 2002) and Wrightech Corporation (October 2002). All are operated as part of the Pump Products Group. Halox, headquartered in Bridgeport, Connecticut, is a manufacturer of point-of-use chlorine dioxide equipment. Its products generate chlorine dioxide for use in water treatment and disinfectant applications. Rheodyne, headquartered in Rohnert Park, California, is a manufacturer of injectors, valves, fittings and accessories for the analytical instrumentation market and used by manufacturers of high performance liquid chromatography equipment. Wrightech, headquartered in Waukesha, Wisconsin, is a manufacturer of stainless-steel positive displacement circumferential piston pumps and replacement parts for the sanitary pump market. Wrightech is operated as part of Viking Pump, while Halox is operated as part of Pulsafeeder. Rheodyne became IDEX's 12th stand-alone business unit, with its activities being closely coordinated with those of ISMATEC, Micropump and Trebor. IDEX acquired the above businesses for an aggregate purchase price of $74,928, with financing provided by borrowings under the Credit Facility. The Company also acquired $2,136 of debt in connection with the acquisitions. Goodwill and intangible assets recognized as part of these acquisitions was $62,370 and $6,431, respectively. In addition, in certain instances, the acquisitions contain purchase price contingencies, which are considered to be immaterial to the Company. In 2001, IDEX completed the acquisitions of Liquid Controls L.L.C. (January 2001), Class 1, Inc. (January 2001) and Versa-Matic Tool Inc. (June 2001). Liquid Controls and Versa-Matic are operated as part of the Pump Products Group, while Class 1 is operated as part of the Other Engineered Products Group. Liquid Controls, headquartered in Lake Bluff, Illinois, is a leading manufacturer of positive displacement flow meters, electronic registration and process control systems. Class 1, headquartered in Ocala, Florida, is a leading manufacturer of electronic and mechanical components and systems for the specialty vehicle market. Versa-Matic, headquartered in Export, Pennsylvania, is a leading manufacturer and distributor of air-operated double-diaphragm pumps and pump replacement parts. IDEX acquired these businesses for an aggregate purchase price of $132,295, with financing provided by borrowings under the Credit Facility. The Company also acquired $2,931 of debt in connection with the acquisitions. Goodwill and intangible assets recognized as part of these acquisitions was $94,320 and $1,061, respectively. Goodwill of $67,782 and intangible assets of $740 were assigned to the Pump Products Group, while goodwill of $26,538 and intangible assets of $321 were assigned to the Other Engineered Products Group. All acquisitions were accounted for as purchases, and operating results include the acquisitions from the dates of purchase. The Company does not consider any of the acquisitions to be material to its results of operations, financial condition, or cash flows for any of the years noted. 11. COMPREHENSIVE INCOME The tax effects of the components of other comprehensive income for 2003, 2002 and 2001 follow:
2003 2002 2001 ---- ---- ---- Minimum pension adjustment Pretax amount $ (2,864) $ (13,732) $ 640 Tax benefit (provision) 954 4,944 (296) ------------ ------------ ------------ Aftertax amount $ (1,910) $ (8,788) $ 344 ============ ============ ============ Unrealized translation adjustment Pretax amount $ 26,652 $ 19,466 $ 263 Tax provision - - - ------------ ------------ ------------ Aftertax amount $ 26,652 $ 19,466 $ 263 ============ ============ ============ Unrealized gains (losses) on derivatives Cumulative effect of change in accounting principles $ - $ - $ 329 Derivatives - 226 (555) ------------ ------------ ------------ Pretax amount - 226 (226) Tax (provision) benefit - (86) 86 ------------ ------------ ------------ Aftertax amount $ - $ 140 $ (140) ============ ============ ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 12. INCOME TAXES Pretax income for the years ended December 31, 2003, 2002, and 2001, was taxed under the following jurisdictions:
2003 2002 2001 ---- ---- ---- Domestic $ 66,402 $ 58,087 $ 29,882 Foreign 30,268 25,808 23,549 -------------- ------------- -------- Total $ 96,670 $ 83,895 $ 53,431 ============== ============= ========
The provision for income taxes for the years ended December 31, 2003, 2002, and 2001, was as follows:
2003 2002 2001 ---- ---- ---- Current U.S. $ 13,000 $ 12,891 $ 12,775 State and local 738 448 1,178 Foreign 10,093 6,852 6,920 -------------- ------------- -------- Total current 23,831 20,191 20,873 -------------- ------------- -------- Deferred U.S. 6,954 6,934 (1,747) State and local 779 - (150) Foreign 2,754 2,658 1,745 -------------- ------------- -------- Total deferred 10,487 9,592 (152) -------------- ------------- -------- Total provision for income taxes $ 34,318 $ 29,783 $ 20,721 ============== ============= ========
Deferred (prepaid) income taxes resulted from the following:
2003 2002 2001 ---- ---- ---- Employee and retiree benefit plans $ 5,046 $ (59) $ (903) Depreciation and amortization 8,334 6,603 4,364 Inventories (785) (285) (2,263) Allowances and accruals (1,557) 3,560 (1,808) Other (551) (227) 458 -------------- ------------- ----------- Total deferred (prepaid) $ 10,487 $ 9,592 $ (152) ============== ============= ===========
Deferred tax assets (liabilities) related to the following at December 31, 2003 and 2002:
2003 2002 ---- ---- Employee and retiree benefit plans $ 11,144 $ 13,762 Depreciation and amortization (55,776) (43,328) Inventories (4,456) (4,764) Tax benefit carry forwards 872 2,575 Allowances and accruals 4,922 3,789 Other 2,512 2,061 ------------- ----------- Total $ (40,782) $ (25,905) ============= ===========
The balance sheet at December 31, 2003, included a current deferred tax liability of $9,437 in accrued expenses and a noncurrent deferred tax liability of $31,345 in other noncurrent liabilities. The balance sheet at December 31, 2002, included a current deferred tax liability of $1,677 in accrued expenses and a noncurrent deferred tax liability of $24,228 in other noncurrent liabilities. The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to pretax income. The computed amount and the differences for the years ended December 31, 2003, 2002, and 2001, were as follows:
2003 2002 2001 ---- ---- ---- Pretax income $ 96,670 $ 83,895 $ 53,431 ======== ======== ======== Provision for income taxes: Computed amount at statutory rate of 35% $ 33,835 $ 29,363 $ 18,701 State and local income tax (net of federal tax benefit) 986 291 668 Taxes on non-US earnings-net 960 674 (536) Amortization of cost in excess of net assets acquired - - 2,197 Foreign sales corporation (945) (1,260) (858) Other (518) 715 549 -------- -------- -------- Total provision for income taxes $ 34,318 $ 29,783 $ 20,721 ======== ======== ========
No provision has been made for U.S. or additional foreign taxes on $50,630 of undistributed earnings of foreign subsidiaries, which are permanently reinvested. It is not practical to estimate the amount of additional tax that might be payable if these earnings were repatriated. However, the Company believes that U.S. foreign tax credits would, for the most part, eliminate any additional U.S. tax and offset any additional foreign tax. 13. DERIVATIVE INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", requires that derivative financial instruments be recognized in the financial statements at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity as a component of comprehensive income, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS No. 133 in 2001 initially increased comprehensive income by $204 in Consolidated Shareholders' Equity. At December 31, 2003, the Company had a foreign currency contract, which it entered into in anticipation of the funding of the January 2004 purchase of Manfred Vetter. The increase in fair market value of this contract resulted in income of $.5 million at December 31, 2003 and was included in "Other income (expense) - net" in the Consolidated Statements of Operations. At December 31, 2001, the Company had two interest rate swaps, which effectively converted $52.3 million of floating rate debt into fixed rate debt at interest rates approximating 5.6%. The fair market value of the interest rate swaps was a net expense of $140 at December 31, 2001, as reported in other comprehensive income. Both of the interest rate swaps expired in March 2002. Fair values relating to derivative financial instruments reflect the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, based on quoted market prices of comparable contracts. The net gain or loss on the interest rate swap contracts was not material. IDEX Corporation 2003 Annual Report 37 14. RETIREMENT BENEFITS The Company sponsors several qualified and nonqualified pension plans and other postretirement plans for its employees. The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets over the two-year period ended December 31, 2003, and a statement of the funded status at December 31 for both years:
PENSION BENEFITS OTHER BENEFITS 2003 2002 2003 2002 ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION Obligation at January 1 $ 71,968 $ 58,914 $ 16,188 $ 14,171 Service cost 3,765 3,486 330 346 Interest cost 4,703 4,209 1,066 1,054 Plan amendments (15) 407 - - Benefits paid (5,374) (3,854) (510) (480) Actuarial loss 9,470 8,806 1,583 1,097 -------- -------- -------- -------- Obligation at December 31 $ 84,517 $ 71,968 $ 18,657 $ 16,188 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 $ 38,764 $ 44,402 $ - $ - Actual return on plan assets 7,668 (5,387) - - Employer contributions 20,444 3,019 510 480 Benefits paid (5,374) (3,854) (510) (480) Other 746 584 - - -------- -------- -------- -------- Fair value of plan assets at December 31 $ 62,248 $ 38,764 $ - $ - ======== ======== ======== ======== FUNDED STATUS Funded status at December 31 $(22,269) $(33,204) $(18,657) $(16,188) Unrecognized loss 29,354 28,313 3,619 2,127 Unrecognized transition obligation 287 321 - - Unrecognized prior service cost 2,411 2,798 (533) (564) -------- -------- -------- -------- Net amount recognized at December 31 $ 9,783 $ (1,772) $(15,571) $(14,625) ======== ======== ======== ======== RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS Prepaid benefit cost $ 5,433 $ 4,707 $ - $ - Accrued benefit liability 16,764 (25,085) (15,571) (14,625) Intangible asset 1,712 2,069 - - Accumulated other comprehensive income 19,402 16,537 - - -------- -------- -------- -------- Net amount recognized at December 31 $ 9,783 $ (1,772) $(15,571) $(14,625) ======== ======== ======== ========
The accumulated benefit obligation for all defined benefit pension plans was $77,611 and $63,205 at December 31, 2003 and 2002, 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 $67,847, $62,073 and $45,309, respectively, at December 31, 2003, and $62,654, $54,140 and $29,055, respectively, at December 31, 2002. The assumptions used in the measurement of the Company's benefit obligation at December 31, 2003 and 2002, were as follows:
U.S. PLANS NON-U.S. PLANS 2003 2002 2003 2002 ---- ---- ---- ---- Discount rate 6.00% 6.75% 5.50% 5.75% Expected return on plan assets 8.50% 9.00% 6.50% 6.50% Rate of compensation increase 4.00% 4.00% 4.25% 3.75%
The discount rate assumption for benefits other than pension benefit plans was 6.00% and 6.75% at December 31, 2003 and 2002, respectively. To develop the expected rate of return on plan assets, the Company considered the historical returns and the future expectations for returns on each asset class, as well as the target asset allocation of the pension portfolio. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The following tables provide the components of, and the assumptions used to determine, the net periodic benefit cost for the plans in 2003, 2002, and 2001:
PENSION BENEFITS OTHER BENEFITS 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Service cost $ 3,765 $ 3,486 $ 3,160 $ 330 $ 346 $ 317 Interest cost 4,703 4,209 3,991 1,066 1,054 1,155 Expected return on plan assets (3,449) (3,903) (4,248) - - - Net amortization 3,216 848 475 (31) (29) 28 ------- ------- ------- ------- ------- ------ Net periodic benefit cost $ 8,235 $ 4,640 $ 3,378 $ 1,365 $ 1,371 $1,500 ======= ======= ======= ======= ======= ======
U.S. PLANS NON-U.S. PLANS 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Discount rate 6.75% 7.50% 8.00% 5.75% 6.00% 6.00% Expected return on plan assets 8.50% 9.00% 9.00% 6.50% 7.50% 7.00% Rate of compensation increase 4.00% 4.00% 4.00% 3.75% 4.00% 4.50%
The discount rate assumption used to determine the net periodic benefit cost for benefits other than pension benefit plans was 6.75%, 7.50% and 8.00% in 2003, 2002 and 2001, respectively. Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market value of assets are amortized over the average remaining service period of active participants. Contributions to bargaining unit-sponsored multiemployer plans and defined contribution plans were $6,756, $6,607 and $6,292 for 2003, 2002 and 2001, respectively. For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually each year to a rate of 6% for 2008, and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% increase in the assumed health care cost trend rates would increase the service and interest cost components of the net periodic benefit cost by $137 and the health care component of the accumulated postretirement benefit obligation by $1,711. A 1% decrease in the assumed health care cost trend rate would decrease the service and interest cost components of the net periodic benefit cost by $116 and the health care component of the accumulated postretirement benefit obligation by $1,463. The provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Act) have not been taken into account in the determination of IDEX's accumulated postretirement benefit obligation or net periodic benefit cost, pending further guidance on the accounting for the federal subsidy. The Company does not expect that the effects of the Act will have a material impact on its results of operations, financial condition, or cash flows. Plan Assets The Company's pension plan weighted-average asset allocations at December 31, 2003, and 2002, by asset category, were as follows:
2003 2002 ---- ---- Equity securities 68% 54% Debt securities 31 39 Other 1 7 --- --- Total 100% 100% === ===
The investment objectives of its plan assets are to earn the highest possible rate of return consistent with the tolerance for risk as determined periodically by IDEX in its role as a fiduciary. The general guidelines of asset allocation of fund assets are that equities will represent from 55% to 75% of the market value of total fund assets with a target of 64%, and fixed income obligations, including cash, will represent from 25% to 45% with a target of 36%. 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. As of December 31, 2003 and 2002, there were no shares of the Company's stock held in plan assets. Cash Flows The Company expects to contribute approximately $9.0 million to its pension plans and $.7 million to its other postretirement benefit plans in 2004. 15. QUARTERLY RESULTS OF OPERATIONS The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2003 and 2002:
2003 QUARTERS FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Net sales $195,498 $207,147 $197,314 $197,961 Gross profit 74,303 82,123 76,178 76,716 Operating income 23,401 29,557 28,943 27,961 Net income 12,695 16,943 16,509 16,205 Basic EPS $ .39 $ .52 $ .51 $ .49 Basic weighted average shares outstanding 32,291 32,384 32,661 32,785 Diluted EPS $ .39 $ .51 $ .49 $ .48 Diluted weighted average shares outstanding 32,805 33,131 33,640 33,826
2003 QUARTERS FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Net sales $174,936 $190,430 $189,105 $187,543 Gross profit 65,425 74,138 71,614 70,261 Operating income 22,506 28,160 26,945 22,761 Net income 11,545 15,610 14,786 12,171 Basic EPS $ .38 $ .49 $ .46 $ .38 Basic weighted average shares outstanding 30,513 31,668 32,245 32,252 Diluted EPS $ .37 $ .48 $ .45 $ .37 Diluted weighted average shares outstanding 31,544 32,653 32,883 32,893
During the second and fourth quarters of 2002, IDEX took actions to downsize its operations to reflect lower levels of activity. As a result, the Company recorded a charge of $107 and income of $310 in the second and fourth quarters of 2002, respectively, related to the restructuring activity. See Note 7 for additional details. IDEX Corporation 2003 Annual Report 39 REPORTS INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of IDEX Corporation We have audited the accompanying consolidated balance sheets of IDEX Corporation and its subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, consolidated shareholders' equity, and consolidated cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 the Company and its subsidiaries at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the Consolidated Financial Statements, in 2002 the Company changed its method of accounting for goodwill and intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois January 22, 2004 MANAGEMENT REPORT IDEX Corporation's management is responsible for the fair presentation and consistency of all financial data included in this Annual Report in accordance with accounting principles generally accepted in the United States of America. Where necessary, the data reflect management's best estimates and judgments. Management also is responsible for maintaining a system of internal control with the objectives of providing reasonable assurance that IDEX's assets are safeguarded against material loss from unauthorized use or disposition, and that authorized transactions are properly recorded to permit the preparation of accurate financial data. Cost benefit judgments are an important consideration in this regard. The effectiveness of internal control is maintained by personnel selection and training, division of responsibilities, establishment and communication of policies, and ongoing internal review programs and audits. Management believes that IDEX's system of internal control as of December 31, 2003, is effective and adequate to accomplish the above described objectives. /s/ Dennis K. Williams Dennis K. Williams Chairman of the Board, President and Chief Executive Officer /s/ Wayne P. Sayatovic Wayne P. Sayatovic Senior Vice President - Finance and Chief Financial Officer Northbrook, Illinois January 22, 2004