EX-13 5 c02997exv13.txt PORTIONS OF 2005 ANNNUAL REPORT TO SHAREHOLDERS Exhibit 13 IDEX CORPORATION 2005 ANNUAL REPORT Historical Data(1) (dollars in thousands except per share amounts)
2005 2004 2003 2002 2001 ---------- ---------- -------- -------- -------- RESULTS OF OPERATIONS Net sales $1,043,275 $ 928,297 $797,920 $742,014 $726,947 Gross profit 423,844 370,795 309,320 281,438 263,722 SG&A expenses 241,057 221,411 199,458 181,269 164,893 Goodwill amortization -- -- -- -- 14,165 Restructuring activity -- -- -- (203) 11,226 Operating income 182,787 149,384 109,862 100,372 73,438 Other income (expense)--net 564 (743) 899 (123) 731 Interest expense 14,423 14,764 14,091 16,354 20,738 Provision for income taxes 59,125 47,471 34,318 29,783 20,721 Income from continuing operations 109,803 86,406 62,352 54,112 32,710 Income from discontinued operations -- -- -- -- -- Extraordinary items -- -- -- -- -- Net income 109,803 86,406 62,352 54,112 32,710 FINANCIAL POSITION Current assets $ 347,501 $ 261,238 $224,496 $221,260 $214,903 Current liabilities 153,296 148,255 115,681 108,332 87,338 Working capital 194,205 112,983 108,815 112,928 127,565 Current ratio 2.3 1.8 1.9 2.0 2.5 Capital expenditures 22,994 21,097 20,318 19,335 21,639 Depreciation and amortization 30,651 31,529 30,055 30,105 44,297 Total assets 1,244,180 1,186,292 960,739 931,050 838,804 Total borrowings 160,043 225,317 176,546 241,051 291,820 Shareholders' equity 823,010 713,605 592,102 506,791 401,112 PERFORMANCE MEASURES Percent of net sales Gross profit 40.6% 40.0% 38.8% 37.9% 36.3% SG&A expenses 23.1 23.9 25.0 24.4 22.7 Goodwill amortization -- -- -- -- 1.9 Restructuring activity -- -- -- -- 1.5 Operating income 17.5 16.1 13.8 13.5 10.1 Income before income taxes 16.2 14.4 12.1 11.3 7.4 Income from continuing operations 10.5 9.3 7.8 7.3 4.5 Effective tax rate 35.0 35.5 35.5 35.5 38.8 Net income return on average assets 9.0 8.0 6.6 6.1 4.1 Borrowings as a percent of capitalization 16.3 24.0 23.0 32.2 42.1 Net income return on average shareholders' 14.3 13.2 11.3 11.9 8.4 equity PER SHARE DATA(2) Basic--income from continuing operations $ 2.14 $ 1.73 $ 1.28 $ 1.14 $ .72 --net income 2.14 1.73 1.28 1.14 .72 Diluted--income from continuing operations 2.08 1.68 1.25 1.11 .70 --net income 2.08 1.68 1.25 1.11 .70 Cash dividends declared .48 .45 .37 .37 .37 Shareholders' equity 15.59 14.04 11.97 10.40 8.70 Stock price--high 45.33 40.96 28.25 26.44 24.80 --low 36.50 26.53 17.35 17.13 16.60 --close 41.11 40.50 27.73 21.80 23.00 Price/earnings ratio at year end 20 24 22 20 33 OTHER DATA(2) Employees at year end 4,263 4,232 3,689 3,863 3,873 Shareholders at year end 6,700 6,000 5,700 4,700 5,500 Shares outstanding (in 000s): Weighted average--basic 51,392 50,073 48,795 47,504 45,333 --diluted 52,720 51,348 49,973 48,725 46,571 At year end (net of treasury) 52,794 50,821 49,479 48,716 46,101
(1) See Notes to Consolidated Financial Statements for additional detail. (2) All share and per share data have been restated to reflect the three-for-two stock splits effected in the form of 50% stock dividends in January 1995 and 1997, and May 2004. 16 IDEX CORPORATION 2005 ANNUAL REPORT
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- $704,276 $655,041 $640,131 $552,163 $474,699 277,952 256,484 252,846 222,357 187,074 149,639 140,495 132,627 110,588 93,217 11,797 11,312 10,676 8,174 6,241 -- -- -- -- -- 116,516 104,677 109,543 103,595 87,616 1,031 568 479 (693) (696) 16,521 18,020 22,359 18,398 17,476 37,581 32,797 33,267 31,029 25,020 63,445 54,428 54,396 53,475 44,424 -- -- 10,182 5,151 5,774 -- -- (2,514) -- -- 63,445 54,428 62,064 58,626 50,198 $232,089 $213,715 $195,900 $197,267 $191,599 177,811 91,634 80,265 77,801 83,286 54,278 122,081 115,635 119,466 108,313 1.3 2.3 2.4 2.5 2.3 20,739 18,338 20,763 13,562 11,634 36,704 34,835 33,575 24,943 21,312 758,854 738,567 695,811 599,193 569,745 241,886 268,589 283,410 258,417 271,709 374,502 329,024 286,037 238,671 195,509 39.5% 39.2% 39.5% 40.3% 39.4% 21.2 21.4 20.7 20.0 19.6 1.7 1.7 1.7 1.5 1.3 -- -- -- -- -- 16.5 16.0 17.1 18.8 18.5 14.3 13.3 13.7 15.3 14.6 9.0 8.3 8.5 9.7 9.4 37.2 37.6 37.9 36.7 36.0 8.5 7.6 9.6 10.0 9.8 39.2 44.9 49.8 52.0 58.2 18.0 17.7 23.7 27.0 29.0 $ 1.42 $ 1.23 $ 1.23 $ 1.22 $ 1.03 1.42 1.23 1.41 1.34 1.16 1.38 1.21 1.21 1.19 .99 1.38 1.21 1.38 1.30 1.13 .37 .37 .36 .33 .29 8.25 7.40 6.47 5.44 4.51 24.00 22.75 25.83 24.46 18.42 15.17 14.42 13.00 15.50 13.25 22.09 20.25 16.33 23.25 17.75 16 17 14 20 16 3,880 3,773 3,803 3,326 3,093 5,200 5,600 7,000 7,000 6,100 44,589 44,316 43,998 43,776 43,227 45,948 45,128 45,078 44,999 44,669 45,387 44,454 44,199 43,875 43,389
Net Sales (in millions) (BAR GRAPH)
Net Sales --------- 2005 $1,043,275 2004 $ 928,297 2003 $ 797,920 2002 $ 742,014 2001 $ 726,947 2000 $ 704,276 1999 $ 655,041 1998 $ 640,131 1997 $ 552,163 1996 $ 474,699
Operating Margin (percent) (BAR GRAPH)
Operating Margin ---------------- 2005 17.5 2004 16.1 2003 13.8 2002 13.5 2001 10.1 2000 16.5 1999 16.0 1998 17.1 1997 18.8 1996 18.5
Diluted Earnings Per Share (dollars) (BAR GRAPH)
Diluted Earnings per Share -------------------------- 2005 $2.08 2004 $1.68 2003 $1.25 2002 $1.11 2001 $0.70 2000 $1.38 1999 $1.21 1998 $1.21 1997 $1.19 1996 $0.99
17 IDEX CORPORATION 2005 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT The "Historical Overview and Outlook" and the "Liquidity and Capital Resources" sections of this management's discussion and analysis of our operations contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These statements may relate to, among other things, capital expenditures, cost reductions, cash flow, and operating improvements and are indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "management believes," "the Company believes," "we believe," "the Company intends" and similar words or phrases. These statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from those anticipated at the date of this filing. The risks and uncertainties include, but are not limited to, the following: economic and political consequences resulting from terrorist attacks and wars; levels of industrial activity and economic conditions in the U.S. and other countries around the world; pricing pressures and other competitive factors, and levels of capital spending in certain industries-- all of which could have a material impact on our order rates and results, particularly in light of the low levels of order backlogs we typically maintain; our ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which we operate; interest rates; capacity utilization and the effect this has on costs; labor markets; market conditions and material costs; and developments with respect to contingencies, such as litigation and environmental matters. The forward-looking statements included here are only made as of the date of this report, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here. HISTORICAL OVERVIEW AND OUTLOOK IDEX Corporation (IDEX or the Company) sells a broad range of pump products, dispensing equipment and other engineered products to a diverse customer base in the United States and other countries around the world. Accordingly, our businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where our products are sold and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are among the factors that influence the demand for our products. IDEX consists of three reporting segments: Pump Products Group, Dispensing Equipment Group and Other Engineered Products Group. 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, and personal care products; refinishing equipment; and centralized lubrication systems. The Other Engineered Products Group produces firefighting pumps, valves, controls, rescue tools, lifting bags and other components and systems for the fire and rescue industry; and engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications. IDEX has a history of achieving above-average operating margins. Our operating margins have exceeded the average operating margin of the companies that comprise the Value Line Composite Index (VLCI) every year since 1988. We view the VLCI operating performance statistics as a proxy for an average industrial company. Our operating margins are influenced by, among other things, utilization of facilities as sales volumes change and inclusion of newly acquired businesses. Some of our key 2005 financial highlights were as follows: - Orders were a record $1,057.0 million, 12% higher than a year ago; base business orders--excluding 2004 acquisitions and foreign currency translation--were up 10%. - Sales of $1,043.3 million set a new record and were up 12% from last year; base business sales--excluding 2004 acquisitions and foreign currency translation--were up 10%. - Gross margins improved 60 basis points to 40.6% of sales, while operating margins at 17.5% were 140 basis points higher than 2004. - Net income rose 27% to $109.8 million. - Diluted EPS of $2.08 was 40 cents ahead of last year. - Cash flows from operating activities rose 1% and reached an all time high of $144.9 million. We are pleased with our results in 2005. Our business units again delivered--with double digit increases in orders, sales, and net income as well as strong cash flow. All three business segments generated organic sales growth and continued operating margin expansion as a result of our operational excellence and new product and market initiatives. We enter 2006 well positioned for continued growth and are using all the tools at our disposal to drive revenues, profitability and cash generation. The following forward-looking statements are qualified by the cautionary statement under the Private Securities Litigation Reform Act set forth above. 18 IDEX CORPORATION 2005 ANNUAL REPORT We expect economic conditions to remain favorable as we continue to leverage rapid process improvement to meet customer needs, drive earnings and fund innovation to support our organic growth. As a short cycle business, we are mindful that our financial performance is reliant on the current pace of incoming orders. Although we have limited visibility on future business conditions, we believe IDEX is well positioned for earnings expansion, based on our lower cost levels resulting from our operational excellence discipline, our investments in new products, applications and global markets, and our pursuit of strategic acquisitions to complement our longer-term profitable growth. RESULTS OF OPERATIONS The following is a discussion and analysis of our financial position and results of operations for each of the three years in the period ended December 31, 2005. 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 26. PERFORMANCE IN 2005 COMPARED WITH 2004 Orders, sales, net income and earnings per share were higher in 2005 compared with 2004. New orders in 2005 totaled $1,057.0 million and were 12% higher than the prior year. Excluding foreign currency translation and the impact of the three acquisitions made since the beginning of 2004 (Systec--April 2004; Scivex--May 2004 and Dinglee--July 2004), orders were 10% higher than a year ago. Sales in 2005 of $1,043.3 million were 12% higher than the $928.3 million recorded a year ago. Base business sales rose 10%, while acquisitions accounted for an improvement of 2%. Base business sales increased in all three of the Company's reporting segments. Domestic base sales were up 12% over the prior year, while base sales to international customers increased 7% in 2005. Sales to international customers represented 43% of the total, compared with 44% in 2004. In 2005, the Pump Products Group contributed 59% of sales and 54% of operating income, the Dispensing Equipment Group accounted for 18% of sales and 19% of operating income, and the Other Engineered Products Group represented 23% of sales and 27% of operating income. Pump Products Group sales of $620.7 million in 2005 increased $78.3 million, or 14%, compared with 2004. The 2004 acquisitions of Systec and Scivex accounted for a 3% sales improvement, while base business activity provided an 11% increase. In 2005, base business sales increased 12% domestically, while base international sales increased 7%. Base business sales to customers outside the U.S. were 37% of total group sales in 2005, down from 38% in 2004. Dispensing Equipment Group sales of $187.8 million increased by $17.6 million, or 10%, in 2005 compared with the prior year, due to a 9% increase in base business activity and favorable foreign currency translation of 1%. Base domestic sales increased 20% compared with 2004, while base international sales increased 2%. Base sales to customers outside the U.S. were 59% of total group sales in 2005, down from 61% in 2004. Other Engineered Products Group sales of $239.0 million increased by $20.0 million, or 9%, in 2005 compared with 2004. Base business activity drove the 9% increase in sales. In 2005, base sales increased 8% domestically, while base international sales increased 11%. Base business sales to customers outside the U.S. were 46% of total group sales in 2005, up from 39% in 2004. Gross profit of $423.8 million in 2005 was $53.0 million, or 14%, higher than 2004. As a percent of sales, gross profit was 40.6% in 2005, which represented a 60 basis point increase from 40.0% in 2004. The higher gross profit margin primarily reflects volume leverage and the Company's global sourcing and operational excellence initiatives. Selling, general and administrative (SG&A) expenses increased to $241.1 million in 2005 from $221.4 million in 2004. This increase reflects the deliberate reinvestment in the business to drive long-term growth, volume-related expenses and acquisitions. As a percent of net sales, SG&A expenses were 23.1%, an improvement of 80 basis points compared with the 23.9% achieved in 2004. Operating income increased by $33.4 million, or 22%, to $182.8 million in 2005 from $149.4 million in 2004, primarily due to higher 2005 gross profit, offset by increased SG&A expenses. Operating margins in 2005 were 17.5% of sales, an improvement of 140 basis points compared with the 16.1% achieved in 2004. In the Pump Products Group, operating income of $114.4 million and operating margin of 18.4% increased in 2005 compared with the $93.4 million and 17.2% recorded in 2004. Operating income for the Dispensing Equipment Group increased to $40.8 million in 2005 from $33.5 million last year, and operating margins improved to 21.7% from 19.7% recorded in 2004. Operating income in the Other Engineered Products Group of $56.7 million and operating margin of 23.7% increased from the $47.1 million and 21.5% achieved in 2004. The margin improvement in all three segments was mostly attributable to the improved sales volumes and other factors discussed above. 19 IDEX CORPORATION 2005 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) COMPANY AND BUSINESS GROUP FINANCIAL INFORMATION (dollars in thousands)
For the years ended December 31,(1) 2005 2004 2003 ----------------------------------- ---------- ---------- -------- PUMP PRODUCTS GROUP Net sales(2) $ 620,673 $ 542,336 $456,516 Operating income(3) 114,404 93,356 70,436 Operating margins(3) 18.4% 17.2% 15.4% Identifiable assets $ 707,614 $ 694,731 $551,183 Depreciation and amortization(4) 15,797 16,464 16,141 Capital expenditures 13,758 13,968 12,887 DISPENSING EQUIPMENT GROUP Net sales(2) $ 187,814 $ 170,198 $159,225 Operating income(3) 40,785 33,489 25,724 Operating margins(3) 21.7% 19.7% 16.2% Identifiable assets $ 205,333 $ 214,140 $203,786 Depreciation and amortization(4) 5,210 5,616 5,881 Capital expenditures 3,824 2,769 2,967 OTHER ENGINEERED PRODUCTS GROUP Net sales(2) $ 238,992 $ 219,006 $185,022 Operating income(3) 56,682 47,120 32,990 Operating margins(3) 23.7% 21.5% 17.8% Identifiable assets $ 256,622 $ 246,410 $186,417 Depreciation and amortization(4) 5,696 6,012 5,116 Capital expenditures 4,357 3,204 3,874 COMPANY Net sales $1,043,275 $ 928,297 $797,920 Operating income(3) 182,787 149,384 109,862 Operating margins(3) 17.5% 16.1% 13.8% Total assets $1,244,180 $1,186,292 $960,739 Depreciation and amortization(4) 29,965 30,949 29,475 Capital expenditures 22,994 21,097 20,318
(1) Includes acquisitions of Scivex, Inc. (May 2004), Systec, L.L.C. (April 2004), Classic Engineering, Inc. (September 2003) and Sponsler Co., Inc. (June 2003) in the Pump Products Group; and Tianjin Dinglee Machine and Motor Co., Ltd (July 2004) and Manfred Vetter GmbH (January 2004) in the Other Engineered Products Group from dates of acquisition. See Note 11 of the Notes to Consolidated Financial Statements. (2) Group net sales include intersegment sales. (3) Group operating income excludes net unallocated corporate operating expenses. (4) Depreciation and amortization includes amortization of intangible assets and unearned compensation. 20 IDEX CORPORATION 2005 ANNUAL REPORT Other income of $.6 million in 2005 was $1.3 million higher than $.7 million of expense in 2004. In 2005, we benefited from foreign currency exchange gains. Additionally, in 2004, we incurred hurricane-related costs at one of our business units as well as certain costs associated with the refinancing of our credit facility. Interest expense decreased to $14.4 million in 2005 from $14.8 million in 2004. The decrease was principally due to lower debt levels resulting from debt paydowns, partially off-set by higher interest rates. The provision for income taxes increased to $59.1 million in 2005 from $47.5 million in 2004. The effective tax rate decreased to 35.0% in 2005 from 35.5% in 2004 due to a favorable impact from foreign tax credits and the additional benefit realized from the deduction for income from qualified domestic production activity, partially offset by a reduction in research and development credits. Net income was $109.8 million, or $2.08 per share, compared with $86.4 million, or $1.68 per share, in 2004. PERFORMANCE IN 2004 COMPARED WITH 2003 Orders, sales, net income and earnings per share were higher in 2004 compared with 2003. New orders in 2004 totaled $942.4 million and were 18% higher than the prior year. Excluding the impact of the six acquisitions made since the beginning of 2003 (Sponsler-June 2003; Classic-September 2003; Vetter-January 2004; Systec-April 2004; Scivex-May 2004 and Dinglee-July 2004) and foreign currency translation, orders were 9% higher in 2004 compared with 2003. Sales in 2004 of $928.3 million were 16% higher than the $797.9 million recorded in 2003. Acquisitions and foreign currency translation accounted for an improvement of 6% and 3%, respectively, while base business sales rose 7%. Base business sales increased in all three of the Company's reporting groups. Domestic base sales were up 10% over the prior year, while base sales to international customers increased 2% in 2004. Base sales to international customers represented 43% of the total, compared with 45% in 2003. In 2004, the Pump Products Group contributed 58% of sales and 54% of operating income, the Dispensing Equipment Group accounted for 18% of sales and 19% of operating income, and the Other Engineered Products Group represented 24% of sales and 27% of operating income. Pump Products Group sales of $542.3 million in 2004 increased $85.8 million, or 19%, compared with 2003. Acquisitions and foreign currency translation accounted for an 8% and 2% sales improvement, respectively, while base business activity provided a 9% increase. In 2004, base business sales increased 12% domestically, while base international sales increased 6%. Base business sales to customers outside the U.S. were 38% of total group sales in 2004, down from 40% in 2003. Dispensing Equipment Group sales of $170.2 million increased by $11.0 million, or 7%, in 2004 compared with the prior year, due to favorable foreign currency translation of 5% and a 2% increase in base business activity. Base domestic sales increased 7% compared with 2003, while base international sales decreased 2%. Base sales to customers outside the U.S. were 61% of total group sales in 2004, down from 63% in 2003. Other Engineered Products Group sales of $219.0 million increased by $34.0 million, or 18%, in 2004 compared with 2003. Acquisitions accounted for an increase of 7%, foreign currency translation added 4% and base business activity contributed 7%. In 2004, base sales increased 13% domestically, while base international sales decreased 1%. Base business sales to customers outside the U.S. were 39% of total group sales in 2004, down from 43% in 2003. Gross profit of $370.8 million in 2004 was $61.5 million, or 20%, higher than 2003. As a percent of sales, gross profit was 40.0% in 2004, which represented a 120 basis point increase from 38.8% in 2003. The higher gross profit margin primarily reflects reduced material costs from our global sourcing and operational excellence initiatives, volume leverage, and price increases, all of which more than offset cost increases and additional expenses. SG&A expenses increased to $221.4 million in 2004 from $199.5 million in 2003. This increase was partly due to the inclusion of six acquisitions that incrementally added $10.0 million of cost. This increase also reflects the deliberate reinvestment in the business to drive organic growth as well as certain volume-related cost increases. As a percent of net sales, SG&A expenses were 23.9% in 2004, down from 25.0% in 2003. Operating income increased by $39.5 million, or 36%, to $149.4 million in 2004 from $109.9 million in 2003, primarily due to higher 2004 gross profit, offset by increased SG&A expenses. Operating margins in 2004 were 16.1% of sales, compared with 13.8% in 2003. 21 IDEX CORPORATION 2005 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In the Pump Products Group, operating income of $93.4 million and operating margin of 17.2% increased in 2004 compared with the $70.4 million and 15.4% recorded in 2003. Operating income for the Dispensing Equipment Group increased to $33.5 million in 2004 from $25.7 million last year, and operating margins improved to 19.7% from 16.2% recorded in 2003. Operating income in the Other Engineered Products Group of $47.1 million and operating margin of 21.5% increased from the $33.0 million and 17.8% achieved in 2003. The margin improvement in all three segments was mostly attributable to the improved sales volumes and other factors discussed above. Other expense of $.7 million in 2004 was $1.6 million higher than $.9 million of income in 2003. In 2004, we incurred hurricane-related costs at one of our business units as well as certain costs associated with the refinancing of our credit facility. In 2003, we benefited from a foreign currency exchange gain related to the anticipated funding of the Vetter acquisition in January 2004. Interest expense increased to $14.8 million in 2004 from $14.1 million in 2003. The increase was principally due to higher debt levels resulting from our recent acquisitions as well as a slightly higher interest rate environment. The provision for income taxes increased to $47.5 million in 2004 from $34.3 million in 2003. The effective tax rate was 35.5% for both periods. Net income was $86.4 million, or $1.68 per share, compared with $62.4 million, or $1.25 per share, in 2003. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2005, working capital was $194.2 million and our current ratio was 2.3 to 1. Cash flows from operating activities increased by $1.8 million, or 1%, to $144.9 million in 2005, mainly due to the improved operating results discussed earlier offset by an increase in working capital requirements. Cash flows from operating activities were more than adequate to fund capital expenditures of $23.0 million and $21.1 million in 2005 and 2004, respectively. Capital expenditures were generally for machinery and equipment that improved productivity, tooling to support IDEX's global sourcing initiative, business system technology and replacement of equipment and facilities. Management believes that IDEX has ample capacity in its plant and equipment to meet expected needs for future growth in the intermediate term. In 2004, the Company acquired Vetter, Systec, Scivex and Dinglee at a cost of $44.8 million, $22.4 million, $98.6 million and $4.1 million, respectively. In 2004, the Company also paid $1.1 million in settlement of a purchase price contingency related to the 2003 acquisition of Classic. These payments were financed under the Company's credit facilities. In addition to the $150.0 million of 6.875% Senior Notes (Senior Notes) due February 15, 2008, the Company also maintains a $600.0 million domestic multi-currency bank revolving credit facility (Credit Facility), which expires on December 14, 2009. With no borrowings outstanding under the Credit Facility at December 31, 2005, and outstanding letters of credit totaling $4.7 million, the maximum amount available under the Credit Facility was $595.3. million. The Credit Facility contains a covenant that limits total debt outstanding to 3.25 times operating cash flow, as defined in the agreement. Our total debt outstanding was $160.0 million at December 31, 2005, and based on the covenant, total debt outstanding was limited to $693.3 million. Interest is payable quarterly on the outstanding balance at the bank agent's reference rate or, at the Company's election, at LIBOR plus an applicable margin. The applicable margin is based on the credit rating of our Senior Notes, and can range from 27 basis points to 75 basis points. Based on the Company's BBB rating at December 31, 2005, the applicable margin was 55 basis points. We also pay an annual fee of 15 basis points on the total Credit Facility. We also have a one-year, renewable $30.0 million demand line of credit (Short-Term Facility), which expires on December 12, 2006. Borrowings under the Short-Term Facility are at LIBOR plus the applicable margin in effect under the Credit Facility. At December 31, 2005, there were no borrowings outstanding under the Short-Term Facility. We believe the Company will generate sufficient cash flow from operations for the next 12 months and over the long term to meet its operating requirements, interest on all borrowings, required debt repayments, any authorized share repurchases, planned capital expenditures, and annual dividend payments to holders of common stock. In the event that suitable businesses are available for acquisition upon terms acceptable to the Board of Directors, we may obtain all or a portion of the financing for the acquisitions through the incurrence of additional borrowings. 22 IDEX CORPORATION 2005 ANNUAL REPORT CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS Our contractual obligations and commercial commitments include rental payments under operating leases, payments under capital leases, and other long-term obligations arising in the ordinary course of business. There are no identifiable events or uncertainties, including the lowering of our credit rating that would accelerate payment or maturity of any of these commitments or obligations. The Company also has obligations with respect to its pension and postretirement medical benefit plans, which are not included in the table below. See Note 13 of the Notes to Consolidated Financial Statements. The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2005, and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings. Additional detail regarding these obligations are provided in the Notes to Consolidated Financial Statements, as referenced in the table:
Less More Payments Due than 1-3 3-5 than by Period Total 1 Year Years Years 5 Years ----------------- -------- ------- -------- ------ ------- (in thousands) Borrowings (Note 4)(1) $184,673 $13,793 $169,675 $1,074 $ 131 Operating lease commitments (Note 5) 20,250 6,699 8,309 3,441 1,801 Capital lease obligations(2) 6,362 955 1,251 1,374 2,782 Purchase obligations(3) 39,645 36,418 3,199 28 -- -------- ------- -------- ------ ------ Total contractual obligations(4) $250,930 $57,865 $182,434 $5,917 $4,714 ======== ======= ======== ====== ======
(1) Includes interest payments based on contractual terms and current interest rates for variable debt. (2) Comprised primarily of property leases. (3) Comprised primarily of inventory commitments. (4) Comprised of liabilities recorded on the balance sheet of $184,319, and obligations not recorded on the balance sheet of $66,611. CRITICAL ACCOUNTING POLICIES We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 of the Notes to Consolidated Financial Statements. Revenue recognition--We recognize revenue from product sales when title passes and the risks of ownership have passed to the customer. Our customary terms are FOB shipping point. Based on our historical experience, we estimate and record provisions for sales returns and sales allowances in the period the related products are sold. 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, 2005 balances for goodwill and intangible assets of $691.9 million and $28.6 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 reasonable- ness 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--The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities based on currently enacted tax laws. The Company's tax balances are based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Future tax authority rulings and changes in tax laws and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company. Contingencies and litigation--We are currently involved in certain legal and regulatory proceedings and, as required and where it is reasonably possible to do so, have accrued our estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future operating results for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. 23 IDEX CORPORATION 2005 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Defined benefit retirement plans--The plan obligations and related assets of defined benefit retirement plans are presented in Note 13 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 with actuaries using a number of assumptions provided by the Company. Key assumptions in measuring the plan obligations include the discount rate at which the obligations could be effectively settled and the anticipated rate of future salary increases. Key assumptions in the determination of the annual pension expense include the discount rate, the rate of salary increases, and the estimated future return on plan assets. To the extent actual amounts differ from these assumptions and estimated amounts, results could be adversely affected. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. SFAS 123R also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. See Note 1 for the pro forma effect on our net income and earnings per share of applying SFAS No. 123. SFAS 123R is effective for public companies for annual periods that begin after June 15, 2005. Accordingly, we will adopt SFAS 123R in the first quarter of 2006. The Company is still evaluating the impact of adopting this SFAS in 2006, but we anticipate an annual pre-tax expense of approximately $8.0 million, or 10 cents per diluted share, net of tax. In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on our results of operations, financial condition or cash flows. 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 $160.0 million of total debt outstanding at December 31, 2005. Approximately 6% 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. 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. As of December 31, 2005, the Company did not have any derivative instruments outstanding. 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. 24 IDEX CORPORATION 2005 ANNUAL REPORT Consolidated Balance Sheets (dollars in thousands except per share amounts)
2005 2004 ---------- ---------- As of December 31, ASSETS Current assets Cash and cash equivalents $ 77,290 $ 7,274 Receivables--net 132,544 119,567 Inventories 126,576 126,978 Other current assets 11,091 7,419 ---------- ---------- Total current assets 347,501 261,238 Property, plant and equipment--net 145,485 155,602 Goodwill 691,869 713,619 Intangible assets--net 28,615 29,545 Other noncurrent assets 30,710 26,288 ---------- ---------- Total assets $1,244,180 $1,186,292 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts payable $ 69,473 $ 71,405 Accrued expenses 74,358 70,745 Short-term borrowings 3,144 -- Dividends payable 6,321 6,105 ---------- ---------- Total current liabilities 153,296 148,255 Long-term borrowings 156,899 225,317 Other noncurrent liabilities 110,975 99,115 ---------- ---------- Total liabilities 421,170 472,687 ---------- ---------- Commitments and Contingencies (Note 5) Shareholders' equity Common stock: Authorized: 150,000,000 shares at December 31, 2005 and 75,000,000 shares at December 31, 2004, $.01 per share par value Issued: 52,857,059 shares at December 31, 2005 and 50,996,444 shares at December 31, 2004 529 510 Additional paid-in capital 290,428 234,354 Retained earnings 524,035 439,137 Minimum pension liability adjustment (5,884) (4,644) Cumulative translation adjustment 25,160 53,046 Treasury stock, at cost: 63,318 shares at December 31, 2005 and 175,650 shares at December 31, 2004 (2,361) (4,209) Unearned compensation (8,897) (4,589) ---------- ---------- Total shareholders' equity 823,010 713,605 ---------- ---------- Total liabilities and shareholders' equity $1,244,180 $1,186,292 ========== ==========
See Notes to Consolidated Financial Statements. 25 IDEX CORPORATION 2005 ANNUAL REPORT Consolidated Statements of Operations (in thousands except per share amounts)
For the years ended December 31, 2005 2004 2003 -------------------------------- ---------- -------- -------- Net sales $1,043,275 $928,297 $797,920 Cost of sales 619,431 557,502 488,600 ---------- -------- -------- Gross profit 423,844 370,795 309,320 Selling, general and administrative expenses 241,057 221,411 199,458 ---------- -------- -------- Operating income 182,787 149,384 109,862 Other income (expense)--net 564 (743) 899 ---------- -------- -------- Income before interest expense and income taxes 183,351 148,641 110,761 Interest expense 14,423 14,764 14,091 ---------- -------- -------- Income before income taxes 168,928 133,877 96,670 Provision for income taxes 59,125 47,471 34,318 ---------- -------- -------- Net income $ 109,803 $ 86,406 $ 62,352 ========== ======== ======== EARNINGS PER COMMON SHARE Basic earnings per common share $ 2.14 $ 1.73 $ 1.28 ========== ======== ======== Diluted earnings per common share $ 2.08 $ 1.68 $ 1.25 ========== ======== ======== SHARE DATA Basic weighted average common shares outstanding 51,392 50,073 48,795 ========== ======== ======== Diluted weighted average common shares outstanding 52,720 51,348 49,973 ========== ======== ========
See Notes to Consolidated Financial Statements. 26 IDEX CORPORATION 2005 ANNUAL REPORT Consolidated Statements of Shareholders' Equity (dollars in thousands except per share amounts)
Common Stock and Minimum Additional Pension Cumulative Total Paid-In Retained Liability Translation Treasury Unearned Shareholders' Capital Earnings Adjustment Adjustment Stock Compensation Equity ---------- -------- ---------- ----------- -------- ------------ ------------- Balance, December 31, 2002 $182,863 $331,635 $(10,571) $ 9,240 $(1,946) $(4,430) $ 506,791 -------- -------- -------- -------- ------- ------- --------- Net income 62,352 62,352 Other comprehensive income, net of tax Cumulative translation adjustment 26,652 26,652 Minimum pension adjustment (1,910) (1,910) --------- Other comprehensive income 24,742 --------- Comprehensive income 87,094 --------- Issuance of 809,079 shares of common stock from exercise of stock options and deferred compensation plans 15,633 15,633 Amortization of restricted common stock award 1,899 1,899 Restricted shares surrendered for tax withholdings (957) (957) Cash dividends declared--$.37 per common share outstanding (18,358) (18,358) -------- -------- -------- -------- ------- ------- --------- Balance, December 31, 2003 198,496 375,629 (12,481) 35,892 (2,903) (2,531) 592,102 -------- -------- -------- -------- ------- ------- --------- Net income 86,406 86,406 Other comprehensive income, net of tax Cumulative translation adjustment 17,154 17,154 Minimum pension adjustment 7,837 7,837 --------- Other comprehensive income 24,991 --------- Comprehensive income 111,397 --------- Issuance of 1,238,247 shares of common stock from exercise of stock options and deferred compensation plans 31,997 31,997 Issuance of 145,000 shares of restricted common stock 4,371 (4,371) -- Amortization of restricted common stock award 2,313 2,313 Restricted shares surrendered for tax withholdings (1,306) (1,306) Cash dividends declared--$.45 per common share outstanding (22,898) (22,898) -------- -------- -------- -------- ------- ------- --------- Balance, December 31, 2004 234,864 439,137 (4,644) 53,046 (4,209) (4,589) 713,605 -------- -------- -------- -------- ------- ------- --------- Net income 109,803 109,803 Other comprehensive income, net of tax Cumulative translation adjustment (27,886) (27,886) Minimum pension adjustment (1,240) (1,240) --------- Other comprehensive income (29,126) --------- Comprehensive income 80,677 --------- Issuance of 1,848,340 shares of common stock from exercise of stock options and deferred compensation plans 52,683 52,683 Issuance of 176,150 shares of restricted common stock 3,410 3,735 (7,145) -- Amortization of restricted common stock award 2,837 2,837 Restricted shares surrendered for tax withholdings (1,887) (1,887) Cash dividends declared--$.48 per common share outstanding (24,905) (24,905) -------- -------- -------- -------- ------- ------- --------- BALANCE, DECEMBER 31, 2005 $290,957 $524,035 $ (5,884) $ 25,160 $(2,361) $(8,897) $ 823,010 ======== ======== ======== ======== ======= ======= =========
See Notes to Consolidated Financial Statements. 27 IDEX CORPORATION 2005 ANNUAL REPORT Consolidated Statements of Cash Flows (in thousands)
For the years ended December 31, 2005 2004 2003 -------------------------------- -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $109,803 $ 86,406 $ 62,352 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,420 27,998 27,146 Amortization of intangible assets 708 638 430 Amortization of unearned compensation on restricted stock 2,837 2,313 1,899 Amortization of debt issuance expenses 686 580 580 Income tax benefit related to equity awards 15,234 5,624 2,061 Deferred income taxes 4,483 10,782 10,487 Changes in (net of the effect from acquisitions): Receivables (18,769) (5,953) 6,867 Inventories (3,931) (9,284) 4,624 Trade accounts payable 512 11,897 211 Accrued expenses 7,691 11,995 2,508 Other--net (786) 119 (6,900) -------- --------- -------- Net cash flows provided by operating activities 144,888 143,115 112,265 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (22,994) (21,097) (20,318) Acquisition of businesses (net of cash acquired) (1,191) (170,983) (21,954) Proceeds from fixed asset disposals 86 527 3,436 -------- --------- -------- Net cash flows used in investing activities (24,099) (191,553) (38,836) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit facilities for acquisitions -- 170,983 21,954 Net repayments under credit facilities (60,067) (124,953) (85,387) Net borrowings (repayments) of other long-term debt (1,709) 1,665 (1,686) Dividends paid (24,689) (21,415) (18,284) Proceeds from stock option exercises 37,503 22,848 13,176 Other--net (1,887) (1,148) (1,023) -------- --------- -------- Net cash flows provided by (used in) financing activities (50,849) 47,980 (71,250) -------- --------- -------- Effect of exchange rate changes on cash and cash equivalents 76 (820) (579) -------- --------- -------- Net increase (decrease) in cash 70,016 (1,278) 1,600 Cash and cash equivalents at beginning of year 7,274 8,552 6,952 -------- --------- -------- Cash and cash equivalents at end of year $ 77,290 $ 7,274 $ 8,552 ======== ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for: Interest $ 13,953 $ 14,022 $ 13,576 Income taxes 35,916 23,617 18,774 SIGNIFICANT NON-CASH ACTIVITIES Issuance of restricted stock $ 7,145 $ 4,371 --
See Notes to Consolidated Financial Statements. 28 IDEX CORPORATION 2005 ANNUAL REPORT 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, and 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 sales returns and allowances, warranties, 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. Customary terms are FOB shipping point. Based on its historical experience, the Company estimates and records provisions for sales returns and sales allowances in the period the related products are sold. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original 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. A reserve for excess inventory is recorded for inventory on hand in excess of anticipated or historical usage. An obsolescence reserve is recorded for inventory made obsolete by marketplace, product or engineering changes. DEBT EXPENSES Expenses incurred in securing and issuing debt are amortized over the life of the related debt and are included in interest expense in the Consolidated Statements of Operations. EARNINGS PER COMMON SHARE Earnings per common share (EPS) are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents and unvested restricted shares (diluted) outstanding during the year. Common stock equivalents consist of stock options and deferred compensation units (DCUs) and have been included in the calculation of weighted average shares outstanding using the treasury stock method. Basic weighted average shares outstanding reconciles to diluted weighted average shares outstanding as follows:
2005 2004 2003 ------ ------ ------ Basic weighted average common shares outstanding 51,392 50,073 48,795 Dilutive effect of stock options, DCUs and unvested restricted shares 1,328 1,275 1,178 ------ ------ ------ Diluted weighted average common shares outstanding 52,720 51,348 49,973 ====== ====== ======
Options to purchase approximately .2 and .1 million shares of common stock as of December 31, 2005 and 2004, respectively, were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the Company's common stock and, therefore, the effect of their inclusion would be antidilutive. STOCK OPTIONS The Company uses the intrinsic-value method of accounting for stock option awards as prescribed by Accounting Principles Board (APB) Opinion No. 25 and, accordingly, does not recognize compensation expense for its stock option awards in the Consolidated Statements of Operations. 29 IDEX CORPORATION 2005 ANNUAL REPORT Notes to Consolidated Financial Statements (continued) The following table reflects pro forma net income and EPS had the Company elected to adopt the fair value approach of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
2005 2004 2003 -------- ------- ------- NET INCOME As reported $109,803 $86,406 $62,352 Add: Stock-based employee compensation expense, 1,804 1,457 1,196 net of tax Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (8,591) (6,839) (5,985) -------- ------- ------- Pro forma $103,016 $81,024 $57,563 ======== ======= ======= BASIC EPS As reported $ 2.14 $ 1.73 $ 1.28 Pro forma 2.00 1.62 1.18 ======== ======= ======= DILUTED EPS As reported $ 2.08 $ 1.68 $ 1.25 Pro forma 1.97 1.58 1.15 ======== ======= =======
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 2005, 2004 and 2003, respectively: dividend yields of 1.50%, 1.55% and 1.84%; volatility of 30.0%, 29.6% and 32.6%; risk-free interest rates of 4.3%, 3.0% and 3.2%; 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. 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. 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 $24,213, $21,242 and $17,261 in 2005, 2004 and 2003, respectively. FOREIGN CURRENCY TRANSLATION The functional currency of substantially all operations outside the United States is the respective local currency. Accordingly, those foreign currency balance sheet accounts have been translated using the exchange rates in effect as of the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from changes in exchange rates from year to year have been reported in "Cumulative translation adjustment" in the Consolidated Balance Sheets. The effect on the Consolidated Statements of Operations of transaction gains and losses is insignificant for all years presented. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash, trade receivables, accounts payable and accrued expenses, approximate their fair values. CONCENTRATION OF CREDIT RISK IDEX is not overly dependent on a single customer, the largest of which accounted for less than 2% of net sales for all years presented. RECLASSIFICATION Certain reclassifications have been made in the prior years' financial statements to conform to the current year presentation. Specifically, the 2004 and 2003 effect of foreign currency exchange rates on cash and cash equivalents have been reclassified to a separate line outside of operating activities on the Consolidated Statements of Cash Flows. This change in presentation was deemed to be immaterial. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123R will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. SFAS 123R also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. SFAS 123R is effective for public companies for annual periods that begin after June 15, 2005. Accordingly, we will adopt SFAS 123R in the first quarter of 2006. The Company is still evaluating the impact of adopting this SFAS in 2006, but we anticipate an annual pre-tax expense of approximately $8.0 million, or 10 cents per diluted share, net of tax. In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation 30 IDEX CORPORATION 2005 ANNUAL REPORT to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on the Company's results of operations, financial condition or cash flows. 2. BALANCE SHEET COMPONENTS The components of certain balance sheet accounts at December 31, 2005 and 2004, were as follows:
2005 2004 -------- -------- RECEIVABLES Customers $133,993 $120,696 Other 2,367 3,131 -------- -------- Total 136,360 123,827 Less allowance for doubtful accounts 3,816 4,260 -------- -------- Total receivables--net $132,544 $119,567 ======== ======== INVENTORIES Raw materials $ 52,215 $ 52,824 Work in process 13,138 14,181 Finished goods 61,223 59,973 -------- -------- Total inventories $126,576 $126,978 ======== ========
Inventories that were carried on a LIFO basis amounted to $97,785 and $104,957 at December 31, 2005 and 2004, respectively. The excess of current cost over LIFO inventory value amounted to $1,686 and $897 at December 31, 2005 and 2004, respectively.
2005 2004 -------- -------- PROPERTY, PLANT AND EQUIPMENT, AT COST Land and improvements $ 14,812 $ 15,474 Buildings and improvements 94,740 95,984 Machinery and equipment 208,691 206,494 Office and transportation equipment 81,007 80,222 Engineering drawings 5,791 3,990 Construction in progress 5,814 5,650 -------- -------- Total 410,855 407,814 Less accumulated depreciation and amortization 265,370 252,212 -------- -------- Total property, plant and equipment--net $145,485 $155,602 ======== ======== ACCRUED EXPENSES Payroll and related items $ 24,381 $ 23,950 Management incentive compensation 13,109 14,366 Income taxes payable 7,234 5,345 Deferred income taxes 1,142 7,638 Insurance 6,810 4,776 Other 21,682 14,670 -------- -------- Total accrued expenses $ 74,358 $ 70,745 ======== ======== OTHER NONCURRENT LIABILITIES Deferred income taxes $ 64,650 $ 56,414 Pension and retiree medical reserves 36,387 40,196 Other 9,938 2,505 -------- -------- Total other noncurrent liabilities $110,975 $ 99,115 ======== ========
3. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004, by business group, were as follows:
Other Pump Dispensing Engineered Products Equipment Products Total -------- ---------- ---------- -------- Balance, December 31, 2003 $338,292 $125,287 $ 95,429 $559,008 Goodwill acquired during the year 103,409 -- 39,535 142,944 Foreign currency translation 1,400 5,754 4,513 11,667 -------- --------- ---------- -------- Balance, December 31, 2004 $443,101 $131,041 $139,477 $713,619 Purchase price adjustments (2,174) -- (71) (2,245) Foreign currency translation (2,088) (10,053) (7,364) (19,505) -------- --------- ---------- -------- Balance, December 31, 2005 $438,839 $120,988 $132,042 $691,869 ======== ========= ========== ========
The carrying value of identifiable intangible assets at December 31, 2005 and 2004, was $28,615 and $29,545, respectively, which was split between definite and indefinite lived intangible assets as follows:
Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- As of December 31, 2005 DEFINITE LIVED INTANGIBLE ASSETS Patents $ 9,386 $(4,984) $ 4,402 Other 972 (274) 698 ------- ------- ------- Total definite lived intangible assets 10,358 (5,258) 5,100 ------- ------- ------- INDEFINITE LIVED INTANGIBLE ASSETS Trademarks 23,515 -- 23,515 ------- ------- ------- Total intangible assets $33,873 $(5,258) $28,615 ======= ======= ======= As of December 31, 2004 DEFINITE LIVED INTANGIBLE ASSETS Patents $10,018 $(4,808) $ 5,210 Other 725 (168) 557 ------- ------- ------- Total definite lived intangible assets 10,743 (4,976) 5,767 ------- ------- ------- INDEFINITE LIVED INTANGIBLE ASSETS Trademarks 23,778 -- 23,778 ------- ------- ------- Total intangible assets $34,521 $(4,976) $29,545 ======= ======= =======
31 IDEX CORPORATION 2005 ANNUAL REPORT Notes to Consolidated Financial Statements (continued) Amortization of intangible assets was $708 and $638 in 2005 and 2004, respectively. Amortization expense for the next five years is estimated to be consistent with 2005. 4. BORROWINGS Borrowings at December 31, 2005 and 2004 consisted of the following:
2005 2004 -------- -------- Senior Notes $150,000 $150,000 Bank credit facilities -- 64,195 Other borrowings 10,043 11,122 -------- -------- Total borrowings 160,043 225,317 Less current portion 3,144 -- -------- -------- Total long-term borrowings $156,899 $225,317 ======== ========
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, 2005, the fair market value of the Senior Notes was approximately $154 million, based on the quoted market price. The Company also maintains a $600 million domestic multi-currency bank revolving credit facility (Credit Facility), which expires on December 14, 2009. At December 31, 2005, there were no borrowings outstanding under the Credit Facility and outstanding letters of credit totaled approximately $5 million. The net available borrowings under the Credit Facility as of December 31, 2005, were approximately $595 million. Interest on the outstanding borrowings under the Credit Facility is payable quarterly at a rate based on the bank agent's reference rate or, at the Company's election, at a rate based on LIBOR plus 55 basis points per annum. A facility fee equal to 15 basis points per annum is payable quarterly on the total amount available under the Credit Facility. The Company also has a $30 million demand line of credit (Short-Term Facility), which expires on December 12, 2006. Borrowings under the Short-Term Facility are based on LIBOR plus the applicable margin in effect under the Credit Facility. At December 31, 2005, there were no borrowings under the Short-Term Facility. At December 31, 2005, other borrowings included capital leases as well as debt at international locations maintained for working capital purposes. Interest is payable on the outstanding debt balances at the international locations at rates ranging from 2.3% to 7.7% per annum. There are two financial covenants that the Company is required to maintain in connection with the Credit Facility. As defined in the agreement, the minimum interest coverage ratio (operating cash flow to interest) is 3.0 to 1 and the maximum leverage ratio (outstanding debt to operating cash flow) is 3.25 to 1. At December 31, 2005, the Company was in compliance with both of these financial covenants. Total borrowings at December 31, 2005 have scheduled maturities as follows: 2006 $ 3,144 2007 485 2008 152,599 2009 553 2010 721 Thereafter 2,541 -------- Total borrowings $160,043 ========
5. COMMITMENTS AND CONTINGENCIES At December 31, 2005, total future minimum rental payments under noncancelable operating leases, primarily for office facilities, warehouses and data processing equipment, were $20,250. The future minimum rental commitments for each of the next five years and thereafter are as follows: 2006-- $6,699; 2007--$4,915; 2008--$3,394; 2009--$2,256; 2010-- $1,185; thereafter--$1,801. Rental expense totaled $9,402, $10,401 and $9,238 for the years ended December 31, 2005, 2004 and 2003, 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. COMMON AND PREFERRED STOCK The Company issued 176 and 145 shares of restricted stock as compensation to key employees in 2005 and 2004, respectively. Of the 176 shares issued in 2005, 100 shares vest annually from one to four years after the grant date, while the remaining 76 shares contain a cliff vesting feature and vest four years after the grant date. Of the 145 shares issued in 2004, 115 shares vest annually from one to five years after the grant date, while the remaining 30 shares contain a cliff vesting feature with half vesting four years and the remaining half five years after the grant date. In 2000, the Company issued 525 shares of restricted stock as compensation to a key employee. These shares vested annually from one to five years after the grant date. All restricted shares carry dividend and voting rights, and the sale of the shares is restricted prior to the date of vesting. 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. 32 IDEX CORPORATION 2005 ANNUAL REPORT On October 20, 1998, IDEX's Board of Directors authorized the repurchase of up to 2.25 million shares of the Company's common stock, either at market prices or on a negotiated basis as market conditions warrant. Since the inception of this program, IDEX has purchased a total of 10 shares at a cost of approximately $144. At December 31, 2005 and 2004, the Company had 150 million and 75 million shares of authorized common stock, respectively, with a par value of $.01 per share and 5 million shares of preferred stock with a par value of $.01 per share authorized. No preferred stock has been issued as of December 31, 2005. 7. DERIVATIVE INSTRUMENT At December 31, 2003, the Company had a foreign currency contract, which it entered into in anticipation of the funding of the January 2004 purchase of Vetter. The increase in fair market value of this contract resulted in income of $.5 million for the year ended December 31, 2003 and was included in "Other income (expense)--net" in the Consolidated Statements of Operations. The Company did not enter into any derivative contracts in 2004 or 2005. 8. INCOME TAXES Pretax income for the years ended December 31, 2005, 2004, and 2003, was taxed in the following jurisdictions:
2005 2004 2003 -------- -------- ------- Domestic $115,984 $ 85,119 $66,402 Foreign 52,944 48,758 30,268 -------- -------- ------- Total $168,928 $133,877 $96,670 ======== ======== =======
The provision for income taxes for the years ended December 31, 2005, 2004, and 2003, was as follows:
2005 2004 2003 ------- ------- ------- Current U.S. $37,043 $21,921 $13,000 State and local 1,738 326 738 Foreign 15,861 14,442 10,093 ------- ------- ------- Total current 54,642 36,689 23,831 ------- ------- ------- Deferred U.S. 2,730 6,293 6,954 State and local (164) 1,439 779 Foreign 1,917 3,050 2,754 ------- ------- ------- Total deferred 4,483 10,782 10,487 ------- ------- ------- Total provision for income taxes $59,125 $47,471 $34,318 ======= ======= =======
Deferred tax assets (liabilities) related to the following at December 31, 2005 and 2004:
2005 2004 -------- -------- Employee and retiree benefit plans $ 2,199 $ 882 Depreciation and amortization (69,074) (68,455) Inventories (3,284) (4,660) Allowances and accruals 6,774 5,666 Other 1,506 2,515 -------- -------- Total $(61,879) $(64,052) ======== ========
The deferred tax assets and liabilities recognized in the Company's Consolidated Balance Sheets are as follows:
2005 2004 -------- -------- Deferred tax asset--other current assets $ 3,913 $ -- Deferred tax liability--accrued expenses (1,142) (7,638) Noncurrent deferred tax liability--other noncurrent liabilities (64,650) (56,414) -------- -------- Net deferred tax liabilities $(61,879) $(64,052) ======== ========
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, 2005, 2004, and 2003 are shown in the following table.
2005 2004 2003 -------- -------- ------- Pretax income $168,928 $133,877 $96,670 ======== ======== ======= Provision for income taxes: Computed amount at statutory rate of 35% $ 59,125 $ 46,857 $33,835 State and local income tax (net of federal tax benefit) 1,023 1,147 986 Taxes on non-US earnings --net of foreign tax credits (620) 2,319 960 U.S. business tax credits (1,455) (2,674) -- Extra-territorial income (ETI) deduction (1,214) (1,531) (945) Domestic activities production deduction (1,528) -- -- Other 3,794 1,353 (518) -------- -------- ------- Total provision for income taxes $ 59,125 $ 47,471 $34,318 ======== ======== =======
The Company has not provided an estimate for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries that might be payable if these earnings were repatriated since the Company considers these amounts to be permanently invested. 33 IDEX CORPORATION 2005 ANNUAL REPORT Notes to Consolidated Financial Statements (continued) 9. COMPREHENSIVE INCOME The tax effects of the components of other comprehensive income for 2005, 2004 and 2003 follow:
2005 2004 2003 -------- ------- ------- MINIMUM PENSION ADJUSTMENT Pretax amount $ (1,748) $12,118 $(2,864) Tax benefit (provision) 508 (4,281) 954 -------- ------- ------- Aftertax amount $ (1,240) $ 7,837 $(1,910) ======== ======= ======= CUMULATIVE TRANSLATION ADJUSTMENT Pretax amount $(27,886) $17,154 $26,652 Tax provision -- -- -- -------- ------- ------- Aftertax amount $(27,886) $17,154 $26,652 ======== ======= =======
10. 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, and personal care products; refinishing equipment; and centralized lubrication systems. The Other Engineered Products Group designs, produces and distributes engineered equipment for industrial and commercial markets, including fire and rescue, transportation equipment, oil and gas, electronics, and communications. IDEX is not overly dependent on a single customer, the largest of which accounted for less than 2% of net sales for all years presented. Information on IDEX's business segments follows, and is based on the nature of products and services offered. The Company evaluates performance based on several factors, of which operating income is the primary financial measure. The accounting policies of the business segments are described in Note 1. Intersegment sales are accounted for at fair value as if the sales were to third parties.
2005 2004 2003 ---------- ---------- -------- NET SALES Pump Products External customers $ 616,475 $ 539,101 $453,703 Intersegment sales 4,198 3,235 2,813 ---------- ---------- -------- Total group sales 620,673 542,336 456,516 ---------- ---------- -------- Dispensing Equipment External customers 187,814 170,195 159,224 Intersegment sales -- 3 1 ---------- ---------- -------- Total group sales 187,814 170,198 159,225 ---------- ---------- -------- Other Engineered Products External customers 238,986 219,001 184,994 Intersegment sales 6 5 28 ---------- ---------- -------- Total group sales 238,992 219,006 185,022 ---------- ---------- -------- Intersegment eliminations (4,204) (3,243) (2,843) ---------- ---------- -------- Total net sales $1,043,275 $ 928,297 $797,920 ========== ========== ======== OPERATING INCOME(1) Pump Products $ 114,404 $ 93,356 $ 70,436 Dispensing Equipment 40,785 33,489 25,724 Other Engineered Products 56,682 47,120 32,990 Corporate office and other(2) (29,084) (24,581) (19,288) ---------- ---------- -------- Total operating income $ 182,787 $ 149,384 $109,862 ========== ========== ======== ASSETS Pump Products $ 707,614 $ 694,731 $551,183 Dispensing Equipment 205,333 214,140 203,786 Other Engineered Products 256,622 246,410 186,417 Corporate office and other(2) 74,611 31,011 19,353 ---------- ---------- -------- Total assets $1,244,180 $1,186,292 $960,739 ========== ========== ======== DEPRECIATION AND AMORTIZATION Pump Products $ 15,797 $ 16,464 $ 16,141 Dispensing Equipment 5,210 5,616 5,881 Other Engineered Products 5,696 6,012 5,116 Corporate office and other(3) 3,262 2,857 2,337 ---------- ---------- -------- Total depreciation and amortization $ 29,965 $ 30,949 $ 29,475 ========== ========== ======== CAPITAL EXPENDITURES Pump Products $ 13,758 $ 13,968 $ 12,887 Dispensing Equipment 3,824 2,769 2,967 Other Engineered Products 4,357 3,204 3,874 Corporate office and other 1,055 1,156 590 ---------- ---------- -------- Total capital expenditures $ 22,994 $ 21,097 $ 20,318 ========== ========== ========
(1) Group operating income excludes net unallocated corporate operating expenses. (2) Includes intersegment eliminations. (3) Includes amortization of intangible assets and unearned compensation. 34 IDEX CORPORATION 2005 ANNUAL REPORT Information about the Company's operations in different geographical regions for the years ended December 31, 2005, 2004 and 2003 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.
2005 2004 2003 ---------- -------- -------- NET SALES U.S. $ 595,091 $516,155 $441,427 Europe 255,216 244,153 213,905 Other countries 192,968 167,989 142,588 ---------- -------- -------- Total net sales $1,043,275 $928,297 $797,920 ========== ======== ======== LONG-LIVED ASSETS- PROPERTY, PLANT AND EQUIPMENT U.S. $ 97,805 $101,357 $102,522 Europe 43,713 51,398 42,358 Other countries 3,967 2,847 2,215 ---------- -------- -------- Total long-lived assets $ 145,485 $155,602 $147,095 ========== ======== ========
11. ACQUISITIONS In January 2006, the Company acquired the assets used to conduct the Airshore International business of Direct Equipment West, Ltd. Based in British Columbia, Canada, the Airshore business provides stabilization struts for collapsed buildings and vehicles, high and low pressure lifting bags and forcible entry tools for the fire and rescue markets. Airshore will operate as part of Hale Products. In 2004, the Company acquired Manfred Vetter GmbH (January 2004), Systec, L.L.C. (April 2004), Scivex, L.L.C. (May 2004) and Tianjin Dinglee Machine and Motor Co., Ltd (July 2004). Vetter, based in Zulpich, Germany, designs and manu- factures pneumatic lifting and sealing bags for vehicle and aircraft rescue, environmental protection, industrial maintenance, and disaster recovery and control. Vetter operates as part of the Hale business unit within the Other Engineered Products Group. Systec, based in New Brighton, Minnesota, designs and manufactures vacuum degassing products for the analytical chemistry instrumentation market. Systec operates as part of our Rheodyne business unit within the Pump Products Group. Scivex, which operates Upchurch Scientific in Oak Harbor, Washington and Sapphire Engineering in Pocasset, Massachusetts, is a leading provider of fluidic components and systems for the analytical, biotechnology and diagnostics instrumentation markets. Scivex is being operated as a stand-alone business unit in IDEX's Pump Products Group. Dinglee, based in Tianjin, China, is a leading manufacturer of rescue tools in the Chinese rescue tool market. Dinglee operates as part of our Hale business unit within the Other Engineered Products Group. IDEX acquired Vetter, Systec, Scivex and Dinglee for a purchase price of $44,813, $22,442, $98,553 and $4,106, respectively, with financing provided by borrowings under the Credit Facility. In addition, a purchase price contingency related to the acquisition of Classic Engineering in September 2003 was settled in 2004, resulting in an additional payment of $1,069. Goodwill and intangible assets recognized as part of these transactions was $142,944 and $10,212, respectively. In 2003, the Company acquired Sponsler Co., Inc. (June 2003) and Classic Engineering, Inc. (September 2003). Sponsler, headquartered in Westminster, South Carolina, is a manufacturer of precision turbine flow meters to meet all flow applications, including low-flow and situations where viscosity, corrosive media, extreme temperature or hazardous materials are factors. Classic, headquartered in Jacksonville, Florida, is a supplier of fully integrated pump and metering systems to chemical companies and municipal water treatment facilities. It also designs, engineers and manufactures standard and custom chemical-feed systems for the water, wastewater, chemical OEM, pulp and paper, cement and general industrial markets. Within the Pump Products Group, Classic is operated as part of Pulsafeeder, while Sponsler is operated as part of Liquid Controls. IDEX acquired Sponsler and Classic for a purchase price of $10,251 and $3,703, respectively, with financing provided by borrowings under the Credit Facility. Goodwill and intangible assets recognized as part of these acquisitions was $11,484 and $373, respectively. In February 2003, an $8.0 million payment of deferred consideration was made in connection with the Rheodyne acquisition in July 2002. All acquisitions were accounted for as purchases, and operating results include the acquisitions from the dates of purchase. In addition, in certain instances, the acquisitions contain purchase price contingencies, which are considered to be immaterial to the Company. IDEX does not consider any of the acquisitions, individually or in aggregate, to be material to its results of operations, financial condition, or cash flows for any of the years presented. 12. 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 issued prior to 2005 become exercisable in five equal installments, while all options issued in 2005 become exercisable in four 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 1.5 million shares. 35 IDEX CORPORATION 2005 ANNUAL REPORT Notes to Consolidated Financial Statements (continued) The following table summarizes option activity under the plans:
Weighted Number Average of Shares Option Price Under Option Per Share ------------ ------------ Outstanding at December 31, 2002 4,994,343 $19.65 Granted 1,510,988 20.36 Exercised (813,900) 16.94 Forfeited (284,181) 21.47 ---------- ------ Outstanding at December 31, 2003 5,407,250 20.16 Granted 1,619,300 28.23 Exercised (1,249,628) 18.95 Forfeited (208,810) 22.00 ---------- ------ Outstanding at December 31, 2004 5,568,112 22.70 Granted 681,040 40.82 Exercised (1,838,719) 20.35 Forfeited (213,283) 25.40 ---------- ------ Outstanding at December 31, 2005 4,197,150 $26.57 ========== ====== Exercisable at December 31, 2003 2,309,903 $19.14 ========== ====== Exercisable at December 31, 2004 1,946,501 $19.90 ========== ====== Exercisable at December 31, 2005 1,353,473 $22.10 ========== ======
Weighted average fair value of options granted during the year ended: December 31, 2003 $ 5.90 ====== December 31, 2004 $ 8.04 ====== December 31, 2005 $11.82 ======
The following table summarizes information about options outstanding at December 31, 2005:
Options Outstanding ------------------------------------------------- Options Exercisable Weighted Average ------------------------------ Number Remaining Weighted Average Number Weighted Average Range of Exercise Prices Outstanding Life of Contract Exercise Price Exercisable Exercise Price ------------------------ ----------- ---------------- ---------------- ----------- --------------- $11.66-18.00 165,819 3.4 years $17.00 148,183 $16.95 18.01-23.00 1,384,236 6.1 years 19.59 679,070 19.53 23.01-27.00 592,672 5.9 years 25.32 284,255 25.12 27.01-44.84 2,054,423 8.4 years 32.42 241,965 28.90 --------- --------- ------ --------- ------ Total 4,197,150 7.1 years $26.57 1,353,473 $22.10 ========= ========= ====== ========= ======
36 IDEX CORPORATION 2005 ANNUAL REPORT 13. RETIREMENT BENEFITS The Company sponsors several qualified and nonqualified pension plans and other postretirement plans for its employees. The Company uses a measurement date of December 31 for its U.S. defined benefit pension plans and a September 30 measurement date for its non-U.S. defined benefit pension plans. 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, 2005, and a statement of the funded status at December 31 for both years:
Pension Benefits ---------------------------------------- 2005 2004 ------------------- ------------------ Other Benefits NON- Non- ------------------- U.S. U.S. U.S. U.S. 2005 2004 -------- -------- ------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION Obligation at January 1 $ 73,432 $ 21,883 $67,966 $ 16,551 $ 20,090 $ 18,657 Service cost 4,261 593 3,849 581 410 414 Interest cost 4,107 1,124 4,014 1,089 1,193 1,088 Plan amendments 492 -- 433 -- (93) 250 Benefits paid (6,606) (1,048) (5,576) (890) (1,015) (692) Actuarial loss 2,941 3,495 2,746 214 2,734 373 Currency translation -- (2,674) -- 1,530 -- -- Other -- -- -- 2,808 -- -- -------- -------- ------- -------- -------- -------- Obligation at December 31 $ 78,627 $ 23,373 $73,432 $ 21,883 $ 23,319 $ 20,090 ======== ======== ======= ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 $ 64,306 $ 11,163 $54,988 $ 7,260 $ -- $ -- Actual return on plan assets 1,098 1,447 6,384 718 -- -- Employer contributions 6,438 1,983 8,510 1,901 1,015 692 Benefits paid (6,606) (1,048) (5,576) (890) (1,015) (692) Currency translation -- (1,281) -- 728 -- -- Other -- -- -- 1,446 -- -- -------- -------- ------- -------- -------- -------- Fair value of plan assets at December 31 $ 65,236 $ 12,264 $64,306 $ 11,163 $ -- $ -- ======== ======== ======= ======== ======== ======== FUNDED STATUS Funded status at December 31 $(13,391) $(11,109) $(9,126) $(10,720) $(23,319) $(20,090) Unrecognized loss 28,401 7,980 23,536 6,439 6,232 3,770 Unrecognized transition obligation 139 -- 199 -- -- -- Unrecognized prior service cost 2,178 -- 2,420 -- (376) (281) -------- -------- ------- -------- -------- -------- Net amount recognized at December 31 $ 17,327 $ (3,129) $17,029 $ (4,281) $(17,463) $(16,601) ======== ======== ======= ======== ======== ======== RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS Prepaid benefit cost $ 23,806 $ -- $22,010 $ -- $ -- $ -- Accrued benefit liability (9,376) (10,193) (7,310) (9,844) (17,463) (16,601) Intangible asset 929 -- 608 -- -- -- Accumulated other comprehensive income 1,968 7,064 1,721 5,563 -- -- -------- -------- ------- -------- -------- -------- Net amount recognized at December 31 $ 17,327 $ (3,129) $17,029 $ (4,281) $(17,463) $(16,601) ======== ======== ======= ======== ======== ========
The accumulated benefit obligation for all defined benefit pension plans was $95,720 and $87,955 at December 31, 2005 and 2004, 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 $33,233, $31,917 and $12,263, respectively, at December 31, 2005, and $30,558, $28,487 and $11,163, respectively, at December 31, 2004. 37 IDEX CORPORATION 2005 ANNUAL REPORT Notes to Consolidated Financial Statements (continued) The assumptions used in the measurement of the Company's benefit obligation at December 31, 2005 and 2004, were as follows:
U.S. Plans Non-U.S. Plans ----------- --------------------- 2005 2004 2005 2004 ---- ---- --------- --------- Discount rate 5.50% 5.75% 4.30-5.10% 5.50-6.00% Expected return on plan assets 8.50% 8.50% 5.00-5.90% 5.00-6.50% Rate of compensation increase 4.00% 4.00% 4.25% 4.25%
To develop the expected rate of return on plan assets, the Company considered the historical returns and the future expectations for returns on each asset class, as well as the target asset allocation of the pension portfolio. The following tables provide the components of, and the assumptions used to determine, the net periodic benefit cost for the plans in 2005, 2004, and 2003:
Pension Benefits Other Benefits --------------------------- ------------------------ 2005 2004 2003 2005 2004 2003 ------- ------- ------- ------ ------ ------ Service cost $ 4,854 $ 4,430 $ 3,765 $ 410 $ 413 $ 330 Interest cost 5,231 5,103 4,703 1,194 1,088 1,066 Expected return on plan assets (5,935) (5,597) (3,449) -- -- -- Net amortization 3,276 3,227 3,216 212 67 (31) ------- ------- ------- ------ ------ ------ Net periodic benefit cost $ 7,426 $ 7,163 $ 8,235 $1,816 $1,568 $1,365 ======= ======= ======= ====== ====== ======
U.S. Plans Non-U.S. Plans ------------------ ---------------------------- 2005 2004 2003 2005 2004 2003 ---- ---- ---- --------- --------- ---- Discount rate 5.75% 6.00% 6.75% 5.50-6.00% 5.50-6.00% 5.75% Expected return on plan assets 8.50% 8.50% 8.50% 5.00-6.25% 6.50% 6.50% Rate of compensation increase 4.00% 4.00% 4.00% 4.25% 4.25% 3.75%
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 on the market value of assets are amortized over the average remaining service period of active participants. Costs of bargaining unit-sponsored multi-employer plans and defined contribution plans were $7,354, $6,404 and $6,756 for 2005, 2004 and 2003, respectively. For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate was assumed to decrease gradually each year to a rate of 6% for 2013, 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 $103 and the health care component of the accumulated postretirement benefit obligation by $1,445. 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 $89 and the health care component of the accumulated postretirement benefit obligation by $1,235. PLAN ASSETS The Company's pension plan weighted average asset allocations at December 31, 2005 and 2004, by asset category, were as follows:
2005 2004 ---- ---- Equity securities 64% 66% Debt securities 35 33 Other 1 1 --- --- Total 100% 100% === ===
38 IDEX CORPORATION 2005 ANNUAL REPORT INVESTMENT POLICIES AND STRATEGIES The investment objectives of the Company's plan assets are to earn the highest possible rate of return consistent with the tolerance for risk as determined periodically by IDEX in its role as a fiduciary. The general guidelines of asset allocation of fund assets are that "equities" will represent from 55% to 75% of the market value of total fund assets with a target of 66%, and "fixed income" obligations, including cash, will represent from 25% to 45% with a target of 34%. The term "equities" includes common stock, convertible bonds and convertible stock. The term "fixed income" includes preferred stock and/or contractual payments with a specific maturity date. The Company strives to maintain asset allocations within the designated ranges by conducting periodic reviews of fund allocations and plan liquidity needs, and rebalancing the portfolio accordingly. The total fund performance is monitored and results measured using a 3- to 5-year moving average against long-term absolute and relative return objectives to meet actuarially determined forecasted benefit obligations. No restrictions are placed on the selection of individual investments by the qualified investment fund managers. The performance of the investment fund managers is reviewed on a regular basis, using appointed professional independent advisors. As of December 31, 2005 and 2004, there were no shares of the Company's stock held in plan assets. CASH FLOWS The Company expects to contribute approximately $6.0 million to its defined benefit plans, $7.0 million to its defined contribution plans and $1.0 million to its other postretirement benefit plans in 2006. ESTIMATED FUTURE BENEFIT PAYMENTS The future estimated benefit payments for the next five years and the five years thereafter are as follows: 2006--$9,327; 2007--$7,087; 2008--$5,536; 2009--$5,827; 2010--$6,234; 2011 to 2015--$45,149. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2005 and 2004:
2005 QUARTERS 2004 Quarters ----------------------------------------- ----------------------------------------- FIRST SECOND THIRD FOURTH First Second Third Fourth -------- -------- -------- -------- -------- -------- -------- -------- Net sales $252,058 $271,758 $257,930 $261,529 $214,600 $233,590 $237,557 $242,550 Gross profit 101,957 111,649 104,044 106,194 85,730 93,923 94,989 96,153 Operating income 40,695 48,132 46,649 47,311 31,286 39,814 39,961 38,323 Net income 23,645 28,933 28,515 28,710 17,692 22,834 23,219 22,661 Basic EPS $ .47 $ .57 $ .55 $ .55 $ .36 $ .46 $ .46 $ .45 Basic weighted average shares outstanding 50,679 50,963 51,618 52,306 49,475 50,060 50,293 50,462 Diluted EPS $ .45 $ .55 $ .54 $ .54 $ .35 $ .44 $ .44 $ .43 Diluted weighted average shares outstanding 52,383 52,641 53,071 53,492 51,279 52,037 52,400 52,099
39 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of IDEX Corporation We have audited the accompanying consolidated balance sheets of IDEX Corporation and its subsidiaries (the Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of IDEX Corporation and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP -------------------------- Deloitte & Touche LLP Chicago, Illinois February 27, 2006 40 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of IDEX Corporation We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that IDEX Corporation and its subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in "Internal Control--Integrated Frame work" issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an under standing of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of IDEX Corporation and its subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated February 27, 2006 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP -------------------------- Deloitte & Touche LLP Chicago, Illinois February 27, 2006 41 IDEX CORPORATION 2005 ANNUAL REPORT Management's Report on Internal Control over Financial Reporting Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining effective internal control over financial reporting for the Company. Management has used the framework set forth in the report entitled "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess the effectiveness of the Company's internal control over financial reporting. Management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2005. Deloitte & Touche LLP has issued an attestation report on management's assessment of the Company's internal control over financial reporting dated February 27, 2006. /s/ Lawrence D. Kingsley ------------------------------------- Lawrence D. Kingsley President and Chief Executive Officer /s/ Dominic A. Romeo ------------------------------------- Dominic A. Romeo Vice President and Chief Financial Officer Northbrook, Illinois February 27, 2006 42