10-Q 1 iex-20160630x10q.htm 10-Q Document

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________ 
Form 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10235
IDEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
36-3555336
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1925 West Field Court, Lake Forest, Illinois
 
60045
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number: (847) 498-7070
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  þ
 
Accelerated filer  ¨
 
Non-accelerated filer ¨
 
Smaller reporting company  ¨
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨   No   þ 
Number of shares of common stock of IDEX Corporation outstanding as of July 28, 2016: 76,130,884.
 




TABLE OF CONTENTS
 
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
Item 4.
 
 
 
Item 1.
Item 2.
Item 6.



PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
(unaudited)
 
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
361,488

 
$
328,018

Receivables, less allowance for doubtful accounts of $8,231 at June 30, 2016 and $7,812 at December 31, 2015
296,481

 
260,000

Inventories — net
257,659

 
239,124

Other current assets
53,656

 
35,542

Total current assets
969,284

 
862,684

Property, plant and equipment — net
250,904

 
240,945

Goodwill
1,516,303

 
1,396,529

Intangible assets — net
354,335

 
287,837

Other noncurrent assets
18,530

 
17,448

Total assets
$
3,109,356

 
$
2,805,443

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Trade accounts payable
$
129,164

 
$
128,911

Accrued expenses
141,408

 
153,672

Notes payable and current portion of long-term borrowings
1,233

 
1,087

Dividends payable
25,908

 
25,927

Total current liabilities
297,713

 
309,597

Long-term borrowings
1,054,325

 
839,707

Deferred income taxes
152,875

 
110,483

Other noncurrent liabilities
107,513

 
102,365

Total liabilities
1,612,426

 
1,362,152

Commitments and contingencies

 

Shareholders’ equity
 
 
 
Preferred stock:
 
 
 
Authorized: 5,000,000 shares, $.01 per share par value; Issued: None

 

Common stock:
 
 
 
Authorized: 150,000,000 shares, $.01 per share par value
 
 
 
Issued: 90,232,839 shares at June 30, 2016 and 90,151,131 shares at December 31, 2015
902

 
902

Additional paid-in capital
689,945

 
679,623

Retained earnings
1,759,157

 
1,666,680

Treasury stock at cost: 14,031,568 shares at June 30, 2016 and 13,616,592 shares at December 31, 2015
(799,202
)
 
(757,416
)
Accumulated other comprehensive income (loss)
(153,872
)
 
(146,498
)
Total shareholders’ equity
1,496,930

 
1,443,291

Total liabilities and shareholders’ equity
$
3,109,356

 
$
2,805,443

See Notes to Condensed Consolidated Financial Statements

1


IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
549,696

 
$
514,881

 
$
1,052,268

 
$
1,017,079

Cost of sales
305,638

 
283,266

 
584,875

 
559,423

Gross profit
244,058

 
231,615

 
467,393

 
457,656

Selling, general and administrative expenses
131,082

 
121,706

 
251,860

 
245,990

Operating income
112,976

 
109,909

 
215,533

 
211,666

Other (income) expense — net
(1,874
)
 
827

 
(2,618
)
 
(896
)
Interest expense
11,205

 
10,584

 
21,694

 
21,181

Income before income taxes
103,645

 
98,498

 
196,457

 
191,381

Provision for income taxes
27,886

 
28,913

 
52,568

 
55,842

Net income
$
75,759

 
$
69,585

 
$
143,889

 
$
135,539

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.00

 
$
0.89

 
$
1.89

 
$
1.74

Diluted earnings per common share
$
0.99

 
$
0.89

 
$
1.87

 
$
1.72

 
 
 
 
 
 
 
 
Share data:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
75,690

 
77,466

 
75,719

 
77,731

Diluted weighted average common shares outstanding
76,674

 
78,297

 
76,687

 
78,576

See Notes to Condensed Consolidated Financial Statements

2


IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
75,759

 
$
69,585

 
$
143,889

 
$
135,539

Other comprehensive income (loss)
 
 
 
 
 
 
 
Reclassification adjustments for derivatives, net of tax
1,093

 
1,126

 
2,190

 
2,256

Pension and other postretirement adjustments, net of tax
591

 
820

 
1,262

 
1,600

Cumulative translation adjustment
(27,043
)
 
23,743

 
(10,826
)
 
(32,894
)
Other comprehensive income (loss)
(25,359
)
 
25,689

 
(7,374
)
 
(29,038
)
Comprehensive income
$
50,400

 
$
95,274

 
$
136,515

 
$
106,501

See Notes to Condensed Consolidated Financial Statements

3


IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands except share amounts)
(unaudited)
 
 
 
 
 
 
Accumulated Other Comprehensive
Income (Loss)
 
 
 
 
 
Common
Stock and
Additional
Paid-In Capital
 
Retained
Earnings
 
Cumulative
Translation
Adjustment
 
Retirement
Benefits
Adjustment
 
Cumulative
Unrealized Gain (Loss) on
Derivatives
 
Treasury
Stock
 
Total
Shareholders’
Equity
Balance, December 31, 2015
$
680,525

 
$
1,666,680

 
$
(92,979
)
 
$
(30,901
)
 
$
(22,618
)
 
$
(757,416
)
 
$
1,443,291

Net income

 
143,889

 

 

 

 

 
143,889

Cumulative translation adjustment

 

 
(10,826
)
 

 

 

 
(10,826
)
Net change in retirement obligations (net of tax of $643)

 

 

 
1,262

 

 

 
1,262

Net change on derivatives designated as cash flow hedges (net of tax of $1,253)

 

 

 

 
2,190

 

 
2,190

Issuance of 311,017 shares of common stock from issuance of unvested shares, performance share units and exercise of stock options

 

 

 

 

 
16,934

 
16,934

Repurchase of 725,993 shares of common stock

 

 

 

 

 
(53,890
)
 
(53,890
)
Unvested shares surrendered for tax withholding

 

 

 

 

 
(4,830
)
 
(4,830
)
Share-based compensation
10,322

 

 

 

 

 

 
10,322

Cash dividends declared - $0.68 per common share outstanding

 
(51,412
)
 

 

 

 

 
(51,412
)
Balance, June 30, 2016
$
690,847

 
$
1,759,157

 
$
(103,805
)
 
$
(29,639
)
 
$
(20,428
)
 
$
(799,202
)
 
$
1,496,930

See Notes to Condensed Consolidated Financial Statements

4


IDEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) 
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
143,889

 
$
135,539

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
18,986

 
17,460

Amortization of intangible assets
23,146

 
20,137

Amortization of debt issuance costs
758

 
860

Share-based compensation expense
11,603

 
11,802

Deferred income taxes
3,669

 
524

Excess tax benefit from share-based compensation

 
(4,083
)
Non-cash interest expense associated with forward starting swaps
3,443

 
3,539

Changes in (net of effect from acquisitions):
 
 
 
Receivables
(22,625
)
 
(15,274
)
Inventories
11,386

 
(10,473
)
Other current assets
(17,233
)
 
(630
)
Trade accounts payable
(3,367
)
 
4,158

Accrued expenses
(12,675
)
 
(15,886
)
Other — net
(2,137
)
 
755

Net cash flows provided by operating activities
158,843

 
148,428

Cash flows from investing activities
 
 
 
Additions of property, plant and equipment
(17,052
)
 
(23,826
)
Acquisition of businesses, net of cash acquired
(221,556
)
 
(173,333
)
Other — net
27

 
(105
)
Net cash flows used in investing activities
(238,581
)
 
(197,264
)
Cash flows from financing activities
 
 
 
Borrowings under revolving facilities
280,391

 
350,342

Proceeds from 3.20% Senior Notes
100,000

 

Proceeds from 3.37% Senior Notes
100,000

 

Payments under revolving facilities
(266,203
)
 
(240,586
)
Payment of 2.58% Senior Euro Notes

 
(88,420
)
Debt issuance costs
(92
)
 
(1,323
)
Dividends paid
(51,430
)
 
(46,910
)
Proceeds from stock option exercises
16,934

 
13,459

Excess tax benefit from share-based compensation

 
4,083

Purchase of common stock
(55,971
)
 
(113,592
)
Shares surrendered for tax withholding
(4,830
)
 
(3,202
)
Net cash flows provided by (used in) financing activities
118,799

 
(126,149
)
Effect of exchange rate changes on cash and cash equivalents
(5,591
)
 
(22,657
)
Net increase (decrease) in cash
33,470

 
(197,642
)
Cash and cash equivalents at beginning of year
328,018

 
509,137

Cash and cash equivalents at end of period
$
361,488

 
$
311,495

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Interest
$
17,019

 
$
17,296

Income taxes — net
49,142

 
36,338

See Notes to Condensed Consolidated Financial Statements

5


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)

1.    Basis of Presentation and Significant Accounting Policies
The Condensed Consolidated Financial Statements of IDEX Corporation (“IDEX,” “we,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The statements are unaudited but include all adjustments, consisting only of recurring items, except as noted, that the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the entire year.
The Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company elected to early adopt this standard in the quarter ended March 31, 2016. The Company applied this standard prospectively and thus prior periods have not been adjusted.
The impact of the adoption resulted in the following:
The Company recorded a tax benefit of $1.6 million and $4.2 million within Provision for income taxes for the three and six months ended June 30, 2016, respectively, related to the excess tax benefit on stock options, restricted stock and performance share units. Prior to adoption this amount would have been recorded as a reduction of additional paid-in capital. This change could create volatility in the Company’s effective tax rate.
The Company elected not to change our policy on accounting for forfeitures and continued to estimate the total number of awards for which the requisite service period will not be rendered.
The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the statement of cash flows.
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and six months ended June 30, 2016. This increased our diluted weighted average common shares outstanding by 178 thousand and 175 thousand shares for the three and six months ended June 30, 2016, respectively.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a new lessee model that will require most leases to be recorded on the balance sheet and eliminates the required use of bright line tests in current U.S. GAAP for determining lease classification. This standard is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which introduces a new five-step
revenue recognition model. Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative
disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the
costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, using either of
the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior

6


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. The Company is currently evaluating the impact of the
new guidance on our consolidated financial statements and has not yet determined the method by which we will adopt the
standard in 2018.

2.    Acquisitions and Divestitures
All of the Company’s acquisitions have been accounted for under FASB Accounting Standards Codification (“ASC”) 805, Business Combinations. Accordingly, the accounts of the acquired companies, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements from their respective dates of acquisition.
The Company incurred $1.4 million and $1.0 million of acquisition-related transaction costs in the three months ended June 30, 2016 and 2015, respectively, and $2.4 million and $1.2 million in the six months ended June 30, 2016 and 2015, respectively. These costs were recorded in Selling, general and administrative expenses and were related to completed transactions, pending transactions and potential transactions, including transactions that ultimately were not completed. During the three and six months ended June 30, 2016, the Company recorded $3.6 million and $5.8 million, respectively, of fair value inventory step-up charges in Cost of sales associated with the completed 2016 acquisition.
2016 Acquisitions
On March 16, 2016, the Company acquired the stock of Akron Brass Holding Corporation (“Akron Brass”), a producer of a large array of engineered life–safety products for the safety and emergency response markets, which includes apparatus valves, monitors, nozzles, specialty lighting, electronic vehicle–control systems and firefighting hand tools. The business was acquired to complement and create synergies with our existing Hale, Class 1, and Godiva businesses. Headquartered in Wooster, Ohio, Akron Brass had annual revenues in its most recent fiscal year of approximately $120 million and operates in our Fire & Safety/Diversified Products segment. Akron Brass was acquired for cash consideration of $221.6 million. The purchase price was funded with borrowings under the Company’s revolving facilities. Goodwill and intangible assets recognized as part of the transaction were $123.9 million and $90.4 million, respectively. The goodwill is not deductible for tax purposes.
The Company made an initial allocation of the purchase price for the Akron Brass acquisition as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities. As the Company obtains additional information about these assets and liabilities and learns more about the newly acquired business, we will refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period, as required.
The allocation of the acquisition costs to the assets acquired and liabilities assumed, based on their estimated fair values, is as follows:
 
 
Total
Current assets, net of cash acquired
 
$
44,887

Property, plant and equipment
 
12,452

Goodwill
 
123,855

Intangible assets
 
90,400

Total assets acquired
 
271,594

Current liabilities
 
(6,757
)
Deferred income taxes
 
(36,836
)
Other noncurrent liabilities
 
(6,445
)
Net assets acquired
 
$
221,556

Acquired intangible assets consist of trade names, customer relationships and unpatented technology. The goodwill recorded for the acquisition reflects the strategic fit, revenue and earnings growth potential of this business.

7


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Of the $90.4 million of acquired intangible assets, $28.8 million was assigned to the Akron Brass trade name and is not subject to amortization. The acquired intangible assets and weighted average amortization periods are as follows:
 
Total
 
Weighted Average Life
Trade names
$
4,200

 
15
Customer relationships
44,800

 
14
Unpatented technology
12,600

 
9
Amortized intangible assets
61,600

 
 
Indefinite lived - Akron Brass trade name
28,800

 
 
Total acquired intangible assets
$
90,400

 
 
2015 Acquisitions
On May 29, 2015, the Company acquired the stock of Novotema, SpA (“Novotema”), a leader in the design, manufacture and sale of specialty sealing solutions for use in the building products, gas control, transportation, industrial and water markets. The business was acquired to complement and create synergies with our existing sealing group. Located in Villongo, Italy, Novotema operates in our Health & Science Technologies segment. Novotema was acquired for cash consideration of $61.1 million (€56 million). The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were $34.3 million and $20.0 million, respectively. The $34.3 million of goodwill is not deductible for tax purposes.
On June 10, 2015, the Company acquired the stock of Alfa Valvole, S.r.l (“Alfa”), a leader in the design, manufacture and sale of specialty valve products for use in the chemical, petro-chemical, energy and sanitary markets. The business was acquired to expand our valve capabilities. Located in Casorezzo, Italy, Alfa operates in our Fluid & Metering Technologies segment. Alfa was acquired for cash consideration of $112.6 million (€99.8 million). The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were $69.6 million and $32.1 million, respectively. The $69.6 million of goodwill is not deductible for tax purposes.
On July 1, 2015, the Company acquired the membership interests of CiDRA Precision Services, LLC (“CPS”), a leader in the design, manufacture and sale of microfluidic components serving the life science, health and industrial markets. The business was acquired to provide a critical building block to our emerging microfluidic and nanofludics capabilities. Located in Wallingford, Connecticut, CPS operates within our Health & Sciences Technologies segment. CPS was acquired for an aggregate purchase price of $24.2 million, consisting of $19.5 million in cash and contingent consideration valued at $4.7 million as of the opening balance sheet date. The contingent consideration was based on the achievement of financial objectives during the 12-month period following the close. Based on potential outcomes, the undiscounted amount of all the future payments that the Company could have been required to make under the contingent consideration arrangement was between $0 and $5.5 million. During the six months ended June 30, 2016, the Company re-evaluated the contingent consideration arrangement and fully reversed the $4.7 million liability based on CPS’s actual operating results from July 1, 2015 to June 30, 2016. The reversal was recognized as a benefit within Selling, general and administrative expenses of $1.0 million and $4.7 million during the three and six months ended June 30, 2016, respectively. The entire purchase price was funded with cash on hand. Goodwill and intangible assets recognized as part of this transaction were $9.7 million and $12.3 million, respectively. The $9.7 million of goodwill is deductible for tax purposes.
On December 1, 2015 the Company acquired the assets of a complementary product line within our Fluid & Metering Technologies segment. The purchase price and goodwill associated with this transaction were $1.9 million and $0.7 million, respectively.
2015 Divestiture
The Company periodically reviews its operations for businesses which may no longer be aligned with its strategic objectives and focus on core business and customers. On July 31, 2015, the Company completed the sale of its Ismatec product line to Cole-Palmer Instruments Company for $27.7 million in cash, resulting in a pre-tax gain on the sale of $18.1 million. The results of Ismatec were reported within the Health & Science Technologies segment through the date of sale.


8


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



3.    Business Segments
The Company has three reportable business segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products.
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, injectors, and other fluid-handling pump modules and systems and provides flow monitoring and other services for the water and wastewater industries. The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, aerospace, semiconductor, telecommunications and electronics manufacturing, laboratory and commercial equipment used in the production of micro and nano scale materials, precision photonic solutions used in life sciences, research and defense markets, and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications. The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, valves, monitors, nozzles, rescue tools, lifting bags and other components and systems for the fire and rescue industry, engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications, and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.
Information on the Company’s business segments is presented below, based on the nature of products and services offered. The Company evaluates performance based on several factors, of which operating income is the primary financial measure. Intersegment sales are accounted for as if the sales were to third parties.
 

9


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
 
 
 
 
 
 
 
Fluid & Metering Technologies
 
 
 
 
 
 
 
External customers
$
221,635

 
$
214,983

 
$
433,344

 
$
432,915

Intersegment sales
175

 
310

 
309

 
626

Total group sales
221,810

 
215,293

 
433,653

 
433,541

Health & Science Technologies
 
 
 
 
 
 
 
External customers
186,453

 
188,046

 
372,704

 
365,796

Intersegment sales
115

 
359

 
207

 
1,729

Total group sales
186,568

 
188,405

 
372,911

 
367,525

Fire & Safety/Diversified Products
 
 
 
 
 
 
 
External customers
141,608

 
111,852

 
246,220

 
218,368

Intersegment sales
3

 
89

 
9

 
195

Total group sales
141,611

 
111,941

 
246,229

 
218,563

Intersegment elimination
(293
)
 
(758
)
 
(525
)
 
(2,550
)
Total net sales
$
549,696

 
$
514,881

 
$
1,052,268

 
$
1,017,079

Operating income
 
 
 
 
 
 
 
Fluid & Metering Technologies
$
53,865

 
$
51,857

 
$
105,266

 
$
107,755

Health & Science Technologies
41,125

 
42,060

 
81,824

 
79,517

Fire & Safety/Diversified Products
34,116

 
31,482

 
59,520

 
58,644

Corporate office and other
(16,130
)
 
(15,490
)
 
(31,077
)
 
(34,250
)
Total operating income
112,976

 
109,909

 
215,533

 
211,666

Interest expense
11,205

 
10,584

 
21,694

 
21,181

Other (income) expense - net
(1,874
)
 
827

 
(2,618
)
 
(896
)
Income before income taxes
$
103,645

 
$
98,498

 
$
196,457

 
$
191,381


 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Fluid & Metering Technologies
$
1,118,917

 
$
1,125,266

Health & Science Technologies
1,110,302

 
1,108,302

Fire & Safety/Diversified Products
753,491

 
448,867

Corporate office
126,646

 
123,008

Total assets
$
3,109,356

 
$
2,805,443


4.    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 outstanding (diluted) during the period. Common stock equivalents consist of stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method, restricted stock, performance share units, and shares issuable in connection with certain deferred compensation agreements (“DCUs”).
ASC 260, Earnings Per Share, provides that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. The Company

10


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



has determined that its outstanding shares of restricted stock are participating securities. Accordingly, earnings per common share are computed using the more dilutive of the treasury stock method and the two-class method prescribed by ASC 260.
Basic weighted average shares reconciles to diluted weighted average shares as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Basic weighted average common shares outstanding
75,690

 
77,466

 
75,719

 
77,731

Dilutive effect of stock options, restricted stock, performance share units and DCUs
984

 
831

 
968

 
845

Diluted weighted average common shares outstanding
76,674

 
78,297

 
76,687

 
78,576

Options to purchase approximately 1.0 million and 1.3 million shares of common stock for the three and six months ended June 30, 2016, respectively, and 0.9 million shares of common stock for both the three and six months ended June 30, 2015 were not included in the computation of diluted EPS because the effect of their inclusion would be antidilutive.

5.    Inventories
The components of inventories as of June 30, 2016 and December 31, 2015 were:
 
 
June 30,
2016
 
December 31,
2015
Raw materials and component parts
$
163,302

 
$
141,671

Work in process
34,321

 
32,387

Finished goods
60,036

 
65,066

Total
$
257,659

 
$
239,124

Inventories are stated at the lower of cost or market. Cost, which includes material, labor and factory overhead, is determined on a FIFO basis.

6.    Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2016, by reportable business segment, were as follows:
 
 
Fluid &
Metering
Technologies
 
Health &
Science
Technologies
 
Fire & Safety/
Diversified
Products
 
Total
Balance at December 31, 2015
$
584,770

 
$
590,605

 
$
221,154

 
$
1,396,529

Foreign currency translation and other
1,534

 
(4,344
)
 
352

 
(2,458
)
Acquisitions

 

 
123,855

 
123,855

Acquisition adjustments
(1,623
)
 

 

 
(1,623
)
Balance at June 30, 2016
$
584,681

 
$
586,261

 
$
345,361

 
$
1,516,303

ASC 350, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of the reporting unit below its carrying value. Annually, on October 31, goodwill and other acquired intangible assets with indefinite lives are tested for impairment. The Company did not consider there to be any triggering events that would require an interim impairment assessment, therefore none of the goodwill or other acquired intangible assets with indefinite lives were tested for impairment during the six months ended June 30, 2016. Based on the results of our annual impairment test at October 31, 2015, all reporting units had a fair value that was more than 70% greater than the carrying value, except for our IDEX Optics and Photonics (“IOP”) and Valves reporting units. Our IOP reporting unit had a fair value that was approximately 20% in excess

11


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



of the carrying value and our Valves reporting unit had a fair value near its carrying value as a result of the formation of this reporting unit in conjunction with our Alfa acquisition in June 2015.

     The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets at June 30, 2016 and December 31, 2015:
 
 
At June 30, 2016
 
 
 
At December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
$
10,298

 
$
(6,633
)
 
$
3,665

 
11
 
$
10,202

 
$
(6,175
)
 
$
4,027

Trade names
114,307

 
(42,155
)
 
72,152

 
16
 
110,658

 
(38,696
)
 
71,962

Customer relationships
301,507

 
(157,907
)
 
143,600

 
11
 
257,071

 
(144,134
)
 
112,937

Non-compete agreements

 

 

 
3
 
794

 
(775
)
 
19

Unpatented technology
91,129

 
(47,751
)
 
43,378

 
10
 
78,562

 
(42,745
)
 
35,817

Other
6,539

 
(5,899
)
 
640

 
10
 
6,554

 
(5,579
)
 
975

Total amortized intangible assets
523,780

 
(260,345
)
 
263,435

 
 
 
463,841

 
(238,104
)
 
225,737

Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Banjo trade name
62,100

 

 
62,100

 
 
 
62,100

 

 
62,100

Akron Brass trade name
28,800

 

 
28,800

 
 
 

 

 

Total intangible assets
$
614,680

 
$
(260,345
)
 
$
354,335

 
 
 
$
525,941

 
$
(238,104
)
 
$
287,837

The Banjo trade name is an indefinite lived intangible asset which is tested for impairment on an annual basis in accordance with ASC 350 or more frequently if events or changes in circumstances indicate that the asset might be impaired. In the first six months of 2016, there were no triggering events or changes that would have required a review. Based on the results of our annual impairment test at October 31, 2015, the fair value of the Banjo trade name was greater than 20% in excess of the carrying value.
The Akron Brass trade name is an indefinite lived intangible asset that was generated as a result of the Akron Brass acquisition in March 2016.
Amortization of intangible assets was $12.3 million and $10.2 million for the three months ended June 30, 2016 and 2015, respectively. Based on the intangible asset balances as of June 30, 2016, amortization expense is expected to approximate $21.4 million for the remaining six months of 2016, $34.4 million in 2017, $25.6 million in 2018, $24.0 million in 2019 and $23.3 million in 2020.


12


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



7.    Accrued Expenses
The components of accrued expenses as of June 30, 2016 and December 31, 2015 were:
 
 
June 30,
2016
 
December 31,
2015
Payroll and related items
$
56,468

 
$
67,209

Management incentive compensation
10,731

 
12,599

Income taxes payable
13,101

 
3,836

Insurance
9,265

 
9,505

Warranty
6,036

 
7,936

Deferred revenue
11,820

 
9,885

Restructuring
2,379

 
6,636

Liability for uncertain tax positions
4,113

 
3,498

Accrued interest
1,824

 
1,230

Contingent consideration for acquisition

 
4,705

Other
25,671

 
26,633

Total accrued expenses
$
141,408

 
$
153,672


8.    Other Noncurrent Liabilities
The components of other noncurrent liabilities as of June 30, 2016 and December 31, 2015 were:
 
 
June 30,
2016
 
December 31,
2015
Pension and retiree medical obligations
$
86,182

 
$
76,190

Liability for uncertain tax positions
3,518

 
4,252

Deferred revenue
2,041

 
3,763

Other
15,772

 
18,160

Total other noncurrent liabilities
$
107,513

 
$
102,365


9.    Borrowings
Borrowings at June 30, 2016 and December 31, 2015 consisted of the following:
 
 
June 30,
2016
 
December 31,
2015
Revolving Facility
$
210,000

 
$
195,000

4.5% Senior Notes, due December 2020
300,000

 
300,000

4.2% Senior Notes, due December 2021
350,000

 
350,000

3.2% Senior Notes, due June 2023
100,000



3.37% Senior Notes, due June 2025
100,000



Other borrowings
1,654

 
2,436

Total borrowings
1,061,654

 
847,436

Less current portion
1,233

 
1,087

Less deferred debt issuance costs
4,778

 
5,203

Less unaccreted debt discount
1,318

 
1,439

Total long-term borrowings
$
1,054,325

 
$
839,707


13


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



On June 13, 2016, the Company completed a private placement of $100 million aggregate principal amount of 3.20% Senior Notes due June 13, 2023 and $100 million aggregate principal amount of 3.37% Senior Notes due June 13, 2025 (collectively, the “Notes”) pursuant to a Note Purchase Agreement, dated June 13, 2016 (the “Purchase Agreement”). Each series of Notes bears interest at the stated amount per annum, which is payable semi-annually in arrears on each June 13th and December 13th. The Notes are unsecured obligations of the Company and rank pari passu in right of payment with all of the Company’s other unsecured, unsubordinated debt. The Company may at any time prepay all, or any portion of the Notes; provided that such portion is greater than 5% of the aggregate principal amount of Notes then outstanding. In the event of a prepayment, the Company will pay an amount equal to par plus accrued interest plus a make-whole amount. In addition, the Company may repurchase Notes by making an offer to all holder of the Notes, subject to certain conditions.
The Purchase Agreement contains certain covenants that restrict the Company’s ability to, among other things, transfer or sell assets, incur indebtedness, create liens, transact with affiliates and engage in certain mergers or consolidations or other change of control transactions. In addition, the Company must comply with a leverage ratio and interest coverage ratio, as further described below, and the Purchase Agreement also limits the outstanding principal amount of priority debt that may be incurred by the Company to 15% of consolidated assets. The Purchase Agreement provides for customary events of default. In the case of an event of default arising from specified events of bankruptcy or insolvency, all of the outstanding Notes will become due and payable immediately without further action or notice. In the case of payment event of default, any holder of the Notes affected thereby may declare all the Notes held by it due and payable immediately. In the case of any other event of default, a majority of the holders of Notes may declare all of the Notes to be due and payable immediately.
On June 23, 2015, the Company entered into a credit agreement (the “Credit Agreement”) along with certain of its subsidiaries, as borrowers (the “Borrowers”), Bank of America, N.A., as administrative agent, swing line lender and an issuer of letters of credit, with other agents party thereto. The Credit Agreement replaces the Company’s existing five-year, $700 million credit agreement, dated as of June 27, 2011, which was due to expire on June 27, 2016.
The Credit Agreement consists of a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $700 million, with a final maturity date of June 23, 2020. The maturity date may be extended under certain conditions for an additional one-year term. Up to $75 million of the Revolving Facility is available for the issuance of letters of credit. Additionally, up to $50 million of the Revolving Facility is available to the Company for swing line loans, available on a same-day basis.
Proceeds of the Revolving Facility are available for use by the Borrowers for acquisitions, working capital and other general corporate purposes, including refinancing existing debt of the Company and its subsidiaries. The Company may request increases in the lending commitments under the Credit Agreement, but the aggregate lending commitments pursuant to such increases may not exceed $350 million. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate
certain foreign subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation,
the Company is required to guarantee the obligations of any such subsidiaries.
Borrowings under the Credit Agreement bear interest, at either an alternate base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin is based on the Company’s senior, unsecured, long-term debt rating and can range from .005% to 1.50%. Based on the Company’s credit rating at June 30, 2016, the applicable margin was 1.10%, resulting in an interest rate of 1.56% at June 30, 2016. Interest is payable (a) in the case of base rate loans, quarterly, and (b) in the case of LIBOR rate loans, on the maturity date of the borrowing, or quarterly from the effective date for borrowings exceeding three months.
The Credit Agreement requires payment to the lenders of a facility fee based upon (a) the amount of the lenders’ commitments under the credit facility from time to time and (b) the applicable corporate credit ratings of the Company. Voluntary prepayments of any loans and voluntary reductions of the unutilized portion of the commitments under the credit facility are permissible without penalty, subject to break funding payments and minimum notice and minimum reduction amount requirements.
The negative covenants include, among other things, limitations (each of which is subject to customary exceptions for
financings of this type) on our ability to grant liens; enter into transactions resulting in fundamental changes (such as mergers or sales of all or substantially all of the assets of the Company); restrict subsidiary dividends or other subsidiary distributions; enter into transactions with the Company’s affiliates; and incur certain additional subsidiary debt.
The Credit Agreement also contains customary events of default (subject to grace periods, as appropriate) including among others: nonpayment of principal, interest or fees; breach of the representations or warranties in any material respect; breach of the financial, affirmative or negative covenants; payment default on, or acceleration of, other material indebtedness; bankruptcy or insolvency; material judgments entered against the Company or any of its subsidiaries; certain specified events under the Employee

14


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Retirement Income Security Act of 1974, as amended; certain changes in control of the Company; and the invalidity or unenforceability of the Credit Agreement or other documents associated with the Credit Agreement.
At June 30, 2016, $210.0 million was outstanding under the Revolving Facility, with $7.9 million of outstanding letters of credit, resulting in net available borrowing capacity under the Revolving Facility at June 30, 2016 of approximately $482.1 million.
Other borrowings of $1.7 million at June 30, 2016 consisted primarily of debt at international locations maintained for working capital purposes. Interest is payable on the outstanding debt balances at rates ranging from 0.6% to 2.8% per annum.
There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility and the Notes, a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1. At June 30, 2016, the Company was in compliance with both of these financial covenants. There are no financial covenants relating to the 4.5% Senior Notes or 4.2% Senior Notes; however, both are subject to cross-default provisions.

10.    Derivative Instruments
The Company enters into cash flow hedges from time to time to reduce the exposure to variability in certain expected future cash flows. The type of cash flow hedges the Company enters into includes foreign currency contracts and interest rate exchange agreements that effectively convert a portion of floating-rate debt to fixed-rate debt and are designed to reduce the impact of interest rate changes on future interest expense.
The effective portion of gains or losses on interest rate exchange agreements is reported in accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into net income in the same period or periods in which the hedged transaction affects net income. See Note 13 for the amount of loss reclassified into income for interest rate contracts for the six months ended June 30, 2016 and 2015. The remaining gain or loss in excess of the cumulative change in the present value of future cash flows or the hedged item, if any, is recognized into net income during the period of change.
 
Fair values relating to derivative financial instruments reflect the estimated amounts that the Company would receive or pay to sell or buy the contracts based on quoted market prices of comparable contracts at each balance sheet date. As of June 30, 2016, the Company did not have any interest rate contracts outstanding.
In 2010 and 2011, the Company entered into two separate forward starting interest rate contracts in anticipation of the issuance of the 4.2% Senior Notes and the 4.5% Senior Notes. The Company cash settled these two interest rate contracts in 2010 and 2011 for a total of $68.9 million, which is being amortized into interest expense over the 10 year term of the debt instruments. Approximately $6.7 million of the pre-tax amount included in accumulated other comprehensive income (loss) in shareholders’ equity at June 30, 2016 will be recognized to net income over the next 12 months as the underlying hedged transactions are realized.

11.    Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The following table summarizes the basis used to measure the Company’s financial assets at fair value on a recurring basis in the balance sheets at June 30, 2016 and December 31, 2015:
 

15


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



 
Basis of Fair Value Measurements
 
Balance at 
 June 30, 2016
 
Level 1
 
Level 2
 
Level 3
Money market investment
$
24,793

 
$
24,793

 
$

 
$

Available for sale securities
5,358

 
5,358

 

 

 
 
Basis of Fair Value Measurements
 
Balance at 
 December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Money market investment
$
21,931

 
$
21,931

 
$

 
$

Available for sale securities
4,794

 
4,794

 

 

Contingent consideration
(4,705
)
 

 

 
(4,705
)
There were no transfers of assets or liabilities between Level 1 and Level 2 during the three and six months ended June 30, 2016 or the year ended December 31, 2015.
In determining the fair value of the contingent consideration potentially due on the acquisition of CPS, the Company used probability weighted estimates of EBITDA during the earn-out period. The $4.7 million represented management’s best estimate of the liability as of the opening balance sheet date and December 31, 2015, based on a range of outcomes of CPS’s 12 month operating results, from July 1, 2015 to June 30, 2016. During the six months ended June 30, 2016, the Company re-evaluated the contingent consideration arrangement and fully reversed the $4.7 million liability based on CPS’s actual operating results from July 1, 2015 to June 30, 2016. The reversal was recognized as a benefit within Selling, general and administrative expenses and amounted to $1.0 million and $4.7 million during the three and six months ended June 30, 2016, respectively.
The carrying value of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair values because of the short term nature of these instruments. At June 30, 2016, the fair value of the outstanding indebtedness under our Revolving Facility, 3.2% Senior Notes, 3.37% Senior Notes, 4.5% Senior Notes and 4.2% Senior Notes, based on quoted market prices and current market rates for debt with similar credit risk and maturity, was approximately $1,105.7 million compared to the carrying value of $1,058.7 million. This fair value measurement is classified as Level 2 within the fair value hierarchy since it is determined based upon significant inputs observable in the market, including interest rates on recent financing transactions to entities with a credit rating similar to ours.

12.    Restructuring
During the fourth quarter of 2015, the Company recorded restructuring costs as part of the 2015 restructuring initiatives that support the implementation of key strategic efforts designed to facilitate long-term, sustainable growth through cost reduction actions, primarily consisting of employee reductions. The costs incurred related to these initiatives were included in Restructuring expenses in the Consolidated Statements of Operations while the related accruals were included in Accrued expenses in the Consolidated Balance Sheets. Severance costs primarily consisted of severance benefits through payroll continuation, COBRA subsidies, outplacement services, conditional separation costs and employer tax liabilities.
Restructuring accruals of $2.4 million and $6.6 million at June 30, 2016 and December 31, 2015, respectively, are recorded in Accrued expenses in the Consolidated Balance Sheets. Severance benefits are expected to be paid in the next nine months using cash from operations. The changes in the restructuring accrual for the six months ended June 30, 2016 are as follows:
 
 
Restructuring
Balance at January 1, 2016
 
$
6,636

Payments, utilization and other
 
(4,257
)
Balance at June 30, 2016
 
$
2,379

    

16


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



13.    Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30, 2016
 
Three Months Ended 
 June 30, 2015
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Cumulative translation adjustment
$
(27,043
)
 
$

 
$
(27,043
)
 
$
23,743

 
$

 
$
23,743

Pension and other postretirement adjustments
912

 
(321
)
 
591

 
1,215

 
(395
)
 
820

Reclassification adjustments for derivatives
1,719

 
(626
)
 
1,093

 
1,767

 
(641
)
 
1,126

Total other comprehensive income (loss)
$
(24,412
)
 
$
(947
)
 
$
(25,359
)
 
$
26,725

 
$
(1,036
)
 
$
25,689

 
Six Months Ended 
 June 30, 2016
 
Six Months Ended 
 June 30, 2015
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Cumulative translation adjustment
$
(10,826
)
 
$

 
$
(10,826
)
 
$
(32,894
)
 
$

 
$
(32,894
)
Pension and other postretirement adjustments
1,905

 
(643
)
 
1,262

 
2,390

 
(790
)
 
1,600

Reclassification adjustments for derivatives
3,443

 
(1,253
)
 
2,190

 
3,539

 
(1,283
)
 
2,256

Total other comprehensive income (loss)
$
(5,478
)
 
$
(1,896
)
 
$
(7,374
)
 
$
(26,965
)
 
$
(2,073
)
 
$
(29,038
)

The following table summarizes the amounts reclassified from accumulated other comprehensive income to net income during the six months ended June 30, 2016 and 2015:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
 
Pension and other postretirement plans
 
 
 
 
 
 
 
 
Amortization of service cost
$
912

 
$
1,215

 
$
1,905

 
$
2,390

 
Total before tax
912

 
1,215

 
1,905

 
2,390

 
Provision for income taxes
(321
)
 
(395
)
 
(643
)
 
(790
)
 
Total net of tax
$
591

 
$
820

 
$
1,262

 
$
1,600

 
Derivatives
 
 
 
 
 
 
 
 
Reclassification adjustments
$
1,719

 
$
1,767

 
$
3,443

 
$
3,539

 
Total before tax
1,719

 
1,767

 
3,443

 
3,539

 
Provision for income taxes
(626
)
 
(641
)
 
(1,253
)
 
(1,283
)
 
Total net of tax
$
1,093

 
$
1,126

 
$
2,190

 
$
2,256

 

The Company recognizes net periodic benefit cost in both Selling, general and administrative expenses and Cost of sales, depending on the functional area of the underlying employees included in the plans.

14.    Common and Preferred Stock
On December 1, 2015, the Company’s Board of Directors approved a $300.0 million increase in the authorized level for repurchases of common stock. Repurchases will be funded with future cash flow generation or borrowings available under the Revolving Facility. During the six months ended June 30, 2016, the Company purchased a total of 726 thousand shares at a cost of $53.9 million, of which $0.2 million was settled in July 2016. During the six months ended June 30, 2015, the Company purchased 1.5 million shares at a cost of $113.3 million, of which $2.3 million was settled in July 2015. As of June 30, 2016, the amount of share repurchase authorization remaining is $581.1 million.
At June 30, 2016 and December 31, 2015, the Company had 150 million shares of authorized common stock, with a par value of $.01 per share, and 5 million shares of authorized preferred stock, with a par value of $.01 per share. No preferred stock was outstanding at June 30, 2016 or December 31, 2015.

17


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



15.    Share-Based Compensation

Stock Options
Weighted average option fair values and assumptions for the periods specified are disclosed below. The fair value of each option grant was estimated on the date of the grant using the Binomial lattice option pricing model.
 
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Weighted average fair value of option grants
$20.60
 
$19.49
 
$18.41
 
$20.39
Dividend yield
1.63%
 
1.65%
 
1.70%
 
1.42%
Volatility
29.62%
 
29.87%
 
29.71%
 
29.94%
Risk-free forward interest rate
0.60% - 2.56%
 
0.26% - 3.11%
 
0.53% - 2.50%
 
0.23% - 2.75%
Expected life (in years)
5.91
 
5.90
 
5.91
 
5.90
Total compensation cost for stock options is as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$
143

 
$
124

 
$
262

 
$
350

Selling, general and administrative expenses
1,511

 
1,494

 
3,806

 
3,690

Total expense before income taxes
1,654

 
1,618

 
4,068

 
4,040

Income tax benefit
(526
)
 
(502
)
 
(1,286
)
 
(1,269
)
Total expense after income taxes
$
1,128

 
$
1,116

 
$
2,782

 
$
2,771

A summary of the Company’s stock option activity as of June 30, 2016, and changes during the six months ended June 30, 2016, are presented in the following table:
 
Stock Options
Shares
 
Weighted
Average
Price
 
Weighted-Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2016
2,266,433

 
$
54.05

 
6.58
 
$
51,918,028

Granted
549,815

 
74.80

 
 
 
 
Exercised
(393,142
)
 
43.03

 
 
 
 
Forfeited
(64,874
)
 
71.49

 
 
 
 
Outstanding at June 30, 2016
2,358,232

 
$
60.25

 
7.12
 
$
51,540,880

Vested and expected to vest as of June 30, 2016
2,204,293

 
$
59.23

 
6.98
 
$
50,424,569

Exercisable at June 30, 2016
1,211,400

 
$
47.70

 
5.52
 
$
41,674,285


Restricted Stock
Restricted stock awards generally cliff vest after three years for employees and non-employee directors. Unvested restricted stock carries dividend and voting rights and the sale of the shares is restricted prior to the date of vesting. A summary of the Company’s restricted stock activity as of June 30, 2016, and changes during the six months ended June 30, 2016, are presented as follows:


18


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Restricted Stock
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1, 2016
272,755

 
$
65.90

Granted
60,120

 
75.01

Vested
(100,972
)
 
51.41

Forfeited
(13,420
)
 
73.83

Unvested at June 30, 2016
218,483

 
$
74.61

Dividends are paid on restricted stock awards and whose fair value is equal to the market price of the Company’s stock at the date of the grant.

Total compensation cost for restricted shares is as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$
133

 
$
94

 
$
261

 
$
255

Selling, general and administrative expenses
968

 
1,256

 
2,498

 
3,513

Total expense before income taxes
1,101

 
1,350

 
2,759

 
3,768

Income tax benefit
(324
)
 
(365
)
 
(837
)
 
(1,054
)
Total expense after income taxes
$
777

 
$
985

 
$
1,922

 
$
2,714


Cash-Settled Restricted Stock
The Company also maintains a cash-settled share based compensation plan for certain employees. Cash-settled restricted stock awards generally cliff vest after three years. A summary of the Company’s unvested cash-settled restricted stock activity as of June 30, 2016, and changes during the six months ended June 30, 2016, are presented in the following table:
Cash-Settled Restricted Stock
Shares
 
Weighted-Average
Fair Value
Unvested at January 1, 2016
110,860

 
$
76.61

Granted
39,450

 
82.10

Vested
(35,750
)
 
72.41

Forfeited
(7,340
)
 
82.10

Unvested at June 30, 2016
107,220

 
$
82.10

Dividend equivalents are paid on certain cash-settled restricted stock awards. Total compensation cost for cash-settled restricted stock is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$
131

 
$
226

 
$
320

 
$
544

Selling, general and administrative expenses
461

 
485

 
961

 
925

Total expense before income taxes
592

 
711

 
1,281

 
1,469

Income tax benefit
(86
)
 
(107
)
 
(184
)
 
(224
)
Total expense after income taxes
$
506

 
$
604

 
$
1,097

 
$
1,245



19


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



Performance Share Units
Weighted average performance share unit fair values and assumptions for the period specified are disclosed below. The performance share units are market condition awards and have been assessed at fair value on the date of grant using a Monte Carlo simulation model.
 
 
Three and Six Months Ended June 30,
 
 
2016
 
2015
Weighted average fair value of performance share units
 
$111.42
 
$95.07
Dividend yield
 
—%
 
—%
Volatility
 
17.99%
 
19.14%
Risk-free forward interest rate
 
0.89%
 
1.01%
Expected life (in years)
 
2.86
 
2.86
 A summary of the Company’s performance share unit activity as of June 30, 2016, and changes during the six months ended June 30, 2016, are presented in the following table:

Performance Share Units
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1, 2016
146,275

 
$
94.80

Granted
85,130

 
111.42

Vested

 

Forfeited
(1,065
)
 
94.74

Unvested at June 30, 2016
230,340

 
$
100.95

Performance share units that vested on December 31, 2015 resulted in 87,600 shares issued in February 2016.
Total compensation cost for performance share units is as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$

 
$

 
$

 
$

Selling, general and administrative expenses
1,815

 
1,183

 
3,496

 
2,525

Total expense before income taxes
1,815

 
1,183

 
3,496

 
2,525

Income tax benefit
(633
)
 
(408
)
 
(1,168
)
 
(838
)
Total expense after income taxes
$
1,182

 
$
775

 
$
2,328

 
$
1,687

The Company’s policy is to recognize compensation cost on a straight-line basis, assuming forfeitures, over the requisite service period for the entire award. Classification of stock compensation cost within the Consolidated Statements of Operations is consistent with classification of cash compensation for the same employees.
As of June 30, 2016, there was $14.3 million of total unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 1.5 years, $10.4 million of total unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of 1.1 years, and $10.1 million of total unrecognized compensation cost related to performance share units that is expected to be recognized over a weighted-average period of 1.1 years.


20


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)



16.    Retirement Benefits
The Company sponsors several qualified and nonqualified defined benefit and defined contribution pension plans and other postretirement plans for its employees. The following tables provide the components of net periodic benefit cost for its major defined benefit plans and its other postretirement plans.
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Three Months Ended June 30,
 
2016
 
2015
 
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
Service cost
$
294

 
$
304

 
$
376

 
$
376

Interest cost
747

 
355

 
937

 
433

Expected return on plan assets
(1,175
)
 
(220
)
 
(1,248
)
 
(280
)
Net amortization
827

 
243

 
855

 
470

Net periodic benefit cost
$
693

 
$
682

 
$
920

 
$
999

 
Pension Benefits
 
Six Months Ended June 30,
 
2016
 
2015
 
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
Service cost
$
588

 
$
603

 
$
751

 
$
757

Interest cost
1,494

 
705

 
1,875

 
868

Expected return on plan assets
(2,350
)
 
(439
)
 
(2,496
)
 
(556
)
Net amortization
1,654

 
481

 
1,679

 
929

Net periodic benefit cost
$
1,386

 
$
1,350

 
$
1,809

 
$
1,998

 
 
Other Postretirement Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
181

 
$
169

 
$
313

 
$
338

Interest cost
224

 
209

 
398

 
418

Net amortization
(154
)
 
(111
)
 
(308
)
 
(219
)
Net periodic benefit cost
$
251

 
$
267

 
$
403

 
$
537

The Company previously disclosed in its financial statements for the year ended December 31, 2015, that it expected to contribute approximately $6.1 million to its defined benefit plans and $0.9 million to its other postretirement benefit plans in 2016. As of June 30, 2016, the Company now expects to contribute $5.4 million to its defined benefit plans and $0.9 million to its other postretirement benefit plans in 2016. The Company contributed a total of $2.2 million during the first six months of 2016 to fund these plans.
17.    Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary course of business, none of which are expected to have a material impact on its financial condition, results of operations or cash flows.


21


IDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data and where otherwise indicated)
(unaudited)




18.    Income Taxes
The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes decreased to $27.9 million in the second quarter of 2016 from $28.9 million in the same period of 2015. The effective tax rate decreased to 26.9% for the second quarter of 2016 compared to 29.4% in the same period of 2015 due to the early adoption of ASU 2016-09 and the related tax effects of share based payments now recognized in income, the enactment of the Protecting Americans from Tax Hikes Act of 2015 on December 18, 2015 which, beginning in 2015, permanently extended the U.S. Research and Development credit, as well as the mix of global pre-tax income among jurisdictions.

The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The provision for income taxes decreased to $52.6 million in the six months ended June 30, 2016 from $55.8 million in the same period of 2015. The effective tax rate decreased to 26.8% for the six months ended June 30, 2016 compared to 29.2% in the same period of 2015 due to the mix of global pre-tax income among jurisdictions. Additionally, the effective tax rate for the current year period was favorably impacted by the early adoption of ASU 2016-09 and the related tax effects of share based payments now recognized in income and the effective tax rate for the comparable period of the prior year was favorably impacted by the enactment of the Protecting Americans from Tax Hikes Act of 2015 on December 18, 2015 which, beginning in 2015, permanently extended the U.S. Research and Development credit.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $4.1 million.

19.    Subsequent Events
On July 1, 2016, the Company announced the acquisition of AWG Fittings GmbH (“AWG”), for cash consideration of approximately $51 million (€46 million). AWG, located in Ballendorf, Germany, produces a large array of engineered-life safety products for the safety and emergency response markets, including apparatus valves, monitors, nozzles, and hydraulic rescue tools. AWG has annual revenues of approximately $40 million and will operate within our Fire & Safety/Diversified Products segment.
On July 28, 2016, the Company entered into a definitive agreement to acquire SFC-Koenig AG (“SFC”) for cash consideration based on an enterprise value of approximately $240 million (€217 million), subject to certain customary post-closing adjustments. SFC offers solutions for quick and reliable metal-to-metal sealing and flow control applications. With its wide product range of bore diameters and pressure ranges, SFC is a solution provider for the transportation, hydraulics, aerospace and medical industries. Located in Dietikon, Switzerland, SFC has annual revenues of approximately $63 million (€57 million) and will operate within our Health & Science Technologies segment. The transaction is expected to close in approximately 30 to 45 days, subject to regulatory approvals and customary closing conditions.

On July 29, 2016, the Company entered into a definitive agreement to sell its shares of Melles Griot KK, based in Tamagawa, Japan, in an all cash transaction for approximately $19 million (¥2 billion) on a cash-free, debt-free basis, subject to certain customary post-closing adjustments. The results of Melles Griot KK were reported within the Health & Science Technologies segment and Melles Griot KK generated revenues of approximately $19 million in 2015. The transaction is expected to close by the end of the third quarter, subject to customary closing conditions.

On July 29, 2016, the Company entered into a definitive agreement and completed the sale of its Hydra-Stop product line, based in Burr Ridge, IL, for cash consideration of $15 million, subject to customary post-closing adjustments, and contingent consideration of up to $2 million based on financial objectives for net sales in 2016 and 2017. The results of the product line were reported within the Fluid & Metering Technologies segment and the product line generated revenues of approximately $11 million in 2015.

22


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Under the Private Securities Litigation Reform Act
This quarterly report on Form 10-Q, including the “Overview and Outlook” and the “Liquidity and Capital Resources” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements may relate to, among other things, capital expenditures, acquisitions, cost reductions, cash flow, revenues, earnings, market conditions, global economies and operating improvements, and are indicated by words or phrases such as “anticipate,” “estimate,” “plans,” “expects,” “projects,” “forecasts,” “should,” “could,” “will,” “management believes,” “the Company believes,” “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 report. 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 order rates and IDEX’s results, particularly in light of the low levels of order backlogs it typically maintains; its 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 the company operates; 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 management undertakes no obligation to publicly update them to reflect subsequent events or circumstances, except as may be required by law. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.

Overview and Outlook
IDEX is an applied solutions company specializing in fluid and metering technologies, health and science technologies, and fire, safety and other diversified products built to customers’ specifications. IDEX’s products are sold in niche markets to a wide range of industries throughout the world. Accordingly, IDEX’s businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where it does business and by the relationship of the U.S. Dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are among the factors that influence the demand for IDEX’s products.
The Company has three reportable business segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”). Within our three reportable segments, the Company maintains fifteen platforms where we focus on organic growth and strategic acquisitions. Each of our fifteen platforms is also a reporting unit, where we annually test goodwill for impairment.
The Fluid & Metering Technologies segment contains the Energy (comprised of Corken, Faure Herman, Liquid Controls, SAMPI and Toptech), Valves (comprised of Alfa Valvole), Water (comprised of Pulsafeeder, Knight, ADS, IETG, and iPEK), Industrial (comprised of Richter, Viking, Aegis, Warren Rupp, and Trebor), and Agricultural (comprised of Banjo) platforms. The Health & Science Technologies segment contains the IDEX Optics & Photonics (comprised of CVI Melles Griot, Semrock, and AT Films), Scientific Fluidics (comprised of Eastern Plastics, Rheodyne, Sapphire Engineering, Upchurch, ERC, and CiDRA Precision Services), Material Processing Technologies (comprised of Quadro, Fitzpatrick, Microfluidics, and Matcon), Sealing Solutions (comprised of PPE, FTL, and Novotema), Micropump, and Gast platforms. The Fire & Safety/Diversified Products segment is comprised of the Dispensing, Rescue (comprised of Lukas, Vetter, Hurst Jaws of Life, and Dinglee), Band-It, and Fire Suppression (comprised of Class 1, Hale, Akron Brass, and Godiva) platforms. 
The Fluid & Metering Technologies segment designs, produces and distributes positive displacement pumps, flow meters, injectors, and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food, chemical, general industrial, water and wastewater, agricultural and energy industries.
The Health & Science Technologies segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems used in beverage, food processing, pharmaceutical and cosmetics, pneumatic components and sealing solutions, very high precision, low-flow rate pumping solutions required in analytical instrumentation, clinical diagnostics and drug discovery, high performance molded and extruded, biocompatible medical devices and implantables, air compressors used in medical, dental and industrial applications, optical components and coatings for applications in the fields of scientific research, defense, biotechnology, aerospace, telecommunications and electronics manufacturing, laboratory and commercial equipment used in the production of micro and nano scale materials, precision photonic solutions used in life sciences, research and defense markets, and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications.

23


The Fire & Safety/Diversified Products segment produces firefighting pumps and controls, valves, monitors, nozzles, rescue tools, lifting bags and other components and systems for the fire and rescue industry, engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications, and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.
Management’s primary measurements of segment performance are sales, operating income, and operating margin. In addition, due to the highly acquisitive nature of the Company, the determination of operating income includes amortization of acquired intangible assets and, as a result, management reviews depreciation and amortization as a percentage of sales. These measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are analyzed with segment management.
This report references organic sales, a non-GAAP measure, that refers to sales calculated according to U.S. GAAP but excluding amounts from acquired or divested businesses during the first twelve months after acquisition or divestiture and the impact of foreign currency translation. The portion of sales attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and (b) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. The Company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because the nature, size, and number can vary dramatically from period to period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult.
In addition, this report references EBITDA. EBITDA means earnings before interest, income taxes, depreciation and amortization. Given the acquisitive nature of the Company, which results in a higher level of amortization expense at recently acquired businesses, management uses EBITDA as an internal operating metric to provide another representation of performance of businesses across our three segments and for enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the Company and a way to evaluate and compare operating performance and value companies within our industry. EBITDA is also used to calculate certain financial covenants, as discussed in Note 9 of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements.”
Organic sales have been reconciled to Net sales and EBITDA has been reconciled to Net income in Item 2 under the heading “Non-GAAP Disclosures.” The reconciliation of segment EBITDA to net income was performed on a consolidated basis due to the fact that we do not allocate consolidated interest expense or the consolidated provision for income taxes to our segments.
The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP, and the financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.
Some of our key financial results for the three months ended June 30, 2016 when compared to the same period from the prior year are as follows:
Sales of $550 million increased 7%; organic sales (which excludes acquisitions, divestitures and foreign currency translation) were down 1%.
Operating income of $113 million increased 3%.
Net income increased 9% to $76 million or 14% of sales.
EBITDA of $137 million was 25% of sales and covered interest expense by more than 12 times.
Diluted EPS of $0.99 increased 10 cents, or 11%.
Some of our key financial results for the six months ended June 30, 2016 when compared to the same period from the prior year are as follows:
Sales of $1.1 billion increased 3%; organic sales (which excludes acquisitions, divestitures and foreign currency translation) were down 2%.
Operating income of $216 million increased 2%.
Net income increased 6% to $144 million or 14% of sales.
EBITDA of $260 million was 25% of sales and covered interest expense by nearly 12 times.
Diluted EPS of $1.87 increased 15 cents, or 9%.

24


Given the Company’s current outlook, we are projecting third quarter 2016 EPS in the range of $0.90 to $0.92 with full year 2016 EPS of $3.70 to $3.75. This guidance anticipates flat organic growth for the year with operating margin between 20.5 and 21.0 percent.

Results of Operations
The following is a discussion and analysis of our results of operations for the three and six month periods ended June 30, 2016 and 2015. Segment operating income and EBITDA excludes unallocated corporate operating expenses of $16.1 million and $15.5 million for the three months ended June 30, 2016 and 2015, respectively, and $31.1 million and $34.3 million for the six months ended June 30, 2016 and 2015, respectively.

Consolidated Results for the Three Months Ended June 30, 2016 Compared with the Same Period of 2015
(In thousands)
Three Months Ended 
 June 30,
 
2016
 
2015
Net sales
$
549,696

 
$
514,881

Operating income
112,976

 
109,909

Operating margin
20.6
%
 
21.3
%
For the second quarter of 2016, Fluid & Metering Technologies contributed 40% of sales, 42% of operating income and 40% of EBITDA; Health & Science Technologies accounted for 34% of sales, 32% of operating income and 35% of EBITDA; and Fire & Safety/Diversified Products represented 26% of sales, 26% of operating income and 25% of EBITDA. These percentages are calculated on the basis of total segment (not total Company) sales, operating income and EBITDA.
Sales in the three months ended June 30, 2016 were $549.7 million, a 7% increase from the comparable period last year. This increase reflects an 8% increase from acquisitions (Novotema - June 2015, Alfa - June 2015, CPS - July 2015 and Akron Brass - March 2016) and a 1% decrease in organic sales. Sales to customers outside the U.S. represented approximately 50% of total sales in the second quarter of 2016 compared to 51% during the same period in 2015.
Gross profit of $244.1 million in the second quarter of 2016 increased $12.4 million, or 5%, from the same period in 2015. Gross margin of 44.4% in the second quarter of 2016 decreased 60 basis points from 45.0% during the same period in 2015. The decrease in gross margin is primarily due to a $3.6 million fair value inventory step-up charge related to the Akron Brass acquisition.
Selling, general and administrative expenses increased to $131.1 million in the second quarter of 2016 from $121.7 million during the same period of 2015. The increase is primarily related to $9.7 million of incremental costs from acquisitions, partially offset by the $1.0 million reversal of contingent consideration from a 2015 acquisition. As a percentage of sales, selling, general and administrative expenses were 23.8% for the second quarter of 2016, up 10 basis points from the 23.7% for the same period of 2015.
Operating income of $113.0 million, in the second quarter of 2016, was up from the $109.9 million recorded during the same period in 2015