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

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term ratings for IDEX Corporation at 'BBB+'. The Rating Outlook is Stable. The ratings affect $853 million of total debt outstanding as of Sept. 30, 2015. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings and Outlook incorporate a modest softening in IDEX's sales in the near term in the context of healthy operating trends over the past five years. IDEX benefits from a diversified customer and product portfolio and a focus on improving operational efficiency, which serve to moderate the effect of cyclical end-markets. Acquisition activity will augment mature organic growth and, depending on the pace of acquisitions, could push financial leverage moderately higher. However, Fitch expects leverage will remain within its historical range supported by steady profitability and free cash flow (FCF).

IDEX's top line softened in the first nine months of 2015, with consolidated sales down 6% due to lower organic sales and the impact of foreign currency translation. The EBITDA margin was nonetheless up approximately 50 basis points (bps) to 24.9% in the nine months ended Sept. 30, 2015 from the year earlier period reflecting a shift in the sales mix and strong cost control efforts. By end-market, demand remains mixed, with weak demand in IDEX's energy, agricultural and North American industrial markets. This has been partly offset by stronger results in water services, scientific fluidics and sealing solutions.

Profitability should be steady over the near term as the effect of lower volumes is offset by productivity initiatives and restructuring activities. Heightened focus on cost efficiencies and more fully integrating past acquisitions should strengthen productivity. Fitch anticipates an EBITDA margin of around 25% over the next two years, with some upside longer-term. Fitch expects FCF will track at or above $200 million annually, with steady operating income over the near term, capital spending equal to approximately 2% of revenues, and a 30%-35% dividend payout ratio.

FCF will be used for a combination of acquisitions and share repurchases, and Fitch believes that acquisition spending will likely track at higher levels going forward despite currently high M&A valuations. IDEX uses recurring acquisitions to augment its business and technology portfolio, targeting businesses with attractive margins, strong niche market positions and technologies primarily in adjacent markets. Acquisitions have totalled $200 million thus far in 2015, exceeding the cumulative total from 2012-2014, and could track at or above that level on an annual basis going forward.

In November 2014, the company's Board of Directors approved a $400 million increase in the share repurchase authorization. During the first nine months of 2015, IDEX repurchased $178 million in shares, though the pace of share repurchases would likely slow if the pace of acquisitions remains elevated.

Total leverage (total debt-to-operating EBITDA) was flat at 1.6x at Sept. 30, 2015 compared with year end-2014, and EBITDA/interest declined slightly to 12.5x in the LTM period from 12.9x in 2014. Fitch believes larger acquisitions would be debt financed, and that leverage could inch higher over the next few years as the combination of acquisitions and share repurchases could exceed FCF. Debt/EBITDA has historically ranged from 1.5x-2.0x, and Fitch assumes leverage will move higher within this range, though there could be temporary spikes in leverage associated with larger acquisitions.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for IDEX include:

--Revenues decline by 5%-6% in 2015 due to a 2%-3% decline in organic growth, a -4% impact from currencies and +1% from acquisitions.

--Revenues grow by 3% in 2016 due to flat organic growth and 3% from acquisitions. Thereafter revenues grow at 7% annually, 3% from organic growth and 4% from acquisitions.

--EBITDA margins are flat at 2014 levels.

--Acquisitions of $300 million annually.

--FCF is steady at or above $200 million annually.

RATING SENSITIVITIES

The ratings are unlikely to be upgraded in the absence of meaningfully higher annual FCF and commitment to more conservative financial policies.

The following factors, individually or collectively, could lead to a negative rating action: A sustained increase in financial leverage, with debt/EBITDA moving above 2.0x and funds from operations (FFO) adjusted leverage moving above 3.0x for an extended period or the FCF margin declines to below 8%-10%.

LIQUIDITY

IDEX has adequate liquidity, which as of Sept. 30, 2015 consisted of $306 million of cash and cash equivalents, the bulk of which was held outside the U.S., a $700 million credit facility expiring in 2020 (approximately $500 million available), and annual FCF at or above $200 million.

FULL LIST OF RATING ACTIONS

Fitch affirms IDEX's ratings as follows:

-- Long-term IDR at 'BBB+';

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

--Senior unsecured debt at 'BBB+'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Oct. 20, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992622

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Contacts

Fitch Ratings
Primary Analyst:
Philip Zahn, +1-312-606-2336
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Philip Zahn, +1-312-606-2336
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com