IDEX 'halfway through' CVI Melles integration

27 Apr 2012

Parent company cuts operating expenses at its optics and photonics subsidiary in a bid to improve margins.

IDEX Corporation, the industrial fluidics company that acquired CVI Melles Griot last year, says that it is halfway through the integration of the photonics firm within its “health and sciences technology” (HST) division, and will complete the process by the end of the year.

Speaking to investors about IDEX’s first-quarter financial results for 2012, CEO Andy Silvernail said that the integration was “on track”, and remained the highest priority for the company. “We've completed one facility consolidation in Q1 and additional rationalization is in process,” he said, as the parent company looks to trim operating costs at CVI and bring its margins closer to the IDEX average.

Those productivity efforts have been somewhat hampered by weaker semiconductor and defense markets than IDEX had expected, which together account for around one-third of CVI’s sales revenues. “The scientific and industrial markets are reasonably robust, but we continue to feel pressure for semiconductor and defense,” Silvernail said.

“Talent upgrade”
As well as trimming marketing spend, IDEX has made several changes to management within the newly formed “optics and photonics platform”, which includes Semrock and ATFilms as well as CVI, as it primes the division for future growth. Silvernail said: “We've upgraded talent in sales and marketing, product development, operations and finance. We're building a platform team that can win now and put us in position to continue to grow organically and through acquisitions.”

Only last week, IDEX added further to its burgeoning photonics operation with the acquisition of Precision Photonics for $20 million, while the CEO describes the company’s mergers and acquisitions pipeline as “full”.

“We continue to progress in late stages of diligence on additional acquisition targets,” Silvernail told investors, adding that the target price for those deals would likely be in the $25 million-$100 million region.

Technologically, IDEX is concentrating on developing three topics in particular within optics and photonics this year. Those areas are high-speed pulse laser optics, advanced metrology and optical-fluidic engines. Speaking about the third of those areas, Silvernail said: “This technology uniquely leverages IDEX's strengths by combining the best of microfluidics, optics and photonics in a highly engineered, compact solution that will be used in the next generation of biotech, and in diagnostic systems.”

Margin impact
IDEX’s HST division posted sales of $174 million in the quarter ended March 31 – up 35% year-on-year, an increase that was mostly a result of the CVI acquisition. That helped propel the wider company to record sales, but the lower profitability of CVI compared with IDEX’s existing businesses dragged down operating margins significantly, highlighting the management team’s desire to cut costs.

The HST division delivered operating income of $31.7 million on sales of $173.8 million in the latest quarter, compared with an operating income of $29.5 million on sales of only $129.2 million in the same period last year – meaning that the acquisition was largely responsible for a 4.5% negative impact on operating margins.

By the end of this year, IDEX expects to have completed the vast majority of integration and facility consolidation relating to CVI, although it will likely have more photonics-related acquisitions to integrate in the meantime.

With nearly $250 million in cash on its balance sheet, IDEX easily has the financial muscle to push through deals on the scale of Precision Photonics. And while that balance sheet also shows a hefty long-term debt of $770 million, the wider company’s cash-generating ability (free cash flow in the latest quarter was $52 million) and market capitalization currently in the region of $3.6 billion suggests that this should not be an issue.

IDEX borrowed $325 million to part-finance the $400 million acquisition of CVI, which has annual revenues in the region of $185 million.