IDEX “tough-minded” in CVI Melles restructure

24 Jul 2012

CVI Melles Griot parent company has slashed costs at the photonics subsidiary as it seeks to boost productivity and profit margins.

IDEX, the industrial technology company that acquired the well-known optics firm CVI Melles Griot just over a year ago, has cut headcount within the division by around 20% as it strives to improve profitability in what is proving to be a tough market environment.

In a conference call to discuss IDEX’s second-quarter financial results, CEO Andy Silvernail told investors that one CVI site had been closed and that two other major manufacturing facilities were being rationalized in what he described as “pretty aggressive” actions to improve margins.

Those actions are taking place largely in Europe, where employment rules make cost-cutting more difficult than in the US. The restructuring is set to continue while IDEX is also battling what it described as “uncertainty in several OEM markets” in which CVI operates.

The optics subsidiary is exposed to swings in demand from the defense and semiconductor sectors. Together those sectors accounted for just under half of the firm's revenues in 2010, but both of the markets are weak at the moment. While Silvernail stressed that IDEX remained convinced of the underlying potential of the photonics sector, in which it has said that it aims to further expand, at the moment it was “working through a tough patch in optics”.

IDEX says that its “right-sizing” of CVI, which it acquired for $400 million from private equity group Norwest Equity Partners, is due to be completed by the end of this year.

But with IDEX known for running its various businesses in the manner of a very tight ship, CVI is dragging down the company’s overall profitability at a time when it is battling against weakening demand in both China and, in particular, Europe. “We need to be very tough-minded,” said Silvernail.

European drag
Describing the macroeconomic picture and general trends, the CEO said that demand began to deteriorate shortly after IDEX set its initial guidance for Q2, first in Europe and then in China. The good news for the company is that demand from North America remains robust for now, but IDEX has nevertheless been forced to reduce its full-year guidance.

“The fiscal year now looks more challenging than it looked in Q1,” the CEO said. “The CVI Melles Griot integration is on track, however top-line pressure has resulted in lower than expected financial performance. CVI has very high contribution margins and given the current environment, we need to continue to right-size their cost structure in order to drive profitability.”

Sales from CVI make up around a quarter of total revenues from IDEX’s “health and science technologies (HST)” division, which posted sales of $171 million in the latest quarter. That represented an increase of around 21% on the year-ago figure of $140 million, largely reflecting the additional CVI revenues.

But the HST division’s operating margin fell from 21.3% a year ago to just 16.6% in Q2 of 2012, demonstrating the dilutive effect of the acquisition and indicating why IDEX is continuing to cut costs at CVI.

With the weakening market in mind, IDEX has now revised its sales and earnings guidance for the year. It now expects to post $1.94 billion in sales, down from $2 billion previously, with earnings of $2.65-$2.70 per share, down from $2.80-$2.85.

However, the company remains highly profitable and is sitting on a large pile of cash – much of which may be used to fund further acquisitions, some of which are likely to be in the photonics sector.