Wendy Palacios:

Good morning, everyone. This is Wendy Palacios, Vice President of FP&A and Investor Relations for IDEX Corporation.

Eric Ashleman:

Thanks, Wendy, and good morning, everyone. I'm on Slide 3. In Q1, our core execution capabilities delivered strong results, particularly within our Fluid & Metering Technologies and Fire & Safety/Diversified Products businesses. We experienced an encouraging lift in sequential orders from our core industrial and municipal markets after a period of elongated destocking, and we were able to quickly capitalize on this bounce and deliver for our customers.

Eric Ashleman:

Thanks, Abhi. I'm on Slide 10. I'd like to close by coming back to the simple value equation I talked about in my opening remarks. It all starts with organic growth outperformance, typically targeting 300 basis points above market entitlements. We drive about 20 to 25 bps across the company at any one time to achieve these results. I highlighted earlier some examples of growth initiatives through Applied Technologies within HST.

Operator:

[Operator Instructions]

Michael Halloran:

So just a simple question, Eric. Maybe just talk about, in your mind, if anything has really changed in the market since you gave the last guidance or from an expectation perspective, obviously, dispensing a little better in the first quarter, doesn't seem like your expectations for the remainder of the year are all that different.

Eric Ashleman:

Yes. No, thanks for the question. I mean not a lot that's different. I mean, I provided some color around the cadence of those kind of smaller flow FMT order of businesses that we have that are such good diagnostics. I think just to show that at the end of the day, the call remains the same, but it was interesting to watch the sensitivity and kind of ebb and flow in a way.

Michael Halloran:

Yes. No, makes sense. And then an HST margin question. Obviously, you're running well below peak right now. When you get mix normalized and those end markets come back, whether it's '25 or later, back part of this year, as you just mentioned, how do you think about margin normalization?

Abhishek Khandelwal:

Yes, Mike, this is Abhi. So I think if you go back 90 days and think about the discussion near the end of Q4, I think, look, what we've said is that the volumes come back in HST, more specifically in life sciences and the semicon that Eric just talked about. This business levers really well. And what we have said is we expect margins to be closer to 30% in HST once our volumes are back.

Operator:

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Eric Ashleman:

Yes. And that cadence that I articulated in the opening in Mike's question was really right there. It was on those bellwether businesses that we aggregate, take a look at weekly and then kind of use as an ultimate barometer of industrial health for IDEX. And I think, again, we saw those launching really strong in January, continued into February. It was interesting, a little bit of a pullback in March, and we had Easter earlier than ever before. So probably some of it.

Deane Dray:

That's real helpful. And I'm glad you mentioned about that normalization of supply chain because that's been a focus. And just a separate question on the life sciences, analytical instruments market. We've been watching this and just kind of waiting where and how that -- the destocking might run its course and it just really hasn't turned the corner yet. I did see one of the life science guys report a strong quarter, but that was more on the bio processing side, less on the instrument side.

Eric Ashleman:

Yes. So I think there's a couple of points to hit there. I'll start with the first where you ended. I mean the lag is -- I mean it's not extended for us because most of our replenished cycles and lead time fulfillment abilities and capabilities of components going to companies like that is really fast. I mean it's one of the reasons that when this sort of destocking cycle started, we were one of the first to come and recognize it back in Q4 of '22. And so I think any sign of life, we're going to see that first and it's -- and we're going to see it probably pretty close to the time that they're talking about selling the instruments just because of the natural way that forecast would roll in and come back into our factories.

Vladimir Bystricky:

I guess can you just talk about, and sorry if I missed it, what price versus cost overall actually was in the quarter and your expectations for price versus cost for the year and what you're seeing in terms of inflationary pressures versus your expectations coming into the year?

Vladimir Bystricky:

Great. That's helpful color. I appreciate it. And then just to go back to HST. In terms of the organic sales decline that we've seen in the quarter, are you able to give us more color on the underlying growth rates in industrial and semicon versus what you're seeing in life sciences and analytical instrumentation?

Abhishek Khandelwal:

Yes. No, the only thing I'd add is I think just -- look, we've talked about this, I think comparing it year-over-year is kind of tricky given what we saw last year. So I think it's important to kind of point out, if I look at the sequential order trends, look at the sequential order patterns from Q4 to Q1, we saw about $59 million of order uptick, $14 million of that was tied to FSDP, half of that, I'd say is blanket with our large customers that give us blanket that we ship throughout 2024. The other half is normal book-to-bill.

Nathan Jones:

Getting back on to the HST order patterns and the sequential improvement that you're seeing there. It's obviously up quite a lot off the bottom from third quarter of '23. Customers did a lot of inventory destocking out of some of those businesses. Is it your view that customer inventories have been rightsized and we're kind of moving back to an area where your orders are pretty close to what your end customers are selling? Or is that still continued destocking going on from your customers? And do you have visibility into that?

Nathan Jones:

That's helpful. Maybe back on to the margin question and where it gets back to in a more normalized volume environment, I think you said 30%. Is that -- first, is that an EBITDA margin target? Because historically, we've been talking about operating margins...

Nathan Jones:

Yes. And I would think that during this downturn, that, that business carries a lot of very highly-skilled labor that you would be really hesitant to rationalize during your downturn, particularly one that's likely to be short and cyclical. And so that's led to some of these pretty high decrementals that you're seeing in that segment. But should all that result in very good operating leverage and very high incrementals as we come out of the other side. Is there any commentary you can give us on kind of what you'd expect to see out of incremental margins in HST as we see that volume adjust?

Joseph Giordano:

Just curious like on the tools and the life science piece of HST, is there like -- medium term, is there any sort of like adjustments at the top end of like what this potential is? I mean I know we're going to get to the end of the destock and all that over the next bit here, and long term there's a clear call. But like do we need to like adjust what we think like the potential is over like a multiyear period here given what's happening internationally and things like that?

Joseph Giordano:

Would you say like globally, it's longer term fungible? Like there's a baseline global demand that is going up and whether it's China or elsewhere, where this needs to be put in, it needs to be put in and like it's just friction over like a shorter-term basis? Is that how you kind of think about it?

Matt Summerville:

I wanted maybe just a little bit of commentary and maybe a little bit more granularity on what you're seeing in the M&A pipeline at present, which businesses, which end markets are you focused on have you seen as far as purchase price multiples? Just a little more detailed color there.

Eric Ashleman:

Yes. I think, as I've said a couple of times before, I don't think it launches with a lightning bolt or a bang, but actually, the duration of it is going to be very durable. You've had a lot of intentional funding announcements put out there. Those always take a while to find their way home and funded projects that have been engineered and are now being deployed.

Robert Wertheimer:

Eric, you touched on an interesting topic in your opening comments just on semiconductors and the AI shift, which is obviously driving huge -- in demand, pricing power, all sorts of things, across pockets of industrials. I wonder, do you have any expanded remarks on what your exposure is there, how your technological capabilities are changing, whether you're entering kind of a new segment of semiconductors? Anything you can flesh out there if you're willing.

Operator:

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Abhishek Khandelwal:

Thank you.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice-President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX fourth-quarter and full-year 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months and full-year ending December 31, 2023. The press release along with the presentation slides to be used during today's webcast can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Abhi Khandelwal, our new Senior Vice-President and Chief Financial Officer. Today, we will begin with Eric, providing an overview of the state of IDEX's business. Abhi will then discuss our fourth-quarter and full-year 2023 financial results and provide an update on the various markets we serve. He will also discuss our outlook for the first quarter and full-year 2024. Lastly, Eric will close the call with his final remarks. We will then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13742102, or simply log on to our company homepage for the webcast replay. Before we begin a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will now turn this call over to our CEO and President, Eric Ashleman.

Abhi Khandelwal:

Thanks, Eric, and thanks to everyone for welcoming me back to IDEX. It's great to be here and be re-joining a great organization. Moving onto the consolidated financial results on Slide 8. All comparisons are against the prior year period unless stated otherwise. Orders of $754 million in the fourth quarter were down 6% overall, and down 10% organically. We experienced an organic decrease in each of our three segments. FMT and FSDP declined mid-single-digits while HST contracted by about 17% as market stabilized at a new level post-recalibration. For the year orders were down 7% overall, and down 11% organically. Our HST segment contracted upwards of 20% as customer experienced a sharp inventory recalibration during the year and level-set to new near-term demand targets that include stunted growth expectations for China coming out of the pandemic. Our FMT and FSDP segments were down low-single digits as they also experienced recalibration although at a much smaller scale. Fourth quarter sales of $789 million were down 3% overall, and down 6% organically. We experienced a 19% organic decrease in HST while both FMT and FSDP grew by 3% organically. Full-year sales of $3.3 billion were up 3% overall and down 1% organically. HST contracted by 10% on an organic basis driven by declining life sciences analytical instrumentation and semiconductor markets, partially offset by price. FMT and FSDP grew mid-single-digits, driven largely by strong price capture on slightly higher volumes. Fourth-quarter gross margin was essentially flat at 42.7% while adjusted gross margin, which was also 42.7% contracted 90 basis points due to lower volume leverage, unfavorable mix and the dilutive impact of acquisitions and divestitures, partially offset by strong price-cost and operational productivity. Both full-year gross margin and adjusted gross margin of 44.2% contracted 60 basis points for the same reasons I just described. Fourth-quarter adjusted EBITDA margin was 25.8%, down 120 basis points. I will discuss the drivers of fourth-quarter adjusted EBITDA on the next slide. On a full-year basis adjusted EBITDA margin contracted 40 basis points to 27.5%. A bridge of the full-year adjusted EBITDA can be found in the appendix of this presentation. Despite a year of significant volume pressure, our teams delivered on price-cost and operational productivity, significantly muting the impact of these unprecedented volume declines. On a GAAP basis, our Q4 effective tax rate of 22.7% versus last year's fourth-quarter effective tax rate of 20.5% increased primarily due to the absence of one-time foreign currency benefits realized in 2022 in connection with the funding of the acquisition of Muon as well as the impact of the loss recorded on the sale of Novotema during 2023. For which no related tax benefit was realized due to the type of consolidated group in which it participated. Our full-year GAAP effective tax rate of 21.7% was flat with the prior year. However, both 2023 and 2022 included favorable discrete events. Fourth-quarter net income was $109 million generating EPS of $1.43. Adjusted net income was $139 million with adjusted EPS of $1.83, down $0.18 from the prior year fourth quarter. Full-year net income was $596 million, resulting in EPS of $7.85. Adjusted net income was $624 million. Generating adjusted EPS of $8.22, up $0.10 or 1% from last year. Finally, free cash flow for the quarter was $179 million, up 22% over the prior year period. We achieved a conversion rate of 129% of adjusted net income, mainly driven by improved working capital performance despite lower adjusted net income. On an organic basis, we drove more than $40 million of inventory reduction in the quarter through our targeted reduction efforts and we saw inventory turns improve. For the year we delivered record free cash flow of $627 million, up 28% versus last year and coming in at 101% of adjusted net income. Mainly driven by lower net working capital as we reduced organic inventory levels by almost $65 million and achieved higher adjusted net income. We achieved this despite higher year-over-year capital expenditure as we maintain focus on investing for the future. We will continue to drive inventory levels down and optimize working capital levels further in 2024. Moving on to Slide 9 which details the drivers of our fourth-quarter adjusted EBITDA. Adjusted EBITDA decreased by $15 million compared to the fourth quarter of 2022. Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $36 million, flowing through at our prior year adjusted gross margin rate. Price cost was accretive to margins and we drove operational productivity that offset employee-related inflation. Mix was unfavorable by $3 million. Reductions in variable compensation contributed $3 million of benefit in the quarter. These results yielded a negative 39% organic flow-through. Overall, our team's focus on cost containment and resource reallocation has effectively managed our revenue declines. IDEX is well-positioned to recover and grow back stronger than before when market dynamics turn favorable. The impact of FX and acquisitions, net of divestitures contributed $5 million of adjusted EBITDA in the quarter. However, the divestiture of Micropump load flow-through as the margins were higher than those of our newly acquired assets who were experiencing volume deleveraging, given the end markets deplane. With that, I will provide a deeper look at our segment performance. I'm on Slide 10. Let me walk you through our outlook as it relates to our end markets. First, as I consider the markets served by our Fluid & Metering technology segment. Industrial derates began to see some sequential improvement in the fourth quarter and we expect continued stability in the near-term as our short-cycle businesses meet underlying customer demand. We continue to see normalized book-and-bill order patterns given shorter lead times and normalized supply chain dynamics. As we move into 2024, we're cautiously optimistic as we continue to see tailwinds due to domestic infrastructure initiatives and within mining. We anticipate these patterns will hold. Dolby will continue to mind our derates to evaluate longer-term expectations as this is the most short-cycle market exposure. Our water businesses continue to be favorably positioned as we enter 2024. Municipal project activity remains strong with no signs of funding delays and the project funnel is healthy with new opportunities winning share to deliver solutions for critical water challenges. Our energy business has been steady, even as new oil production is down and fuel markets are flat, driven by declining fuel prices and mild heating seasons in North America and Europe. As consolidation occurs within this industry and funding for new projects remain delayed, we see operators doing more with less using the same infrastructure to drive production. These market dynamics favorably impact our demand profile. As our energy businesses meet customers' need for replacements as they keep existing infrastructure running. In the chemical market, we continue to see positive results across US and Europe with pharma and battery applications providing opportunities for growth. China softness is being mitigated by the rest of Asia. The one area experiencing pronounced headwinds in FMT is our agricultural business. The size of this market is about 10% of the FMT segment, which equates to mid-single-digits for overall IDEX. We continue to see headwinds as OEMs have stepped down their projections due to continued destocking and declining net farm income and crop prices. Our KZValve acquisition continues to be a differentiator with its automated actuation valve technology and we are focused on targeted share gain to offset the pressure of current market challenges. Moving onto the Health & Science Technologies segment. We continue to see positive results stemming from our space broadband laser communication initiatives which are bolstered by Iridian's technological capabilities. We expect this space to grow in 2024. The industrial markets served by businesses in the HST segment are experiencing signals in line with FMT has expectations. Our material processing technology business is gaining share in battery production with the step up in new orders as we enter the year. And we continue to see signs of improvement within biopharma related to new vaccine development, where our technologies are uniquely positioned. We see particular strength in emerging markets. For semiconductor, we began to see initial signs of improvement as we exited 2023. We expect this market will continue to recover somewhat in '24 driven by an improved outlook for memory chips due to demand for devices. Further out, we look forward to continued growth in Semicon driven by artificial intelligence, automotive and long-term secular tailwinds driven by electrification. While these markets point towards growth area within the HST, that is not yet showing signs of recovery is in our Life Sciences and Analytical Instrumentation markets, which represents nearly 35% of HST and about 15% of overall IDEX. However, the long-term growth drivers have not changed. While orders appear to be stabilizing, we have not forecasted a positive inflection yet for 2024. While this industry navigates immediate-term challenges, we continue to have our eye on the future. We are closely partner with our customers across our Life Sciences businesses and we're actively innovating to provide tomorrow solution. With our focus on innovation and operational scale to support customers from prototyping to production we are uniquely positioned for growth as these markets recover. Turning to our Fire & Safety Diversified Products. We expect FSDP will be flattish to down slightly in 2024 driven by headwinds in dispensing as key customers recently completed the multi-year refreshment cycle. We expect Fire & Safety end markets to remain stable and growth to be driven by strategic share gain initiatives our teams are focused on. We continue to win through value-added integrated systems and technology and standardized offerings that enable higher OEM throughput. Overall demand Band-it continues to remain strong and we expect growth on a year-over-year basis. With that, I'd like to provide an update on our outlook for the first quarter and full-year 2024. I'm on Slide 11. We expect full-year organic growth of 0% to 2% with the majority of our end markets stable to growing as I highlighted in my market outlook commentary. This wage reflects low-single-digit growth from FMT and includes acknowledgment of the uncertainty in timing and scale of recovery given the short-cycle nature of our business. For HST we expect low-single-digit growth as broader expectations for year-over-year growth across its markets are moderated by the lack of visibility in the Life Sciences and Analytical Instrumentation space. And we expect FSDP to be down slightly as the dispensing refreshment cycle has completed and volume in that space will step down. The dynamic is expected to lower overall IDEX organic growth by 1% and offset the growth expected by Fire & Safety and Band-it. This organic rate guide equals earnings per share contraction of $0.03 to growth of $0.26 depending on top-line results and includes price-cost, which we anticipate will be positive for the year and mixed pressure stemming from dispensing volumes. Additionally, we expect our operational productivity will more than offset pressure from wage-related inflation and provide $0.10 to $0.15 of EPS growth. As always, we're committed to investing in the future growth prospects and expect to make incremental resource investments of $0.05 to $0.09 during the year as we invest in the people needed to champion our growth efforts and drive the next chapter for outperformance. The reset of variable compensation levels after a challenging 2023 provides a $0.16 headwind while the impact of recent acquisitions and divestitures contributes $0.12 of adjusted EPS growth. Finally, considering a few non-operational items lower levels of debt due to pay-downs in the second half of 2023 are expected to yield $0.07 of EPS growth and we expect FX to also provide $0.07 of benefit. These are more than offset by an increase in the effective tax rate on a year-over-year basis, creating $0.19 of headwinds to adjusted EPS. The 2023 effective tax rate includes certain discrete events, which produced $0.09 of benefit to adjusted EPS in '23, as compared to 2022. Those benefits do not repeat in 2024 and conversely, the projected 2024 rate of 23%, includes a heavier mix of improved performance in geographical regions with higher tax rates, as well as certain legislative changes increasing global tax. So in summary, we're projecting organic revenue growth of 0% to 2% for the year. The variable compensation and tax-rate pressure essentially erodes 4% of EPS growth year-over-year lending adjusted EPS expectation in the range of $8.15 to $8.45 or down 1% to up 3% over 2023. Moving to Slide 12. I'll provide additional details regarding our 2024 guidance for both our first quarter and full-year. In Q1, we are projecting GAAP EPS to range from $1.45 to $1.50 and adjusted EPS to range from $1.70 to $1.75. Organic revenue is expected to decline 6% to 7% year-over-year due to tough comps and adjusted EBITDA margins are estimated to be about 25%. While it is not a factor impacting year-over-year comparability, I would like to remind you that on a sequential basis when walking from fourth-quarter results to first-quarter we have a headwind of $0.10 related primarily to the accelerated recognition of share-based compensation in the first-quarter of each year. Turning to the full-year 2024, in summary, we estimate full-year organic revenue of flat to up 2%, to yield GAAP EPS of $7.15 to $7.45 and adjusted EPS of $8.15 to $8.45. Adjusted EBITDA margin is expected to be approximately 28%. Capital expenditures are anticipated to be about $75 million normalized upon the completion of certain factory automation investments and emerging market footprint expansion in 2023. And free cash flow is expected to be over 100% of adjusted net income. Corporate costs are also expected to be approximately $95 million, up from 2023 by approximately $10 million as variable compensation resets to current market expectations, With that, I'll turn it over to Eric for closing remarks.

Operator:

[Operator Instructions] Thank you. And our first question will be coming from the line of Nathan Jones with Stifel. Please proceed with your questions.

Abhi Khandelwal:

Thank you, Nathan.

Eric Ashleman:

Yeah. Well, certainly the second is much larger than the first probably outlet by a level of two. So, we saw these kind of double-digit declines here pushing I think 20% at some point. I don't think that's representative of their underlying markets, and we haven't seen that in the public comments for them either. So this really was an incredible run-up and then, obviously, kind of an artificial plunge down as those things were normalized. So where is the state of their markets? Down low-single digits to maybe slightly double or the early start of double. But again, I think one of the main points we want to make sure people understand is while the comparisons even in Q4 for were dramatically different for us and we could continue to see that calibration, we've actually been living in-kind of a sequential level of stability here for a while now. And we were talking about in late summer and certainly saw through the bulk of the fourth quarter and are now projecting that more formally across '24. And so it's kind of a case of two realities, one that's going to for a while now continue to still have those year-over-year comparisons, because of the market difference we have 12 months ago the periods we're going to move through at least through the first half of the year. But a relatively stable platform here. Just lacking a little bit of visibility as to when that catalyst comes in there, that starts to accelerate again.

Eric Ashleman:

Yeah. A couple of things there and Abhi can fill in anything I miss. But I mean, we do get a little bit more blanket activity at the end of the year even in those core lifecycle Analytical Instrumentation market, there is a little step-up there. About half of HST is kind of classically more industrial anyways and mirrors a lot of what we have over in FMT. And so that same kind of broader support and early indicators of growth that I know we'll talk about a lot here on the call we saw that kind of hit that Thanksgiving time on there too. So that accounts for a piece of it. Little bit of activity on the Semicon side, although that's real early days and modest too. So, nothing really on the declining side. A few things moving up. The only thing, again, most of it just sort of reflective of broad-based support with that one exception of a little bit of year-end blanket activity on the Life science world.

Nathan Jones:

And then I guess last one, just across the portfolio. Your customers' level of inventory now, I mean, you guys talked about still taking your inventory down in the first half of '24. Do you think your customers are still accepting similar and there is still a headwind from destocking in the first half of '24 and when do you think we'll actually get to a point where customer inventories match demand levels?

Nathan Jones:

Excellent. Thanks very much for taking my questions.

Operator:

Our next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your questions.

Eric Ashleman:

Yeah. No. Great questions and early here in the year there's a number of conferences and trade shows and things that always reoccur. So it's a good time to, have good touch points with people. I will tell you and I think I've said this the last couple of quarters, the level of innovation that's happening between our folks on the ground and our major customers is at a really strong level. And, I think if you step back a second, I mean, it actually makes sense Intuitively. It's a tough environment. People are coming off of a phase where largely it was about replenishment and trying to make things. And now I think there's a recognition, it's back to dynamics that are a bit more normal. You've got real competition between some very, very serious and well-established customers. Innovation in this sector is going to lead the way. And then if you look at the way that we typically interface with IDEX, I mean, we're really good at scaling with customers. So, we're hearing a lot of things now around, can you get the prototypes done sooner? Because if we do that, then that gives you the scalable production right behind it. And so I think that's as healthy as I've seen it. And in many ways to the extent that people are grappling with their own dimensions of trying to normalize cost and potentially might not have as many resources. That actually in well for the kind of work that we do as well, because we've got now a full suite of integrated capabilities. So, I think that side of it actually is our most healthy barometer about long-term, success here for both us and the sector. Competitive dynamics, there's not a ton of names in this world, I think we've good understanding of where we stack up and how we're positioned in our share. So I feel very good about, we've maintained if not enhanced our position with all the major players. And then, we continue to follow how they're doing as they battle it out side-by-side. And I always feel very good about the number of bets that we have with virtually all of them.

Abhi Khandelwal:

Yeah, Allison. As we mentioned in our opening remarks, we took down inventory about $65 million in 2023, which is about a 0.4 point improvement as we think of 2024 we're targeting another 0.5 point of improvement from an inventory standpoint.

Abhi Khandelwal:

Thank you.

Mike Halloran:

Good morning, everyone.

Mike Halloran:

So let's just start on the overall thought process for the year. Certainly appreciate all the color, prepared remarks. But as you think about how you're conceptually setting the guidance here, is the thought that you're basically looking for sequential stability across the platform from current levels, understanding that the ag piece, the dispencing piece, have some cyclical pressures. But the remaining pieces is just relatively normal cyclicality, not assuming an inflection or should we be thinking about those positive catalyst markets as you're pushing some sort of inflection in the numbers this year as an offset, and then maybe just talk about how you're expecting that cadencing to workout.

Abhi Khandelwal:

Yeah, Mike. Just to add a little more color to it as you kind of-- just to build on Eric's commentary here. So if you go from left to right, kind of think about where we ended Q4. We ended Q4 at $1.83, as I move the pencil forward and look at, what we're seeing in Q1, again to Eric's point, we took a bit of a conservative view. Just sequentially, we expect operationally to get better by $0.12 to $0.15. So if you just look at operationally, $1.83 at $0.15 to it you have not $1.98 closer to $2. Year-over-year, it doesn't matter sequentially as I think about it, what does impact us is a $0.10 stock-comp timing and then $0.04 of variable comp reset that kind of takes our guide down to what we've laid up in the paper here from $1.75 to $1.77. But sequentially as you look at it operationally, we are seeing the improvement that Eric is talking about, it's early days. But as Eric mentioned we build backlog in January, majority of that is shippable in Q2 and beyond and then you see a seasonal uptick from Q1 to Q2.

Eric Ashleman:

Yeah. No, it continues to be an area of tremendous focus I think irrespective of what the backdrop is. We've driven the increases in potential there with funnel build and cultivation and conversations and analysis and other things that really are at the highest level we've ever had in the company. I do think though that as maybe the year feel some of the same, fundamental support that we're talking about here, I could imagine that that might help availability of targets and people might start to think about monetizing them and moving and maybe they lift the market around us as well. So it's still largely being driven by our efforts, but I think a good environment and we feel very, very positive about what we're going to be able to do there.

Eric Ashleman:

Thank you.

Deane Dray:

Thank you. Good morning, everyone.

Abhi Khandelwal:

Good morning, Deane.

Abhi Khandelwal:

Thank you, Deane.

Eric Ashleman:

Yeah. From an inventory reduction perspective, I mean, again, this is a big industry with a lot of end markets, we have different platforms, different programs and all of them. So, I mean we really get it down to customer-by-customer, factory-by-factory and inventory position between us and them in every single case. So we've known for a while that, we're in pretty lockstep at that level. Then it comes down to individual demand swings and to be fair, there'll be some and maybe in line with what you're talking about there is some pockets of end-customer inventory that might still be out there and in the way of recovery and pieces of what we have. But in other places, I think we're comfortable that the mix is going to work over and kind of hold the flat narrative that we have here and the flat projections that we have internally. Absolutely I've heard some of the same commentary around the back half. I don't have information to refute any of that and I'd be quite happy if it were to come about that way. But I think just from an internal planning and forecasting perspective. Being conservative in this way, making sure our costs are in control, we've got everything ready to go from a materials, resourcing perspective. We've built some muscle here to be more dynamic than ever before. I think presents us in lines us up in a way, should that then start to happen in the second half. So, I certainly take the point, I think, if you could see it at our level, you'd see kind of technology and major platform and customers sort of arrayed on a grid that is the way that our teams think about it as they just move across quarter-to-quarter.

Eric Ashleman:

Yeah. I mean, I haven't heard that raised as an internal concern or issue. I'm thinking, a lot of the business we do, let's say in Analytical Instrumentation I mean it's a bit more of a mature space, mature industry maybe not as likely in the short-term, dimension to be obsoleted by major steps in technology, but I can add it there. That hasn't been something that we've talked a lot about.

Eric Ashleman:

Yeah. That's one of the healthiest indicators that we have here. Just for everybody on the call, again, these are the shortest cycle more sort of widely dispersed businesses that we have with the most fragmented customer sets. And so when they move they tend to indicate, where the world is going either way. When they move together they strongly indicate where the world is going and, we saw them move together, back at the original zones of recalibration here as they move down. And in Q4 and certainly continuing here in January, they are all moving together towards the positive. These are modest rates, but a simple green arrow next to all of those names across IDEX, is meaningful and supports a lot of the confidence that we have.

Abhi Khandelwal:

Thanks you, Deane.

Vlad Bystricky:

Hey. Good morning, guys. Thanks for taking my call and thanks for all the great information. Just quickly, and sorry if I missed it, did you say what price cost actually was in the quarter and what you're assuming for price cost in '24 as well as your overall price assumptions in the 0% to 2% organic growth outlook?

Vlad Bystricky:

Perfect. That's really helpful. Thanks, Abhi. And then I just wanted to ask you a little more-- Slide 10 is very helpful color around what you're seeing in businesses and the end markets. Can you talk a little more about what you're seeing with respect to energy transition-related demand. Kind of particular project types that are seeing a pickup or driving that and whether you're seeing it across regions or more pronounced in any particular geographies.

Vlad Bystricky:

Great. That's really helpful color. I appreciate it. Thanks.

Operator:

Our next question is from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Abhi Khandelwal:

Well, look. Thanks for the questions. So as I think about where we've been over the last couple of years as just good operators, good business cadence, we've been looking at our cost structure, you can see in our financials where quarter-after-quarter if you look at our restructuring around, right, we've done work in that area. Where we are today from a cost standpoint in our Life Sciences business, because that was the question, we feel comfortable with where we are, given where the volume levels are. To your point, as the volumes start to turn, the leverage on that is going to be a point where the margin rates are going to expand. As I think about how we're going to be thinking about this business long-term, it is all about, balancing our cost structure in a way where it physically volume levels. We don't have any specific plans today to take any more cost out.

Rob Wertheimer:

Perfect. Thank you for the mini-education there Eric and I look forward to meeting you Abhi. Thanks.

Operator:

Our next question is from the line of Brett Linzey with Mizuho. Please proceed with your question.

Abhi Khandelwal:

Good morning, Brett.

Eric Ashleman:

Yeah. I mean, you kind of see that large project work and large capital in primarily in our water business to some degree you see it, of course, that's municipal capital, be it in energy, a little bit in pharma. So I mean, in those zones, I would say it's early days and modest, but it is positive. So these would be small expansion opportunities or projects that they've been talking about for a while that they want to now start to get moving. I don't know that in many of them I would say you're at the, kind of mega project level or we're ready to go, or it's been sanctioned, but to be fair, that's the usual step-up when things get more positive. So we are hearing some good indications, from a variety of different markets, about more intentional capital deployment. Not yet at the levels of kind of full-cycle supporting multi-quarter or even year in duration, but good early signs that it's actually quite different than what we saw in a lot of 2023.

Abhi Khandelwal:

Yeah, absolutely. I can do that for you. So as you saw in our guide for '24 for the company is 28%. So if you think about HST, I think as we exit the year, you're going to start to see our margins come closer to 30%, as the volumes flexes back up in the back half of the year. On the FMT side, you should expect slight bit of margin expansion on top of what you saw in 2023. And about the FSDP side, you should expect to see slight margin erosion due to the, completion of the big-box retailer refresh cycle, which puts some mix pressure on the margin line But again, HST you should see expansion, FMT slight bit of expansion and FSD a little bit of contraction, tied to dispensing.

Operator:

Thank you. Our next question is from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your questions.

Eric Ashleman:

Yeah. Well, I appreciate the question and that's absolutely where we're heading. And so think of this as two levers primarily that we're moving. One is just the nature of the portfolio of IDEX. So, we've been more aggressive towards capital deployment. Everything we're bringing into IDEX today is inherently in faster-growing markets than, let's say, more of the industrial core that we see, most notably in FMT. So, the comparative basis that's tuning. We haven't done a lot of pruning on the other side, it's fairly modest. But to the extent we're doing it, that's actually moving that portfolio average up as well. And then, if with reasonable market support sort of absent massive swings of either way, as you suggested, I think we've long been targeting 200 basis points to 300 basis points of outperformance and everything we're working on today is moving that towards the upper bound of that run-out. So if you think of a world that let's say would start to dial itself in more from a fundamental perspective towards something in the 2% to 3% range and sort of natural entitlement. And maybe that's lifting from there because of the work that we're doing, as I mentioned, and then out performance above it, it has us, moving into a space where we're targeting mid-single-digit growth for IDEX. On an organic basis. With then obviously some, fundamental capital deployment on top of it, which would then extend the overall organic rate of the company. It's absolutely the area of focus, has been for a while and we're really, we're excited about potentially taking out some of the forces that have been swinging up-and-down and sideways making that hard to see.

Abhi Khandelwal:

Well, look, first of all. I think to your point, where the world is we're not back to the inflation levels that we were at, pre-pandemic. I mean even if you look at the near-term view it's still at what 2.5%, 3%. So are we going to hang on to where we are today? No. Does that mean we're going to, go back to where they used to be back in the historical levels? No, it's going to be somewhere in the middle. But looking at 2024, we feel pretty good about our position and where we are from a price cost standpoint.

Jeff Sprague:

Thanks. And just one other quick one. What percent of your total Life Sciences and Analytical is in China at this point?

Jeff Sprague:

Got it. Thank you very much.

Andrew Buscaglia:

Hey. Good morning, guys.

Andrew Buscaglia:

Just wanted to -- on Slide 10, you gave a great breakdown of kind of where you're thinking things shake out, where they're going by end-market. I'm wondering HST, margins really kind of struggled towards the end of the year there. That Life Sciences and Analytical Instrumentation piece, how do we think about it from a mix standpoint because you mentioned mix a few times, I imagine if that were to come back this year that could be a nice bonus for your margins.

Andrew Buscaglia:

Okay. In FMT, I thought that was surprising the growth you saw this quarter. How much is attributed to really like some of the government stimulus you're seeing? And is that where some of your confidence is coming in '24?

Andrew Buscaglia:

Yeah. All right. Thanks for the color.

Operator:

Our next question is from the line of Joe Giordano with TD, Cowen. Please proceed with your questions.

Abhi Khandelwal:

Yeah. So if I kind of think about the guide for the year and look at the order-- sequential order run up from Q3 to Q4, as you mentioned. First of all, the uptick in orders of $30 million from Q3 to Q4 $10 million of that was blanket orders. That's going to ship throughout 2024 and $20 million of debt was through demand or sequential improvement that we saw throughout the quarter. That said, as I think about 2024, we do expect to build or build the orders up as we go throughout the year. As Eric mentioned, we are being cautious, given where we are seeing early signs of recovery in the different parts of HST. So as you think about the order profile and think about the balance of the year, we expect to continue to build that order book up and ship that throughout the year.

Joe Giordano:

Thanks, guys.

Eric Ashleman:

Okay. Well, thanks everyone on the call for your questions and the interest in IDEX. Abhi, thanks for joining and coming to your first earnings call with me. Just a few things here. I mean, number one, we realize from the outside, IDEX is a complex and diversified company. And it hasn't helped that we've had a lot of, swings in some of the larger markets of the company, both up-and-down over the last couple of years. So, we've done our best to work through that with you and help you understand where we are. I think right now that we're actually in a place where things are a lot clearer than they've been in a while. Certainly, one of our key messages here is we've hit a uniform market stability, we hit that last fall and we really enjoyed Q4 and being having a chance to take a breath and get lined up here for the beginnings of what we think will be a great cycle. The vast majority of our end markets are starting to see a return to growth, as we said and I think that point around the shorter cycle business is starting to move together. That has always been a very reliable proxy for us in the company. Early days, but we've seen that, we've now seen it reinforced in January. And I remind people that as we've tuned IDEX and tuned it to the kind of companies that we brought in that are faster-growing closer to really, really strong OEMs, it drives a series of bets and initiatives across the company where the unit measure is a little bit larger. We're working to execute that and laying that on a foundation as we go. The fundamental piece of the story here is, we have confidence in accelerating through the year. The Life Sciences and Analytical Instrumentation world, it is uncertain for 2024. But I do want to come back and just echo some comments I've made before about just our commitment to that space and are confident in the long-term fundamental performance that we're all going to enjoy there and our positioning is fantastic. We see that evidenced by the innovation that we're being asked to do. And finally, we put a lot of capital to work over the last three years with real intentionality in some pretty choppy seas. And so if things are going to calm down and we'll get some more winds at our back, I'm really, really confident we'll be able to push that further, and continue to do that work and continue to transform the company. So thanks again for joining. Have a great day.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Interim Chief Financial Officer and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third quarter 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ending September 30, 2023. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today is Eric Ashleman, our Chief Executive Officer and President. Today, we will begin with Eric providing an overview of the state of IDEX's business. I will then discuss IDEX's third quarter financial results, an update on segment performance in the markets they serve, and our outlook for the fourth quarter and full year 2023. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes, by dialing the toll-free number (877) 660-6853 and entering conference ID 13734464, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will now turn this call over to our CEO and President, Eric Ashleman.

Allison Lausas:

Thanks, Eric. Moving on to our third quarter consolidated financial results on Slide 9. All comparisons are against the third quarter of 2022, unless otherwise stated. Orders of $712 million were down 9% overall and down 11% organically. We experienced an organic decrease within our HST and FMT segment and organic growth in FSD. Sales of $793 million were down 4% overall and down 6% organically. We experienced a 15% organic decrease in HST and a 1% decrease in FMT. FSD revenues grew organically by 3%. Gross margin of 44.1% decreased by 220 basis points compared with last year. Adjusted gross margin decreased 90 basis points, primarily due to lower volume leverage and unfavorable mix, which was partially offset by strong operational productivity and price costs. Adjusted EBITDA margin was 28.4%, down 30 basis points. I will discuss the drivers of adjusted EBITDA on the next slide. On a GAAP basis, our Q3 effective tax rate of 20.2% was lower than our effective rate in the third quarter of 2022 of 21.8%. The rate was driven down by both the finalization of research expenditure capitalization treatment that served to increase tax benefits on foreign source income and a tax election related to the Muon acquisition that reduced our minimum tax on foreign earnings. These favorable rate items were partly offset by tax recorded on the gain from the Micropump divestiture and are not expected to have a significant impact on our fourth quarter rate. Net income was $209 million, which resulted in GAAP EPS of $2.75. Adjusted net income was $161 million, with adjusted EPS of $2.12, which is down $0.02 or 1%. The lower tax rate contributed $0.11 of adjusted EPS favorability in the current quarter compared to both the prior year and the midpoint of our third quarter guidance. Finally, cash from operations of $227 million was up 14%, primarily due to lower working capital, driven by inventory reductions. Free cash flow for the quarter was $207 million, up 14% versus last year and achieved a conversion rate of 129% of adjusted net income. We drove over $25 million of inventory out of the business in the third quarter through our targeted reduction efforts, and we saw inventory turns remain consistent with last quarter due to lower sales. Moving on to Slide 10, which details the drivers of our third quarter adjusted EBITDA. Adjusted EBITDA decreased by $6 million compared to the third quarter 2022. Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $37 million flowing through at our prior year adjusted gross margin rate. Price cost was accretive to margins, and we drove operational productivity that offset employee-related inflation. Mix was unfavorable by $6 million, mainly centered in HST, due to continued volume declines in our analytical instrumentation, life science and semiconductor components. Resource and discretionary spending was favorable versus last year, as we continue to execute on our cost containment plan given the top line pressure we are experiencing. Reductions in variable compensation expense contributed $8 million of benefit in the quarter. These results yielded a negative 31% organic flow-through. Overall, our team's focus on cost containment and resource reallocation has effectively managed our revenue decline, ensuring continuity of our most valuable resources has IDEX well positioned to recover and grow back stronger than before when market dynamics turn favorable. Muon and Iridian acquisitions, net of Knight and Micropump divestitures and FX contributed an additional $9 million of adjusted EBITDA. With that, I'll provide a deeper look at our segment performance. I'm on Page 11. In our Fluid & Metering technology segment, orders decreased by 5% organically, mainly due to an expected slowdown in our industrial businesses and continued customer destocking in our agriculture business. Sales decreased by 1% organically, driven by this destocking impact, partly offset by favorable energy, chemical and water performance. We began to see our industrial order day rates decline in the second quarter of this year, and they remain steady at that level throughout the third quarter. Although our customers continue to exercise caution, due to recession concerns and lower energy prices, we see tailwinds tied to domestic infrastructure initiatives and within mining. Within agriculture, we continue to experience the impact of distribution destocking, exacerbated by declining net farm incoming crop prices. Our delivery continues to outperform our competitors, and we are focused on targeted share gain to offset this pressure. Additionally, the acquisition of KZValve and the adoption of its automated actuation technology is delivering strong results. On the energy side, we continue to execute well, driving down backlogs and lead times. Underlying market demand remains steady, but we expect to see revenue declines versus third quarter as our backlog position normalizes. In the chemical market, we continue to see positive results across the U.S., Europe and Asia, with pharma and battery applications providing opportunities for growth. Our water business continues to exhibit growth. Our opportunity funnels are increasing, and we see no signs of municipal project funding delays as we approach 2024. Adjusted EBITDA margin expanded 50 basis points compared to last year, primarily due to strong price cost and favorable operational productivity more than offsetting lower volume leverage. Moving to the HST segment. We experienced a 24% organic orders decrease and a 15% organic sales decrease, mainly due to pressure across the life sciences, analytical instrumentation and semiconductor markets as well as industrial market performance similar to that within FMT. Adjusted EBITDA margins contracted by 410 basis points, primarily due to lower volume leverage and unfavorable mix, partially offset by strong price cost and favorable operational productivity. Our analytical instrumentation business continues to experience customers destocking, which remains driven by China softness, lower pharma-biopharma spending and overall caution around the global economy. We expect that performance will remain stable at this level in the fourth quarter, with improvement in 2024. We see a similar trend within our life science business. Semiconductor continues to experience softness with the expectation that the market has reached a bottom in the third quarter. We anticipate a broader market will begin to recover at some point in 2024. We continue to see positive results stemming from our space, broadband laser communication initiatives, which are bolstered by Iridian's technological capabilities. Our material processing technology business continues to experience softness across pharma markets but are seeing some early signs of improvement within biopharma, food and nutrition as well as tailwinds connected to leveraging our technology and battery production application. Industrial markets and HST slowed in the quarter, in line with FMT's results. Finally, turning to our Fire & Safety Diversified Products segment. Organic orders grew by 2% versus third quarter last year and organic sales grew 3%, with strong fire and safety results more than offsetting destocking at BAND-IT. Adjusted EBITDA margins expanded by 150 basis points, primarily due to strong price cost and favorable operational productivity, partially offset by unfavorable mix and lower volume leverage. The paint market remains mixed. The uncertain global macro environment is driving consumer confidence lower, while at the same time, the construction market in North America remains strong. Within our fire business, we do not see any significant changes to North America fire OEM production capacity. We continue to win through value-add integrated systems and technology and standardized offerings that enable higher OEM throughput. Our Europe and Asia businesses remain steady. Rescue performance remains steady as well, although we are seeing some signs of North American budget delays and inventory reduction due to high borrowing costs. BAND-IT continues to outperform a relatively flat U.S. auto market due to having content on high-priority vehicles. There is some pressure on the energy side, driven by lower oil prices, and we experienced some destocking within aviation. With that, I would like to provide an update on our outlook for the fourth quarter and full year 2023. I'm on Slide 12. In Q4, we are projecting GAAP EPS to range from $1.50 to $1.55 and adjusted EPS to range from $1.74 to $1.79. Organic revenue is expected to decline 8% to 9% and adjusted EBITDA margins are expected to be about 26%. We expect that our HST revenues will be slightly unfavorable versus our previous guide, offset by FMT volumes landing better than expected. Equally, our strong execution in the third quarter allowed us to work through our backlog faster than expected. This is driving an equal and offsetting $0.05 of impact to third quarter results and fourth quarter expectations. Turning to the full year 2023. We are maintaining our full year organic revenue guidance of down 1% to 2%. At the midpoint, we have raised our EPS guidance by $0.20, with approximately $0.11 driven by lower third quarter effective tax rate and the remainder coming from third quarter operational outperformance, partly offset by $0.05 of revenue timing due to accelerated backlog burn in the third quarter. In summary, we estimate full year organic revenue contraction of 1% to 2% to yield GAAP EPS of $7.91 to $7.96 and adjusted EPS of $8.13 to $8.18. Adjusted EBITDA margin is expected to be approximately 27.5%. Capital expenditures are anticipated to be about $80 million, and free cash flow is expected to be 100-plus percent of adjusted net income. With that, I'll turn it over to the operator for your questions.

Deane Dray:

First, start with congratulations on the CFO news. We've heard from a couple of former IDEX executives who are seeing obvious praises. So that's fabulous you got him to rejoin. And then can I add my thanks to Allison for all her help in her role as interim CFO.

Allison Lausas:

Thank you.

Eric Ashleman:

Yes. Well, I mean, we often refer to those as the kind of canaries in our coal mine. And we discretely track about five of those businesses and keep an eye on weekly order rates and do it at the sort of small order flow day-to-day stuff level. We parse out projects. What we can see in there is, frankly, between the second and the third quarter, they're almost dead on flat. So the kind of moderate destocking cycle that we predicted at the beginning of the year, I think, largely played out through the first half of the year and frankly, moderated. Even quarter to -- month-to-month within the quarter, we didn't see a lot of changes there. So what that says is kind of our distributors because there's a lot in that world. Our end users, all of us were kind of back to the right inventory position based on our quick replenishment, our fast lead times. And now I think it goes into the question of sort of an uncertain environment, when does it start to flex upward? Those would be the businesses. Of course, we would watch to see early indications of that. So for right now, it's flattened out. It's holding. There's decent activity out there. There's certainly opportunities here and there, but not signaling any further trouble and waiting to see if it brings forth some more encouraging signs.

Eric Ashleman:

I want to take a little time here because I think I got to set our context in relation to those comments in the environment you described. First of all, as I said in the prepared remarks, I mean, we're talking about four buckets of business primarily that kind of fall into this category. Analytical instruments, life science, of course, that's the larger piece of it. Pharma exposure as well as semicon, that's about half of HST, and that's the piece that we're describing when we walk through this. Then I want to back up and say, if you think about time line, you actually have to go back, we're almost a year into this, for us. Because of the short clinical nature, we actually saw some of this noise in Q4 of last year. And as you said, we and others, I think, have to get our heads around the fact that it's actually been a series of additive components that's played out here over the course of that year. Initially, thought it was just simply aggressive demand turning to something more moderate. Of course, we felt that in our businesses in Q4. Then, it was a reexamination of inventory positions and just frankly, seeing way too much of it at many points. And of course, that destocking played out. I think here in the second and third quarter, it's been kind of a second or third inning, if you will, of some concerns about some macro forces, probably the most significant being China's contribution or lack thereof as we -- going forward relative to what it has been in earlier periods. So there's kind of three things that played out. What I think that's done for us is, of course, we felt that pretty aggressively in the earlier piece. So there's a lot of businesses because of the component nature of the products we make. And here more moderately in the last quarter, and I can see that our backlog position, our visibility within the quarter, our kind of inventory position in factories where we supply, that's an equilibrium. So I don't see any more external forces or things that would come in there simply trying to unwind the past. That does mean, frankly, that we're kind of open to the recovery loop that's ahead of us and the uncertainty of when it will occur and how it might play out. And again, Deane, I back up a little bit and say, we're hitting that from four different levels. So while there could be some things that fall off in other places as people kind of think about demand and where they may go, maybe some of those are in the life science arenas, that we're going to have some other things that are going to potentially be working against that, that may wash that out in the interim. So equilibrium is a little bit more of a variable term for us. But I think those abnormal shocks to the system that we saw play out over the last year or so. We're essentially seeing that those are behind us. And now, like everybody else, we can lean forward, go and kind of poke the customer level and take a look at what people are doing in innovation streams and start to plan our course from here.

Mike Halloran:

So I want to follow up to both those questions Deane asked. So just to make sure I'm clear on what you're saying on the life science analytical instrumentation side. You're not necessarily saying that you're expecting the end market to recover from here in some sort of linear fashion or anything like that? You're just saying sell-in is at the point where it's matching with sell-out? Or am I misinterpreting that?

Mike Halloran:

Exactly. And so as you get into next year, that's where the variability hits, but at least the comps are easy starting from, call it, mid-4Q onward type range?

Mike Halloran:

Got it. And then you talked about the short cycle side of things. From a destock perspective, that makes a lot of sense. Maybe higher level, how are you thinking about the economically sensitive parts of your business as we head into '24? The risk profile, as you're seeing in, doesn't sound like the day rates are saying that there's much worsening going on, but maybe some of that's being clouded by the destock piece. So just some help as we think on a full [indiscernible].

Mike Halloran:

Yes, makes sense. One quick follow-up, a clarification for Allison. Did you say that $0.05 shifted from 4Q into 3Q? I just want to clarify what that statement was, Allison.

Operator:

Our next question comes from Nathan Jones with Stifel.

Eric Ashleman:

Yes. But well, look, again, I put a lot of weight on the predictive abilities of those early indicator businesses that we have to talk a lot about sort of day-to-day, how the system is operating. So I think that -- again, that stability means a lot. In this environment, order patterns do change a little bit. Remember, an earlier comment I had there for Mike, I mean I think you're seeing people moving to shorter increments of order patterns. They know now companies like -- I mean, certainly, IDEX, we can deliver with faster replenishment. Our customer satisfaction metrics are really good. So if you feel any uncertainty, you don't have to give us nearly the same kind of visibility in your order requirements that you had to 2 quarters ago or a year ago. So I think you do see a piece of that, that changes in the order profiling, more of a order it as you go. And so -- again, we ate into some pretty aggressive backlog along the way. At any time lead times keep coming down, I mean that does tend to influence order patterns for folks on the other side. So I think it's things like that playing out, by and large, around a pretty stable base, especially on the industrial side. To me, says, I think this is a stable environment, but one that's looking for the next catalyst.

Eric Ashleman:

Yes. Well, that's probably a piece of the answer to your last question as well. I mean the certainty around projects like that is not very good. And you've got some people that are -- they're still talking about them, but they start to move that time horizon. We're getting closer to 2024 like a magnet. And so it becomes a reference point and a point in the calendar where people are pointing to when things might come to fruition in that side of it. Again, contextually for us, that's not all of our businesses, but we'll see it as part of a planned expansion commitment or something like that for food or something related to infrastructure. So those kind of discrete things that require a lot of capital will come together, a lot of planning. I think there is a lot more uncertainty around them. And it's -- instead, it's kind of running the current system faster and a little bit longer before you rebuild it due to that same level of uncertainty.

Allison Poliniak:

So Eric, I just want to go back to HST. One of the things IDEX has been known for is investing through the cycle. Could you maybe talk to the new product development cycle in analytical instrumentation, life sciences? Or maybe even how you're thinking about that investment? Has that slowed at all? Should we expect maybe a slower organic coming out of this? Just any thoughts there.

Allison Poliniak:

That's great. That's good color. And then a small divestiture, as you think of the portfolio today, obviously, a very unusual cycle here. Was this sort of just a one-off? Or is this something that you think we might see more of as we go forward here? Just any thoughts.

Operator:

Our next question comes from Vlad Bystricky with Citigroup.

Eric Ashleman:

Yes. Again, it's an important, but a small part of IDEX at less than 10%. But I think I think that one is pushed further into 2024. I mean it's stable here. We're certainly -- and we hit it from a variety of levels. We're in fabs. We're in metrology instruments. We're in memory. We're in sophisticated sides of it. And so we see it from a whole bunch of different spots, but I think all of it suggests the recovery of that sector is a little bit further out into 2024. We're certainly close to those customers. We're critical. They can't do much with our parts and components. So we'll get that intelligence, but I suspect the order ramp will start somewhere out into 2024.

Allison Lausas:

Sure, Vlad. No, I can take that. That's really the step down due to dispensing as that replenishment cycle did come to an end there. So you see that slowdown in the third quarter. You'll see it also a bit into fourth. But also in fourth quarter, we've got a bit of seasonality in Fire & Rescue, fewer production days.

Rob Wertheimer:

I joined the conversation and the education on life sciences and HST has obviously been a bit more volatile than many expected. And I wonder if you could do almost like a 101, what normalization looks like? With the simpler question is, what drives customer purchasing? Is it your customers' volumes? Is it innovation cycles? Is it CapEx cycles and confidence cycles? Just how your products flow through that life cycle?

Rob Wertheimer:

Perfect. And if I -- I know there was a lot on that topic, but I appreciate it. And then if I can just go a little bit further field, just in the general acquisition market. You've seen cost of capital rising for private equity, perhaps faster than when you guys have pretty good cash flow are getting easier to win? Or any general characterization of that market? And I'll stop there.

Operator:

Our next question comes from Andrew Buscaglia with BNP.

Eric Ashleman:

Yes. Well, a couple of things here. Well, first, I'm glad you noticed. I mean the FMT segment, in particular, I mean, has fantastic performance. Over the last couple of quarters, Q3 was really good. And what you're seeing there is, look, reasonable cost containment, we run them -- we're in those businesses pretty lean anyways. It's much easier to run them at a steady state than kind of the last few years have been. So that brings out our best. And frankly, our teams have recognized, they're doing their part from an IDEX side and really drive an outstanding performance. I would say from an investment profile, I mean these are businesses, some of which are 80, 90, 100 years old. They are really, really well positioned. They do very well in almost all versions of economic realities that are out there. So making sure that they stay innovative, well positioned with the right channel partners, out in the right places, that's something we're always thoughtful of. We -- typically, the investments when we talk about growth investments. They're generally people based. And they are often discrete additive things that we'll do to go at certain things like battery production to support mobility -- e-mobility economy or something like that. So we'll augment and make those investments, or not, depending on how we view kind of the staying in the outside world. But the base of the business, just the kind of core of the franchise, we are really, really careful of that to make sure that, that domain expertise that supports all that positioning, and differentiation and incredible margins is sound for any reality.

Eric Ashleman:

I mean there's a couple of things to keep in mind there. At any point, and we've seen it a couple of times over the last few years, if that business gets kind of close to flat or negative, the deleveraging side of things is really tough because of the strong contribution margins and our commitment to kind of maintain the core. So depending where things go, we always have to be aware of that. We are also at probably the best point of the price cost cycle here now. That's -- the spread that we're at today is probably not going to continue out into the future. We've always been a company that gets price. Of course, it's been more aggressive here lately with inflation. We're now at a point where those prices are sticky. There's some moderation on the inputs. This is the best part of the cycle, and this is the best part of the company that gets that pricing. So there's a little bit of a piece on here. I'd be careful of is assuming it's perpetual state, it's the good part of this part of the cycle.

Brett Linzey:

Just one more on HST. So encouraging to see the stabilization and certainly, the recovery path is going to take some time to play out and figure out. But just in terms of the profit recovery on the other side, should we think of the businesses yielding a stronger-than-average incremental margin as they do or when they do recover? Or do you need some cost to come back? Any way to dimension that?

Brett Linzey:

Okay. Great. And then just shifting over to the comments you made on water. It sounds like the opportunity funnel is increasing. You might be able to size that. And is it related to some of the fiscal stimulus or other independent factors driving that strength?

Operator:

Our next question comes from Joe Giordano with TD Cowen.

Eric Ashleman:

Look, I'll let -- go ahead, Allison.

Joe Giordano:

Okay. So that maybe not necessarily a sign that things are improving, it's just kind of a seasonal order uptake?

Joe Giordano:

At what point -- just extension of that, just given like the nature of that business and the fact that you're running kind of book-to-bill sub-1 there still. So like at what point, can you -- there's like an organic decline in HST kind of be like baked in for 2024? Like when do orders need to start to improve for that to be a positive number theoretically?

Joe Giordano:

That's fair. And just last, with the accelerated kind of backlog burn that you had this quarter, are there targeted opportunities to do that again in the fourth quarter in parts of your business?

Operator:

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Eric Ashleman for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice-President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX second-quarter 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending June 30, 2023. The press release, along with the presentation slides to be used during today's webcast can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. Today, we will begin with Eric providing an overview of the state of IDEX's business. Then Bill will discuss second-quarter financial results, an update on segment performance in the markets they serve, and our outlook for the third-quarter and full-year 2023. Lastly, Eric will close the call with his final remarks. Following our prepared remarks we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering conference ID number 13734463 or simply log on to our company's homepage for the webcast replay. Before we begin, a brief reminder, this call may contain certain forward-looking statements that are subject to the Safe Harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will now turn this call over to our CEO and President, Eric Ashleman.

William Grogan:

Thanks, Eric. Moving on to our second-quarter consolidated financial results on slide eight. All comparisons are against the second-quarter of 2022, unless otherwise stated. Orders of $766 million were down 9% overall, and down 13% organically, mainly driven by a 27% organic decrease in HST, due to timing of project orders for next-gen sequencing equipment, as well as OEM pressure across the life sciences, analytical, instrumentation, pharma and semiconductor markets. Record sales of $846 million were up 6% overall and up 3% organically. We experienced 10% organic growth within FMT, 8% organic growth within FSD and 6% organic decrease in HST. Gross margin of 44.7% decreased by 10 basis points compared with last year. This was driven by lower-volume leverage in HST, the dilutive impact of acquisitions and unfavorable mix. Partially offset by strong price-cost and favorable operational productivity across the segments. Adjusted EBITDA margin was 28.4%, up 90 basis points. I will discuss the drivers of adjusted EBITDA on the next slide. Our second-quarter effective tax rate was 22.4% was comparable with our prior year effective tax rate of 22.1%. Net income was $139 million, which resulted in an EPS of $1.82. Adjusted net income was $165 million with an adjusted EPS of $2.18, which was up $0.16 or 8%. Finally, cash from operations of $141 million was up 26%, primarily due to lower investments in working capital versus last year. Free cash flow for the quarter included higher CapEx and was $120 million, up 24% versus last year, coming in at 72% of adjusted net income. We drove over $20 million of inventory out of the business in the quarter through our targeted reduction efforts. And we saw inventory returns improve versus last quarter. Moving on to Slide 9, which details the drivers of our second quarter adjusted EBITDA. Adjusted EBITDA increased by $22 million compared to the second quarter of 2022. Our 3% organic growth included over 4% of price, placing volumes negative for the quarter. This lower volume unfavorably impacted adjusted EBITDA by $9 million flowing through at our prior year adjusted gross margin rate. Price cost was accretive to margins, and we drove operational productivity that offset employee related inflation. The mix was unfavorable by $3 million, mainly centered in HST due to continued volume declines in our analytical instrumentation and life science components. Resource and discretionary spending was approximately flat versus last year. We have executed tight cost controls given our volume pressure, and we continue to identify reduction opportunities for the balance of the year. Reductions and variable compensation expense based on our updated outlook contributed $5 million of benefit in the quarter. These results yielded a 60% organic flow-through. Muon and KZValve acquisitions, net of the Knight divestiture and FX contributed an additional $9 million of adjusted EBITDA. Inclusive of acquisitions, divestitures and FX, we delivered 43% flow-through. Excluding the impact of variable compensation, flow-through is about 35%. With that, I'll provide a deeper look at our segment performance. In our fluid metering technology segment, we experienced strong sales performance with organic growth of 10%. But orders did contract by 4% organically, mainly driven by the slowing industrial landscape. Adjusted EBITDA margin expanded by 340 basis points versus the second quarter of last year, driven by strong price cost performance and volume leverage. We saw our industrial day rate decline early in the second quarter remained steady at that lower level. Customers are taking a cautious view of the second half as they process a variety of economic factors that influence their demand. Our water business performed well. The North American market continues to be positive with extreme weather, necessary technology and infrastructure upgrades and improved funding, all fueling growth. Our energy markets remain mixed. Improved chassis availability is driving strength in our mobile applications and the teams continue to work down past due backlog, but lower oil prices look to slow the pace of investment in the second half of the year. In the chemical market, we saw positive results across the US, Europe and Asia, with battery markets providing additional opportunities for growth. The agricultural demand landscape remains mixed. Farm fundamentals are positive overall, and our OEM business remains strong. However, distributor inventory levels remain high, and we have not seen a material bleed down as we have progressed through the planting season. Moving to the Health & Science Technologies segment. Organic orders contracted 27% in the quarter, driven by analytical instrumentation, life science and biopharma customers' inventory destocking, timing of next-gen sequencing orders, soft semiconductor and slowing industrial demand. Sales were down 6% organically and adjusted EBITDA margins contracted by 420 basis points driven by unfavorable volume leverage and mix as well as higher employee-related costs, partially offset by strong price cost performance. As Eric noted, our Life Science and Analytical Instrumentation businesses are being impacted by customers' inventory destocking and reduced demand. This was driven by a combination of improved supply chain conditions, macroeconomic factors and lower-than-expected China demand. We expect this pressure to remain throughout the balance of the year. The semiconductor market continues to experience softness resulting from memory oversupply, as well as customers feeling the impact of the US export controls. We have exposure to multiple parts of the semiconductor value chain and expect demand will stabilize in the third quarter with recovery in the fourth quarter. Our Material Processing Technology business continues to experience softness across pharma, biopharma and nutrition markets, driven by tighter capital availability and customer hesitancy due to recession concerns. We are seeing some strength in aftermarket and positive impact from our battery market opportunities and we see some signs of improved quotation activity for these early days. Industrial markets and HST slowed in the quarter in line with FMT results. Finally, turning to our Fire & Safety Diversified Products segment. Organic orders grew by 2% versus last year, mainly driven by favorable fire and safety, and dispensing results. Organic sales growth was strong at 8% with double-digit growth in both Fire & Rescue and BAND-IT. Adjusted EBITDA margins expanded by 300 basis points versus last year, largely driven by strong price cost performance, operational productivity, favorable volume leverage, and positive mix. The paint market remains mixed with positive North American results, offset by delays of Europe and Asia customer investments. Within our fire business, we continue to gain share with North America mid-tier and China OEMs through our integrated system strategy. Underlying truck demand remains positive and OEMs continue to improve their output. Rescue markets are stable overall with some distributors burning off excess inventory being balanced by growth in our E3 products. BAND-IT results remain positive. We continue to gain share in an otherwise flat automotive market, which is partially offset by slowing energy and industrial markets. With that, I'll provide an update for our outlook for the third quarter and the full year 2023. I'm on Slide 11. In the third quarter, we are projecting GAAP EPS to range from $1.60 to $1.65 and adjusted EPS to range from $1.84 to $1.89. Organic revenue is expected to decline 7% to 8%, and adjusted EBITDA margins are estimated to be approximately 27%. We project sequential volume declines across HST and FMT with relatively flat FSD sales. On a year-over-year basis, we expect negative mid-teen organic sales decline in HST, negative low to mid-single-digit declines in FMT and low single-digit growth in FSD. Turning to the full year. As Eric mentioned, we have reduced our full year revenue guidance in response to our softening HST second half outlook. We now expect organic revenue declines of 1% to 2%. This implies high single-digit revenue contraction in HST with low to mid-single-digit growth in FMT and FSD. At the midpoint, we have reduced our EPS guidance by $0.45 with approximately $0.60 related to lower volume and the associated leverage and unfavorable mix. We offset $0.15 of this pressure with additional cost containment actions related to targeted restructuring and lower resource investment, and variable compensation along with discretionary spend. In summary, we estimate full year organic revenue contraction of 1% to 2%, GAAP EPS of $6.80 to $6.90 and adjusted EPS of $7.90 to $8. Adjusted EBITDA margin will be approximately 27%. Capital expenditures are anticipated to be about $70 million and free cash flow is expected to be 100-plus percent of adjusted net income. With that, I'll turn it back over to Eric for his closing remarks.

Operator:

Thank you. We’ll now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Mike Halloran with Robert W. Baird. Please proceed.

Eric Ashleman:

Hi, Mike.

Eric Ashleman:

Yes. Well, thanks for that. So, I think if we step-back and kind of think about this traversing over the course of the year. I go back to kind of the end of Q4, that's where we went some virtually unbounded demand essentially only capacity and capability, entering the mix is a constraint. To those first signs that, okay, we're going to have to tune this thing and get it to something more sustainable long-term, more normal. So we saw that play-out initially as a lot of focus on inventory, just too much inventory all over the place. I think over-time and here especially in the second-quarter, we saw a view of -- as people start to attack that with analytics and we got a lot closer to our customers. You could see kind of the depth of it; where it was accumulated, how much it was -- how long it was going to take to burn that off, that became kind of a secondary component for us in Q2. And then I think -- I think the piece that's really played out and we saw a lot of this calibration in the second-quarter was another assessment of end-markets and where they really are on the customer's part. So, you kind of had markets clicking along kind of at the top-end of high-single-digits, I think in the pandemic, kind of moved back-down to an assumption that they would be more normal, I'd say, more mid-single digits. And I think closer now to -- in the near-term at least, balance of the year, in that low single digits, with those factors that I talked about in the open remarks. And I think probably maybe strength of China being the one that was the most pronounced and started to really pop out of the page for -- and the conversations that we had in Q2. So we sort of backed-up, took a look at those forecast, that situation, and as you can see here, essentially, cleared the deck for the rest of the year. I think we've bottomed-out from an orders perspective. We've seen kind of the levels that we're at now hold here through July. Even with all the analytics, today we have an inventory, you can see the two kind of working together. So, then I think that all of the visibility shifts to probably the real spirit of your question, which is, when does this start to get back to something that's more traditional in terms of growth rates. For us, I think, honestly, we see that past -- certainly, past the six months that are ahead of us, somewhere probably out in 2024, obviously the comparatives would get a lot easier. But I think we're still going to all have to watch. We're going to have to watch and see what's the long-term call on China. Is this a trough of a cycle there and there is ultimately an uptick? We'll be listening for that intelligence as well. The funding environment, how are people leaning into kind of approving projects and outfitting plants and things that we see in the CapEx intensive sides of our business, probably the semicon piece, that I feel the best about. I mean, that's tracked by everybody and we can kind of see -- everybody pointing to better days ahead starting in kind of -- for us, probably beginning of Q4 and certainly leading into the year. So I think the arrow up in 2024, probably still with some variable rates coming out of it and a lot more assessments that we've got to make as we go through a period that we think now it's been derisked and sort of laid out there in a way that we can all get comfortable with.

Eric Ashleman:

Yes. And I want to emphasize that, that side of the businesses it's kind of run its course exactly the way we thought it would. So you've seen here, order rates declining, that's the normalization of backlog. I want to make it clear to everybody that you all recognize how close to normal we actually are now. So our backlog, when you net out sort of the compounded price, the aggressive price that's happened over the last couple of years and compare it to sort of pre-pandemic levels. We're basically pretty close. We're a little higher-than-normal, but we'll get there soon, certainly in the back-half of the year. So that's on the industrial side of the business. Our quarterly coverage that we have, if you're familiar with us, we typically talk about half the quarter covered, and the other half we have to go find. We're there now. And so, really now we are able to see into these markets and understand and think a lot more about the future than the past. And that's why as we kind of got -- re-examined the list of markets that don't went through. And you're seeing, I think in many ways kind of an absence of catalysts unless it's really, really tied to identifiable mega trend with a bunch of funding sources, like the water space for us. You're seeing kind of that same story of, hey, hesitancy. I wonder where things are going. A little reticence to go ask for big funding of large capital projects. So, I think we're well-positioned for what inevitably at some point will start to move-up, and I do believe that next cycle is going to be a good one. But I think here in the near-term it's still going to be kind of a story of watching the rest of the world catch-up and kind of get to the same point of calibration that we are. And then, I think it's going to be a much bigger, broader kind of macroeconomic conversation as we head into 2024, of which catalysts will be out there. The good news from an IDEX perspective is, I know you know, Mike, we do really well on the entry point, once we kind of hit this point and are ready to go, short lead times, rapid recovery out there at the tip of the spear with innovation. So, that's kind of my take on where things are now with an emphasis on how close to normal the company is actually positioned.

Eric Ashleman:

Yes. I think the examples I cited there, particularly now that they've been augmented with some really, really strong capital deployment. It gets us closer to that 300% outperformance that we've been shooting for in terms of potential of delivery. So if, let's say, we enter a world that has kind of a 2% nominal floor, we would be expecting to drive with combination of solid price capture, innovation, and the assets that we have, something closer to that 5% level. And then, continuing to deploy capital on top of that, which then ultimately if you kind of run it through the algorithm of contribution margins and the compounding nature of what we have as a company, that sets up the double-digits earning growth that I think everybody kind of expects and is looking-forward to from an IDEX.

Eric Ashleman:

Thank you.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

I want to follow-up on some of the commentaries, both on the HST and industrial side. And on HST, we agree, this has been well vetted in terms of the public company analytical instrument, companies discuss, saying the destocking, and we're getting the sense that the bottoming is coming, but just share with us, you're one-step removed as a supplier to these OE's. So what is your level of visibility and how has that changed? And what has happened with lead times now that you've had -- much of this destocking happening?

Deane Dray:

All right. That's really helpful. And just to flip over on the industrial side, what we're trying to do is connect the dots here about your commentary about slowing industrial orders and slowing industrial landscape and I'm trying to parse out how much of this is just a result of the normalizing supply-chain and release of buffer inventories and shortening lead times, which in itself is kind of a normalized process. But it doesn't sound like there's anything disturbing on the end-market, the sell-through side of the end-market demand, but I just wanted to get clarification on that. So how much of this is strictly from a normalizing supply-chain on the industrial side versus any deterioration on the end-market demand?

Deane Dray:

Alright. Eric, that's exactly what we're looking for, and appreciate all the color. Thank you.

Operator:

Our next question comes from Alison Poliniak with Wells Fargo.

William Grogan:

Yes, Allison, it's Bill. I think in the third quarter, you'll see a little bit of additional pressure as volume steps down in the third quarter. And we bottomed out in the orders side here in Q2. Sales will bottom out in Q3. I think margins hit its low point, and we'll start to build back up Obviously, the additional cost actions we have taken have helped mitigate that. And then the volume leverage we'll get as we start to build back in the fourth quarter. We'll start to set our journey back to a 29%, 30% EBITDA-type margin as we progress through the recovery.

William Grogan:

Yes. No, not really. I mean, I haven't seen anything there. I mean the backdrop matters. It might prevent some folks from putting something out there because they want to let things clear and not be quite as noisy or something like that in the short term, but nothing that's really topped and said because the cycle is playing out a certain way, the funnel is now composed much different than it has been for us.

William Grogan:

No, there's still more to go. I think from absolute dollars, I think we'll continue to bleed. Inventory turns, there will be a little bit pressure just with the decreased volumes within HST, but the teams continue to track, and there's probably another $20 million to $30 million of inventory reduction here in the back half.

William Grogan:

Thanks a lot.

Vlad Bystricky:

Good morning, team. Thanks for taking the call. So I just wanted to ask within FSDP, a couple of things there. In terms of the durability of the strength you're seeing at Fire & Rescue, are you able to parse out sort of how much of that is better chassis availability with your traditional OEMs versus your growing relationships with the mid-tier OEMs and the retrofit offerings you now have available.

Vlad Bystricky:

Got it, okay, that's helpful and then just a follow-up within that segment. The strength in the North American paint dispenser business, I think it was a little surprising versus what I was expecting anyway. So were there any larger onetime type deliveries in there that contributed to that strength? And how are you thinking about the outlook for the NAM dispenser business going forward?

Vlad Bystricky:

Okay, great, that's helpful, thanks a lot, get back-in queue.

Operator:

Thank you. Our next question comes from Joe Giordano with TD Cowen.

Eric Ashleman:

Well, look, I think those are all absolutely legitimate of the things we're planning on. It's what we're tuning the company to be. I'm, in some ways, helping people understand what I'm describing, we're at a position now where we can kind of see exactly the mindset of people in the current -- in the next quarter in a way that for years, we have not been able to. And so I'm with you because I think many of the kind of big broader trends that are out there are going to have nice runs as we go forward. Some of them are underway now. Some are going to be in the next period to come. But I do think there's some noise in the system where, again, people are processing a lot of their own backlog and things like that. And then it's easier to sort of link that to those trends and say, well, there it is. That's validation. I just -- this is a unique point that it's taken us a few years to get to that says, no, no, everything we see now is actually near term or talking about the world that's right in front of us. So -- and again, some of those things are playing out. We had that in the walk. We talked about water. We talked about some decent things happening in chemicals. We just talked about some of the chassis

Joe Giordano:

Yes, I think that's fair. And would you just -- would you categorize -- it seems like most companies this quarter are kind of like -- are certainly changing their commentary around like industrial distribution and things like that. It seems to be weakening and orders are getting worse. And you guys -- maybe you feel like you were just kind of there first, and this is...

Joe Giordano:

Fair enough. Thanks guys.

Nathan Jones:

Good morning, everyone.

Nathan Jones:

I wanted to start with just taking a finer point on some of the inventory correction. Can you quantify what you think the headwind to growth or the dollars of inventory that are coming out of the business, or coming out of your customers' businesses this year, that will obviously, if we get that destock complete this year won't repeat next year.

Nathan Jones:

Okay, then I'm going to ask a question on a metric that I don't think anybody out there has really talked about for the last 3 years, which is on-time delivery, because with all the supply chain challenges, everybody's on-time delivery metrics got blown up. Now that you're talking about lead times being kind of fairly back to normal, how much improvement have you seen in on-time delivery metrics? Where are they relative to where they were before COVID? And how much more improvement is left to go on that?

William Grogan:

That's a really-really interesting point that we're always-on the lookout for to make sure that we kind of moved out of that world of promises to actual customer requirements and that our lead times are in sync with those and then the ultimate metrics says prove it with the OTD number. And so we're in a really-really good shape and I think for a couple of businesses where we're still struggling with. Extended lead times or on-time delivery. Those are the business is actually orders have still been fairly positive, because those behaviors, haven't been able to calibrate on their customers exact to the point Eric highlighted earlier, where we have seen all those improvements, you've seen new order rates comprised are aligned with shorter lead times.

William Grogan:

Yes. I mean the first phase of cost reduction is obviously on the discretionary side, things that we've implemented broad-based across the portfolio. We talked about that last quarter, even in the businesses that weren't as impacted as [indiscernible]. They helped to mitigate some of the profit shortfalls. And the second phase has been volume-related costs. We've done a little bit of restructuring internally. That's saved some of the economics. But to your last point, fundamentally, we're leveraging 80/20 and a resource allocation model to preserve a vast majority of our growth resources, as Eric's point, I think we are going to be through this phase at some point in time next year. The investments that we're making now will drive results into the future.

Nathan Jones:

Great, thanks very much for taking my questions.

Robert Wertheimer:

Thanks, good morning, everybody. You've touched on this throughout the call, and I think you've been pretty clear, but if the issue is trying to figure out how channel inventory dynamics and HST relate to the rest of the business or whether there's a risk of that happening. I wonder if you could step back a little bit and talk about how the channel in HST differs from the other 2 segments? And then I assume the analytic process that you put in the kind of focus in your comments on HST is applied broadly throughout the business. So I wonder if you can just sort of help with that understanding and that risk of the channel destock.

Robert Wertheimer:

Perfect. That was educational. And just because I don't know, and I'm not sure you say, but what is the China mix within HST. And is that weakness in China, obviously, China is weak. I don't know if that's general economic slowdown or something industry-specific that accentuated it for you there.

Robert Wertheimer:

Perfect, okay. I'll stop there. Thank you.

Operator:

Thank you. There are no further questions in queue at this time. I would like to turn the call back to Mr. Ashleman for closing comments.

Operator:

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX first quarter 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ending March 31, 2023. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. Today, we will begin with Eric providing an overview of the state of IDEX's business. Then Bill will discuss IDEX first quarter financial results and update on segment performance in the markets they serve and our outlook for the second quarter and full year 2023. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay, beginning approximately two hours after the call concludes, by dialing the toll-free number 877-660-6853 and entering conference ID 13734462, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

William Grogan:

Thanks, Eric. Moving on to our first quarter consolidated financial results on Slide 8. All comparisons are against first quarter 2022, unless otherwise stated. Orders of $826 million were down 4% overall and down 10% organically, mainly driven by the timing of project orders for dispensing in FSD and next-gen sequencing in HST as well as OEM pressure across the life sciences, analytical instrumentation, pharma and semiconductor markets in HST. Record sales of $845 million were up 13% overall and up 6% organically. We experienced 9% organic growth within our FMT and FSD segments and 3% growth in HST. Gross margin of 45.2% contracted by 40 basis points. This was driven by unfavorable mix, largely centered in HST, the dilutive impact of acquisitions and employee-related inflation, partially offset by favorable price cost and productivity. Adjusted EBITDA margin, which includes $6 million related to accelerated recognition of share-based compensation, was 27.2%, down 140 basis points. I'll discuss the remaining drivers of adjusted EBITDA on the next slide. Our effective tax rate for the quarter was 22.2% and was relatively flat compared with our prior effective tax rate of 22.4%. Net income was $140 million, which resulted in EPS of $1.84. Adjusted net income was $159 million with adjusted EPS of $2.09, which was up $0.13 or 7%. The accelerated recognition of share-based compensation that I mentioned earlier lowered adjusted EPS by $0.06. Finally, cash from operations was $148 million and up 86%, primarily due to lower investments in working capital versus last year. Free cash flow for the quarter, which included higher year-over-year capital investment, was $121 million, up 91% versus last year and coming in at 76% of adjusted net income. This represents the strongest first quarter free cash conversion we have experienced in the past 5 years. Moving on to Slide 9, which details the drivers of our first quarter adjusted EBITDA. Adjusted EBITDA increased $15 million compared to the first quarter of 2022. Our 6% organic growth contributed approximately $6 million flowing through at our prior year gross margin rate. Price/cost was accretive to margins, and we drove operational productivity that more than offset employee-related inflation. Mix was unfavorable by $3 million, mainly centered in HST due to volume declines in our analytical instrumentation and life science components businesses. Resource and discretionary spending increased by $8 million. As we noted in our prior guidance, this was carryover from last year. In 2022, we did not return to a sustainable level of discretionary spending until the second quarter. Equally, we ramped up our resource investment spend as we progress through the year. This will come down as part of our cost mitigation plan for the balance of the year. We had $6 million related to accelerated recognition of share-based compensation due to the timing of certain participants reaching retirement eligibility status. These results yielded a 5% organic flow through. Excluding the impact of accelerated share-based compensation, our organic flow-through was around 20%. Nexsight, KZValve and Muon acquisitions, net of the Knight divestiture and FX, contributed an additional $13 million of adjusted EBITDA. Inclusive of acquisitions, divestitures and FX, we delivered 16% flow-through. Excluding the impact of accelerated share-based compensation, we delivered 22% flow-through. With that, I'll provide a deeper outlook for our segment performance. I'm on Page 10. In our Fluid & Metering technology segment, we experienced strong order and sales performance with organic growth of 5% and 9%, respectively. Adjusted EBITDA margin expanded by 50 basis points versus last year, driven by strong price/cost, volume leverage and productivity, which more than offset higher employee-related costs and discretionary spending as well as the dilutive impact of acquisitions. Industrial demand remained steady throughout the quarter. We experienced tailwinds from energy, mining, chemical and lithium-ion battery markets. Our water businesses performed well. Quote activity remained strong due to U.S. infrastructure funding initiatives, and we see continued momentum around the adoption of AI and cloud technologies. Our energy markets continue to be strong, driven by favorable oil export and mobile truck demand. In the chemical market, we are experiencing wins in the energy transition space as well as strong China and Middle East demand. The agricultural demand landscape is mixed. Farm fundamentals are positive with stable commodity prices and net farm incomes as well as lower fertilizer costs versus last year. However, distribution inventory levels were higher than typical coming into the planting season, and a slower start to the season due to weather has delayed the turnover of this inventory. Moving on to the Health & Science Technologies segment. Organic orders contracted 23%, driven by the OEM inventory calibration impact as well as timing of a large next-gen sequencing order we received in the first quarter of last year. As Eric noted, our life science and analytical instrumentation businesses are being impacted by broad-based inventory destocking as our customers recalibrate to a more normalized demand pattern. We expect that these markets will continue to see this pressure through the second quarter with some recovery in the back half of the year. The semiconductor market is experiencing softness resulting from memory oversupply as well as customers feeling the impact of U.S. export controls. We anticipate that macro conditions will improve as we progress through the remainder of the year. We do continue to leverage share gain to buffer some of the broader market declines. Our material processing technology business is seeing softness across pharma, biopharma and nutrition markets, driven by tighter capital availability and customer hesitancy due to recession concerns. Our funnel does remain strong, and we expect some recovery in the second half of the year. The automotive market remains positive. We continue to see a solid global trend towards electrification driving opportunities for our growth. We delivered 3% organic sales growth in the first quarter, driven by strong next-gen sequencing, satellite broadband and fuel cell-targeted growth initiatives with some offset from the market factors I mentioned earlier. Adjusted EBITDA margin contracted by 300 basis points versus the first quarter of 2022. Most of this pressure is in the gross margin line, with unfavorable volume leverage and mix more than offsetting favorable price/cost. The recent Muon acquisition is accretive to HST's overall EBITDA margin. Finally, turning to our Fire & Safety Diversified Products segment. Organic orders contracted by 4%, mainly driven by timing of project orders in our dispensing business last year. Organic sales results were strong at 9% growth, with double-digit growth in both Fire & Rescue and BAND-IT offsetting the decline in dispensing. Adjusted EBITDA margins expanded by 160 basis points versus last year, largely driven by strong price cost performance, volume leverage and productivity more than offsetting higher discretionary spend and employee-related costs. The paint market is mixed, with pressure from the North American replenishment cycle coming to an end and softness in Southeast Asia being offset with strong European and Indian demand. Within our Fire business, demand for trucks remains strong. North American OEM volumes continue to be constrained by supply chain. However, we are gaining share with North American mid-tier and China OEMs with our integrated system strategy and have pivoted our go-to-market approach for our SAM product to retrofit in-service trucks to bypass the OEM backlog constraints. Our rescue markets are stable, and we have experienced favorable demand in Europe and good project activity across most of the globe. BAND-IT results continue to be positive. Industrial demand is steady, energy is strong, and we continue to drive higher than market performance in automotive due to our position on high-demand vehicles and share gain. With that, I'll give an update on our outlook for the second quarter and full year 2023. I'm on Slide 11. I'll now provide some additional details regarding our revised 2023 guidance for both the second quarter and the full year. In Q2, we are projecting GAAP EPS to range from $1.86 to $1.89 and adjusted EPS to range from $2.10 to $2.13, with organic revenue growth of approximately 3% and adjusted EBITDA margins ranging from 27.3% to 27.7%. We anticipate that HST volumes will be negative in the second quarter, and the strength we saw in Q1 industrial performance sustains. Turning to the full year. As Eric mentioned, we have reduced our full year revenue guidance, reflecting headwinds related to OEM destocking across the HST segment. At the midpoint, we expect volume and mix impact reduces EPS by $0.48, offset by $0.23 of cost actions, yielding $0.25 of net pressure on our annual guide. This equates to a full year low single-digit organic revenue contraction in HST and low- to mid-single-digit growth in FMT and FSD. Our view on the industrial market has not changed, and we continue to assume a second half decline with a modest recovery in the back half for HST. Bringing it all together, we project GAAP EPS of $7.30 to $7.60 and adjusted EPS to range from $8.25 to $8.55. We expect full year organic revenue growth of 0% to 3% and adjusted EBITDA margin to range between 27.5% and 27.9%. The high end of our range implies that we will sustain our record profitability from last year. Capital expenditures are anticipated to be about $70 million, and free cash flow is expected to be 100-plus percent of adjusted net income. With that, I'll turn it over to the operator for your questions.

Deane Dray:

Just starting with the HST story here. And look, we're seeing this across the sector. We covered Danaher. They've been through this, this whole kind of you're on the other side of the COVID surge in volume. And Dover's biopharma pumps, same story there as well. So it's not execution. We know that. It's not share loss. But what's your degree of confidence in the path to normalizing? Just what kind of visibility do you have here?

William Grogan:

And I'd just add is our guide. On the low end, we have kind of that HST recovery only up about 1% sequentially from the first half to the second half. And then on the high side, a 7%. So reasonable range relative to the things that Eric just highlighted.

Eric Ashleman:

So are you saying, Deane, kind of take it from a little bit more depth...

Eric Ashleman:

On the HST and then rotate it over -- okay.

Eric Ashleman:

Got it.

Eric Ashleman:

Yes. So obviously, the most pronounced recalibration happening exactly in the area that we're talking about here in HST. As you look at the industrial side of it and in particular, kind of the day rate stuff right down the center of our fairway, first quarter held up really, really well. I mean business to business, I think we called out ag is the only one where we saw some similar dynamics of kind of inventory and things ready to go to plan. I will say though, in more recent data here in April, some of those canaries that we often reference, you can see things pull back a little bit, and you can see them doing it together. So it is going to be something we'll watch. April is, for whatever reasons, never a real strong predictor for us. It firms up as we go through May and especially into June. But I will say you can see a little bit of that there in those businesses. In terms of just day rates, it's not a big drop, but the uniformity of it is interesting across a couple of weeks here most recently. And when you kind of hold that up with some other things, some of which we do informally and others have done more formally around inventory positions of distributors and things like that, maybe you can see sort of the same comments, hold that up with the same feelings of uncertainty. So it's not a logic break in terms of how this might play out. And let's remember, in our comments here last time, I mean, we actually have this positioned in our back half. So we have a bit of a glide path and then here, very recently, seeing some of the first signs of it.

Eric Ashleman:

Yes. And a couple of the other FMT pump businesses and even more specifically, a couple of product lines we look at within and where we just know they tend to be ordered typically, 1 and 2 and 3, general replacement. The ones you mentioned, a few other places, but yes, they're the ones we often always look at when we talk to you.

Michael Halloran:

Can we follow up on Deane's question and talk about the other side of the coin, just maybe the CapEx side of things? Are you seeing any pullbacks? Obviously ignore some of the destock HST stuff you already commented on. But on some of the other longer cycle pieces, are you seeing any change in dynamic? Or anything noteworthy underneath the hood?

Michael Halloran:

And apologies in advance for this one. I think Bill gave some commentary on expectations by the segments for the remainder of the year. Unfortunately, you guys were breaking up on me. Could you just repeat that in case I misheard? Or maybe I'm wrong, maybe you guys didn't do that, but can you comment on that?

Michael Halloran:

Okay. Okay. That's helpful. And then I guess just a quick follow-up on that then. On the FMT piece, the orders are good. I think the end markets there are probably a little bit healthier broadly. Why the decel as you work through the year on that piece specifically? Is there anything you're seeing that's concerning? Or is it just how you think things layer out as we look forward?

Operator:

The next question comes from the line of Allison Poliniak with Wells Fargo.

Eric Ashleman:

Yes. I mean, holding up really, really well. KZ, just to remind people, brought a key piece of automation technology that, frankly, goes to the same customer set that we have in our Banjo business. They're very close by. So I mean this is a [Technical Difficulty]. And so we're working on the commercial side, the technical side and all of the pieces of the IDEX operating model. So really, really happy there. The Nexsight business, reminder, there was -- they were kind of long channel partners, and there's a piece of software that came with that business we've long used as well. So many people have kind of associated this with IDEX for a number of years. So pretty seamless integration, expands our presence in depth. And then the water markets, as we referenced in the earlier comments and we'll say here, are doing well. There's good strong support for municipal projects, municipal work that I think will play out for quite a while. So yes, real favorable with those 2.

Eric Ashleman:

Yes.

Eric Ashleman:

I don't think so. I think largely, this is a story of coming off of a multi-period of really aggressive rates, both for us and our end customers. I mean I look at our segment. I mean HST was up 30% across 2 years. I think that tracks with a lot of the end markets where we are. And so a retraction or a pullback down to more typical rates in the single digits. Even if they're mid-single digits, it's pretty dramatic if, in fact, your thinking is changing in a relatively short time horizon. So I think the single biggest variable for -- certainly for us as a component supplier into it is going to be levels of inventory [Technical Difficulty] taking it into different areas. So it's -- in some ways, it's doing math. It's math and rate of travel. It is different than we've seen before, but the preceding period in the run-up there was different as well. So I think we're all learning to do that together. And as I spoke earlier on the call, the need for even tighter alignment and iteration as we go through that to protect everybody is very important.

Nathan Jones:

A couple of questions on HST. I was just wanted to hit the margins, down 300 basis points year-over-year in the first quarter. I think, Bill, you said -- you talked about lower absorption, but revenues were up 3% organically. Can you maybe just flesh out a little bit the inputs into the year-over-year margin decline in HST?

Nathan Jones:

Okay. That makes sense. And then just maybe a little bit more color on how you expect the year to sequence on HST. I mean you had in the 20s of orders down. Just maybe any color you can give us on how we should think about the comps, I guess, especially in 2Q, with this being a relatively short-cycle business. Do you take most of the pain here on organic growth in the second quarter, and then you see revenues improve pretty meaningfully, sequentially as we go past that?

Nathan Jones:

And then just one last one on HST. IDEX is not typically an inventory business. You end up typically seeing a lot of inventory on customer shelves. Obviously, an inventory destock is what we're talking about. And so can you just talk about how this inventory ends up on customer shelves, how that works its way through the system?

Operator:

And the next question comes from the line of Vlad Bystricky with Citigroup.

Eric Ashleman:

Yes. Well, I think in energy specific, remember that we largely do mobile custody transfer there. So there's a little bit of an overhang as the industry gets healthier and price support are out there. You're going to get some general tailwinds for CapEx spend. More specifically for us, though, we do a lot in mobile applications, a lot of which depends upon chassis availability. That's been -- that was highly constrained for a couple of years. That's freed up as a lot of other supply chains have, and some of it is just captive demand at a good and favorable time in the environment, that -- something like that, a micro story like that actually matters for us. On the chemical side, we've seen strength in China, specifically, with our Richter business. I think some of that is probably also related to the fact the country was kind of locked down for a while. There are some investments that have to be made. We're super well positioned there. We'll see how that plays out longer term. And actually, Europe in the chemical side, which is an area of concern and was pretty depressed as well for a bunch of reasons we've talked about, that was actually pretty strong for us as well. So it's these little pockets that kind of play out in typical IDEX fashion that goes from big to small stories here. But I would say, generally, we're still following others out there that are larger. So not a massive component of project spend or multi-period expansion here, but more micro events and things. And otherwise, markets, I think, are doing pretty well.

Vladimir Bystricky:

Okay. That's really helpful. And then just on the M&A front, can you give us some more color on the Spectral tech acquisition? I know it's relatively small, but can you just talk about what attracted you to that particular asset, potential scalability of the business? And more broadly, what you're seeing in the M&A pipeline and environment today?

Operator:

And the next question comes from the line of Jeff Sprague with Vertical Research.

William Grogan:

No. I mean the only thing of note, it was small, it was a couple of million dollars. Just as we got Nexsight on our normal accounting procedure, they picked up a couple of weeks of incremental revenue, but it was a $2 million, $3 million type of deal.

Operator:

And the next question comes from the line of Matt Summerville with D.A. Davidson.

Operator:

Matt, your line is now live.

Eric Ashleman:

Yes, sure. So price is a big part of our value capture across our portfolio balancing, hey, we have differentiated products and making sure we capture that value from our customers. Obviously, last year, from an inflationary perspective, we were hitting an all-time high. So we had ramped our price pretty significantly as we went through, I think, topping off close to 5% last year. This year, we guided about 4%. We're on track for that. That's a combination of new price increases that we've launched here throughout the first quarter and then carryover pricing from actions we took throughout last year.

William Grogan:

Sure. I mean we haven't disclosed exactly other than it's at -- it will be at the high end of HST growth on a normalized basis. Before we bought them, they had been a double-digit compounder. So really successful with their growth trajectory historically, and we continue to see that here as they progress in the high single digits. From an EPS perspective, I'd refer you to our annual guide. We didn't break out the individual pieces, but I think incrementally this year, we said $0.43 for Muon, the carryover for Nexsight and KZ, net of the divestiture of Knight.

Brett Linzey:

I wanted to come back to HST. So the order's down 23%. Are you able to parse out how much of that decline was specific to the OEM destock versus maybe some softening in other areas of the portfolio?

Brett Linzey:

Yes, sure. So the first one is on HST. So order's down 23%. Wondering if you're able to parse out how much of that decline was specific to the OEM destock versus softening in other areas of that business?

Brett Linzey:

Okay. Got it. And just one other one. You talked about some of the barometer businesses pulling back a little bit. How does that shape your thinking around incremental restructuring or further curtailment of some of this discretionary? Do you lean into additional actions here to defend the margins? Just curious what the business planning assumption is.

Operator:

And the next question comes from the line of Joe Giordano with TD Cowen.

William Grogan:

Yes.

Eric Ashleman:

Yes. No, it's a good question. I mean look, if you kind of get it right down to the way that inventory replenishment is done, obviously, your future projections and your assumptions around lead time drive almost all of your requirements. And so in hindsight, now you can view this and think, well, there must have been irrationality there, but I don't think that's actually the case. I think if you are projecting a line in a certain way, and you've been experiencing delivery patterns, not just for us, but for others at a certain level, it's going to say, you need a lot of stuff. I think part of what's changed here and maybe changed most dramatically is you have kind of a simultaneous -- well, first of all, the calendar change, funny as it sounds, that always tends to bring a different headset. And I think there's some legitimate things out there kind of from a macro perspective that people are wondering about. We're further away from COVID. We're starting to see some pullback in biopharma spending. We have some funding crisis associated with start-ups and things in biopharma places. So the minute you interject that back into the equation, you potentially go change your assumption on long-term demand, it actually has a pretty striking effect on what you should be bringing in. Now you combine that with the fact that we execute really well, so our lead times and our customer set, returning quickly back to normal, you put those 2 things together, even an automated system is going to say, "Hey, you've probably got too much here." So back to your point on learnings and things like that. First of all, we're not typically seeing cycles of this magnitude, these kind of swings. But to be fair, maybe in the world to come as we see, and it seems like there's always another chapter around the corner. So I do take your point. And I think higher iteration, really coming together and understanding long-term projections being maybe potentially more transparent with where we are in terms of lead time performance, customer set, making sure that, that's exactly understood not just today, but tomorrow as we move through cycles and swings like this, I think those would be the kind of things that our teams are talking about at both the commercial and the operational level.

Eric Ashleman:

Yes, I mean, I think this is about the pattern that you would expect at some point. I would say, look, this is pretty recent. April, as I said, is often a kind of an interesting month of transition as you move into the spring. So we'll see. But we're always looking for a slight step down one way or the other, and then uniformity. Because I think that's where, again, the portfolio nature of IDEX comes into play. We're able to kind of see it across a variety of end markets simultaneously, all of which have kind of the same sort of short order fulfillment patterns that have long been known to people. So when they tend to move in concert with each other, either positively or negatively, it's at least worth looking at and taking a signal. I would say this is a small drop. It is uniform in nature, but that is exactly what we would have probably expected and I think is modeled in ultimately in the back end. And we'll obviously continue to monitor it and talk to you and others about it as we get -- roll through and finish the second quarter.

Eric Ashleman:

Thanks so much. I apologize, I know we've had some glitches with the technology. Maybe we'll need to put more filters to work on telecommunications. First of all, I want to thank the IDEX employees. I know there's always some listening in on the call. Very, very strong quarter. You've continued to really perform for the business and for our customers. Thanks to others on the call for your interest and support in the company. Bottom line here, we knew 2023 was going to be a year of recalibration moving from one state of the world to another. It's playing out more dynamically than we initially suspected in the HST side. But as you can see, we're executing through it. We're taking the appropriate responses in the business. And I think most importantly, we ultimately believe in the long-term success and outgrowth in those markets. We're talking about coming down from highs to something that's actually pretty typical, but absolutely advantaged. We think it's going to continue that way and then accelerate for years to come. So through all of these dynamic swings over the last 3 years, I'm really proud of the fact that we've executed well, and we certainly stepped up our capital deployment, really happy to announce the sixth transaction since the beginning of '21 with Iridian, doubled our emerging markets footprint and capability set and continue to strengthen a really unique culture as we've done it. So we're built for the long haul here. We're confident that we're going to perform and deliver value throughout. And I look forward to updating everybody along the way as the -- in the year to come and the years in the future play out for IDEX. Thank you.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX fourth quarter and full year 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months and full year ending December 31, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. We will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance. Bill will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023. Eric will then close the call with our key priorities for 2023. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13734461 or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

William Grogan:

Thanks, Eric. In our Fluid & Metering Technology segment, industrial day rates were steady in the fourth quarter, and we expect they remain at this level in the near term with strong price support. We've seen initial signs that customers are returning to a book-and-bill order pattern, consistent with pre-pandemic behavior. We continue to monitor day rates to evaluate longer-term expectations as this is our most short-cycle market exposure. We expect another strong year in agricultural business with strong farmer sentiment and high crop prices. We continue to see positive signals from both our OEMs and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs. We are on our next phase of process automation at Banjo and see continued improvement in delivery and efficiencies putting us in a good position to capture share. Our outlook for our municipal water business continues to be favorable. The healthy quoting activity we experienced over the past few quarters is expected to translate into 2023 growth. And we continue to identify opportunities to leverage our technology to capture new programs. The EPA just received record funding and the Infrastructure Bill could provide a tailwind in the back half of the year. The chemical markets overall are soft. We see opportunities for growth in U.S. green energies and strong project activity in the Middle East, but this is offset by softer European demand due to higher energy costs and cuts to production capacity. In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support. However, customers continue to delay larger investments as they focus on cost, inventory and supply chain issues. The strong price capture and productivity achieved in 2022 as well as new pricing actions in '23 will continue to drive improvements in FMT margins with some risk of offset from lost volume leverage, depending on the second half volumes. Moving on to the Health & Science Technology segment. We expect HST to remain our highest growth segment. Our life sciences and analytical instrumentation businesses will continue to grow in '23 due to strong next-gen sequencing applications and continued expansion of cell-based therapies in various chromatography and mass spec applications. In the short term, however, several of our OEM customers are holding excess inventory, driving volume out of the first quarter and into the balance of the year. We believe this is a short-term issue, and the overall market outlook remains extremely positive for this sector. Our targeted growth initiatives tied to a wide variety of applications from satellites and space, to energy-efficient fuel cells continue to perform well, and our industrial businesses are seeing market trends similar to FMTs. We are seeing some slowing in semiconductor market, driven by higher memory device inventory levels and declining customer chip spending. Fabrication spending and new fab construction are both expected to be down for the year. That said, we provide critical consumable components for a large installed base, which tends to be more stable despite end market and CapEx cycles. Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market. We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects. Customers are hesitant to make larger investments given inflation and higher interest rates. India continues to accelerate and the easing of China restrictions could drive growth and recovery in the region to offset some. Lastly, our auto business is expected to perform well. Global auto production is stable, and our presence in premium vehicle segments in EV and hybrids is driving a faster recovery as compared to the overall market. HST margins will expand in '23 due to pricing, productivity and volume, partially offset by continued reinvestment in our highest growth businesses and some mix headwinds in the short term due to expected life science AI demand patterns. Finally, we expect our Fire Safety and Diversified Products segment will experience growth towards the lower end of our guided range. In fire safety, U.S. and European fire OEM volumes remain constrained by supply chain and throughput issues, but backlogs are strong and volumes are steady. We expect continued share gain with smaller builders that are coming online to capture surplus demand. Our rescue business remains positive with strong NPD, and we continue to leverage our integrated model to drive distribution growth. We expect our Banjo business to continue to outperform across industrial, automotive and energy markets as it leverages its inventory and differentiation to capture share. Finally, our dispensing business has achieved strong results for the last 2 years, but will be down in 2023, driven by lower North American project volume as customer equipment refresh cycles approach their final innings. We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia. For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in the segment. With that, I'll discuss our financial results. Moving on to our consolidated financial results on Slide 9. Q4 orders of $803 million, were up 1% overall and up 1% organically. We experienced continued orders growth in FMT, driven by strong water and energy results and an FSD due to strong fire and rescue orders as well as the receipt of a large project order for dispensing in the quarter. HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier. For the year, orders were up 8% overall and up 5% organically. We experienced positive orders growth across all 3 of our segments. Fourth quarter sales of $811 million, were up 13% overall and up 12% organically. We experienced nearly 20% organic growth in HST and strong growth across both FMT and FSD. Full year sales of $3.2 billion, were up 15% overall and up 13% organically. We saw strong double-digit growth across FMT and HST and 9% growth in FSD. Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021 and adjusted gross margin of 43.6% contracted by 40 basis points. This was driven by unfavorable mix within HST and FSD, the dilutive impact of acquisitions, employee-related inflation and unfavorable productivity in HST, partially offset by volume leverage and strong price cost. For the full year, gross margins expanded by 50 basis points, and adjusted gross margins expanded by 10 basis points to 44.8%, primarily driven by strong volume leverage, positive price/cost and productivity, more than offsetting employee-related inflation and engineering resource investments. Fourth quarter adjusted EBITDA margin was 27%, up 10 basis points versus 2021. A bridge of Q4 adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation. Full year adjusted EBITDA margin of 27.9%, is up 20 basis points versus 2021's adjusted EBITDA of 27.7%. This represents record profitability for IDEX. I will discuss the drivers of full year adjusted EBITDA on the next slide. Our Q4 effective tax rate of 20.5%, decreased versus last year's effective tax rate of 22.5%, primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Muon Group acquisition. Our full year effective tax rate of 21.7% also included tax benefits from the sale of our Knight business and was down from the 2021 effective tax rate of 22.5%. Fourth quarter net income was $130 million, which resulted in an EPS of $1.71 Adjusted net income was $153 million, with an adjusted EPS of $2.01, which was up $0.30 or 18% over prior year. Full year net income was $587 million, which resulted in an EPS of $7.71. Adjusted net income was $618 million, resulting in an EPS of $8.12, up $1.25 or 18% over prior year adjusted EPS. Finally, free cash flow for the quarter was $147 million, 96% of adjusted net income, mainly driven by improved working capital performance. For the year, free cash flow was $489 million, down 1% versus last year and coming in at 79% of adjusted net income. mainly driven by higher net working capital, partly offset by higher income. As we exit the year, we made progress in reducing core business inventories and have momentum behind us to continue to drive further reduction into next year. Moving on to Slide 10, which details the drivers of our total year adjusted EBITDA. Full year adjusted EBITDA increased $119 million compared to 2021 and Our 13% organic growth contributed approximately $91 million flowing through at our prior year gross margin rate. We levered well on the volume increase and had record price capture to offset record inflation. Price/cost was accretive to margins and has returned to historic levels. As we exited the year, all 3 of our segments posted positive price/cost results. We drove operational productivity to offset supply chain-driven inefficiencies and realized the benefits of our energy and Italian site consolidations. Mix was a small positive for the year. We saw unfavorable mix pressure in the fourth quarter of about $3 million that were reversed a majority of the year-to-date favorability. We invested $20 million taking in the form of engineering and commercial resources in the business and M&A and diversity equity inclusion resources in corporate. Tracking to the lower end of the $0.20 to $0.25 of full year spend we highlighted at the beginning of the year. Discretionary spending increased by $25 million versus last year, closer to the high end of the $0.20 to $0.25 range on significantly higher sales than our original guide. We exited the year with a solid 30% organic flow-through. ABEL, Nexsight, KZValve and Muon acquisitions, net of the Knight divestiture and FX contributed an additional $14 million of adjusted EBITDA. Inclusive of acquisitions, divestitures and FX, we also delivered 30% flow-through. With that, I would like to provide an update on our outlook for the first quarter and full year 2023. I'm on Slide 11. We expect full year organic revenue growth to be in the range of 1% to 5%. This range reflects the uncertainty in the second half of the year given the short-cycle nature of our business. This organic growth rate equates to $0.12 to $0.60 depending on the top line results. This range includes price cost, which we anticipate will be positive for the year and some mix pressure stemming from HST and dispensing volume in FSD. We expect that our operational productivity will more than offset pressure from employee-related wage and benefits inflation. We operated in a challenging supply chain environment in 2022, and we expect the easing of these conditions as well as driving our own internal productivity funnel will deliver $0.06 to $0.08 of net productivity for the year. In 2022, we returned to a more sustainable level of discretionary spending post-pandemic and invested in the people needed to drive our strategy. Travel and external services did not fully rebound until the second quarter of 2022. And we hired an increasing rate as we move through the year. Although our spend is only moderately increased versus our 4Q exit rate, we'll see pressure of approximately $0.09 on a year-over-year basis. This impact is entirely felt in the first quarter of 2023. Although not to the same level as in 2022, we will continue to invest for the future. People, new products as well as applications for existing products, and these investments will provide up to $0.20 of pressure in 2023, depending on top line results. The range indicates how we will focus on resource allocation and an uncertain period and dial in our investments appropriately. Net of the divestiture of our Knight business last year, we expect acquisitions to contribute $168 million of revenue and $0.43 of EPS. Now let's look at a couple of non-operational items. Interest expense associated with the Muon acquisition represents a headwind of $0.12, and we expect FX to be a small impact, providing $0.02 of EPS pressure. So in summary, we are projecting organic revenue growth of 1% to 5% for the year, adjusted EPS expectations are in the range of $8.50 to $8.80, a 5% to 8% growth over 2022. The midpoint of our guidance implies a solid 30% adjusted EBITDA flow-through. Moving on to Slide 12. We I'll now provide some additional details regarding our 2023 guidance for both the first quarter and full year. In the first quarter, we are projecting GAAP EPS to range from $1.74 to $1.79 and adjusted EPS to range from $1.98 to $2.03, with organic revenue of 3% to 5% and adjusted EBITDA margins of approximately 27%. Our guidance includes $0.07 of pressure from accelerated recognition of share-based compensation as well as a delay in HST OEM shipments to the latter part of the second quarter that is lowering our organic growth expectations for the quarter. These factors, plus the carryover item I mentioned on the previous slide, mutes our year-over-year flow-through for the quarter, but expect to deliver solid flow-through for the year. Turning to the full year 2023. We project GAAP EPS of $7.55 to $7.85 and adjusted EPS to range from $8.50 to $8.80. We expect full year organic revenue growth of 1% to 5% and adjusted EBITDA margins to be 28% or higher. Capital expenditures are anticipated to be about $70 million, in line with 2022 spending as we continue to identify opportunities to reinvest in our core businesses. And free cash flow is expected to be 100-plus percent of adjusted net income. With that, I'll turn it back to Eric.

Operator:

[Operator Instructions] Our first question is from Allison Poliniak with Wells Fargo.

Eric Ashleman:

Yes. And that's probably the area with the best example. We're coming off an environment where a lot of even the best intentional processes kind of turn into chasing things, looking for parts and waiting for the truck to come in at noon, all of that kind of stuff. So as that moderates and gets better, we just want to be intentional to make sure that we're going back and putting in those process-based fundamentals, the right people in the right room, having the right kind of conversations. That's actually how we're going to -- we frankly made a nice turn here in the fourth quarter on inventory. We got a long way to go, but we're really excited about that potential for us moving forward. But I think it's just -- I think everybody should be very thoughtful of recognizing that the way things have worked the last couple of years, if you're not intentional about reorienting it back to something that operates in a higher plane, it's going to lag. And so we're taking that opportunity.

William Grogan:

Yes. So in the fourth quarter, we talked to the third quarter inventory stabilized. It wasn't a detriment to cash flow. Here in the fourth quarter, it added about $20 million of free cash flow, the movement we made on our position, and we continue to see that momentum. I think we've got line of sight to a half a turn to a full turn of inventory improvements as we progress through the year. It will be a significant driver of our cash flow performance as we go from, obviously, less than historical averages on our free cash flow conversion to last year being 100-plus percent, which will yield somewhere between 30% and 40% increase in free cash flow year-over-year. So I think that's a huge win as we progress through the year.

Michael Halloran :

So a couple of questions here. First on the guidance. Obviously, the commentary on the first quarter and some pushouts, plus a lot of the commentary about basically expected volatility through the year. How have you cadence that guidance? Is it relative to normal seasonality? I mean how do you think about first half, back half versus a normal year? Not that we've had a lot of normal years lately, but any kind of context you give to how you're thinking about what that cadencing looks like and how much kind of caution maybe you've put in there given what that backdrop looks like?

Michael Halloran :

Great. That's helpful. Makes sense. And then the comment on order volatility expected is the -- essentially the booking to shipment time period compresses or return to normal. Are you essentially suggesting that you're going to be seeing some pretty volatile order patterns in a year, but maybe a little bit more linear demand patterns as we work through the year relative to the kind of front half, back half comments you just made, Bill? Is that basically a warning sign for -- in your view for what those order rates might be, but don't over extrapolate relative to the underlying demand?

Michael Halloran :

Appreciate that. One quick one, just a clarification. Slide 7 with the arrows within the range. Are those arrows implying high end and lower of the range for the HST and FSD? Or are you suggesting a little bit above, a little bit below and then the green clarification?

Michael Halloran :

Got it. But still the range.

Nathan Jones:

I'm just going to -- I'm going to follow up on Mike's question -- last question there and follow up on this recalibration of orders and things like that. IDEX doesn't typically have a lot of inventory, a lot of channels. But I'm sure there are some pockets of the business where there are some inventory in new channels. How are you thinking about the potential for your customers to destock some of their inventory and for that to be a pause in demand for you guys? Is that something that you baked into that down 2% to 4% volume in the second half?

Nathan Jones:

I think maybe the question on supply chain. I think over the last couple of years, generally, all of these lead times have stretched out. But for IDEX's businesses, the delays have really been up your supply chain because you buy these highly value-added components. So there's a number of steps for them to go through. And as they compress, that's compressing the order to ship time. So can you talk about where your supply chain is relative to where it was in 2019 chain? How much better it's got, how much there is still to go? And what your general assumption is now for getting back to something like normal? Does it happen in '23? Does it happen in '24?

Operator:

Our next question is from Deane Dray with RBC Capital Markets.

William Grogan:

Yes. I think there's 3 things there, Deane. One, we continue to face some of the inefficiencies. We talked about here as we progress through the back half of the year. Some of those businesses have grown 20% and still calibrating on some of the manufacturability of some of this cutting-edge technology that they have. Two was some mix within the portfolio. We talked about some of the short-term OEM pushouts. A lot of that has been kind of our book and ship components that are higher margin. And then the last one, just the addition of Muon, they were only in the portfolio for a month. They were shut down to do a full physical inventory that, that diluted margins a little bit. The Muon on will go away in the first quarter. I think we're making progress on the productivity piece, but the mix, I think, is still a component that we'll experience in the first quarter. Yes, so we've got the volume impact and then that mix carrying through at least through the next 3 months.

William Grogan:

No. We've got carryover and the incremental pricing actions that we took to kick off the year. Obviously, that's part of our normal process and cadence to continue to capture the value for our products. So I think we're in a really good position from a price cost. We said in the fourth quarter, we're back to historic levels, and we think that will continue here as we progress through the year. If something were to change, obviously, we go back to the customers with an incremental increase, but we're well positioned here as we kick off the year.

Eric Ashleman:

Yes. I'd say, Deane, it's still pretty early. I mean everything we're kind of talking about here near term that there was some exposure in Q4 and some carry into Q1. That's very much a temporal condition and otherwise very active and strong markets where you can see, hey, people are taking a pause for all the reasons that you just suggested. Those bellwethers that we have on the industrial side, most of which their order side is coming through the small order flow side, honestly, those are holding up. We're simply, in some cases, projecting that if you combine a couple of things, we kind of know where those inventory levels are, we know how they think about planning, we know where we are from a lead time perspective. We're saying at some point, we expect we'll have some of that moderation there, but it really isn't in front of us as we sit here today. And then back half of the year is more of a macro call than anything else as we think about kind of floor and top end of the range for all of IDEX. So I think your question is helpful because it helps us kind of parse that we'll at least put out there, hey, we're seeing some of these things from an early indication standpoint, but most of them are in a temporal spot. We can imagine some things that would be bigger pieces of IDEX, more industrial in nature that would kind of follow the same calibration. And then ultimately, like everyone else, we're kind of thinking about where does the future go back half of the year, it's more of a macro question.

Operator:

Our next question is from Rob Wertheimer with Melius Research.

Eric Ashleman:

Okay. Well, I think the first question, I wouldn't say that those businesses in the HST world, have more inventory. I would say that they have more sophisticated planning. I think that we've typically seen in any cycle, there's just -- they're bigger organizations, they're a little bit more formal, they're usually a little quicker to react to cycles. And when they do it, that's a more of a concentrated industry anyways. So it tends to be kind of amplified that way. So there's nothing that tells me that somehow that they're sitting on more than anywhere else. And it's in any way, frankly, unusual from some other patterns we've seen when things change. So I'd say that's number one. Remind me again on the second question, I want to make sure I get the exact essence. You talked about supply chain confidence.

Eric Ashleman:

Yes. No, again, I think, think of it as 2 variables. One is lead time compression, that's absolute. And I think people are seeing that. They're seeing that quoted to them when they call and ask about things. I would say the second component that I mentioned that is important, though, is the performance against those quotations. Neither one of them yet are kind of back to where they need to be. They're both improved, but they both work together. And frankly, that second piece, the one about sort of assurance and delivery against commitments, has a huge psychological impact. And I think it's one of the -- I think it's actually the more powerful of the two. So if people say, hey, it's still longer, but I know I'm going to get it exactly want to ask for it, they'll actually make that move in a more fundamental way. If they're still getting surprised from time to time, that tends to fuel a little bit of this. I'm going to keep some things, I'm going to protect some things. So both are moving. And as we continue to talk through the year, you'll hear us talk about both sides of that.

Eric Ashleman:

Yes. I mean -- so in general, our story is a good one here. I mean we've had some good performance over the last couple of years, some great businesses we brought in. I've talked from time to time about the intention of work we've done to sort of build strategic conviction in a really, really formal way that contributes to the basic business intelligence that we have from all the businesses across IDEX. So the things that we control are in a great spot. As we think of them engaging with the outside world, we've always been careful to help people understand that we're fishing in a very high-quality universe that I think, in some ways, holds up and it doesn't move around as much in terms of valuations and even timing of transactions, particularly to do this work well. So -- on the PE front, they're often competing with us for properties like this. They too are attracted to companies like this. And I will say it's probably a little less activity competitively there or people that have been able to raise funding and be in the game. But we've long aspired with this work that we're doing to sort of be ahead of that anyway with cultivation on a proprietary nature, talking to people that we meet at the trade shows, those kind of things so that we're not actually in kind of a classic bake-off with lots of people anyways. It's an efficient market, so it doesn't always happen when it does. I think the dynamic around PE activity is absolutely true. Valuations overall still pretty rich because, again, we're looking for high-quality companies like the last 3 that we've brought into the business.

Scott Graham :

And Eric, thank you for all that transparency that was great. So the question is -- maybe I missed it because I was writing away because you talk -- saying so many things. Did you tell us what pricing was in the quarter?

Scott Graham :

And the gap was it that still about like 50-ish?

Scott Graham :

Yes.

Scott Graham :

Okay. And then the carryover for next year, can you tell us what that would be?

Scott Graham :

Got it. So I was just wondering also with the -- thank you, Bill. I was just wondering also with the step-down in the first quarter organic, is that mostly FMT and maybe secondarily, FSD in the organic?

Scott Graham :

Okay. And then I guess my sort of last question here is also on the M&A environment, I mean, in the past, you guys have sort of talked about what's available and a little bit about the funnel. Is there anything more you can say than what you've already said on M&A? Is that still the spreads been kind of coming in a little bit? Or anything changed?

Operator:

Our next question is from Bryan Blair with Oppenheimer & Company.

William Grogan:

Brian, we said about 2/3 of the business is in those major categories you started with on the medical, semi and food side, the balance in a variety of different applications. We've said it's grown at double digits here the last several years. It's got line of sight to continue to do that here as we progress even with some of the noise out there in the semicon market, where they play in this space is still healthy. They've got innovative technology that they continue to roll out. So we remain bullish on their growth profile both on core products and some of the NPD applications that we've gotten to know a little bit more as we progress through the last couple of months of our ownership.

Bryan Blair:

Definitely makes sense. And given the composition of Man Group, the -- from what I can see at least 5 businesses, I'm not certain divisions or platforms they're in. Are there any unique aspects of integration that you would call out? And I guess just to level set, obviously, this is a growth opportunity. But are there cost synergies?

Bryan Blair:

Okay. Excellent. And 1 last one, if I can. You've called out an increase in project activity in municipal water. -- over recent quarters, there's obviously a lot of funding for domestic projects. Are you willing to offer some finer points on that front? How much the project funnel has expanded anticipated 2023 growth? Anything along those lines?

Operator:

Our next question is from Brett Linzey with Mizuho Americas.

William Grogan:

No. I think from a segment, I think it's most of -- we described within some of the comments within our life sciences and total instrumentation, the folks in that group from a magnitude perspective on what they're holding in from inventory, I wouldn't speak to that other than just conversations with them, there is a calibration period that we're going through. As Eric highlighted earlier in the call, this isn't atypical to what we've seen historically we've gone through really robust cycles of growth. There is a quarter or 2 of recalibration to normalize and then back off. I think as you hear any of the external commentary for those large customers, they are still bullish on their equipment deliveries and the growth that they're going to see in 2023.

Eric Ashleman:

Absolutely. We always think of investing and investing for the future and investing to grow. One of the great things about a company like ours, though, is we can move things around sideways. -- a lot to help us kind of hit the lower end of that range and still make the right choices for the right businesses. And so whenever you see us talking about stuff like a 0, it's actually still very dynamic here. it's just to be candid, we would take businesses that are in softer parts of the universe, and we would quite intentionally like pull those down, lead them out a lot. And redistribute those costs elsewhere to parts of IDEXX that are stronger, sometimes literally taking the same people. and putting them over in stronger parts of IDEXX. So we actually have that nice optionality down at the lower end of the range, but keeps it all moving and allows us to kind of weather a storm if it happens.

Joseph Giordano:

Just a couple of follow-ups on orders here. So if I look at HST, obviously, the orders there on an organic basis, the weakest across the portfolio, but the growth for the year on revenue expected to be the best. Like -- so when -- at what point kind of as you get through the year, do you need to see orders start to stabilize or start accelerating again before like you get a little bit more concerned about the organic revenue profile going forward.

Joseph Giordano:

And then similar on FMT -- sorry, on diversified dispensing is a headwind this year on a revenue basis, but it looks like orders kind of picked back up to almost essentially peak levels that you saw like a year ago. So are you starting to see that? Like do you feel more comfortable about the visibility? Are those like 24 orders, I guess, essentially for dispensing that you're getting on.

Joseph Giordano:

You'd expect the dispensing orders to move back down --

Joseph Giordano:

Yes. Yes, definitely.

Eric Ashleman :

Okay. Well, thank you all for joining and listening to our story. And I know there were a lot of moving pieces there in an environment that's got some pluses and minuses and things that are playing out. So I'll keep this really, really simple. I want to, again, thank all the folks from IDEXX. 2022 was a great year. I mean really, really outstanding year, incredible growth, focused on the right things, getting capital to work, and we grew our people, we grew our culture. I think 2020, this is going to be an equally great year, and it really sets us up for the future to come. We talked a little bit in my last framing comments there about the power of execution. We're really excited about that. We think we've got a chance here to go establish even a little bit more competitive advantage as we jump on this and recalibrate to the world to come. So we're all over it. We're doing that actively. And then just as passionately, we've got a number of teams that are thinking about the future, what comes in 5 years, what comes in 10 years, and we're going to make the choices that we have to to capitalize on those too. So -- thanks for your support and interest, and have a great day.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third quarter 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending September 30, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. Today we’ll begin with Eric providing an overview of the state of IDEX's business, then Bill will discuss IDEX third quarter financial results provide an update on segment performance in the markets we serve and discuss our outlook for the fourth quarter and full year 2022. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13724804 or simply log on to our company home page for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

Bill Grogan :

Thanks, Eric. I'll start with our consolidated financial results on Slide 8. Q3 orders of $781 million were up 1% overall and down 1% organically. We experienced orders growth in FMT, but some contraction in HST and FSD, primarily driven by timing of some larger orders. Core demand rates remain positive across the segments. Third quarter sales of $824 million were up 16% overall and up 15% organically. We experienced record sales with double digit organic increases across all three of our segments and strong performance across all geographies. Third quarter gross margin expanded by 250 basis points and adjusted gross margin expanded by 10 basis points compared to the prior year at 45.1%, driven by strong volume leverage and favorable price cost partially offset by higher employee-related costs. Third quarter operating margin was 24.5%, up 190 basis points compared to the prior year. Adjusted operating margin was 24.9%, up 60 basis points. Incremental amortization related to the Nexsight in KZValve acquisitions, unfavorably impacted adjusted operating margin by 30 basis points. I will discuss additional drivers of adjusted operating income on the next slide. Our Q3 effective tax rate was 21.8%. It decreased compared to the prior ETR of 23.4%, primarily driven due to the tax benefits associated with the sale of the Knight business. Third quarter net income was $179 million, which resulted in an EPS of $2.36. Adjusted net income was $162 million resulting in an EPS, and adjusted EPS of $2.14, up $0.35 or 20% over prior year. Finally, free cash flow for the quarter was $182 million, 112% of adjusted net income. This was a record free cash flow for us, mainly driven by higher earnings we are seeing inventory levels stabilize and expect further reductions as we exit the year. Moving on to Slide 9, which details the drivers of our adjusted operating income. Third quarter adjusted operating income increased $28 million compared to last year. Our 15% organic growth contributed approximately $26 million flowing through at our prior year adjusted gross margin rate. We levered well on the volume increase and we had strong price capture to offset inflation headwinds. Price cost was accretive to margins and has returned to historic levels driven by our FMT and HST segments with FSD making improvements sequentially versus the second quarter. We experienced slight positive mix of $2 million in various parts of the portfolio. We reinvested $6 million taking the form of engineering and commercial resources in the businesses and M&A and DE&I resources at corporate tracking to the $0.20 to $0.25 a full year spend we highlighted at the beginning of the year. Lastly, discretionary spending increased by $6 million versus last year, which is slightly below the second quarter of 2022. As we said last quarter we have reached a more normalized post COVID spend rate and significantly higher sales volume. This delivered a strong organic flow through of 31% in the quarter. Flow through is then negatively impacted by the dilutive impact of acquisitions, divestitures and FX, getting us to our reported flow through of 30%. With that, I'll provide a deeper look at our segment performance. I'm on Page 10. In our Fluid & Metering Technologies segment, we experience excellent order in sales performance with organic growth of 2% and 17% respectively. FMT adjusted operating margin expanded by 250 basis points versus last year. The increase included 80 basis points of headwind due to the incremental amortization related to the next site in KZValve acquisitions. We experienced continued strong volume leverage in operational productivity as well as favorable price cost. Our industrial markets continued exhibit steady demand with tailwinds from energy, mining and infrastructure tempered a bit by some European softness. Our look for our municipal water businesses continues to be positive. We see healthy quoting activities in sync with underlying market trends of growing urbanization, further CCTV inspection adoption and infrastructure investments in the U.S. Agriculture remains strong. We are seeing positive signals from both our OEMs and distributors. Commodity prices remain high and increased fuel and fertilizer costs are incenting farmers to invest in precision technologies. Our investment in Banjo's process automation have improved our delivery putting us in a good position to capture share, and we continue to leverage KZValve's expertise and technology to enhance our product offerings. Our energy business is performing well with strong oil and LPG price support. We continue to see favorable results upstream with midstream investments lagging a bit due to supply chain constraints at our customers in larger project spend delays. Moving on to the Health & Technology segment. Orders contracted by 4%, but sales were strong at 13%. Our backlog position remains robust. The contraction and orders were driven by several large orders that the delayed out of the quarter. European capital good softness and tough comparables from the prior year where we grew orders organically by 44%. HST adjusted operating margin contracted by 70 basis points versus last year. The segment experienced strong volume leverage and positive price cost, which was more than offset by increased engineering and resource investments, higher discretionary spending and some inefficiencies incurred as we continue to onboard labor to meet demand and navigate supply chain challenges. We continue to experience strong demand for analytical instrumentation in chromatography and mass spectrometry as well as next gen sequencing technology for oncology testing and research. Our targeted growth initiatives tied to global broadband and energy efficient fuel cells are performing very well. Two great examples of how we are leveraging our tech in fast growing niche markets. The semiconductor market remains steady. We see customer related supply chain issues driving some slowing, but we are offsetting this headwind through share gains. We provide consumables and technology to drive fab efficiency buffering us for some of the CapEx slowdown on the new equipment side. Our material processing business remains strong on continued pharma and biopharma demand. We are seeing some order slowdown due to investment delays by our customers, but our funnel remains strong and of high quality. Our HST industrial market performance is very much like the experience in FMT. Finally, turning to our Fire, Safety & Diversified product segment. Orders were flat year-over-year as a difficult quarter-over-quarter comparables in our dispensing business was offset by strong growth by the balance of the portfolio. Sales were quite strong with an organic increase of 14%. FSD adjusted operating margin expanded by 70 basis points versus the third quarter of 2021 driven by strong volume leverage, partly offset by pressure on price cost and higher employee related costs. Although price cost is still diluted to margins, it did improve sequentially. Our dispensing business performed well with the delivery of North American project volume and continued strength in the global architectural paint market, but orders were down 30% year-over-year due to large North American replenishment orders that we received last year. Within our fire business, OEMs continue to struggle with supply chain constraints, but we did see positive organic growth from price realization, improved execution and favorable performance in loose equipment. On the rescue side we continue to win with our latest generation E3 tool, bringing enhanced tool features to the market. Finally, BAND-IT experienced strong results across industrial, automotive and energy markets. We continue to win share by having shorter lead times and material availability. On the auto side we are outperforming the market by capturing share on new platforms and winning content on priority, high volume vehicles. With that, I'd like to provide an update on our outlook for the fourth quarter and full year 2022. I'm on Slide 11, which lays out our updated guidance. For the fourth quarter of 2022 we are projecting organic revenue growth of approximately 9% and operating margin of approximately 23.5%. We expect that the volume will decrease sequentially from the third to fourth quarter due to normal seasonality and scheduled maintenance shutdowns. Q4 forecasted op margin is down versus Q3 due to the loss leverage on lower revenues. We expect GAAP EPS to range from $1.75 to $1.80 and adjusted EPS to range from $1.92 to $1.97. Turning to the full year. Given our strong performance in the prior three quarters we are raising our full year guidance. We now expect full year organic revenue growth of approximately 12%. We expect GAAP EPS to range between $7.75 to $7.80 and expect EPS to range from $8.04 to $8.09. Our operating margin for the full year is expected to be approximately 24% and we expect free cash flow as a percent of adjusted net income to range from 75% to 80%. With that, I would like to turn it back to Eric for closing remarks.

Operator:

[Operator Instructions] Our first question today is from Mike Halloran of Robert W. Baird. Please proceed with your question.

Eric Ashleman:

Good morning, Mike.

Eric Ashleman:

Yes. I mean, well you hit a lot of the elements there. I mean, there's a piece of this that we always suspected was going to be there as we start to come off of incredibly high backlog positions, especially for a short cycle, quick lead time business like ourselves. So there's a piece of it that no doubt will be that, and we'll keep an eye on the rate of travel of it as it runs out. There is some summer – kind of summer month seasonality that that's in there as well. I would say from a categorical softness standpoint, probably the one area we'd point to it covers a lot of IDEX businesses would be just some general softening on the European front, which probably isn't too surprising. And then I know, I'm sure we'll talk later here about projects – large projects and things of that nature. That's an interesting story. I mean they were, at the beginning of this whole recovery, I mean, there was a lot of caution on people's parts, sort of held them back, I think in the middle part or a lot of the duration, honestly there was just not enough time and energy to get at it or resources. And now you're kind of seeing that tilt back probably more of a cautionary tone again. We've got a few things that have moved out and placed themselves decisions into Q1 of next year, things of that nature as well. So a few things that we can point to. Some things that are sort of normal based on where we are from a backlog position and time of year, but underneath and around all of that really, really strong support across the board.

Eric Ashleman:

Yes. Well look, I think as I said in the prepared remarks, you could see a few paths that would run out here. I mean, one that's more positive, something that's short-term and kind of a short term pullback and then obviously maybe something with a catalyst that's more negative that none of us can imagine. I just always come back, when we talk about that in the company, I mean, we literally scenario play every one of those. We understand kind of what's variable, what's not variable across all our businesses. We always go back to the top growth that's in the company, almost all of which we can kind of see traveling across the duration here. We factor that in as well. We've certainly learned a lot like every company of about how low you can take discretionary spend, in many ways lower than we would've thought possible before. We know where that floor is and kind of how we would stack that against any of those scenarios. We've talked for a while on the headcount side, we'd be careful. Talent is hard to get, I mean, we're not really at a flush position there anyways. We're actually still pretty lean and we'd be very careful there. And then honestly we would – we would rotate towards the strong and we'd go pretty lean on areas that are weaker. And so, I want to be too predictive here because I think it's still pretty variable in our minds but our approach to each one of those paths is not, we actually know exactly what that is.

Eric Ashleman:

Thank you.

Nathan Jones:

Good morning everyone.

Nathan Jones:

I wanted to just with some price/cost discussion. You guys have said that price/cost has been dilutive to margins in 2022, is that something you target recapturing in 2023 as we've started to see costs moderate. Do you believe you can recapture that margin that was lost in 2022 to price/cost?

Nathan Jones:

Okay. And maybe you could just talk a little bit about some of the order cadence in your shortest cycle businesses. I know you guys have a few businesses that tend to be canaries in the coal mine. I think you said BAND-IT still remains pretty strong, but any commentary you can give us on those businesses that you consider to be leading indicators of the order cadence there?

Nathan Jones:

And one last one just on your own inventory levels. Obviously everybody's been carrying a bit of extra inventory through these disrupted times plans on where you think that goes to in 2023 and what kind of catch generation we should be looking at for next year?

Nathan Jones:

Thank you very much for taking my questions.

Operator:

Our next question comes on the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Eric Ashleman:

Hi Deane.

Bill Grogan:

I think internally we're targeting to get somewhere between a half a turn and a turn as we progress to our more historic levels. The buffer inventory is probably at the lower end of that that we'll keep some of that is the businesses look on the strategic side, where we've been able to take share with some of that inventory level. We'll keep that and the focus is, is just as we've built up inventory to buffer and or have had to increase inventory levels based upon quantities we had to commit to you or customers that have paused some of their shipments as they've worked out supply chain issues on their side. We've built up a little bit of finished goods. Those parts will be the first part to bleed and the things that we think are strategic to enable some of the share capture will hold onto that.

Eric Ashleman:

Yes. That's the end of it. I mean, there's small – some small shipments here in the fourth quarter, but fundamentally it was an initiative that we started and highlighted back in 2020. We partnered with that customer and had a great relationship relative to the partnership on developing the technology and them committing a significant amount of capital to support our production capabilities. And obviously as they've moved in a different direction and got out of the testing, cause the impairment and then the recognition of all that deferred revenue here within the quarter. So most of the noises is they have been taken here in the third quarter. We've kind of moved past with significant knowledge gained in terms of production capabilities and technology that we'll continue to leverage as we move forward.

Eric Ashleman:

Sure.

Allison Poliniak:

Hi, good morning. Eric, would love a little more color on the decision to align FSD and FMT under one leader. Does that indicate sort of maybe potentially more divestitures as you kind of look to refine the portfolio going forward; just any thoughts there?

Allison Poliniak:

Great. And then Bill just going back to the HST orders, I think you kind of alluded to the fact that they were just – there were some orders that were essentially just pushed into to Q4. Have they been executed on? Have they turned into orders or is it something we're still leading to come forward here?

Allison Poliniak:

Great, thank you.

Operator:

Our next question comes from the line of Brett Linzey with Mizuho. Please proceed with your question.

Eric Ashleman:

Hi Brett.

Bill Grogan:

In terms of incremental eps?

Bill Grogan:

This year it's just a couple cents here in the back half. And then we'll have a couple of cents there in the, in the first half of next year is it'll comp as we progress in the Q3 and Q4.

Bill Grogan:

I'm sorry, Brett, the cadence of orders within each month in the third quarter?

Bill Grogan:

I would say the third quarters got some seasonality historically relative to European holidays and slowness within August. Relative to normal order patterns there weren't anything that was a significant outlier relative to what we've seen over the years. As Eric talked about, fundamental orders in our book and ship businesses were strong throughout the quarter. That continued to be strong here in October. Most of the softness, like we said, a little bit on the book and ship stuff in Europe and then some of the project related business and some of the ordering was probably the, the bigger item within our European geographical look; North American-Asia still remain really, really strong.

Brett Linzey:

Okay, great. I'll pass it along. Thanks.

Thomas Johnson:

Hi. Thanks. Congratulations on the strong quarter. I just had a question on kind of near-term results here specific to the HST business you provided some pretty helpful commentary for us on some of those main drivers, the lower productivity and some of the discretionary investments that offset volume and improving price cost from a margin standpoint in 3Q. So it would be helpful if there is any way that you could kind of quantify how that impacted EBIT margins on a sequential basis? Just trying to think through the evolution from 2Q to 3Q from those headwinds? And maybe how you see that progressing moving through the remainder of the year.

Thomas Johnson:

Great. Thanks. That's all for me.

Vlad Bystricky:

Good morning guys. Thanks for taking the call.

Vlad Bystricky:

Hi. So can you just talk about – you've obviously talked throughout the recovery about taking some share, given your ability to service customers and your availability. So as we're starting to see supply chain constraints gradually ease, can you talk about how you expect share trends to evolve as some of your competitors who were maybe more hamstrung at times or coming back more online to normalize service levels?

Vlad Bystricky:

Okay. That's really helpful color. And then maybe just as we think about organic sales obviously you have surprised to the upside here over the past couple of quarters and just raised your 2022 organic growth outlook. So, can you just maybe parse out a little more, what's driving that better top line growth? How much of it is incremental, better pricing than you expected versus just better volume-driven growth?

Vlad Bystricky:

That's helpful. Great quarter. Thank you guys.

Operator:

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Eric Ashleman:

Good morning.

Eric Ashleman:

Yes. Well, it's a business we've known for a few years. It's very much an IDEX business. I mean, it's a highly precise, niche component doing wonderful jobs for a variety of high-end markets, including the ones that we had identified in the prepared remarks. I gave a lot of credit to Marc Uleman, who I referenced in my opening remarks. It's a Netherlands-based business. Marc is located in the Netherlands, and he kept a very active cadence with this team over the last few years. We found a time and a space where we were able to generate some actionability and got the deal done mainly because we could get our head around it very, very quickly based on the work we've done over the last few years and our familiarity with it. What's great about a business like this one is, and the reason I say it's so IDEX-like, is it's actually very tuneable. It's one of the reasons we like these precise components businesses. So, it pings into some very high quality areas of semicon, there is some great applications in medical devices, food production, high-end food production, all areas that we study and participate in across the business. So we can leverage that insights and then apply it on a high quality niche business like this one. Longer, turn down the road this actually sits next to a lot of things we have in our Scientific Fluidics & Optics. So there is some commercial relationships that we could leverage there. There is actually some very interesting technical questions and things that we're going to explore together over a longer duration. And then honestly, when we think of value creation, we start to apply the way we run things at IDEX. You can take a high quality business like that, we would start with 80-20. It's not all applications are created equal. We have a way of thinking about that that we can teach to others, things like value capture with customers. I mean, we do that really well. And so there is a whole bunch of leverageable assets as well, just that you apply against an already very, very strong business that's got a demonstrated history of growth. So, I think, we're really, really excited about it. I think it's indicative of the kind of things that we're looking at and looking for. And yes, we'll see, we'll certainly talk to you about it as we go.

Rob Wertheimer:

No, that was a comprehensive answer. Thank you. Any commentary on whether that's an abnormally large asset within your funnel, whether it's peppered through a big and small? And with that I will stop.

Rob Wertheimer:

Great. Thank you.

Operator:

Our next question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Eric Ashleman :

Sure. I think we look for FSD to continue its ramp. We had said last quarter had bottomed out, it will continue to progress as we move forward. With the caveat that we still need to assess the project funnel for next year for dispensing. Right now we don't think there is a huge hole. There will be some softness on the replenishment side. If we weren't able to fill some of those larger projects that would put a little bit of pressure on FSD’s margins relative to the progress that fire and rescue has made. So right now we're still evaluating the impact of what the project funnel is for dispensing and obviously give you more detail here as we get into the guide in January.

Bill Grogan:

Yes, I mean, it was less than 1% of revenue and obviously a non-material, non-profit for us.

Operator:

Our next question comes from the line of Scott Graham with Loop Capital Markets. Please proceed with your question.

Eric Ashleman:

I mean, from a share capture and things we're able to do, I mean…

Eric Ashleman:

I think it's a small amount. Scott, I think, we've stabilized relative to our production output levels as you look at where we've been from a revenue perspective, it's slightly elevated. So, a point or two at most, we've burned a little bit of backlog the quarter, but backlog position is still pretty high.

Scott Graham:

Got you. Okay, great. That was helpful. Thank you. Also, and I hope this doesn't count as a follow-up. What was pricing I didn't hear it if you said it?

Scott Graham:

Okay. Thank you. And then just a question about the water business. It's a pretty big business. You called it out as a certainly an area of strength. Can you kind of talk about the dynamics of the growth in the quarter? Is that a market that maybe would be a clear sort of green shoot market for you next year as well?

Scott Graham:

Got it. Okay, thanks again.

Operator:

Our next question comes from the line of Joe Giordano with Cowen. Please proceed with your question.

Eric Ashleman:

Hi, Michael.

Eric Ashleman:

Yes, well, I think, our energy businesses have recovered pretty nicely throughout the year. I mean, we've seen a few – we don't have a ton of upstream presence, but that's been stronger here lately. I think the midstream has got some delays and things on the project side and supply chain, some of the classic stuff, but probably lines up behind it, because there are some things that are overdue there. I mean we've got kind of a classic custody transfer business, a lot of it is fossil fuel dependent with the current assets. A lot of that technology, we're actually asking all the questions, as you might imagine, of how transferable it is to other alternate energy sources and things that might be out there. Whatever it is, whether it's hydrogen or some other gases and liquids, it's going to need – people are going to need to get paid and we're going to need to measure that custody transfer happens. And that's kind of work that we long have done and are excited about. There are actually other areas of IDEX that map against some of those same vectors in a way that's probably would strike folks in the outside is kind of unusual as well. That's one of the ways we think of a trend like that is we kind of draw lines and tentacles into different verticals within IDEX and then we sort of leverage insight around how the work is done, how things are shaping up, and then distribute it across a variety of IDEX businesses that might be involved. They may not be going to market together, they might not even be in the same room, but actually some of the same dynamics are meaningful for them in terms of why they would want to invest in it. So it's an area of interest for us in terms of how this will ultimately play out over time. But I think for now the kind of core things that we have are doing pretty well with a decent road and runway ahead.

Eric Ashleman:

I mean, we got some great projects there. They, as you might imagine, go very, very niche very, very quickly. As an example, we've got a great application that makes sure that when you offload a rail car with propane you get all of it out of the bottom. I mean, seems kind of funny, you did suspect, everybody would suspect that actually happens, it doesn't. So our team developed something that guarantees that 100% of the fuel is taken out of the car, and then that's available as productivity for a variety of people. So it's that kind of work that's sort of the – that's the unit of measure of things we think about and develop for customers. And there are others along the way, but that's just one we happen to take a look at about a month ago that's really, really interesting.

Operator:

That's all the time we have for questions. I would like to hand a call back to management for closing remarks.

Operator:

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

Allison Lausas:

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX second quarter 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ended June 30, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We will begin with Eric providing an overview of the state of IDEX's business. Then Bill will discuss IDEX second quarter financial results and update on segment performance in the markets they serve and our outlook for the third quarter and full year 2022. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing toll-free number, 877-660-6853 and entering conference ID 13724804, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to safe harbor language in last night's press release and in IDEX' filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

William Grogan:

Thanks, Eric. I'll start with our consolidated financial results on Slide 8. Q2 orders of 839 million were up 12% overall and up 7% organically. We experienced strong orders growth in HST and FMT, but saw contraction in FSD driven by dispensing North America's strong replenishment orders received last year. Second quarter sales of $796 million were up 16% overall and up 12% organically. We experienced record sales with double-digit increases across all 3 of our segments. Second quarter operating margin was 23.4%, up 30 basis points compared to prior year. Adjusted operating margin was 23.8%, down 60 basis points. Incremental amortization related to Airtech, Nexsight and KZValve acquisitions unfavorably impacted adjusted operating margin by 80 basis points. Second quarter net income was $138 million, which resulted in EPS of $1.81. Adjusted net income was $154 million, resulting in an adjusted EPS of $2.02, up $0.27 or 15% over prior year. Finally, free cash flow for the quarter was $97 million or 63% of adjusted net income. This reflects higher accounts receivables driven by the significant increase in sales versus last year as well as elevated inventory levels. Inventory has increased to buffer supply chain challenges and leveraged material availability as a competitive tool to take share in the market. We have spent a lot of time with our teams reviewing their inventory reduction plans and are targeting to bleed down our inventory positions in the second half of the year. Moving on to Slide 9, which details the drivers of our adjusted operating income. Second quarter adjusted operating income increased $23 million compared to last year. Our 12% organic growth contributed approximately $22 million flowing through at our prior year gross margin rate. We levered well on the volume increase. Our teams drove operational productivity, and we had strong price capture to offset inflation headwinds. Price cost was accretive to margins and is trending towards our historic levels. We experienced positive mix of $2 million across the portfolio. We reinvested $4 million, mainly in the form of engineering and commercial resources, to drive long-term growth and additional resources to support our accelerated M&A activity. Lastly, discretionary spending increased by $9 million versus last year and up $7 million versus the first quarter of 2022. Our teams across the globe are back to in-person partnering with our customers, actively marketing our products and investing to support innovation. As we look ahead to the second half of the year, we do not expect this level of sequential increase to continue. We've now ramped to our pre-pandemic spending rate, but on significantly higher sales. Our organic flow-through was 23%, in line with the flow-through expectations we set at the beginning of the year, but most likely the lowest rate we will experience this year. Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX getting us to a reported flow-through of 21%. With that, I'd like to provide a deeper look at our segment performance. I'm on Page 10. In our Fluid & Metering Technologies segment, we experienced a strong second quarter for both orders and sales with organic growth of 8% and 13%, respectively. FMT adjusted operating margin expanded by 170 basis points versus last year. The increase included 60 basis points of headwind due to incremental amortization related to the Nexsight and KZValve acquisitions. Volume leverage, strong operational productivity and favorable price costs were the main drivers of the increased adjusted operating margin. Our industrial markets are exhibiting stable demand with consistent quote activity over the last few quarters. We are seeing small to midsized projects coming through in the oil and gas and petrochemical markets as well as in applications tied to mining, asphalt and lithium-ion battery production. Agriculture continues to perform well. Farmers are experiencing record inflation and look to our technology and precision ag to drive productivity. The KZValve integration is going extremely well, and our automation project at Banjo is on track. Market conditions remain favorable in our municipal water business. We continue to see a strong commercial funnel and long-term optimism, driven by government funding and ESG initiatives. On the energy side, upstream markets are experiencing healthy demand with oil prices providing strong support. Midstream investments have yet to see a bump in activity due to customer supply chain constraints and caution our long-term price sustainability. Moving on to Health & Science/Technology. Stellar commercial performance continues with organic orders up 13% and organic sales up 12%. HST adjusted operating margin contracted by 130 basis points versus the second quarter of 2021. Incremental amortization related to the Airtech acquisition unfavorably impacted adjusted operating margin by 130 basis points. Additionally, adjusted operating margin was driven by strong volume leverage and positive price cost, partially offset by increased employee-related costs, discretionary spending and resource investments. HST continues to benefit from strong secular growth trends within life science, analytical instrumentation, semiconductor and food and pharma markets. The life sciences market is experiencing strong demand for next-gen sequencing instruments and consistent core diagnostic market performance. Analytical instrumentation and material processing results remain strong on continued pharma and biopharma demand. On the semiconductor side, we continue to see growth, but at a slower pace. We've been able to offer shorter lead times than our competitors, enabling share gain across a variety of applications. We continue to see strong growth in our optics businesses tied to broadband satellite technology and strength in our industrial businesses similar to the FMT results. Finally, turning to our Fire & Safety/Diversified product segment. Orders contracted by 5%, but sales were strong with an organic increase of 11%. FSD adjusted operating margin contracted by 280 basis points versus the second quarter of last year. This was driven by higher volume being more than offset by higher employee-related costs and discretionary spending as well as pressure on price cost due to aged OEM backlogs on the fire side and automotive exposure with more metal content within BAND-IT. As we noted in prior calls, we have taken action to address this gap and expect the price/cost will improve in the second half of 2022 as those increases pull through our backlog. Our dispensing business performed well, driven by delivery of North American project volume and an overall positive global paint market. BAND-IT had strong results across the industrial, automotive and oil and gas markets. On the automotive side, we continue to outperform the market and capture share on new platforms. In Energy, we see strong downhole market demand and capture share due to material availability with shorter lead times for our customers. Within Fire & Safety, we are seeing strong demand with our E3 rescue tools. On the fire side, core North American and European markets remain choppy due to OEM supply chain constraints, but we are starting to see some modest improvement. With that, I'll like to provide an outlook for the third quarter and our full year 2022 results. I'm on Slide 11, which lays out our updated guidance. For the third quarter of 2022, we are projecting organic revenue growth of 9% to 10% and operating margin of approximately 24%. Q3 forecasted op margin is up slightly versus second quarter due to improved price cost, partially offset by lower seasonal volume leverage. We expect GAAP EPS to range from $1.80 to $1.85 and adjusted EPS to range from $1.98 to $2.03. Turning to the full year. Given our strong performance in the first half of the year, we are raising our full year guidance. We now expect full year organic revenue growth of approximately 10%. This reflects our confidence in line of sight for the third quarter, but some caution in the fourth quarter due to the short-cycle nature of our business. We expect GAAP EPS to range between $7.19 to $7.29 and adjusted EPS to range from $7.88 to $7.98. Our operating margin for the full year is expected to be approximately 24%. We are expecting free cash flow as a percent of adjusted net income to range from 75% to 80%, down from our previous guidance. With our higher revenue expectations for the back half of the year, elevating our year-end receivables balance and a slower-than-expected inventory bleed, this is our best estimate as we head into the second half of the year. Our long-term goal remains to be above 100% and consider the current guidance a reflection of the volatile external environment versus a structural shift in our cash generation capabilities. With that, let me pause and turn it over to the operator for your questions.

Michael Halloran:

So let's start with the comment, Eric, that you said you're really not seeing anything yet in terms of deterioration. Things are going well, and you can certainly hear that from all the end market commentary you guys gave. And then balance that with the guidance outlook that says you're taking a little bit more of a cautious outlook into the fourth quarter given short-cycle business and you don't know what you don't know. So -- maybe just talk about those 2 competing things and what things you're looking for in your portfolio to say that things are going to keep this pace, maybe decelerate, could be the BAND-IT business, could be something else, but would love to kind of compare and contrast, all that stuff?

William Grogan:

Yes. And just to frame that, I mean our implied guidance, like, is kind of a 1 percentage sequential deceleration in Q4. So it's small, just a little bit of noise that could potentially be out there. But right now, what we have line of sight to and the confidence in our order patterns, we still think the back half is going to be really strong.

Eric Ashleman:

I mean, it's really broad-based. We're looking at the other day to see if it was kind of in pockets and chunks, and it's not. I mean, it's kind of layered across a lot of things. Our lead times in aggregate are holding or decelerating. I mean, we made a comment there that we are seeing some pockets where frankly, our advantaged lead times that are reducing are giving us some opportunity to go grab some share in things. So I'd say on balance, we're not doing anything to drive that in the wrong direction. It's going in the right direction. And the backlog build is very, very broad-based.

Eric Ashleman:

Yes. I'd say -- I mean, look, I think the environment for high-quality assets is held up pretty well as we've gone through this. But a lot of this is very deliberate work on our part to say that we want to go deeper, frankly, into our insight into those sort of concentric circles that surround our best applications. So there's a purposeful step-up in work of that type, in both resources and some things we're doing with third-party analytics to make sure that we understand it as well as we can, in an environment that so far is holding up pretty well for high-quality assets.

Deane Dray:

Maybe we could start with the free cash flow guidance cut there. And look, we're seeing this across the sector. This is getting to be pretty familiar, but the idea of carrying more buffer inventory and then the expectation with all this demand likely resulting in higher receivables towards year-end. So we get the way the math works. But Bill, can you expand on the time frame for bleeding the inventory down? I guess it really does depend on how the supply chain begins to normalize. But just take us through the math on that.

Deane Dray:

Is there anything on product shortages, semiconductor-related where your inventory is -- you've got nearly finished goods, but they're waiting on a particular product that's adding to your inventory? Is that an issue at all?

Eric Ashleman:

And maybe, Dean, to the extent you were -- I think you were also asking about maybe unfinished things that we have in our own factories or something waiting on a part, much like you see in the auto world. I mean, I wouldn't say that it's completely devoid of our environment, but you don't see it all that often because we have pretty quick rapid turn one piece flow kind of build so it doesn't do well with something that's half done, there's really nowhere to put it. And our production process is quick enough, you're better off not starting it just because in general, most of our businesses, that's how we produce things.

Eric Ashleman:

We wouldn't put a pump or something into the build schedule because we'll make 40 of them in a couple of hours, those kind of things.

Eric Ashleman:

Yes. I'd say probably more of the second category, not getting the release or not coming on the line, something we've been thinking about or projecting for a while now and some of these just get extended out. So you mentioned the midstream side. I mean, there's some pockets in our chemical markets exposure, maybe more on the European side than elsewhere. A little bit in the paint dispensing area. We're just kind of coming off the end of a big replenishment cycle there. And then a few things in just specific industrial markets, food expansion, places like that. I mean, they're pretty isolated. It's not a massive part of our business, but they're good indicators, things to watch. And I would just say it's been interesting over the cycle here is this category never really took off. I think in the beginning, it was very much clouded with uncertainty. The nature of the recovery, then it turned into a kind of a bandwidth issue. Can anybody put together the materials or the time and energy to work on it? Maybe here in the later innings of it, it's sort of all of those factors. Uncertainty creeping in back a bit, the bandwidth issue is still there and now inflation and the cost of these projects is causing some recalibration for -- in certain markets where people have to kind of go back and run the math again.

Allison Poliniak:

Keeping in line with that project comment. I know you talked verticals, but is it any like weighted towards a specific geography? Or does it seem very broad-based by vertical at this point just in terms of what you're seeing?

Allison Poliniak:

Great. And then just kind of going back to the free cash flow and just CapEx in general, tepid start to sort of the approach to that $90 million. You talked about Banjo and then investment in emerging markets. I mean, are those still on track? Or do you kind of risk that some of that gets pushed to next year just because of the uncertainty right now?

Operator:

Our next question comes from the line of Rob Worthermeier with Melius Research.

Eric Ashleman:

Yes. So as I said before, I mean, all this is bracketed a bit by the step up in intentionality and work that we're doing. So in that respect, again, there's a lot of things we're looking at, a lot of analysis that we're doing and a lot of conversations that we're having. You would say our -- that just activity level is north of where it has been, much of it driven by our work. Now in those conversations, probably much like the conversations you have, there is definitely more discussions around near-term prospects and what's going on with the forecast and how do you see the sales tracking out and to the extent that all links back to valuation, it's just more intense than it has been for all the reasons you'd suspect. As Bill and I have always said, though, when you're looking at assets of the quality that we look at, you're generally looking at a history that's very sharp, well positioned, driving in strong ways. And then a reasonable projection path, especially if we're the owners that kind of picks that up again. So -- that doesn't mean that both sides are going to be able to see that and get through it. So that's always a possibility, but our perspective is very long term in nature for the kind of assets that we're looking at. So long story short, more activity on our part, which means I think a strong funnel for us, a lot of activity, engaging with people more near-term discussions around what this all means and where it's going to go, but then kind of just take a deep breath, stare over the horizon and be confident that for quality, I think ideally both sides see it that way and stay engaged.

William Grogan:

No, definitely. I mean, our backlog is kind of 2x of what it has been historically. And normally, we'd go into a quarter with 50% of the quarter sales in backlog. We've got close to 2/3 now. So we have a lot more visibility to temper any dramatic short-term falloff. So again, relative to the next couple of months, we're fairly confident in our numbers. So I don't think there's a huge pause that would come because our backlog could support any short-term decrease in orders.

Matt Summerville:

Just a couple of quick questions. With respect to price, can you comment on where you were price realization second quarter year-over-year? And how much incrementally on top of that you expect to realize in the back half? And then I have a follow-up.

Matt Summerville:

In certain areas of the commodity markets, certainly in metals, steel, aluminum, copper, things have come off their highs pretty materially, still elevated from historical standards, but certainly off-peak. When does some of that start to actually add some incremental benefit to your P&L?

Operator:

Our next question comes from the line of Jeff Sprague with Vertical Research.

Eric Ashleman:

Yes. I mean, we're not a massive center-led kind of organization. Never have been. So this might sound more dramatic than it probably is from a headcount perspective. I mean, it's a few well-positioned ads from the outside work that we're doing on the third-party side. And then frankly, the biggest component is just a higher level of engagement overall business to business. I mean, this is something we've been driving now for a couple of years. And we really focus to combine growth outperformance on top of our just sort of institutional great well-deserved execution shops. And so a lot of it is that way. In terms of where we're looking and what it looks like, I mean, we've always favored. I always come back to this analogy of concentric circles around these applications that we kind of currently sit in. We know these environments really well. We know what's to the right or left of us, and the best work for me is really starting to understand where is this market heading, should we make a move slightly left or right and how would we do that. The recent acquisitions that we've layered into the company are perfect examples of that. As we said before, we're also thinking about the broader world in general and where problems are presenting themselves and where IDEX like styles of competition could come in play, and maybe that would open up a flank for us and some applications that are new to the company. So that's in the mix as well. But if you really had to overgeneralize it and think of it, think of it as just radiating circles from the best parts of the company with more intensity, a lot of it from the ground up. That's the way we like to do it.

Jeffrey Sprague:

Great. And unrelated, just back to this -- I mean, everybody's got their hair to the ground trying to snip out an issue with the economy. Any gut feel that actually these improving lead times are actually the canary in the coal mine? And anything happening in just kind of the supply dynamics and kind of order the shipment dynamics or anything that maybe are an earlier precursor of some deceleration?

Operator:

Our next question comes from the line of Vlad Bystricky with Citigroup.

Eric Ashleman:

Yes. Well, I always kind of preface this question with a reminder that we have a lot of configured customized products with quick replenishment, which means not a ton of our inventory on shelves. So it's a small number. I will say we've got some good visibility to at line of sight minimum. You can see it visually when you go visit them. So you can see some slight increases there for our product. I would assume that's applicable to more stockable components as well. In our world, we think of that as if ultimately that bleeds off over time, in some ways, it's pretty similar the way that it works in our own business. It takes a while because of the wide variety of SKUs that are out there. None of it's really clumped around a standard solution that if you made a deterministic call on it would just flow out in a big pocket or chunk. So we think about it a lot for IDEX, mainly just as more of an indicator of health overall. But from a meaningful impact to the numbers up or down, it extends over a large time horizon. It's not a giant piece of the business, and it usually is kind of lost in the math, to be honest.

Eric Ashleman:

Yes. Well, I mean, some of it -- the impends are fact-based. So we can see and we track our own -- our suppliers' performance and their lead times and their on-time delivery to us. So you basically start there and say, "Well, we can see factually some improvement." The logistics loops are quite a bit better than where they have been on the first part of the year. And frankly, our teams are really good now, at navigating them when they kind of run astray. I think the biggest thing for us and anybody that wants to go tackle this now is, in some ways, you got to take advantage of the ability to take a breath. I would say as we've improved throughput, momentum, and we're executing stronger here, that does buy us a little bit of time, space and energy to go back and recalibrate the systems, which is what you actually have to do to go attack inventory. You've got to go change demand signals. That's part by part. It's -- you do it on lines of paper laid out across the desk. And so -- and Bill talked about our engagement with our teams, that's the kind of work we're making sure is happening. People are kind of racking and stacking it 80s to 20s and making the calls based on fact-based patterns that they can see, and taking advantage of the time and energy, they have to go do it.

Operator:

Our next question comes from the line of Nathan Jones with Stifel.

Eric Ashleman:

Yes. I mean it's exactly the way you described it. I mean it's very much tied to strong trends that we're going to, I think, see run out for quite some time here. So we -- like everything else in IDEX, we break it down into all sorts of little components and drivers and specific application sets. Some of the ones that are going well there, the AI space is healthy. That's a decent part of the business -- sorry, analytical instrumentation. And then the genomics space has been very, very active. A lot of that is involving initially COVID and COVID surveillance. I think now as the pandemic has kind of moved on and entering in its third year. We're seeing now some more targeted work around taking some of that technology and applying it for things like targeted medicine and all the things that were always out there for that field of study. So those have been healthy as well. We continue to have some isolated pockets where we do support for vaccines and things of that nature that stayed strong to the duration as they're continuing to work on different targeted vaccines and things like that for both COVID as well as other things. So it's definitely picking up most of the macro dynamics and trends that we have long known are out there, and it's why we spend a lot of time investing in it and talking about it.

William Grogan:

Yes. No, I think the biggest pressure has been price/cost. With 45% gross margins, you have to have a price cost spread well in excess of that to expand. So that has put constant pressure. And then we continue to invest in engineering resources, which to remind everyone, that is included in our gross margin number. So we've been able to maintain through robust productivity across the portfolio to offset some of those headwinds. So I do think price cost getting back to historical levels and then our continued volume leverage that we get on the high contribution margins we have in our business. Once we stabilize a little bit from an operations perspective, we'll be able to pull through some increases. With, again, just the very difficult operating environment we've been in, the ability to have discrete productivity projects across the portfolio that we've historically been able to execute on has been muted a little bit too here is another point. So I think as things normalize, we'll get another kicker off of that.

Scott Graham:

Congratulations on what was a really good quarter from you guys. I have one quick one for Bill. Kind of can you give us an idea of where sort of your sales are running OpEx versus CapEx?

Scott Graham:

Got it. So now I want to maybe understand dispensing a little bit. There's a comment in the deck, talks about non-repeat orders, quarter back, maybe 2 quarters back, you talked about how dispensing should weaken fairly materially in the second half of this year. I'm just trying to triangulate what that means now for the second half of the year. How does dispensing look? Is it -- does it look better now or not?

Scott Graham:

Got it. And if I could just squeeze this last one on the fire business, where the OEMs, your customers are still saying that they're pretty supply chain restrained. Has anything changed in the last couple of quarters there as it's a pretty good business for you guys, particularly now with your having a nice little beachhead in Europe? Could you give us an idea of where that business goes in the next couple of quarters?

Operator:

Our next question comes from the line of Brett Linzey with Mizuho.

William Grogan:

Obviously, back half, we've got much tougher comps. In the third quarter, at least relative to we have visibility. We think we'll still be positive from an organic perspective, highlighted a little bit of the dispensing pressure that will continue. But overall, IDEX still positive. And from a July perspective, no material changes versus the trends that we've experienced here across the portfolio.

Eric Ashleman:

Sure. I'll cover kind of the general state of the business, let Bill answer the financial question. So I mean that has been a really, really strong acquisition, strong integration process. It is a very, very close complement to our Banjo franchise in the ag space within FMT. It's conveniently not very far away. And so the teams have really attacked it. It's performed strong as all our agricultural businesses have both in North America and Europe. And so this has been, in some ways, one of the easier integrations because the commercial linkage is so strong in the business, and everybody is speaking the same -- on the same page with technology and the broader market supports it. So very, very strong out of the gate. Excited on the long-term prospects here, and I'll let Bill talk about the specifics.

Eric Ashleman:

Yes.

Unidentified Analyst:

Congrats on the strong quarter. You mentioned the strength you're seeing more broadly, but obviously, the macro is deteriorating. What types of initiatives are you doing internally to prepare for those macro data points, ultimately, if they start impacting the business?

William Grogan:

No, I think you said it well. It is -- at least our expectation for decrementals will be a little bit higher than they have been historically because of us relative to current profit levels and the war on talent that Eric highlighted. So maybe we would historically have been in the low 30s. We're probably closer to 40% here if there's a slight pickup here as we progress over the next couple of quarters.

William Grogan:

Yes, I think there's always our first quarter, we generally get our annual blankets from a lot of our customers. So it's generally inflated relative to sequential profile of the balance of the year. So -- that's the real driver from the Q1 to Q2. For us now, it's kind of leveling off with keeping an eye on just our daily order rates, which have sustained here in the month of July.

Eric Ashleman:

Okay. Well, thanks, everybody, for joining today. We're really, really proud of our first half performance here. And as I close, just -- I guess the one thing I'd want you to take away is it's really a story of "and" not "or" here at IDEX. I mean we've long, I think, earned our reputation for tactical execution, good times, difficult times. We're seeing that in the performance that we're addressing here today. And we're working deliberately to drive growth outperformance as an additive component of value creation on top of it. We basically do that by picking the top bets that align really, really well to the macro trends that are going to be great over the long haul. We rally resources around those. And then here, as I spoke a few times, we very deliberately complemented those efforts with organic and inorganic investments, and we'll continue to do that as we go forward. So I think you're seeing it play out. We're seeing it play out in the acquisitions we made that celebrate precision ag or alternative energy in the pneumatic space or water solutions and what that can be. So you're seeing that come together. And I just want to highlight the additive component of those 2 things, and we'll continue to talk about that as we move forward. Thanks very much for your interest in joining today.