Idex Corp: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and related notes in this quarterly report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A, “Risk Factors” in the Company’s most recent annual report on Form 10-K and under the heading “Cautionary Statement Under the Private Securities Litigation Reform Act” discussed elsewhere in this quarterly report.

This discussion includes certain non-GAAP financial measures that have been defined and reconciled to the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) under the headings “Non-GAAP Disclosures” and “Free Cash Flow.” This discussion also includes Operating working capital, which has been defined under the heading “Liquidity and Capital Resources.” The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

Overview

IDEX is an applied solutions provider specializing in the manufacturing of fluid and metering technologies, health and science technologies and fire, safety and other diversified products built to customers’ specifications. IDEX’s products are sold in niche markets across a wide range of industries throughout the world. Accordingly, IDEX’s businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where it does business, as well as by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in certain markets and overall industrial activity are important factors that influence the demand for IDEX’s products.

Second Quarter Highlights

Select key financial results for the three months ended June 30, 2024 when compared to the same period in the prior year are as follows:

(Dollars in millions, except per share amounts)

*These are non-GAAP measures. See the definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP financial measures under the headings “Non-GAAP Disclosures” and “Free Cash Flow.”

(1) There were no non-GAAP adjustments during the three months ended June 30, 2024 or 2023, respectively, to Gross profit or Gross margin.

During the three months ended June 30, 2024, the Company delivered solid operating performance, despite challenging market headwinds. Continued market softness, largely within the Health & Science Technologies segment, resulted in lower sales volumes, which were partly offset by strong price/cost and productivity across all segments.

Results of Operations

The following is a discussion and analysis of the Company’s results of operations for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023.

(Dollars in millions, except per share amounts)

Net Sales

Net sales for both the three and six months ended June 30, 2024 decreased 5% as compared to the same prior year periods. Organic net sales for the same periods decreased 4% and 5%, respectively, as a result of lower volumes, largely as a result of market conditions in the Health & Science Technologies businesses, partially offset by price capture across all segments.

In the three months ended June 30, 2024, net sales decreased 4% domestically and 5% internationally. In the six months ended June 30, 2024, net sales decreased 4% domestically and 6% internationally. Sales to customers outside the U.S. were approximately 50% of total sales in each of the three and six months ended June 30, 2024 and 2023.

Gross Profit and Gross Margin

Gross profit decreased for both the three and six months ended June 30, 2024, primarily due to lower volume leverage, unfavorable mix and higher employee-related costs, partially offset by strong price/cost and favorable operational productivity. Gross margin increased for the three months ended June 30, 2024 and was flat for the six months ended June 30, 2024. The negative impacts of lower volume leverage, unfavorable mix and higher-employee related costs on gross margin were offset by the positive impacts of strong price/cost and favorable operational productivity.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three and six months ended June 30, 2024 increased primarily due to the $2.1 million and $5.6 million impact from acquisitions, net of divestitures, including amortization, respectively, as well as increased professional services and discretionary spending as compared to the same prior year periods.

Restructuring Expenses and Asset Impairments

Restructuring expenses and asset impairments decreased in the three and six months ended June 30, 2024 primarily due to lower severance costs compared with the same periods in 2023. Severance costs were incurred in conjunction with cost mitigation efforts as a result of market conditions.

Gain on Sale of Business

During the three and six months ended June 30, 2024, the Company completed the sale of Alfa Valvole, Srl (“Alfa Valvole”) for proceeds of $45.5 million, net of cash remitted, resulting in a gain on the sale of $4.6 million, net of a release of cumulative foreign currency translation losses of $5.5 million. For additional information regarding the divestiture of Alfa Valvole, refer to Note 2, “Acquisitions and Divestitures,” in the Notes to Condensed Consolidated Financial Statements.

Other Expense (Income) – Net

Other expense (income) – net for the three and six months ended June 30, 2024 benefited from the absence of a $7.7 million credit loss reserve on a note receivable from a collaborative partner that did not reoccur during 2024. Additionally, the current year periods benefited from a favorable impact of foreign currency transactions as compared to the same prior year periods.

Interest Expense – Net

Interest expense – net for the three and six months ended June 30, 2024 decreased compared to the same periods in 2023 due to a decrease in the amount of debt outstanding and higher interest earned on cash balances in 2024, partially offset by increases in interest rates on outstanding debt, which increased interest expense by approximately $0.6 million and $1.4 million for the three and six months ended June 30, 2024, respectively.

Income Taxes

The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The effective tax rate was 21.2% and 21.4% for the three and six months ended June 30, 2024, respectively, as compared to 22.4% and 22.3% during the same periods in 2023, respectively. The decrease in effective tax rate during the three and six months ended June 30, 2024 was primarily due to benefits realized in the second quarter of 2024 related to the finalization of prior years’ research and development tax incentives with taxing authorities in a foreign jurisdiction. The decrease in the effective tax rate during the six months ended June 30, 2024 also reflected the finalization of tax impacts of a previously recorded legal entity restructuring.

In October 2021, members of the Organization for Economic Co-operation and Development (“OECD”) and G20 Inclusive Framework on Base Erosion and Profit Shifting agreed to a two-pillar solution to address the tax challenges associated with the digitalization of the economy. In December 2021, the OECD released the Pillar Two Model Rules (“Pillar Two”), which define the global minimum tax and call for the taxation of large corporations at a minimum rate of 15%. Although it is uncertain when and how the rules will be fully enacted into law, based on our initial assessment, nearly all of the jurisdictions in which the Company operates have an effective tax rate above the 15% threshold. Therefore, the Company does not expect a material impact from the Pillar Two income tax rules.

Results of Reportable Business Segments

The Company has three reportable segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”). For a detailed description of the operations within each segment, refer to Note 13, “Business Segments and Geographic Information,” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Management’s measurements of segment performance are Net sales, adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and Adjusted EBITDA margin.

The table below illustrates the share of Net sales and Adjusted EBITDA contributed by each segment on the basis of total segments (not total Company) for the three and six months ended June 30, 2024.

(1) Segment Adjusted EBITDA excludes the impact of unallocated corporate costs of $21.5 million and $51.4 million for the three and six months ended June 30, 2024, respectively.

Fluid & Metering Technologies Segment

(Dollars in millions)

(Dollars in millions)

(1) Divestitures included Alfa Valvole, sold in June 2024.

• Organic net sales were flat and slightly down for the three and six months ended June 30, 2024, respectively, as compared to the same prior year periods. Both the quarter and year to date results were negatively impacted by lower volumes, primarily in the industrial market. The impact of lower volumes was offset by price capture in both the three and six months ended June 30, 2024.
• Adjusted EBITDA margin for the three and six months ended June 30, 2024 decreased primarily due to higher discretionary spending, lower volume leverage and higher employee-related costs, partially offset by strong price/cost and favorable operational productivity. The six months ended June 30, 2024 were also negatively impacted by unfavorable mix.

Health & Science Technologies Segment

(Dollars in millions)

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(Dollars in millions)

(1) Acquisitions included Iridian Spectral Technologies acquired in May 2023 and STC Material Solutions acquired in December 2023. Divestitures included Micropump, Inc. sold in August 2023 and Novotema, SpA sold in December 2023.

• Organic net sales for the three and six months ended June 30, 2024 were negatively impacted by lower volumes driven by continued broad based market softness, which began in the second half of 2023. This decrease was partially offset by price capture.
• Excluding the net accretive impact of acquisitions and divestitures, Adjusted EBITDA margin for the three and six months ended June 30, 2024 decreased primarily due to lower volume leverage, unfavorable mix and higher employee-related costs, partially offset by favorable operational productivity, strong price/cost and lower discretionary spending.

Fire & Safety/Diversified Products Segment

(Dollars in millions)

(Dollars in millions)

• Organic net sales for the three and six months ended June 30, 2024 were positively impacted by price capture across all markets, which more than offset the impact of slightly lower volumes as compared to the same prior year periods.
• Excluding the dilutive impact of foreign currency, Adjusted EBITDA margin for the three and six months ended June 30, 2024 decreased primarily due to higher employee-related costs and lower volume leverage, partially offset by strong price/cost. The three months ended June 30, 2024 also benefited from favorable operational productivity, while the six months ended June 30, 2024 were favorably impacted by mix.

Liquidity and Capital Resources

Liquidity

Based on management’s current expectations and currently available information, the Company believes current cash, cash from operations and cash available under the Revolving Facility will be sufficient to meet its cash requirements, including planned capital expenditures, interest and principal payments on all borrowings, pension and postretirement funding requirements, share repurchases and quarterly dividend payments to holders of the Company’s common stock for the foreseeable future. Additionally, in the event that suitable businesses are available for acquisition upon acceptable terms, the Company may obtain all or a portion of the financing for these acquisitions through the incurrence of additional borrowings. The Company believes that additional borrowings through various financing alternatives remain available, if required.

Select key liquidity metrics at June 30, 2024 are as follows:

(In millions)

Operating Working Capital

Operating working capital, calculated as Receivables – net plus Inventories – net minus Trade accounts payable, is used by management as a measurement of operational results as well as the short-term liquidity of the Company. The following table details Operating working capital as of June 30, 2024 and December 31, 2023:

(In millions)

Operating working capital increased $12.8 million to $681.7 million at June 30, 2024. Acquisitions, divestitures and foreign currency translation decreased Operating working capital by $19.6 million during the six months ended June 30, 2024. Apart from these items, receivables increased due to strong price capture, which more than offset the impact of lower volumes and inventories increased to support planned production.

Cash Flow Summary

The following table is derived from the Condensed Consolidated Statements of Cash Flows:

(In millions)

Operating Activities

Cash flows provided by operating activities increased $1.1 million to $290.2 million in the six months ended June 30, 2024 primarily due to lower cash payments including payments for variable compensation and lower tax payments in 2024 compared to the prior year, largely offset by lower earnings in 2024 compared to the prior year and higher investments in working capital driven by higher inventory purchases to support planned production and increased receivables due to strong price capture.

Investing Activities

Cash flows provided by investing activities increased during the six months ended June 30, 2024 as the six months ended June 30, 2024 included the proceeds received of $45.5 million from the sale of Alfa Valvole in June 2024. The six months ended June 30, 2023 included the purchase of Iridian Spectral Technologies for $110.3 million as well as the purchase of marketable securities of $19.1 million, which did not reoccur during the six months ended June 30, 2024. Additionally, the six months ended June 30, 2023 included higher capital expenditures of $48.2 million, as compared to $35.9 million in the six months ended June 30, 2024.

Financing Activities

Cash flows used in financing activities primarily consisted of dividends of $100.7 million and $93.9 million paid to common shareholders during the six months ended June 30, 2024 and 2023, respectively. Additionally, the Company repaid $25.0 million of the $50.0 million previously outstanding under the Term Facility during the six months ended June 30, 2024.

Free Cash Flow

The Company believes free cash flow, a non-GAAP measure, is an important measure of performance because it provides a measurement of cash generated from operations that is available for payment obligations such as operating cash requirements, planned capital expenditures, interest and principal payments on all borrowings, pension and postretirement funding requirements and quarterly dividend payments to holders of the Company’s common stock as well as for funding acquisitions and share repurchases. Free cash flow is calculated as cash flows provided by operating activities less capital expenditures.

The following table reconciles cash flows provided by operating activities to free cash flow:

(Dollars in millions)

The increase in free cash flow for the six months ended June 30, 2024 as compared to 2023 is primarily due to lower capital expenditures in 2024 compared with the six months ended June 30, 2023.

Cash Requirements

Mott Corporation Pending Acquisition

On July 23, 2024, the Company entered into a definitive agreement to acquire Mott Corporation and its subsidiaries for cash consideration of $1.0 billion, subject to customary adjustments. The acquisition is expected to be funded using a combination of cash on hand, borrowings under the Company’s Revolving Credit Facility and potential debt issuance. For additional information regarding the Company’s pending acquisition of Mott Corporation, refer to Note 2, “Acquisitions and Divestitures,” in the Notes to Condensed Consolidated Financial Statements.

Subterra AI Acquisition

On July 25, 2024, the Company acquired Subterra AI, Inc. (“Subterra AI”) for cash consideration of $7.5 million. For additional information regarding the Company’s acquisition of Subterra AI, refer to Note 2, “Acquisitions and Divestitures,” in the Notes to Condensed Consolidated Financial Statements.

Capital Expenditures

Capital expenditures generally include machinery and equipment that support growth and improved productivity, tooling, business system technology, replacement of equipment and investments in new facilities. The Company believes it has sufficient operating cash flows to continue to meet current obligations and invest in planned capital expenditures. Cash flows from operations were more than adequate to fund capital expenditures of $35.9 million and $48.2 million in the first six months of 2024 and 2023, respectively.

Share Repurchases

There were no share repurchases during the six months ended June 30, 2024. During the six months ended June 30, 2023, the Company repurchased 5,400 shares at a cost of $1.1 million, of which $0.1 million was settled in July 2023. As of June 30, 2024, the amount of share repurchase authorization remaining was $539.7 million. For additional information regarding the Company’s share repurchase program, refer to Note 11, “Share Repurchases,” in the Notes to Condensed Consolidated Financial Statements.

Dividends

Total dividend payments to common shareholders were $100.7 million during the six months ended June 30, 2024 compared with $93.9 million during the six months ended June 30, 2023.

Covenants

The key financial covenants that the Company is required to maintain in connection with the Revolving Facility, the Term Facility, the 3.37% Senior Notes and the 5.13% Senior Notes, are a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1. At June 30, 2024, the Company was in compliance with these financial covenants, as the Company’s interest coverage ratio was 18.73 to 1 for covenant calculation purposes and the leverage ratio was 1.50 to 1. There are no financial covenants relating to the 2.625% Senior Notes or the 3.00% Senior Notes; however, both are subject to cross-default provisions.

Credit Ratings

The Company’s credit ratings, which were independently developed by the following credit agencies, are detailed below:

• S&P Global Ratings reaffirmed the Company’s corporate credit rating of BBB (stable outlook) in August 2023.
• Moody’s Investors Service affirmed the Company’s corporate credit rating of Baa2 (stable outlook) in December 2021.
• Fitch Ratings reaffirmed the Company’s corporate credit rating of BBB+ (stable outlook) in June 2024.

Off-Balance Sheet Arrangements

The Company had $21.2 million of letters of credit as of June 30, 2024, primarily issued as security for insurance and other performance obligations. Of the $21.2 million of letters of credit, only $2.7 million reduced the Company’s borrowing capacity under the Revolving Facility as of June 30, 2024.

Except as disclosed above, the Company has no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on the Company’s consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates

There have been no changes to the Company’s critical accounting estimates described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Non-GAAP Disclosures

Set forth below are reconciliations of Organic net sales, Adjusted gross profit, Adjusted gross margin, Adjusted net income attributable to IDEX, Adjusted diluted earnings per share (“EPS”) attributable to IDEX, Consolidated Adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and Consolidated Adjusted EBITDA margin to their respective most directly comparable U.S. GAAP measure. Management uses these metrics to measure performance of the Company since they exclude items that are not reflective of ongoing operations, as identified in the reconciliations below. Management also supplements its U.S. GAAP financial statements with adjusted information to provide investors with greater insight, transparency and a more comprehensive understanding of the information used by management in its financial and operational decision making.

Management uses Adjusted EBITDA as its principal measure of segment performance, and believes it is a useful indicator of the strength and performance of the Company and its segments’ ongoing business operations, as well as a way for investors to evaluate and compare operating performance and value companies within the Company’s industry. Management believes that Adjusted EBITDA margin is useful for the same reason as Adjusted EBITDA. The definition of Adjusted EBITDA used here may differ from that used by other companies.

This report also references free cash flow. This non-GAAP measure is discussed and reconciled to its most directly comparable GAAP measure in the section above titled “Free Cash Flow.”

The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. Due to rounding, numbers presented throughout this and other documents may not recalculate precisely. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

All table footnotes can be found at the end of this Non-GAAP Disclosures section.

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2. Reconciliations of Reported-to-Adjusted Gross Profit and Gross Margin (dollars in millions)

3. Reconciliations of Reported-to-Adjusted Net Income Attributable to IDEX and Diluted EPS Attributable to IDEX (in millions, except for per share amounts)

34

4. Reconciliations of Net Income to Adjusted EBITDA (dollars in millions)

(1) Represents the sales from acquired or divested businesses during the first 12 months of ownership or prior to divestiture.

(2) Represents a reserve on an investment with a collaborative partner recorded in Other expense (income) – net during the three and six months ended June 30, 2023. During the fourth quarter of 2023, the Company converted the promissory note receivable from the collaborative partner to equity, resulting in a cost method investment with zero value.

There have been no material changes with respect to market risks disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024.

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes with respect to risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.