IDEX Q4 2021 Earnings Results & Report

IDEX EPS Results

• Actual EPS: $1.55
• Consensus EPS: $1.59
• Beat/Miss: Missed by -$0.04
• One Year Ago EPS: $1.37
• EPS Beat Rate: 7 of last 8 quarters

IDEX Revenue Results

• Actual Revenue: $714.80 million
• Expected Revenue: $705.84 million
• Beat/Miss: Beat by +$8.96 million
• YoY Revenue Growth: +16.30%

IDEX (NYSE:IEX) is an industrial manufacturing company headquartered in Lake Forest, Illinois. The company designs and produces engineered products and technologies used to move, control, measure and apply fluids, as well as equipment used in fire and safety applications.

IDEX operates through businesses serving fluid and metering technologies, health and science technologies, and fire and safety markets. Its products include pumps, valves, flow meters, compressors, dispensing equipment, precision fluidics components and systems, fire pumps, rescue tools and other specialized equipment.

The company serves a broad range of industries, including healthcare, life sciences, water and wastewater, chemical processing, energy, food and beverage, agriculture, industrial manufacturing and municipal fire protection. IDEX sells its products globally through direct sales organizations, distributors and original equipment manufacturers. Founded in 1987, the company has expanded its portfolio primarily through the development and acquisition of specialized industrial businesses.

IDEX Q4 2021 Earnings Call Transcript

Key Takeaways

• IDEX delivered a record year in 2021 with all-time highs in orders, sales, margins and earnings, driven by strong demand, targeted pricing and productivity gains despite a highly inflationary environment.
• Ongoing supply chain disruptions and labor scarcity remain headwinds at least through the first half of 2022, limiting production ramps and creating pockets of customer and supplier delays.
• For full-year 2022, the company forecasts organic revenue growth of 5-8%, an operating margin around 24% and adjusted EPS of $7.33–7.63, reflecting improving price-cost dynamics and operational productivity.
• IDEX’s strong balance sheet enabled record capital deployment in 2021—acquiring Abel Pumps and Airtech and investing in a technology partner—and plans to close on the NexSight acquisition while expanding facilities, automation and digital capabilities.
• By segment, HST is expected to deliver the strongest growth and margin leverage, FMT should benefit from price realizations and cost optimization, while Fire & Safety faces near-term chassis and component constraints with a recovery anticipated later in the year.

Presentation

[Operator]

Greetings, and welcome to IDEX Corporation 4th quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Lausas, Vice President and Chief Accounting Officer. Thank you. You may begin.

[Allison Lausas, VP and Chief Accounting Officer at IDEX Corporation]

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 2021 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months and year ending December 31, 2021. 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, and William 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, including a recap of our recent performance and our 2022 outlook.

[Allison Lausas, VP and Chief Accounting Officer at IDEX Corporation]

Bill will then discuss our 4th quarter and full year 2021 financial results, and we'll conclude with our outlook for the 1st quarter and full year 2022. Lastly, Eric will close with comments around our focus areas for 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 the toll-free number 877-660-6853 and entering conference ID 13724802. Or simply log on to our company homepage for the webcast replay.

[Allison Lausas, VP and Chief Accounting Officer at IDEX Corporation]

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, Eric Ashleman.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thank you, Allison. I'm on slide 6. 2021 was another record year for IDEX. We hit all-time highs on most of our key metrics. Demand for our differentiated technology remains strong. This underlying momentum, combined with our targeted growth initiatives and ability to capture price, drove a strong rebound from 2020. Across most of our portfolio, we saw an expansion beyond pre-pandemic revenue levels. In the 4th quarter, we achieved a record for orders and sales, and our backlog position is very strong as we enter 2022. We expanded our margins in a highly inflationary environment. We levered well on the previous investments we made to optimize our cost position and executed on our productivity funnel. We maintained positive price costs, albeit at a compressed level versus historic performance.

[Eric Ashleman, CEO and President at IDEX Corporation]

We remained diligent in controlling our discretionary spend and used our 80/20 principles to allocate resources to our most promising opportunities. Our strategic focus, purposeful resourcing, and strong operating cash flow enabled us to deploy record capital. We acquired ABEL Pumps and Airtech and made a collaborative investment in a technology company driving advancements in connected products. We also invested across the portfolio to support growth and productivity. We optimized our cost position within our Fluid & Metering Technologies segment through a consolidation of our Italy facilities and our energy businesses and delivered on operational productivity projects across the segment. All of this drove a record year in order, sales, margins, earnings, and capital deployment.

[Eric Ashleman, CEO and President at IDEX Corporation]

We've said in the past that we built IDEX to outperform through a cycle, and we continue to find ourselves in a very challenging one, characterized by supply chain disruptions and labor scarcity, exacerbated throughout the year by the emergence of new COVID-19 variants. Our view continues to be that we don't see gradients of bad. Rather, the supply chain environment is very tough and numerous challenges persist. As pockets of issues improve, they tend to be replaced by new obstacles. Our teams have done an excellent job navigating these day-to-day operational issues, and I'd like to take a moment to thank our IDEX employees around the globe for their dedication and perseverance throughout this prolonged period of disruption. The agility of our teams adjusting to new issues almost every day has been and continues to be outstanding.

[Eric Ashleman, CEO and President at IDEX Corporation]

As we look forward to 2022, we do not see any near-term signs of diminishing supply chain-related headwinds, and the impact of COVID-19 remains highly variable. In the short term, these conditions have and will impact our ability to efficiently ramp production and have created significant pockets of disruption for our customers and suppliers as well. We expect that these challenges will remain at a high level at least through the 1st half of 2022. Regardless of the near-term challenges, our overall IDEX strategy remains focused on the horizon. The core of what makes IDEX strong, highly engineered, specialized products used in mission-critical applications, remains a solid driver for long-term success. We'll continue to deploy capital and invest in the resources necessary to drive organic growth in order to capitalize on a robust demand environment.

[Eric Ashleman, CEO and President at IDEX Corporation]

Our balance sheet has ample capacity, and we will leverage its strength to continue to play offense in M&A. To that end, we expect to close on the acquisition of Nexsight later this quarter. The technologies and capabilities within their business segments will nicely complement our water platform within FMT. With that, I'll turn to our outlook for our segments on page 7.

[Eric Ashleman, CEO and President at IDEX Corporation]

In our Fluid & Metering Technologies segment, we anticipate growth in our industrial day rate businesses in 2022, with a return of larger projects towards the latter half of the year. In the short term, large projects continue to lag as our customers have limited capacity to execute larger upgrades or expansions. Agriculture is expected to perform well due to high crop prices, strong farmer sentiment, and limited availability of new equipment driving aftermarket demand. Our municipal water business is stable.

[Eric Ashleman, CEO and President at IDEX Corporation]

We see improved optimism in the market and project planning activities increasing. We are expecting an uptick in the energy and chemical markets. The North American mobile truck market is improving due to a strong construction market and home heating oil prices. North American pipelines are reporting modest increased capital budgets for 2022. We see international oil and gas quote activity outpacing domestic demand, an opportunity we are well-positioned to capitalize on. FMT continues to be in a strong position to realize price, and we expect this to drive improved margins in 2022. Likewise, the projects we completed last year to optimize our cost position, as well as new operational productivity projects, will yield strong flow-through in 2022, tempered by a discretionary spending rebound and continued resource investment in this segment.

[Eric Ashleman, CEO and President at IDEX Corporation]

Moving to the Health & Science Technologies segment, we expect the strongest growth in HST of all our three segments, and we plan to make the largest resource investments in HST to support that growth. We anticipate margin improvement driven by volume leverage, partly offset by these resource additions. HST continues to have robust demand across all their major end markets. Semiconductor, food and pharma, analytical instrument, instrumentation, and life sciences are all expected to perform well. Next-gen sequencing instrument demand is growing with research and clinical applications outpacing COVID detection and surveillance.

[Eric Ashleman, CEO and President at IDEX Corporation]

Our ability to execute in the current environment continues to distinguish us from our competition and improve our share position. On the semiconductor side, we continue to capitalize on tailwinds generated from global broadband and satellite communication trends. In auto, supply chain issues at our customers, especially around semiconductors, mute our growth.

[Eric Ashleman, CEO and President at IDEX Corporation]

Underlying market demand remains favorable, and we expect our results to improve as supply chain issues ease. The industrial businesses within the segment face similar trends to FMT. Finally, we expect that our Fire & Safety/Diversified Products segment will be our most challenged next year. In fire and safety, North American OEMs are experiencing significant supply chain constraints around chassis and component availability, which limit their production.

[Eric Ashleman, CEO and President at IDEX Corporation]

On the rescue side, we anticipate that larger tenders will lag, compounded by China localization policies that are driving delays. We do not anticipate near-term easing of these conditions and see the potential for recovery towards the latter part of 2022. In our BAND-IT business, like in HST, we see auto supply chain issues dampening current demand. Despite this pressure, our business continues to outperform the broader market due to our content on key vehicle models.

[Eric Ashleman, CEO and President at IDEX Corporation]

Lastly, in the near term, we expect continued momentum within our dispensing business as customer capital investments are deployed in early 2022. However, for the year, we will see a non-repeat of North America projects as we reach the end of the replenishment cycle this year as compared to last year. We anticipate that the unfavorable price cost position we experienced last year will rebound this year as annual contracts are renewed at current pricing. We see this improvement tempered a bit by some margin pressure as dispensing volumes reduce and we make some targeted investments.

[Eric Ashleman, CEO and President at IDEX Corporation]

To summarize, we see favorable conditions across the majority of our end markets. However, the degree to which our customers and our facilities will be impacted by rolling supply chain and COVID-related disruptions remains highly variable. We'll continue to monitor conditions and be as prepared as we can be for potential interruptions.

[Eric Ashleman, CEO and President at IDEX Corporation]

Despite these short-term headwinds, we are optimistic about our growth potential and the trajectory of our end markets. With that, I'd like to turn over to Bill to discuss our financial results.

[William Grogan, CFO at IDEX Corporation]

Thanks, Eric. I'll start with our consolidated financial results on slide 9. Fourth quarter orders of $795 million were up 17% overall and up 13% organically. Organic orders increased across each of our segments. For the year, orders were up 26% overall and up 21% organically. We experienced a strong rebound in demand for our products across all our segments and steadily built our backlog in each quarter of 2021, totaling $266 million for the year. Relative to full year 2019, organic orders were up 15%. Q4 sales of $715 million were up 16% overall and up 11% organically. We experienced a strong demand rebound from 2020, but our results were tempered by supply chain and COVID production limitations.

[William Grogan, CFO at IDEX Corporation]

Full year sales of $2.8 billion were up 18% overall and up 12% organically. We saw favorable results across all our segments, and again, strong performance relative to full year 2019, with organic sales up 4%. Fourth quarter gross margins expanded 20 basis points to 44%. For the full year, gross margins expanded 60 basis points, and adjusted gross margins expanded 80 basis points to 44.7%, primarily driven by strong volume leverage. Q4 operating margin was 22.7%, up 10 basis points compared to prior year. Adjusted operating margin declined 60 basis points, driven by a rebound in discretionary spending, targeted resource investments, and the dilutive impact of acquisition-related intangible amortization, partially offset by volume leverage. Full year operating margin was 23%, up 90 basis points compared to the prior year.

[William Grogan, CFO at IDEX Corporation]

Adjusted operating margin was 23.9%, up 110 basis points compared to prior year. I'll discuss the drivers of adjusted operating income on the next slide. Our 4th quarter effective tax rate was 22.5%, relatively flat compared to the prior year ETR of 22.2%. Our full year effective tax rate was 22.5%, compared to 19.7% in the prior year, due to lower tax benefits associated with executive compensation and the non-repeat of benefits associated with the finalization of the Global Intangible Low-Taxed Income regulations in 2020. Q4 net income was $119 million, which resulted in EPS of $1.55.

[William Grogan, CFO at IDEX Corporation]

Adjusted net income was also $119 million with adjusted EPS of $1.55, which was up $0.18 or 13% over prior year adjusted EPS. Full year net income was $449 million, which resulted in EPS of $5.88. Adjusted net income was $482 million, resulting in an adjusted EPS of $6.30, up $1.11, or 21% over prior year adjusted EPS. The tax rate movement I mentioned drives a $0.23 differential in EPS as compared to the prior year. Said differently, our EPS would have expanded by $1.34 or 26% had 2021 been taxed at the 2020 rate.

[William Grogan, CFO at IDEX Corporation]

Finally, free cash flow for the quarter was $136 million, 115% of adjusted net income. For the year, free cash flow was $493 million, down 5% versus last year, and was 102% of adjusted net income. This result was impacted by a volume driven working capital build and higher CapEx, partially offset by our higher earnings. We spent over $70 million on capital projects this year, an increase of over $20 million versus 2020. Moving on to slide 10, which details the drivers of our adjusted operating income. Adjusted operating income increased $125 million for the year compared to 2020. Our 12% organic growth contributed approximately $106 million flowing through at our prior year gross margin rate.

[William Grogan, CFO at IDEX Corporation]

We levered well on this volume increase, and our teams drove operational productivity to help mitigate the profit headwinds we experienced from increased supply chain costs and the associated inefficiencies. Although we have maintained positive price costs for the year, inflation continues to ramp and we saw a compressed price cost spread versus historic levels, which pressure our operating margin rate and flow-through percentages.

[William Grogan, CFO at IDEX Corporation]

The positive mix is primarily a result of the portfolio and business mix normalizing to pre-pandemic levels that had a negative impact on our results last year. We reinvested $35 million back into the businesses, taking the form of a partial rebound in discretionary spending to pre-pandemic levels, higher variable compensation expenses and targeted reinvestment in resources to drive growth. Despite this incremental spend and a challenging supply chain environment, we achieved a solid 38% organic flow-through for the year.

[William Grogan, CFO at IDEX Corporation]

Flow through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to a reported flow through of 30%. With that, I'd like to provide an update on our outlook for the first quarter and full year 2022. I'm on slide 11. As a reminder, going forward, we will be adjusting EPS for acquisition related intangible amortization in both our guidance and results. Our 4th quarter adjusted EPS under this definition would have been $1.71 per share, while our full year 2021 adjusted EPS would have been $6.87 per share. Under this new definition, for the first quarter of 2022, we are projecting GAAP EPS of $1.57-$1.60, and adjusted EPS to range from $1.73-$1.76.

[William Grogan, CFO at IDEX Corporation]

We expect organic revenue growth of 6%-7% for the first quarter and operating margin of approximately 23%. Q1 expected results incorporate headwinds arising from COVID driven absenteeism and supply chain production constraints. The first quarter effective tax rate is expected to be approximately 22.5%. We expect FX to be unfavorable to our top line by 1% and acquisitions to provide a 4% benefit. Corporate costs in the first quarter are expected to be around $19 million. Turning to the full year 2022. We project GAAP EPS of $6.70-$7, and adjusted EPS to range from $7.33-$7.63. We expect full year organic revenue growth of 5%-8% and operating margins to be around 24%.

[William Grogan, CFO at IDEX Corporation]

We expect FX to be unfavorable to our top line by 1% and acquisitions to provide a 2% benefit. The full year effective tax rate is expected to be around 22.5%. Capital expenditures are anticipated to be around $90 million, an increase over 2021 as we continue to identify opportunities to reinvest in our core businesses. Free cash flow is expected to be approximately 105% of adjusted net income, and corporate costs are expected to be approximately $80 million for the year. Our earnings guidance excludes impacts from future acquisitions and any future restructuring charges. Nexsight is excluded from the figures above as the transaction has yet to close. Next, I will provide some additional details regarding our 2022 guidance for the full year. I'm on slide 12.

[William Grogan, CFO at IDEX Corporation]

On an operational basis, we expect supply chain constraints to mitigate our output for the 1st half of the year, muting an otherwise strong demand environment. Therefore, we are projecting organic revenue for the year to be up 5%-8%, which translates to an EPS impact of $0.60-$0.95 depending on the top line results. This range also assumes improving price cost. We continue to drive operational productivity across the portfolio and expect to see benefits from our 2021 restructuring actions. This will drive $0.20-$0.25 of favorability next year. We also continue to invest in the resources required to grow in the current year and beyond. These investments will reduce EPS by $0.20-$0.25 and are funded by the productivity gains I mentioned previously.

[William Grogan, CFO at IDEX Corporation]

Our discretionary spend partially recovered to pre-pandemic levels in 2021, and we expect this spending to be fully recovered by the end of 2022. The unfavorability impacts EPS by $0.20-$0.25. I'll note that we are ramping spend to pre-pandemic levels, but with 20% higher revenues. ABEL has one partial quarter and Airtech has two quarters in organic results included in our guidance. We expect acquisitions to contribute $54 million of revenue and $0.08 of EPS. The incremental amortization that we see in 2022 versus 2021 is largely related to these acquisitions and will provide an additional $0.05 of EPS. Now let's take a look at a couple non-operational items. First, our guide assumes no impact from tax as our guided rate is flat year-over-year.

[William Grogan, CFO at IDEX Corporation]

Second, we expect a 1% headwind from FX, providing $0.07 of EPS pressure. In summary, we are projecting organic revenue growth of 5%-8% for the year. Adjusted EPS expectations are in the range of $7.33-$7.63, a 7%-11% growth over 2021. Implied in our guidance is mid- to high-20s year-over-year flow-through on the low end and 30% on the high end. With that, I'll throw it back to Eric for some final thoughts.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks, Bill. I'm on the final slide 13. Before we open the call up for questions, I'd like to wrap up with a summary of our most critical 2022 focus areas. In an environment characterized by uncertainty and disruption, it's important not to lose sight of who we are as a company. First and foremost, we are a portfolio of great businesses that leverage 80/20 with an obsessive focus to serve our customers. We refer to that simple model as the IDEX difference. We're committed to navigating the challenges of the short-term landscape, but remain focused on the longer term. We must continue to utilize our 80/20 toolkit to create efficient, innovative, value-creating businesses. In a world with this level of variability, the simpler you are, the more successful you'll be.

[Eric Ashleman, CEO and President at IDEX Corporation]

We remain committed to investing in the resources needed so our businesses are poised to take advantage of the growth potential in front of us. We're a company committed to its core values, and we'll continue to develop top-performing teams as part of an inspiring company culture. Diversity, equity, and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work every day. Our strong operating cash flow and balance sheet put us in a great position to continue to put capital to work, and we've already identified several high return organic investment opportunities across the company that'll push us past our 2021 CapEx record levels. We have invested in new industrial automation that will improve efficiency and expand capacity for growth.

[Eric Ashleman, CEO and President at IDEX Corporation]

We're supporting focused digitalization efforts across our install base to solidify our superior positions and expand share of wallet. Our facility expansions in China and India are well underway, effectively doubling future capacity to support growth across Asia. Lastly, our M&A opportunity pipeline continues to be strong, and we look forward to deploying additional capital in 2022, welcoming new businesses to the IDEX family. With that, let me pause and turn it over to the operator for your questions.

[Operator]

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Allison Poliniak-Cusic with Wells Fargo. Please proceed with your question.

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

Hey, good morning. Eric, you had talked about projects lagging, you know, in the first half in FMT. Could you maybe give us the color in terms of your customer conversations? You know, are these the risk that these sort of get delayed, you know, indefinitely at this point, just the urgency around getting some of these projects going, just any thoughts around that?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. Good to talk to you, Allison. So, I mean, it's a bit of a continuation of the theme that we've seen now for a while. There's plenty of confidence out there that there's lots of demand support to get things done. It is really difficult to do to just frankly bring together all the resources that you need to you know to take a really complex project and take it from beginning to end, lining up material, lining up resources, things like that. So what we are starting to see, frankly, are kind of smaller to medium-sized versions of that, you know, slight expansions, things you can kind of do on the fly. Then continued staging for projects that are of those, you know, slightly larger incremental scale aspects, you know, as people talk about that.

[Eric Ashleman, CEO and President at IDEX Corporation]

I mean, quite honestly, it's kind of the same thing that we're going through in our own business. I mean, we've got a couple of critical big projects that we've deployed. They were really hard to put together. All over the place, we're kind of, while we're running, doing those things that give you that little bit of, you know, 3%-5% output lift as we go. I think that's really the nature of it. Of course, it varies depending on, certain markets are, you know, further out ahead of that, a little bit more positive. Some are lagging even further because they just inherently involve larger chunks of infrastructure. If I was gonna summarize it, I'd describe it that way.

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

No, that's helpful. Then just the free cash flow guidance. You talked about CapEx and the increased spend there, which makes sense. I know working capital, you showed some increases in 2021. Should we expect a similar level of 2022, just given the ongoing challenges that you guys are facing? Just trying to get some color on sort of the-

[William Grogan, CFO at IDEX Corporation]

No, Allison, it's Bill. I think it tapered down a little bit, obviously here and as we progress through the year, a little bit of inventory build to support the..

[William Grogan, CFO at IDEX Corporation]

A higher revenue load, but I don't think it'll be as big of a build as we experienced last year. Our efficiency metrics are down a little bit, but some of that's just related to increased inventory to buffer extended lead times that we have across our vendor base.

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

Got it. I guess along with that, you know, you guys are still in the midst of it, so it's probably not a fair question. Are you guys kind of revisiting some of your processes and such to deal with some of these shocks that, you know, we inevitably go through from time to time? Just any thoughts around that?

[Eric Ashleman, CEO and President at IDEX Corporation]

I hear, Allison, you're asking about just supply chain shocks in general?

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

Yeah, the supply chain shocks.

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah.

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

I mean, are you guys trying to think of things differently going forward just to kind of, you know, avert some of this stuff at this, you know, point?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. I mean, it's a great question. Something we've revisited continuously as we've gone through this. I mean, we are—I think we're. You know, from a high level, we're positioned really, really well. I mean, we do a lot of local supply, close proximity with people that we've known for a long, long time. You know, deep relationships, a lot of trust there. Very, very collaborative. I like that topology. I don't think we would try to change it or move it farther away. And, frankly, any change right now is difficult because everybody's bandwidth's constricted. A couple of places we're looking at that, it's kind of at the sharpest reason why. You know, we have to do something different, and we've got resources allocated there.

[Eric Ashleman, CEO and President at IDEX Corporation]

I will say, the one thing we're spending a lot of time working on, and I mentioned it in the opening comments, is simplification. You can generally see our businesses that have done the most there are frankly having the easiest time of it. We have a highly customized model at the company, and so that's always an inherent challenge for us. I think one of the things we've learned here, and we've gotten better at as we've gone along, is trying to find a way to say, "Is there a simpler way to do it, more modular, you know, simpler design that's easier to reproduce against, you know, kind of a given supply base that will probably stay pretty similar for us as we go forward?

[Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo]

Got it. Thanks so much. I'll pass it along.

[Eric Ashleman, CEO and President at IDEX Corporation]

Mm-hmm.

[Operator]

Our next question comes from the line of Michael Halloran with Robert W. Baird. Please proceed with your question.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

Good morning, everyone.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi, Mike.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

Kind of related to Allison's first question or at least to tack onto it. You know, when you think about some of the delays you're seeing on some of these CapEx decisions just because of bandwidth, or you also put it in the context of the supply chain challenges and everything seeming to linger a little bit longer than people were thinking. How do you think about the risk of demand degradation or at least pipeline degradation that could materialize related to all of those moving pieces?

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, I mean, there's inherently always a little bit more risk as you extend things out than any other externality could jump into the mix and start to inflect decisions along the way. So I think that's there. I mean, as we've kind of thought of, you know, the projects that we're working with. You know, when you consider a project across a long-term cycle, the ones I feel the most assured about are where you can just see there's not enough capacity or there's a lot of labor challenges. I mean, those things aren't gonna go away in the long term. You know, when you sort of see that condition, let's say if that's in a food market, that's somebody recognizing there's a lot of demand here, we're struggling to meet it. We know it's gonna be there in the long run.

[Eric Ashleman, CEO and President at IDEX Corporation]

While the projects themselves can be delayed and they keep extending, honestly, the conversations stay pretty active. The transfer of documents and data and things is still going on. We kind of put those into a different category. You know, the things that are, you can just tell, are a little bit more susceptible to shocks, new technology, it's a launch, it's dependent upon certain conditions to be there. We probably put that in a slightly more variable category. I honestly think over the long term, there's a lot more in the first that ultimately everybody would love to do if they could.

[Eric Ashleman, CEO and President at IDEX Corporation]

We've now seen, and certainly we've talked about before on this call. I think we're seeing the impact of not having it deployed as we try to recover, you know, from levels that are now just essentially at or above levels that were sort of, you know, where we were originally before the pandemic.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

No, that's super helpful. Sticking kind of with the concept of moving pieces and how you're thinking about guidance through the year. Obviously you have these, you know, 1st quarter challenges with absenteeism and everything else. You know, the price cost curve and how that works itself out through the year in the context and everything. When you think about the guidance specifically, both on the margin side as well as on the revenue side, how would you think about profitability versus call it a normal sequential curve through the year? Is it a little bit more sloped than normal? Best guess for when you think you can start getting to something more normalized?

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

I'm not necessarily saying back to 2019 levels of smoothness, but at least more repeatable or better understanding of what the process can look like?

[William Grogan, CFO at IDEX Corporation]

I think, and Mike, it's Bill, that some of that's to be determined how the year plays out. What's implied in our guidance is, you know, from a ramp as we progress through the year, you know, it is obviously more weighted towards latter in the year. If you look at the second quarter, it's kind of, you know, a couple% ramp in output versus the 1st quarter, and then it has to hold there for the balance of the year. Relative to where we're at here and the challenges we have in the 1st quarter, you know, there is an assumption that those will resolve. We do have some of the discretionary costs that have just built through 2021 that are in our current run rate for the 2nd quarter.

[William Grogan, CFO at IDEX Corporation]

As we ramp volume, we'll leverage on that incremental cost. I think you'll see our margin profile continue to expand sequentially as we progress through the year.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

The point, Bill, is that there's not a massive assumption that there's normalization through the year. There's a step up on Q to QQ because there's some identifiable things that normalize out. It's a little bit more wait and see, pretty normal sequentials from call it a 2Q run rate.

[William Grogan, CFO at IDEX Corporation]

Yeah. I said there's not some huge switch that needs to be flipped. I think we're comfortable with the ramp that we see here in the short term. You know, the 2nd quarter seasonally always goes up for us. We've got that.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

Mm-hmm

[William Grogan, CFO at IDEX Corporation]

That on top of some of just the output relief, I think we'll get. It's, you know, unless something created some headwind to decelerate, we should be in a reasonable position.

[Michael Halloran, Senior Research Analyst at Robert W. Baird]

Appreciate it, Bill. Thanks, Eric.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks, Mike.

[Operator]

Our next question comes from the line of Deane Dray with RBC. Please proceed with your question.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi, Deane.

[Deane Dray, Managing Director at RBC Capital Markets]

Hey, I'd like to put the spotlight on these buckets of discretionary spending reinvestment growth investment, if we could. Just so we're trued up, how much of that went into the 4th quarter? On slide 10, that $35 million, did you kind of front load any of that spending into the 4th quarter, or was it level throughout the year?

[Eric Ashleman, CEO and President at IDEX Corporation]

No, Deane, it ramped throughout the year. I think Q3 and Q4, there's a marginal increase in the 4th quarter. We talked about that on our Q3 call that some things had moved from Q3 to Q4. You know, that's one of the issues we have with the 1st quarter is just last year, we were still extremely diligent and didn't spend a whole heck of a lot and then ramped, you know, 2, 3, and 4. There's a little bit of ramp here as we progress from Q4 to Q1, but it's not overly material.

[Deane Dray, Managing Director at RBC Capital Markets]

Got it. On slide 12 for your 2022 bridge, you've got the two buckets, growth investments and discretionary spend rebound. I mean, collectively, that's $0.40-$0.50 in your guide. They both feel a little bit discretionary by definition, right? Just where and how is that being targeted? Is that level throughout the year? Is it contingency in any way? What would be the expected returns that you would get on some of these growth investments? Thanks.

[Eric Ashleman, CEO and President at IDEX Corporation]

Sure. A couple of things there. I mean, you know, one, in general, the nature of this kind of spend, let's say, today versus where it was 3 years ago, I mean, there's some differences. There's actually some productivity that we're all gonna enjoy as we've learned how to work in different ways. Travel won't be as high as it ever was. You know, certainly, marketing and digital ways to get messages out to customers, much more efficient than we've seen before. That's one of the reasons, even with the slight increases here in the ramp-up, we're basically at kind of a level we were 3 years ago with $400 million more dollars of sales in the company. What it's targeted towards is a lot of our investments. Frankly, it's people.

[Eric Ashleman, CEO and President at IDEX Corporation]

It's people on the front end of business and the technology side of the business tied to the parts of the company that we think have the most favorable wind at their backs in terms of our positioning and the end markets that they're sitting in. We talked before about kind of the top 25 bets across IDEX that list ebbs and flows from year-to-year, but about two-thirds of it holds constant. Many of the resources that are here, in some ways, they were identified a year and a half ago. You know, we kind of let the last year play out. We're really, really careful with things, but at some point, start to see that, hey, we've got some real momentum here.

[Eric Ashleman, CEO and President at IDEX Corporation]

The nature of people driving the investments, they've got to get in, they've got to learn the company, they've got to learn the markets and then start to add some value. I think the return, as it often is in anything we do when we're supporting organic growth, is really, really strong on investments of that type. Because it's people dependent, it also makes it pretty easy to be careful with as you go forward. As Bill said, you know, if we start to see things all of a sudden take a turn or there's something that comes into the mix that none of us expected, by nature, we can hold off, we can do more with less. We can ask people to, you know, redeploy towards other areas across IDEX.

[Eric Ashleman, CEO and President at IDEX Corporation]

I think what you're seeing here a little bit is, you know, probably we would have liked to have more of that on board and a more of an even ramp through the year last year. Again, because a lot of it's people, it's as everybody knows, it's hard to find. When you find them, I think you wanna be careful and make sure you bring them on board, when you can. That's part of the mix, too.

[Deane Dray, Managing Director at RBC Capital Markets]

That's real helpful. Just in context of the building backlog, and I might have missed this, I apologize. Can you calibrate how many in the way of revenues could not be shipped? Either you didn't have the products on hand or customers weren't ready, so you've got finished goods. Have you calibrated what that would have been?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. We haven't. In the 4th quarter, it's probably 3%-5% organic that we could have had incrementally to what we delivered if we had full availability of parts and labor.

[Deane Dray, Managing Director at RBC Capital Markets]

Got it. That's real helpful. Have you given the quick overview of Nexsight? It sounds like a really interesting addition to your water business.

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. No, I mean, it's a business we've known for a long, long time, and we've partnered with them with our sewer robots franchise. They've been kind of closer to the customer and a partner for us. Frankly, they're the predominant partner over the years. You know, essentially, they're going to market here in North America predominantly. They do a lot of things around sewer inspection, have a few other ancillary products that go with that. There's some tremendous software capability embedded within that business that's used in that space and we think has application abilities elsewhere in the kind of water technology area. A couple other interesting nascent extensions that they've launched that we also are interested in potentially opening a door for us.

[Eric Ashleman, CEO and President at IDEX Corporation]

It's a really nice fit for a partner that we've known for a long time. It was just the time was right to bring them into the IDEX family.

[Deane Dray, Managing Director at RBC Capital Markets]

Great. We're hearing lots and lots of focus on stormwater from municipalities, and there's, you know, just such a need right now. There's lots, regulatory pressures as well, fines that will be imposed on municipalities if they don't address it. Hot area and nice to see that investment. Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. Compliance is a driver for our businesses in that space. Yes.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks, Deane.

[Operator]

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

[Rob Wertheimer, Founding Partner and Director of Research at Melius Research]

Thanks. Good morning, everyone. So my question is a pretty simple one. You had positive price cost in 2 segments, negative in Fire & Safety, and maybe some of the distinctions are obvious there, but could you just kind of walk through the pace of, you know, how things flow through on pricing changes, if it's all due to that, if there's any inherent, you know, pricing power differentials, that'd be helpful too. Maybe just talk through the dynamics and what you do there. Thank you.

[William Grogan, CFO at IDEX Corporation]

Yeah, sure. The dynamics of price cost is obviously it varies across the portfolio between the segments and the businesses. Holistically, FMTs our strongest price cost relative to a lot of their business goes through channel. Our ability to move price through there is favorable. Obviously, they've got more exposure to heavy casting metal, material inflation, but they have the power to offset it. HST's much more OEM-focused, so there's opportunities, but more on an annual basis on that side of it, and the stuff that looks like the FMT, the industrial parts of it, similar dynamics. FSD has been the challenge, primarily in our fire and rescue businesses.

[William Grogan, CFO at IDEX Corporation]

You know, we talked about the fire OEM challenges and the large backlogs that they're sitting on, you know, in excess of 12-18 months. What we've priced that on, you know, we haven't been able to reprice it, so we continue to work through the lower margin profile on that, you know, through the back half of the year and most likely through the first half of this year. They've gone out with significant price increases here recently on any of the annual contracts that they have, so they're poised for a large recovery and margin improvement as we progress through the year, but still challenged in the 1st half. Dispensing was fairly strong. BAND-IT, you know, relative to their steel exposure and their automotive and aerospace customer base, they were challenged as well.

[William Grogan, CFO at IDEX Corporation]

You know, they were significantly under on the price cost, weighing down the overall organization, but a lot of good effort from the teams to manage through it, and I think are much better positioned as we stand here today to progress through the rest of the year.

[Rob Wertheimer, Founding Partner and Director of Research at Melius Research]

Okay, that's helpful. Is there anything, you know, sort of structural changing on how you think about those long lead times and backlogs and how you price? And then just one more quick one. Omicron, you mentioned, sick outs, which is universal, I suppose, in 1Q. Is that already crested and fading so that you're, until the next wave, you see the risk, contained to 1Q or maybe January, February? I'll stop there. Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah, Rob. The nature of pricing, I mean, I will say, you know, I think we and everybody else are looking at kind of the historical ways that long-term pricing has been done and are finding ways to make sure that we've got more opportunities for adjustment along the way. As you'd suspect, though, given the, you know, the pressure and the volume and just the nature of that space, that's probably gonna take a while. That is in the mix in terms of innovation and different ways to handle it. On the virus, I'd say we're plateaued, slight decrease, but, you know, we got such a global footprint that as it decreases in one area, it kind of comes up in another one.

[Eric Ashleman, CEO and President at IDEX Corporation]

I'd say, you know, kind of level right now, not increasing anywhere, but still at a higher rate than we've seen in any of the other episodes that have come across.

[Rob Wertheimer, Founding Partner and Director of Research at Melius Research]

Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks, Rob.

[Operator]

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

[Nathan Jones, Managing Director at Stifel]

Good morning, everyone.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi, Nathan.

[Nathan Jones, Managing Director at Stifel]

I wanted to start with a couple questions following up on Deane's line on the growth and discretionary spend rebound. Those are really the two large buckets in 2022 that are dragging the incrementals down from kind of, you know, the level that we would normally expect from IDEX. Specifically, you guys said that you're back to 2019 investment levels on $400 million more of revenue. IDEX has always been a big investor in growth. Does that mean that we should expect, you know, potentially more incremental growth investments in 2023? Or are you able to leverage those growth investments better and you think it's a kind of a 1-year ramp-up? I assume the discretionary spend rebound is probably anticipated to be back to normal levels by the end of 2022?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. Yeah. I mean, this again, because of the nature, kind of our model and what those investments usually are in terms of people, I mean, there to be honest, there's kind of a bandwidth limit on the upper side that also governs some of this. These are not the kind of businesses where you can sort of just endlessly pool people in there and it all works better. These are super targeted around, you know, and aligned highly to the bets that we're talking about. Then sort of everything else, we leverage a lot of that productivity to actually support those investments, and kind of run the company that way at a pretty consistent level.

[William Grogan, CFO at IDEX Corporation]

I really do think of this more along the lines as rebuilding a basic base to fuel growth of the company in the highly targeted way that we do it, more than, let's say, a next chapter of spend profiling for the company. We don't need to do that.

[Nathan Jones, Managing Director at Stifel]

Long term, I think you guys have always talked about, you know, when you're at low single-digit, you get 35% incremental margins, maybe getting to 40% if you've got mid- to high single-digit organic growth. Nothing's changed structurally in that outlook over the long term. We're just in a period of bringing the investments back after a period of under-investment forced on you by COVID.

[William Grogan, CFO at IDEX Corporation]

Yeah, exactly, Nathan. I think your point on the discretionary is that being somewhat of a catch-up here as we progress through the last 2 years. That'll fall off. There'll be, you know, nominal increases on that going forward. As Eric said, it's our normal investment profile. If you normalize for the discretionary ramp, you know, we're at our traditional, mid-thirties type of flow through.

[Nathan Jones, Managing Director at Stifel]

Okay. Just one on capital deployment. Record level of acquisition spending in 2021. But you still have rich people problems over there in an unlevered balance sheet, and it would take several years of spending that record level of capital on acquisitions to get you into a you know a more optimal balance sheet structure. Is the pipeline robust enough and are there enough opportunities at the right prices out there for you to look to deploy similar amounts of capital in 2021 as we go forward over the next few years?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah, Nathan, I mean, that's exactly the target and the expectation here. I mean, we talked, I know for the last several quarters about the intentionality we've put on this. You know, some of the investments and resources are focused in this particular area because they have to be. You know, the achievements that we made in 2021, I think was a direct result of they're all high quality. I can assure you, we looked at a lot more than those companies to get the ones that we brought in on the board, and that's the way we're thinking of it going forward. We'll consider valuations will be high, competition will be fierce, and we have to make sure we get plenty of at bats as we go at it and hold our discipline at the same time.

[Eric Ashleman, CEO and President at IDEX Corporation]

We've kind of talked about our ideal spot here would begin to level load at this high at a minimum, this higher level of deployment that actually helps you build a more uniform resource base as you do the work, with always looking for the potential to expand it if in fact we can do that efficiently, you know, manage the change across the company. It's definitely an intentional travel to a higher level. Yes.

[Nathan Jones, Managing Director at Stifel]

Thanks very much for taking my questions.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks, Nathan.

[Operator]

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

[Matt Summerville, Equity Research Analyst at D.A. Davidson]

Thanks. Given some of the pluses and minuses you talk about with respect to the margins as we progress through the year across the segments, how should we be thinking about the incremental margin at the segment level relative to kind of the full year guidance range you talked about, Bill, at the high and low end? Can you give a little more color there?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. Obviously, our 1st quarter is gonna look fairly similar to the 4th quarter with, you know, ramp. I think you're gonna see margin profile improve on a basis point perspective, more in FMT as probably our highest margin improvement. Well, obviously we had the challenges within the FMD business this year with the CapEx reduction and them being significantly lower from a volume perspective. You know, they had several site consolidations and the incremental costs associated with that. And then just that business levers extremely well as they progress. So I would say FMT margins building throughout the year. HST is still extremely strong, but moderated relative to a lot of the investments we're making are on that side of the house.

[Eric Ashleman, CEO and President at IDEX Corporation]

Then, you know, FSD recovering on the price cost side being a primary driver of their margin improvement for the full year with pressure here in the first half, like I mentioned earlier, with Rob's question.

[Matt Summerville, Equity Research Analyst at D.A. Davidson]

Just as a follow-up, just to be clear, how much pricing do you anticipate achieving in 2022 versus maybe what you achieved in 2021? Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

I mean, last year we were about 200 basis points, and we'll be in excess of that here in 2022.

[Matt Summerville, Equity Research Analyst at D.A. Davidson]

Got it. Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Sure.

[Operator]

Our next question comes from the line of Andrew Buscaglia with Berenberg. Please proceed with your question.

[Andrew Buscaglia, Senior Analyst at Berenberg]

Morning, guys.

[Eric Ashleman, CEO and President at IDEX Corporation]

Morning.

[Andrew Buscaglia, Senior Analyst at Berenberg]

I'm looking into, you know, a little bit more into your HST segment, in that your guidance does imply some, you know, pretty decent growth despite really tough comps this year. I'm wondering, you know, what exactly in there. I mean, you're gonna be lapping, I think, tough comps in semis and life sciences, and it sounds like auto could be a source of upside. Are there other areas that just haven't recovered that are really where there's a lot of juice left?

[Eric Ashleman, CEO and President at IDEX Corporation]

I don't know that the story is really that one where it's, you know, folks coming off the pandemic map or something like that. I mean, these are just inherently strong-

[Andrew Buscaglia, Senior Analyst at Berenberg]

Mm-hmm

[Eric Ashleman, CEO and President at IDEX Corporation]

Sectors that we think are gonna continue. We've seen good ramping in 2021, and honestly, it's market dynamics that are gonna drive it in 2022. You know, the pharma space, which you didn't mention, I mean, that is a really good space now. We participate there. We make vaccines more effective. As you can imagine, that's going really well. That's where we're seeing some of the medium-term capital projects. You know, I spoke of sometimes not the biggest ones, but these smaller to medium projects to get expansion out there. That's an area where we're seeing a lot of that.

[Eric Ashleman, CEO and President at IDEX Corporation]

Our optical technologies businesses is really, really well positioned for some great applications and broadband access and coming down from space and things that are really kind of out there. I would say, you know, just stuff right down the middle of the fairway is really good for us. Next gen sequencing, of course, there's all of the growth aspects that were always there as part of that space. Let's be honest, all this COVID surveillance and variant identification, that's the gear that's doing it across the world. This is a story of strong markets. We're well-positioned, and they continue to be needed more than ever, more than it is in any way kind of a recovery aspect.

[Eric Ashleman, CEO and President at IDEX Corporation]

I mean, again, I always remind people there's some industrial businesses in there that might have more FMT-like aspects. For what I think the spirit of the question is, the heart of it's a continuation and a theme that we think is gonna continue.

[Andrew Buscaglia, Senior Analyst at Berenberg]

Okay. You know, a similar question, though. I think FMT and broadly IDEX seems to kind of have-

[Andrew Buscaglia, Senior Analyst at Berenberg]

It seems to be somewhat influenced by energy in that even though it might not be a direct exposure, it's this indirect impact, which now seems to be kind of more topical, more that area is coming back, we think. So what about your sense in maybe an FMT with an energy recovery helping that business, maybe exceed your expectations with, I guess. What are your thoughts there?

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, I mean, a couple things. Energy in general, I mean, it's our single-digit exposure there is localized largely in FMT. That is a story of recovering off of pandemic lows, no doubt because of commodity pricing and some other things and just delayed investments. It's a little different than it was two, three years ago, but it's positive, and that'll help. You're also right. It's always hard to identify, but no doubt there are derivative impacts of that sector in terms of just, you know, the up and down the street industrial businesses that are throughout FMT. We do think we have that factored in the mix, but to the extent any of that overachieves, that's the area that we'd see upside.

[Andrew Buscaglia, Senior Analyst at Berenberg]

Okay. Got it. Thank you.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks.

[Operator]

Our next question comes from the line of Connor Lynagh with Morgan Stanley. Please proceed with your question.

[Connor Lynagh, Stock Analyst at Morgan Stanley]

Yeah. Thank you. I was wondering if we could return to the capital allocation question and, particularly the step-up in M&A allocation that you're targeting over the next couple of years. I'm wondering if you could frame, are there any specific end markets that you see as you sort of look at the pipeline right now where you're overweight, underweight? You know, how do you sort of overlay a view on end markets and cycles to that framework?

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, it probably doesn't map as cleanly as you might imagine because, I mean, you know, when we think about the markets that we're going after, they are often defined by kind of niche application sets. You know, you can see those in any one of our three segments, and in some ways, they might even strike you as kind of counterintuitive. In general, you know, we're obviously looking in areas that we think have more fundamental growth tailwinds behind them. A lot of it just would be exactly where you think it would. Lots of focus in the HST world, lots of focus, as we've just seen here in water technology and spaces like that.

[Eric Ashleman, CEO and President at IDEX Corporation]

There are some great industrial franchises that have done a great job of targeting into certain application spaces that make a lot of sense too, that are sitting in places that you might not otherwise think. The two other examples in 2021 are actually great examples of that. ABEL Pumps, for example, you know, tied to mining is one of its core markets. That's actually really attractive now because of all the mining that's going on to support alternative energy applications. You look at Airtech, which from far away looks like kind of just an industrial compression business or a blower business, and yet they've tuned very nicely to some alternative energy applications as well. It really does.

[Eric Ashleman, CEO and President at IDEX Corporation]

It plays out at that kind of specific work to be done and then how well that lines up often to a high level macro trend. We very quickly kind of bring that down into the, you know, niche kind of environments that we're comfortable with, and we can see that across any one of our overall segments.

[Connor Lynagh, Stock Analyst at Morgan Stanley]

Got it. Maybe switching gears a little bit here. You mentioned labor being a constraint. I'm just curious, is some of the increase in costs you're targeting related to outright increases in wages, or are you just seeing availability as more the issue? How are you thinking about that as we move through 2022 here?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. A couple things there. I mean, I'll always remind people we have a pretty light intensity in terms of labor. It's important, but it's not a huge driver in our P&L. That being said, I think everybody expects a little bit more wage inflation. We have as well here this year. To be honest, we probably see more of it tangibly in terms of premium costs and things that we're doing with the existing bases. We're scrambling, you know, to try to make things on Saturdays or Fridays in a disrupted manner here today. So it matters for us, but it's not a massive driver on the P&L.

[Eric Ashleman, CEO and President at IDEX Corporation]

It is a driver, of course, as it comes in supply components where that same dimension is applying to businesses outside. It's certainly. We're not immune to it. You know, we counteract it with pricing, price capture on the top and manage it that way.

[Connor Lynagh, Stock Analyst at Morgan Stanley]

Understood. Thanks for the color.

[Eric Ashleman, CEO and President at IDEX Corporation]

You bet.

[Operator]

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

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

Thank you. Good morning, everyone.

[Eric Ashleman, CEO and President at IDEX Corporation]

Morning.

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

A couple from me, if I could. Just first on FMT, the segment color you provided in the appendix, you note the annual headwind from Flow MD. Was it also headwind in Q4, or is that business now stabilized?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. No, it's fairly neutral in Q4. I think their current run rate now, you know, bottomed out in the third quarter, and we see progression as we go over the next couple quarters.

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

On Nexsight, could you just provide a little bit of color on the expected accretion and also just a little modeling guidance on what we should expect on the amortization that comes into the adjusted EPS equation as a result?

[Eric Ashleman, CEO and President at IDEX Corporation]

You know, Jeff, once we close, we'll add that to the guide. We have said it's, you know, a $50 million business with about 20% EBITDA margins to frame it out a little bit for you. We'll nail it down once we close later this quarter and include it in our revised guidance in April.

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

Great. Just finally, just back to labor, appreciate that additional color. Could you just size it though, you know, roughly as a % of COGS?

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

The, you know, the cost of labor.

[William Grogan, CFO at IDEX Corporation]

Eric, for our direct labor, so, you know, things directly associated with the product build's about 7% or 8%?

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

Right. Great. Thanks for the color. I appreciate it.

[Eric Ashleman, CEO and President at IDEX Corporation]

Sure. You bet.

[Operator]

Our next question comes from the line of Vladimir Bystricky with Citigroup. Please proceed with your question.

[Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup]

Good morning, everyone. Thanks for taking my call.

[Eric Ashleman, CEO and President at IDEX Corporation]

Morning.

[Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup]

I just wanted to go back to, you know, your comments on sort of capacity constraints and lead times. I think during 3Q, you talked about some extended lead times, but also said, you know, that you felt you were pretty well positioned competitively, you know, versus others in the industry. Can you just give us an update or comment on how you think you're performing versus key competitors across the portfolio and, you know, whether there's any specific businesses where you think you're more challenged versus peers?

[Eric Ashleman, CEO and President at IDEX Corporation]

No, I appreciate the question. I mean, you know, this is something you have to kind of gauge every single business 1 by 1. So we do that when we're talking with them and when we go out there. I mean, our model generally is always designed to be more reactive and quicker than almost any competitor we have. That's why we have local supply and all the things that we've talked about here. You know, I would say from a performance perspective, probably just like everybody else, where we're most challenged, just inherently, are those places that are more electronics specific, where we're dependent on that probably most constrained single commodity that everybody is. It's customized, it's very hard to scramble and get something different, you know, things like PC boards and those things.

[Eric Ashleman, CEO and President at IDEX Corporation]

Now, the people we're competing against, they got the same electronic content that we do, so I don't see that as a net competitive disadvantage. There's a great example there, frankly, in that space where I know we outperformed. Our dispensing business had a really strong back half push. It's some of the most electronic intensive products that we have in the entire company, and they did a phenomenal job, largely because their suppliers are very local, and they've done a great job simplifying the architecture over time. So as I go down the list, you know, don't see too many places where folks are pointing to conversion and suppliers that are beating us. For a couple dimensions, I do think we perform very, very well. It's frustrating right now, but I think we're still in a good spot.

[Eric Ashleman, CEO and President at IDEX Corporation]

We're super well positioned and, you know, a lot of what goes into an IDEX solution, its customized nature, the long history of it. There's kind of a natural defense that's part of it.

[Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup]

Okay. That's really helpful color. Just maybe one more from me. You know, just going back to the CapEx ramp that you're expecting again here in 2022. Can you talk about sort of where you're seeing the best opportunities to deploy this capital? Is it mainly in areas like automation for productivity? How should we think about this ramp?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah.

[Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup]

Is it, you know, reflective of some chunkier 1-time things, or is this kind of a more sustainable level over time?

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, there's definitely a piece of it in there that's a little chunkier in nature because it's related to facility expansion that we have talked about here for the emerging markets. I mean, we're simultaneously effectively doubling capacity over there to support growth across all of Asia. That we wouldn't do all the time. I will say, though, that it is stepped up a bit as things like industrial automation becomes more important for companies like us and others. You know, there are not too many places you can go automate away from people standing on a production floor in our environment, but where there are, it's quite cost-effective to deploy that technology, and we're doing it more than we have before. There's some great CapEx related to supporting growth in some interesting ways.

[Eric Ashleman, CEO and President at IDEX Corporation]

Digitalization as a chapter is something that, you know, wouldn't have been in there 10 years ago or 20 years ago, is a chapter now. I think it's a fairly typical profile, certainly reasonable capacity expansion you'd expect given the growth, you know, that we had last year and we project to have in the future. There are a couple of these extra chapters in there, one sort of one time related to facility, but I think the other ones will become part of the mix as we go forward.

[Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup]

Great. That's really helpful. Thanks.

[Eric Ashleman, CEO and President at IDEX Corporation]

Mm-hmm.

[Operator]

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

[Brett Linzey, Executive Director at Mizuho Americas]

Thanks, and good morning, everyone.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi.

[Brett Linzey, Executive Director at Mizuho Americas]

I wanted to come back to the wins you called out in life sciences and semiconductor. Are the life science wins COVID related or something outside that spectrum? I was hoping you could put a finer point on how IDEX might be positioned with some of this forthcoming capacity build out within semiconductor. Any quantification would be great too.

[Eric Ashleman, CEO and President at IDEX Corporation]

Okay. Well, I mean, a few things there. From a life science perspective, certainly the lingering nature of COVID is in the mix, but I wouldn't say it's the predominant driver anywhere. You know, we talked about next gen sequencing and variant surveillance. That's a part of it, but it's not the majority by any means. It still comes back to, you know, quick cancer detection, point of care medicine. I mean, broader trends that have long been important and are even more important as we get more focused on healthcare. I really don't see the kind of current pandemic as being a significant driver. This is really broad-based and we think has a lot of room to run for us in that space. On the semi side, it's interesting.

[Eric Ashleman, CEO and President at IDEX Corporation]

I mean, we actually participate in kind of two places there in sort of the classic infrastructure build-out. We're, you know, we do that and attack it from the sealing perspective, so actually manufacturing things, we're part of that process. Then in the optical side, we do more of it on the sort of metrology and sort of after production quality side of it. We see it from sort of two angles. You know, in terms of its run rate, as you might suspect here, we've got a long way to go until capacity comes to where it needs to be for that particular sector. There's things still just being announced now that we're all seeing that are exciting for all of us.

[Eric Ashleman, CEO and President at IDEX Corporation]

We think that's gonna continue for quite a while, and most of it is located in our HST segment, our exposure.

[Brett Linzey, Executive Director at Mizuho Americas]

Thanks for that. Other question on orders, another strong year and really finish to 2021. Just curious, as your teams drill down on the order book, are there any signs of, you know, double ordering in any of the businesses or, you know, pull forward as customers try to secure a spot in line? Any color would be great.

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. I think it's a small percentage mainly because of the kind of highly customized nature of what we make. That's kind of a risky bet, and everybody is then betting on capacity that may or may not come around again, just because of the way that we attack it with the products and the kind of product structure that we have. It's typically not a high level. It's barely anything most days. I think we've pointed to it could be a percentage point. At the current levels, I think that's pretty consistent. There's, you know, for high volume things that people can depend on, there's probably a little bit of that. But it's not the majority of what we do here. It never has been.

[Brett Linzey, Executive Director at Mizuho Americas]

Okay, great. Appreciate it.

[Eric Ashleman, CEO and President at IDEX Corporation]

Thanks.

[Operator]

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

[Scott Graham, Analyst at Loop Capital Markets]

Hey, good morning, Eric, Bill, Allison.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi, Scott.

[Scott Graham, Analyst at Loop Capital Markets]

Hey. Let me just ask the harder one 1st, then line that up for Bill. I'm looking at the FMT margin in the quarter, we were down essentially 180 basis points, whereas in the 3rd quarter we were up over 100 basis points. The contribution this quarter from ABEL revenue wise was less. It looked like FMT FMD had a less negative impact on sales in the 4th quarter than the third. Why was the FMT margin down that much?

[Eric Ashleman, CEO and President at IDEX Corporation]

Sequentially, Q3 to Q4 or Q4 to Q3?

[Scott Graham, Analyst at Loop Capital Markets]

No, year-over-year. Well, both, of course, right, but.

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, I would say two things. If you normalize. So just year-over-year, if you normalize FMT and take out FMD and ABEL, you're roughly flat on that margin perspective. I think from a quarter 3 to quarter 4, there's you know a couple things. One, FMT, less working days in some of the vertically integrated businesses, so they have less absorption, which is seasonal and happens in most years. We had the final cost associated with the facility consolidations that weighed a little bit on their margins in the 3rd quarter. And then, just some premium overtime and freight at the end of the year to get some stuff out for customers was diluted.

[Eric Ashleman, CEO and President at IDEX Corporation]

You know, those three things on the sequential piece and, you know, year-over-year, it's really the ex FMD and ABEL that's pressuring the margins.

[Scott Graham, Analyst at Loop Capital Markets]

Okay. It's not an acceleration in supply chain issues there?

[William Grogan, CFO at IDEX Corporation]

No.

[Scott Graham, Analyst at Loop Capital Markets]

Okay, great. Thanks. The 2nd question is more for you, Eric. You know, Bill was kind enough to share with us what the supply chain held you back on organic 3%-5%, and it doesn't look like you're expecting much difference in your 2nd half organic than your 1st. Just kind of wondering, how you're thinking about that 3%-5% in the 4th quarter and how it affects, sort of your first half versus 2nd half thinking. Doesn't that lessen in the 2nd half of the year and therefore maybe you're being conservative on implied second half guide?

[Eric Ashleman, CEO and President at IDEX Corporation]

Yeah. Well, I mean, well, a couple things. I mean, I think we definitely have a frame and a view that Q4 was tougher in a lot of regards because of the things that Bill talked about in terms of as he put some boundaries around it. Clearly, we had more absenteeism here than we'd seen at any other point in the year, and we know the same thing was happening in suppliers and logistic networks and those kind of things. To the extent that, you know, we see that same trend kind of lagging over to the 1st quarter, we've extended it there. We're making certain assumptions here as we go forward. One, we always get a seasonal uptick in our business.

[Eric Ashleman, CEO and President at IDEX Corporation]

There's certain businesses that just, this is the quietest time for them because they can't do their work outside. We know those come online. Not all of those are labor dependent anyways or supplier driven. There's things like that that are out there. Look, we're already seeing some signs that this current wave is going to subside, come down. We are seeing more evidence that people are wanting to get back into the workforce. Those kind of those pieces as well, and it's always easier to run the place when it's warmer out. You know, there's a few things in there, and I don't think the ramp is so significant that it sort of stands in the way of those expectations.

[Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners]

Okay. Good call. Thank you both.

[Eric Ashleman, CEO and President at IDEX Corporation]

Mm-hmm.

[Operator]

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

[Michael Anastasiou, Analyst at TD Cowen]

Good morning. This is Michael Anastasiou for Joe.

[Eric Ashleman, CEO and President at IDEX Corporation]

Hi, Michael.

[Michael Anastasiou, Analyst at TD Cowen]

Thanks for the color on Nexsight. You mentioned sales would be roughly $50 million annually. What percentage is from the software component? Is there a portion that is recurring in nature?

[Eric Ashleman, CEO and President at IDEX Corporation]

Well, I mean, it's an interesting thing because it's embedded in a lot of the products, so it wouldn't be as identifiable as that, you know, like it's a fit-for-purpose definable piece. It's an extension of capabilities that's then realized in the products that we go to market with. We love that capability.

[Michael Anastasiou, Analyst at TD Cowen]

Great. Thank you.

[Operator]

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

[Eric Ashleman, CEO and President at IDEX Corporation]

Okay. Well, thank you all for joining the call today. I appreciate the questions as we went there and the interest in IDEX. Just a couple of things to frame it all out. You know, no doubt, tough environment out there for everyone. As we've seen and talked about, I mean, the IDEX model in some ways doesn't make that any easier. You know, we've got a lot of iterative innovation and customization. Short lead times is a standard expectation, high reliance on value-added suppliers. You know, I put a but in here that's important, that also strengthen us for the short and the long term. I mean, we're an agile company. We're creative. We solve problems very quickly on the fly.

[Eric Ashleman, CEO and President at IDEX Corporation]

That supply chain that we're dependent upon, as I said a few times here today, I mean, it's very close to home. We've known those folks for a long time, and there are deep relationships and trust there, a mutual trust. That's a huge asset for us, all that comes together. We're gonna attack the current situation and deliver our performance and continue to do our best here in the months ahead. We also wanna do that and not lose sight of what we're building ultimately for the future, and I'm glad we had a chance to talk about that as well. We are gonna strengthen the growth prospects that we have in our most advantage verticals through organic and inorganic efforts.

[Eric Ashleman, CEO and President at IDEX Corporation]

We're gonna use the balance sheet to go do that and support it. We're gonna continue to optimize the footprint of the company. We've done some great work over the last few years to build these, you know, more simple, scalable, outposts out there that for IDEX. We've stripped out a lot of complexity that's gonna lever really well for us in terms of supporting growth and driving financials. Then lastly, we're gonna support it all with I think a very inspiring culture that strives to expand the impact of our mission, which is, you know, trusted solutions, improving lives. Thanks for your time today. I wish you all a great day.

[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.

Participants

Executives

• Allison Lausas, VP and Chief Accounting Officer
• Eric Ashleman, CEO and President
• William Grogan, CFO

Analysts

• Allison Poliniak-Cusic, Director and Senior Equity Analyst at Wells Fargo
• Michael Halloran, Senior Research Analyst at Robert W. Baird
• Deane Dray, Managing Director at RBC Capital Markets
• Rob Wertheimer, Founding Partner and Director of Research at Melius Research
• Nathan Jones, Managing Director at Stifel
• Matt Summerville, Equity Research Analyst at D.A. Davidson
• Andrew Buscaglia, Senior Analyst at Berenberg
• Connor Lynagh, Stock Analyst at Morgan Stanley
• Jeffrey T. Sprague, Founder and Managing Partner at Vertical Research Partners
• Vladimir Bystricky, Vice President and Equity Research Analyst at Citigroup
• Brett Linzey, Executive Director at Mizuho Americas
• Scott Graham, Analyst at Loop Capital Markets
• Michael Anastasiou, Analyst at TD Cowen