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Text: This is Allison Lausas, vice president and chief accounting officer for IDEX Corporation.
The format for today's call is as follows.
We will begin with Eric providing an overview of the state of IDEX's business and an overview of our end-market performance.
Bill will then discuss our third-quarter 2021 financial results and provide an update on our outlook for the fourth quarter and full-year 2021.
Finally, Eric will conclude with an update on the IDEX Difference.
Before we begin, a brief reminder.
It's a pleasure to have you on the team.
Mike helped lead an evolution of our finance and accounting organization and his work has had a long-lasting impact on the business.
On behalf of the entire IDEX team, I wish Mike the best in his future endeavors.
Now let's turn to our IDEX overview on Slide 6.
We continue to see supply chain challenges throughout the third quarter.
Our localized sourcing, production, and selling model helps us a bit relative to others, but this prolonged environment of poor material, labor, and logistics availability challenges us just like any other business.
Despite these obstacles, our IDEX teams around the globe have risen to the occasion.
They exhibited both resiliency and stamina as they overcame yet another quarter filled with day-to-day disruptions, all while providing a high level of support to our customers.
At this stage, we don't see any near-term signs of diminishing macroeconomic headwinds.
Rather, we expect they'll remain at a high level and persist into 2022.
We'll continue to leverage our 80/20 principles as we align around our best customers, our best prospects for growth, and our critical business priorities.
I spoke last quarter about our ability to capture price due to the differentiated mission-critical nature of our products.
Overall, the price actions that we took over the past six months were increasingly realized in the third quarter, and we saw our price/cost spread increase sequentially.
We will push price aggressively and appropriately as conditions continue to support our arguments.
Despite the many challenges out there, our organic performance remains strong.
we set another record in the third quarter for orders, sales, and backlog.
Our backlog is now $186 million higher than it was at the end of last year.
Signals around the return of industrial projects have intensified and current energy prices, if sustained, have the potential to drive investments within IDEX application areas.
Our Health Science and Technologies segment performed exceptionally well.
Over the past five or so years, we have stepped up organic investments with our focus on the longer term.
Within our sealing business, we built a new facility with the goal of capturing share in the expanding semiconductor market.
We brought three optics facilities together, and our new Optics Center of Excellence to enable future wins in life sciences by integrating multiple IDEX components to create value for our customers.
We optimized the footprint and core technology of our material processing technology platform to enable long-term repeatable growth across a series of technologies.
These investments have generated tremendous returns, and we are well-positioned to capture share and capitalize on market growth going forward.
On the inorganic side, our recent acquisitions are doing extremely well.
ABEL Pumps is fully integrated and performing ahead of expectations.
The Airtech integration is ahead of schedule, and the team is making strong progress on their growth strategy.
Both are executing well in the challenging operating environment as they come up to speed on our 80/20 playbook.
Our balance sheet remains strong, and we have ample capital available to support future acquisitions and investments in the business.
Our M&A funnel is healthy.
Our expanded team has identified a number of interesting opportunities as we look to deploy additional capital in the near and long term.
In the end, we are focused on delivering and growing within a very difficult near-term operating environment while spending a significant part of each day thinking about the best investments in teams, technologies, and business opportunities to thrive in the years to come.
I'm very confident in our team's ability to outperform in both areas.
With that, I'll turn to our market outlook on Page 7.
In our Fluid & Metering technology segment, industrial day rates were favorable versus the second quarter.
Larger industrial projects still lag, but quote activity and funnel strength have both improved.
Agriculture remains robust, delivering on record volumes.
Our water businesses continue to perform well.
Municipal spending is steady, and there is general optimism around future increased government funding.
The chemical and energy markets continue to lag primarily due to limited capital investment.
However, on the chemical side, smaller, fast-starting projects performed well.
We are cautiously optimistic on energy as increased fuel prices and concerns over energy shortages have the potential to trigger investment.
As we noted last quarter, our Flow MD business has experienced a significant pullback in customers' capital investments.
It impacted FMT's organic sales by 8%.
In other words, excluding the impact of Flow MD, FMT organic sales would have grown 15% instead of 7% as reported.
Moving to the Health & Science Technologies segment.
We continue to see strong demand across all our end markets.
Semiconductor, food and pharma, analytical instrumentation, and life sciences all performed well.
We continue to win share through our targeted growth initiatives, and our intentionality around identifying opportunities that grow faster than the broader market is paying off.
The automotive market remains affected by supply chain-driven challenges, but we continue to see growth due to our concentration in higher-end European vehicles.
The industrial businesses within the segment saw a trend similar to FMT. Finally, our Fire & Safety Diversified Products segment is our most challenged segment right now.
Price capture and volume offsets faced stronger headwinds within the segment due to higher direct OEM exposure and higher levels of material intensity due to vertical integration.
In Fire & Safety, North America Fire OEM production continues to struggle due to supply chain challenges.
Larger tender activity is slowly increasing within the global fire rescue markets, but we feel these market challenges will persist into 2022.
automotive production pullbacks due to microprocessor shortages have tempered the performance of our banded business.
We continue to achieve new platform wins and believe we're well-positioned to supply chain constraints eventually ease.
But in the third quarter, the impact of automotive shutdowns increased versus last quarter and moderated our performance.
Finally, dispensing performed well as key customers deploy capital on strong DIY market demand, and our global product offerings capture share.
We continue to closely monitor market conditions and expect rolling supply chain disruptions to continue throughout the balance of the year and into 2022.
That said, our third-quarter organic orders were flat sequentially versus second quarter, and our backlog remains at a record level.
Overall, the demand environment for IDEX products has not waned despite supply chain challenges, and we remain optimistic about the trajectory of our end markets.
I'll start with our consolidated financial results on Slide 9.
Q3 orders of 774 million were up 36% overall and up 28% organically.
We built 62 million of backlog in the quarter, and all three segments had strong organic performance versus last year as well as versus the third quarter of 2019.
Third-quarter sales of 712 million were up 23% overall and up 15% organically.
We continue to experience a strong rebound from the pandemic across our portfolio, tempered by supply chain constraints.
The Flow MD pressure and Fluid & Metering Eric discussed also had an impact on overall organic sales.
Excluding Flow MD, organic sales would have been up 18% overall.
Q3 gross margin expanded 50 basis points to 43.8%.
The increase over the prior-year quarter was primarily driven by increased volume and price capture, partly offset by inflation and supply chain impacts.
Excluding the impact of a $9.1 million pre-tax fair value inventory step-up charge related to the Airtech acquisition, adjusted gross margin was 45%, and improved sequentially.
Third-quarter operating margin was 22.6%, flat compared to prior year.
Adjusted operating margin was 24.3%, up 120 basis points compared to prior year, largely driven by our gross margin expansion and fixed cost leverage, offset with some pressure from targeted reinvestments and the dilutive impact of Airtech and ABEL acquisitions due to their intangible amortization costs.
I will discuss the drivers of operating income in more detail on the next slide.
Our Q3 effective tax rate was 23.4%, which was higher than the prior-year ETR of 14.4% due to the finalization of tax regulations enacted in the third quarter of 2020 as well as a decrease in the excess tax benefit related to share-based compensation in the current period.
Third-quarter net income was $116 million, which resulted in an earnings per share of $1.51.
Adjusted net income was $125 million, resulting in an adjusted earnings per share of $1.63, up $0.23 or 16% over prior-year adjusted EPS.
The tax rate movement I mentioned drives a $0.27 differential in earnings per share as compared to the prior-year quarter.
Said differently, our earnings per share would have expanded by $0.50 or 35% had 2021 been taxed at the 2020 rate.
Finally, free cash flow for the quarter was 142 million, up 5% compared to prior year, and was 113% of adjusted net income.
The result was impacted by higher earnings, partly offset by volume-driven working capital build.
Our working capital efficiency metrics remain strong, and the teams continue to do a good job managing significant year-over-year volume and supply chain challenges.
Moving on to Slide 10, which details the drivers of our adjusted operating profit.
Adjusted operating income increased 39 million for the quarter compared to the prior year.
Our 15% organic growth contributed approximately 29 million, flowing through at our prior-year gross margin rate.
We achieved positive price cost within the quarter and saw our price/cost spread improve sequentially.
Our teams continue to drive operational productivity as another lever to help mitigate the profit headwinds we experienced from supply chain costs and associated inefficiencies.
The positive mix is a primary result of the portfolio and business mix normalizing to pre-pandemic levels that had a negative impact on our results last year.
As Eric mentioned, we are actively investing in the resources we need to execute on future growth and productivity.
This reinvestment back into the business, higher variable compensation, and targeted increases in discretionary spending drive the year-over-year pressure of $15 million.
Despite the incremental spend, inflation, and supply chain-driven operational efficiencies, we still achieved a solid 37% organic flow-through.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to a reported flow-through of 30%.
With a significant amount of focus dedicated to navigating supply chain disruptions, we did not fully execute on the level of spend we expected in the quarter.
We intend to make these investments in the fourth quarter, and they will mitigate our flow-through a bit as we close out the year.
With that, I would like to provide an update on our outlook for the fourth quarter and full year.
I'm on Slide 11.
For the fourth quarter, we are projecting adjusted earnings per share to range from $1.55 to $1.58.
We expect organic revenue growth of nine to 10% and adjusted operating margins between 23.5% and 24%.
Q4 results are slightly lower than the third quarter, driven by organic and inorganic resource investments, seasonality, and the potential for year-end logistics challenges.
The Q4 effective tax rate is expected to be approximately 23%.
We expect about 0.5% of top-line benefit from FX, and corporate costs in Q4 are expected to be around 19 million.
Turning to the full year.
We are narrowing our full-year earnings per share guidance from a range of $6.26 to $6.36 to $6.30 to $6.33.
We are also maintaining our full-year organic growth of 11 to 12%.
We expect operating margins of approximately 24%.
We expect FX to provide 1.5% benefit to top-line results.
The full-year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around 65 million, in line with our previous guidance.
Free cash flow is expected to be around 105% of net income, lower versus our last guide primarily due to working capital investments.
And corporate costs are expected to be approximately $73 million for the year.
Our earnings guidance excludes impacts from future acquisitions and any future restructuring charges.
Finally, beginning in 2022, IDEX will provide earnings per share guidance and report actual results, excluding the impacts of after-tax acquisition-related intangible amortization.
We believe reporting adjusted earnings per share on this basis will provide more transparency to our core operating results as well as facilitate comparisons with our peer companies as we continue on our capital deployment journey.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 12.
Before we open the call up to questions, I'd like to share a few updates around our great teams.
First off, I'd like to extend my public congratulations to our non-executive chairman, Bill Cook, on being named Public Company Director of the Year by the National Association of Corporate Directors.
Bill and I both joined IDEX around the same time in 2008, and I've learned a great deal from him over the years.
His insightful perspective and critical thinking skills have been tremendously helpful for the company, and I know I speak for everyone at IDEX when I say congratulations, Bill, on this well-deserved honor.
Turning to the IDEX Foundation.
Last month, the foundation entered a national partnership with the Boys & Girls Clubs of America.
Various U.S.-based business units have supported their local boys and girls clubs over the years, but this takes our joint work to the next level, offering a clear pathway for increased engagement.
Every one of our U.S. business units is close to at least one boys and girls club location.
This agreement aligns with the foundation's equity and opportunity charitable pillar added earlier this year, seeking to create opportunities for underserved disadvantaged people of color within our community.
Finally, we attribute much of our success to our strong foundational culture.
Our annual September engagement survey just came back.
And even within this incredibly challenging environment, loaded with disruptions in unexpected turns, we held study and were scored in the top quartile of all manufacturing companies.
Our teams around the world are beginning to develop tactical plans to address feedback provided by their local teams, part of the continuous improvement that supports everything we do at IDEX.

user
q3 adjusted earnings per share $1.63.
q3 sales $712 million.
sees fy adjusted earnings per share $6.30 to $6.33.
sees q4 earnings per share $1.55 to $1.58.
q3 earnings per share $1.51.

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