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Text: This is Mike Yates, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows.
We will begin with Eric providing an overview of the state of IDEX's business and update on our growth investments and an overview of our order performance and outlook for our end markets.
Bill will then discuss our second-quarter 2021 financial results and provide an update on our outlook for the third quarter and full-year 2021.
Finally, Eric will conclude with updates on our sustainability and diversity, equity and inclusion programs.
Beginning with our overview on Slide 6.
The past year and a half have been one of the most dynamic and unpredictable ever experienced, but our IDEX team stepped up again in Q2 and delivered during an extremely challenging environment.
Our commercial performance is very strong as we recorded record orders and backlog in the quarter.
Order trends continue to improve sequentially, and all three segments are materially above pre-pandemic level.
Our day rates are very strong, and our OEM order patterns are robust.
Only large industrial projects, many of them in FMT, continue to lag a bit.
We're beginning to see the move into planning funnels, indicating support for continued phases of organic growth in the back half of 2021 and next year.
1 operating challenge for the quarter was supply chain and logistics disruptions.
IDEX is generally a short-cycle business with quick lead times.
We typically operate at the component level further down our customers' bill of materials.
We're also not very vertically integrated.
We depend on a tight network of supplier partners, often located close by our operating units to quick turn our solutions with a minimum of feasibility.
For these reasons, the challenging conditions of tight material supply and bottleneck logistics tend to lag other industrial companies.
Our agile model does support a quick calibration to today's reality, and it helps us exit quicker than many on the backside of the supply side constraint.
Overall, we believe these disruptions have hit a plateau.
We don't see things getting worse, and the challenges will continue to be highly variable.
At the same time, we don't anticipate these disruptions getting better soon, but most likely they will not subside until the end of this year or early next year.
We anticipated rising inflation as the global economy recovered, but like many did not imagine the sharp rate of increase.
This narrowed our spread between price capture and material costs, although we remain positive overall.
Our teams leveraged the systematic investments we made a few years ago in pricing management and aggressively deployed two, sometimes three pricing adjustments with precision.
We are on track to expand our price cost spread to typical levels as we travel through the back half of the year.
While we spend a lot of time talking about our business's ability to capture price, one area that I don't want to miss is our continued focus on operational productivity.
Our teams continue to drive margin improvement through 80/20 simplification, lean effort and through sound capex deployment.
Our robust project funnels continue to be another weapon to combat rising costs.
The one project that exemplifies the spirit deserves mention as we discuss Q2.
Our energy market now starting to show some signs of recovery off the bottom are still lagging the overall group.
Our teams are aggressively executing a facility rationalization project to consolidate our scale and focus our human resources in close working proximity.
Ultimately, this is a long-term value driver for that group.
But in the quarter, the project created headwinds for us as equipment was delayed and inventory positions were less than ideal to support production transfers.
We expect the project to be back on track and completed by the end of the third quarter.
Overall, I am confident in our path through these choppy recovery as we continue to apply relentless focus from outstanding teams to deliver solutions that matter from high-quality businesses that are very well positioned within their application steps.
Moving on to Slide 7.
We deployed just over $575 million in the first half of the year with our acquisitions of ABEL Pumps, Airtech and a small investment in a digitalization technology start-up within the fire and rescue space.
We continue to build out processes and capabilities to explore additional strategic investments we want to make across IDEX.
Our funnel for potential acquisitions is stronger than it has been in the past, and we are more aggressive in pursuing opportunities that enhance our business solutions, fit well with our style of competition and drive IDEX-like returns.
It's early days in our integration of ABEL and Airtech, but we're happy to see that each business is performing well with excellent growth prospects in the near and long term.
While we've stepped up our M&A game, we're also investing in our existing businesses with a 45% increase in capital spending through the first half of the year.
We're in the process of expanding IDEX facilities in China and India.
We project significant ongoing growth opportunities across Asia, and these investments are critical to support our local-for-local approach as we move to the next level of competitive advantage.
We're also focused on our digital strategy with our largest investments tied to our areas of higher integration and scale as we seek to drive higher impact for our customers.
Lastly, as I mentioned previously, we're focused on operational productivity as market dynamics are changing as well as investing in new technology to support growth.
This is on both the capex and opex side.
Some of these investments are targeted at new applications in high-growth areas, like components to enable new global broadband satellite networks, building batteries for electric vehicles and providing key products to support the build-out of incremental capacity in semiconductor manufacturing.
These investments are combined with targeted spend in areas to support automation and efficiencies across the shop floor.
This strategic approach to both inorganic and organic investment is already paying off and sets us up for ongoing success for years to come.
Turning to our commercial results on Slide 8.
As I mentioned, order strength continued in the second quarter both compared to prior year and sequentially, resulting in a backlog build of $65 million in the quarter.
As we look across our segments, all rebounded well from the pandemic and delivered strong organic order growth.
Sequentially, fluid and metering technologies and fire and safety diversified products saw increased orders compared to the first quarter.
Our health and science technologies segment also saw increased sequential orders if we exclude the impact of a COVID testing application debooking that occurred in Q2.
Order intake across all segments was also above second-quarter 2019 levels.
FMT lags HST and FSD due to lower levels of investment in the oil and gas market as well as concentration in the industrial market, which saw a pre-COVID pullback in the second half of 2019.
These commercial results give us confidence in our ability to deliver double-digit growth in the second half of the year and continue to highlight the resilience of our businesses and the criticality of our solutions to customers.
On Slide 9, we provide a deeper look into our primary end markets.
Our focus is shifting from recovery to growth as most of our businesses are now performing above pre-pandemic levels.
Even with pockets of concern around supply chain disruptions and COVID in certain geographies, we're optimistic about the outlook of our end markets and our ability to execute within them.
In our fluid and metering technology segment, industrial day rates were strong.
Supply chain challenges remain.
But overall, the market trajectory was at or above 2019 levels with only large projects lagging, as I mentioned earlier.
Agriculture continued to drive strong growth, driven by aging farm equipment and record crop prices.
Our water business was stable.
We continue to monitor the impact of the federal infrastructure package on U.S. municipal spending.
Energy and chemical markets continue to trail 2019 levels, primarily due to limited capital investment in the sector as well as a longer project close cycle.
One item to highlight for FMT is the impact of our FMD acquisition last year.
It's now in our organic figures.
And with its backlog burn last year and significant pullback in customers' capital investments, it impacted FMT's organic sales by 11%.
In other words, FMT's organic sales for the quarter would have been 19% instead of 8%.
Moving to the health and science technologies segment.
We're seeing recovery and pivot to growth across all our end markets.
Semiconductor, food and pharma continued to perform well, driven by strong market demand and winning share through our targeted growth initiatives.
The overall automotive market continued to face supply chain-driven challenges but we outperformed the market due to our product concentration in higher-end European vehicles.
Our AI and life science markets continue to perform well as the pandemic impact eased and investments have increased.
The industrial business within the segment saw a similar result to FMT. Finally, in our fire and safety diversified products segment, dispensing rebounded as large retailers freed up capital and worked through pent-up demand for equipment.
Our BAND-IT business was adversely affected by U.S. automotive production pullbacks due to microprocessor shortages in the second quarter.
However, we continue to achieve new platform wins and believe we're well positioned to outperform the market as supply chain constraints ease.
In fire and rescue, we have yet to see larger tenders come back and emerging markets remain slow.
We continue to closely monitor market conditions and expect some choppiness in the second half of the year.
That said, we're confident in the future trajectory of our end markets as well as our ability to execute on our strong backlog and have raised our organic growth expectations for the year.
I will start with our consolidated financial results on Slide 11.
Q2 orders of $751 million were up 44% overall and 39% organically as we built $65 million of backlog in the quarter.
Organic orders grew sequentially and year over year in each of our segments, as highlighted by Eric on the prior slide.
Second-quarter sales of $686 million were up 22% overall and 17% organically.
While we experienced a strong rebound from the pandemic across our portfolio, we were impacted by supply chain constraints and our energy site consolidation, which tempered our results.
The FMD pressure in fluid and metering Eric discussed also had an impact on overall organic sales.
Excluding FMD, organic sales would have been up 22%.
Q2 gross margin expanded by 280 basis points to 44.6%.
The year-over-year increase was primarily driven by increased volume and price capture, partly offset by inflation and supply chain impacts.
Excluding the impact of $1.8 million pre-tax fair value inventory step-up charge related to the ABEL acquisition, adjusted gross margin was 44.9% and was approximately flat sequentially.
Second-quarter operating margin was 23.1%, up 340 basis points compared to prior year.
Adjusted operating margin was 24.4%, up 330 basis points compared to prior year, largely driven by gross margin expansion and fixed cost leverage, offset by a rebound in discretionary spending and investment.
I will discuss the drivers of operating income in more detail on the next slide.
Our Q2 effective tax rate was 21.3%, which was lower than the prior-year ETR of 22.7% due to benefits from foreign sourced income in the second quarter of 2021.
This benefit also drove favorability to our guided rate for the quarter.
Q2 adjusted net income was $123 million, resulting in adjusted earnings per share of $1.61, up $0.51 or 46% over prior-year adjusted EPS.
Finally, free cash flow for the quarter was $120 million, down 25% compared to prior year and was 98% of adjusted net income.
This result was impacted by a volume-driven working capital build, higher capex and timing of tax payments, partially offset by higher earnings.
Our working capital efficiency metrics remain strong, and the teams continue to do a good job managing the significant volume changes year over year.
Moving on to Slide 12, which details the drivers of our adjusted operating income.
Adjusted operating income increased $49 million for the quarter compared to prior year.
Our 17% organic growth contributed approximately $41 million flowing through at our prior-year gross margin rate.
We maintained positive price material cost within the quarter and leveraged well on the volume increase.
Our high contribution margins helped mitigate the profit headwinds we experienced from the supply chain disruptions.
In the second quarter of 2020, discretionary spending and investment were minimal, driven by a strict cost control environment during the pandemic.
As we return to a spend level, in line with our growth and continued strategic investments, we see year-over-year pressure of about $11 million, in line with the guidance we gave at the beginning of the year.
Even with the incremental spend, supply chain and operational issues that tempered our performance, we still achieved a robust 45% organic flow-through.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to our reported flow-through of 39%.
As we highlighted, we expect to reinvest aggressively in the business to drive both organic and inorganic opportunities.
We expect that our level of discretionary spending as well as associated costs from growth initiatives will similarly reduce organic flow-through in subsequent quarters.
With that, I would like to provide an update on our outlook for the third quarter and full year.
Moving on to Slide 13.
For the third quarter, we are projecting earnings per share to range from $1.57 to $1.61.
We expect organic revenue growth of 14% to 16% and operating margins of approximately 24 and a half percent.
The third quarter effective tax rate is expected to be 23% and we expect a 1% top-line benefit from the impact of FX.
And corporate costs in the third quarter are expected to be around $21 million.
Turning to the full year.
We are increasing our full-year earnings per share guidance from our previous range of $6.05 to $6.20, up to $6.26 to $6.36.
This range includes Airtech, which will contribute $0.06 in the second half of 2021, roughly $0.03 a quarter.
We are also increasing our full-year organic revenue growth from 9% to 10% up to 11% to 12%.
We expect operating margins of approximately 24 and a half percent.
We expect FX to provide a 2% 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, an increase of around $10 million versus our last call as we increase our investments in growth opportunities.
Free cash flow is expected to be 110% to 115% of net income, lower versus our last guide, primarily due to the additional capital spending and higher working capital to support our increased volume.
And corporate costs are expected to be approximately $77 million for the year.
Finally, our earnings guidance excludes any costs, earnings associated with future acquisitions or restructuring charges.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 14.
Before we open the call up to questions, I'd like to share an update on our ESG journey and the evolution of our company culture.
I pledged earlier this year that we would hire a new chief diversity, equity and inclusion officer.
I'm pleased to announce that I now have Troy McIntosh in my senior leadership team.
He joined us just last week from U.S. Cellular, the fourth largest cellular communications carrier in the United States where he led significant improvements in their culture and levels of diversity in the workforce.
At IDEX, Troy will help build the global road map and success measures for DE&I.
He will help embed DE&I deeper in our culture and build inclusive leadership confidence and capabilities in all our people through training, education and coaching.
He will help us make sure our systems mitigate bias and create opportunities for everyone, no matter of their background to reach their full potential at IDEX.
I look forward to great things happening with his leadership.
I'd also like to share a nice step we're taking to improve our energy efficiencies.
Work recently began on a solar array on the roof of our manufacturing facility in Germany.
Once completed next month, this collection of solar panels will be about one-third the size of the European soccer field and provide 30% of the electricity needs for the facility.
Not only will it help reduce our carbon footprint there, we estimate it will save the business more than EUR 67,000 in just the first year alone.
We anticipate this project will serve as a pilot, leading the way for other solar installations on IDEX facilities around the world.
Lastly, I want to share that the catastrophic flooding that devastated portions of Western Europe earlier this month has impacted many IDEX employees.
About a quarter of the employees at our German fire and safety business have either had their home severely damaged or destroyed.
All of our employees are safe, living with friends and family as recovery efforts are ongoing.
And operations continued at our facility, which is not directly impacted by the flood.
Amid all this destruction and loss, we once again saw the spirit of IDEX come through.
Colleagues from other IDEX businesses in Germany came to the area to assist.
With pumping equipment from our businesses, our people work tirelessly to help draw water from flooded homes to the long road of recovery again.
The IDEX Foundation also paid $100,000 to the German Red Cross, which has thousands of people in the region assisting those impact.
While I shared this internally, I want to again express with our employees better that we stand by you through this terrible tragedy.
Your outstanding examples of what makes this company so special.

user
idex raises full year guidance.
q2 adjusted earnings per share $1.61.
sees q3 adjusted earnings per share $1.57 to $1.61.
sees fy adjusted earnings per share $6.26 to $6.36.
now projecting 11 to 12 percent organic sales growth for fy.
now projecting a 14 to 16 percent organic sales increase in q3.

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