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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 businesses, including a recap of our recent performance and how we are viewing 2021.
Eric will then provide an update on a few initiatives that we believe are key to IDEX's culture before moving into a review of our order performance and providing our 2021 outlook for our end markets.
Bill will then discuss our fourth-quarter and full-year 2020 financial results.
And we'll conclude with an outlook for the first-quarter and full-year 2021.
It's been a year full of challenge and change with the numerous safety protocols and disruptions in the marketplace.
In that environment, our people continue to shine.
Because of the protocols we have in place, the disruptions in our operations have been limited.
The COVID trends across Europe, North America, and India have been troubling, and we continue to follow those developments closely and remain steadfast in providing a safe place for our employees to work.
We continue to deliver solutions for our customers during a challenging year, focusing on the critical innovation we need to support our long-term strategy, as well as producing new products to help the fight against the pandemic.
Bill will walk through the details shortly, with customer focus, strong execution and our ability to react quickly to unpredictable events helped us deliver a relatively strong performance in 2020, a true testament to our resiliency.
Liquidity was a primary focus of our management strategy as the pandemic hit, and I'm happy to say that we were able to drive record free cash flow this year.
As we address the challenges in front of us, we see a path to bullishness for 2021.
We have seen a steady recovery in our end markets, which we will detail in a few slides.
The diversity and quality of our businesses continues to serve us well, ensuring that we can weather any storm and quickly capitalize when market conditions improve.
While the pandemic still presents many challenges to solve, we are starting to see a focus pivot back to core commercial endeavors as we and our customers prepare for a world healed from the ravages of COVID-19.
Our businesses remain focused on operating safely, and we are prepared to leverage our supply chains and react to increased demands.
A year like 2020 truly test the culture of a company.
Are you rooted in strong values that people really live and believe?
If so, you'll be better prepared to survive and even thrive.
IDEX is that kind of company, and it served us well in a year none of us could have ever predicted.
I'm proud of the culture we have built at IDEX.
It is admired by many, but we can strengthen it still.
We leverage our culture and mission to bind together a uniquely decentralized and diverse company, and our commitment to work even harder to support diversity, equity and inclusion is tied directly to this important aspect of IDEX differentiation.
Our resiliency, agility, and fundamental ability to execute have IDEX exceptionally well-positioned to play off as aggressively as we move forward.
We are actively investing to support our best organic growth bets, and we have ramped up our capital spending to support very exciting initiatives.
The M&A markets are moving again, and we are expanding our capabilities to execute on strategic acquisitions.
In January, we announced an agreement to acquire Abel Pumps and expect that deal to close in the first quarter.
We actively seek to deploy additional capital to acquire IDEX-like businesses, as well as make some calculated bets in new technologies to bolster our growth potential to further strengthen our portfolio and enhance our return to shareholders.
Moving to Slide 7.
As I just mentioned, the strength of IDEX comes from the IDEX difference, a teachable methodology where great teams working together in a superior culture, focused on the critical things that matter with a natural orientation toward the most important needs of their customers.
Our culture is a significant focus and one of my key leadership priorities.
To that end, we are making ongoing improvements based on feedback we received from our employees every day.
Last month, the IDEX Foundation, which was created to positively impact the communities in which we live and work, took a significant step forward as part of these efforts.
IDEX committed $6 million to boost sponsored activities across the company.
The foundation formerly added equity and opportunity as a lasting and fully funded part of its mission, creating opportunities for underserved, disadvantaged people of color in our communities.
This donation allows the foundation to more than double its annual giving.
In addition to initiatives focused on equity and opportunity, we will continue the great work our people have been doing in our communities like building homes for the homeless, renovating community centers, and supporting schools and learning opportunities for young people.
This month, we will host more than a dozen facilitative employee focus groups around the world.
The feedback from our employees will help shape our path forward in diversity equity inclusion.
Developing a formal framework and goals for our DE&I program is something we have all deployed at the senior leadership level making it a top priority.
As part of that commitment, I intend to have a Senior DE&I leader in place reporting directly to me later this year.
We will continue to grow and advance our culture as a key element of differentiation.
You have my commitment on that.
Turning now to our commercial results on Slide 8.
Broad rebound in order rates we discussed in the third quarter continued as our fourth-quarter organic orders were up 7% compared to the prior year.
We entered the quarter with optimism based on the strength of the third-quarter improvement, and that continued into the fourth quarter.
Excluding timing on large OEM blanket orders year over year, our monthly order rates improved throughout the quarter.
FMT organic orders for the fourth quarter were up 3%, driven by project orders in our water businesses, continued strength in agriculture, and recovery in industrial day rate businesses.
HST organic orders were up 6% in the fourth quarter, driven by new product initiatives in life sciences and the recovery in auto and semicon continuing to boost our Sealing Solutions businesses.
Finally, Fire & Safety/Diversified organic orders were up 15% in the quarter.
Dispensing saw significant improvement as retailers began to release pent-up demand for equipment refreshes BAND-IT after a strong bounce back in the third quarter, continued to improve based on auto market strength.
And Fire & Safety saw growth in several product lines.
A year ago, as we entered 2020, we talked about the general industrial slowdown that we were seeing and what a flat to down 2% to 5% world looked like for IDEX.
We have proactively taken strategic actions to address these factors.
We then faced the onset of the pandemic, and we responded to it with purpose.
As we close out 2020 and look forward, we are optimistic that our units and markets are quickly on a path to pre-COVID levels.
The actions that we took in 2019 and 2020 have left us well-positioned as we move into 2021.
Turning to Slide 9.
We provide our current outlook for primary end markets.
In our Fluid & Metering Technology segment, industrial day rates continue to tick up in the fourth quarter, further solidifying the optimism that we discussed last quarter.
We see this increase driven largely by opex needs of our customers.
We continue to see large capital projects remain on hold.
We anticipate that broader signs of economic stability and higher degrees of certainty on COVID recovery timing is required before capital projects begin to move again.
But the investment discussions are happening.
Our Water business has continued to show resiliency, and we are closely monitoring the toll that 2020 will take on municipal budgets in 2021 and beyond.
The strength in agriculture that we've called out for the previous two quarters has continued, and we expect it to grow in 2021.
Energy markets continue to remain challenged with markets still down compared to 2019 levels.
Stabilization of these businesses is largely dependent on increases in fuel prices, driving new capital investments in oil and gas.
Turning to the Health and Science Technologies segment.
We were able to drive approximately $30 million of revenue in 2020 and expect to generate about the same amount in 2021 related to these initiatives.
While some of this revenue is one-time in nature, we believe the technologies and applications we have developed here will generate recurring opportunities in 2022 and beyond.
So relative to our $25 million to $100 million of opportunities we highlighted, we'll achieve about $60 million.
AI improved during the fourth quarter and looks to be on the rebound in 2021.
In life sciences, we saw an offset by continued weakness in IVD/BIO as lab capacity is still largely focused on COVID response, putting on hold other projects and initiatives.
The strength in semicon that we mentioned last quarter has continued.
In addition, our ceilings business has benefited from a rebound in automotive.
We see continued recovery in 2021 for the auto market, particularly driven by strength in European car sales in China and India.
Food and pharma has also remained a bright spot as our businesses continue to benefit from growth in MPT projects and Microfluidics business.
Moving to the Fire & Safety/Diversified segment.
We saw continued improvement in most of our markets.
The largest driver was the significant improvement in the dispensing market as large retailers increase demand for equipment refreshes, combined with order strength in the Asia dispensing markets.
As mentioned previously, the pace of the auto recovery continues to exceed expectations, springing on our BAND-IT business.
Fire & Rescue businesses continued to see strong order performance and we believe that we are seeing a recovery in the OEM businesses, driving through some of the delays in backlog concerns we referenced last quarter.
As with all our municipal businesses, we continue to closely monitor the impact on budgets to see if there are any lagging effects from COVID response spending.
As I highlighted in my previous remarks, we are optimistic about the market recovery we are seeing across most of our markets.
And we need to be prepared for potential interruptions, particularly in the first half of 2021.
Our teams have shown the ability to address these short-term shocks proactively.
And the strategic actions we have taken across our businesses has us well-positioned to be able to ride the positive momentum we're seeing as we exit the issue of the pandemic.
I'll start with our consolidated financial results on Slide 11.
Q4 orders of $679 million were up 10% overall and up 7% organically.
Organic orders increased across each of our segments with drivers highlighted by Eric in his previous comments.
For the year, orders were down 3% overall and down 4% organically, with strong organic order recovery in the fourth quarter partially offsetting the 18% organic order decline we saw in the second quarter at the height of the pandemic.
Fourth-quarter sales of $615 million were up 2% overall, but down 1% organically.
Our industrial and energy markets led the decline but did have positive organic growth of around 60% of our reporting units, led by strong performance in our ceilings, MPT, and dispensing businesses.
Full-year sales of $2.4 billion were down 6% overall and down 9% organically, driven by the impact of COVID, industrial market softness, and challenges in oil and gas.
Q4 gross margins contracted 20 basis points to 43.8%, driven by a decline in volume and unfavorable sales mix, partially offset by price capture.
For the full year, gross margins contracted 140 basis points.
Excluding the impact of the FMD inventory step-up, adjusted gross margins contracted 130 basis points to 43.9%, driven by volume declines in sales mix, offset by our continued ability to capture price and drive operational productivity.
Fourth-quarter operating margin was 22.6%, up 50 basis points compared to prior year.
Full-year operating margin was 22.1%, down 110 basis points compared to the prior year.
Adjusted operating margin was 23.4% for the fourth quarter, up 10 basis points compared to prior year and 22.8% for the year, down 140 basis points compared to 2019.
I'll discuss the drivers of operating income on the following slide.
Our Q4 effective tax rate was 22.2%, which was higher than the prior-year ETR of 20.6% due to the revaluation of foreign deferred income tax balances driven by changes in foreign tax rates.
Fourth-quarter adjusted net income was $105 million, resulting in an earnings per share of $1.37, up $0.04 or 3% over prior-year adjusted EPS.
Full-year adjusted net income was $397 million, resulting in adjusted earnings per share of $5.19, down $0.61 or 11% compared to prior year.
Finally, free cash flow for the quarter was $149 million, up 9% compared to prior year and was 142% of adjusted net income.
For the year, free cash flow was $518 million, a record for IDEX, up 9% versus last year and 131% of adjusted net income, driven by strong working capital performance.
Moving on to Slide 12.
We're going to review our full-year adjusted operating income.
As Eric mentioned, we faced unprecedented challenges in 2020, but the structural and discretionary actions we took were critical to lessen the volume impact on our income and margins.
Using a similar framework as we have for the previous two quarters, we wanted to walk through the components of our full-year adjusted operating income.
Adjusted operating income declined $66 million for the year.
With organic sales down around $247 million, we would have expected a negative impact in operating income of $148 million at roughly 60% contribution margin rate.
The $148 million was offset by $58 million of executed operational actions, $23 million from the impact of restructuring actions combined with $35 million of discretionary cost control items, and $10 million of price, net productivity, and negative business mix.
Finally, we had $7 million of reduced variable compensation for the year.
This yielded a better-than-expected flow-through of 34%.
Again, organic flow-through is based on taking reported sales and op income, less the impact of FX and acquisitions, which was roughly $77 million on the top line and $7 million of profit.
Overall, our team's focused on quickly managing the crisis at hand and effectively managing costs to mitigate revenue declines and has IDEX well-positioned to leverage the recovery we expect in 2021.
Moving on to guidance.
I'm on Slide 13.
Based on current order rates and expected market recoveries, we see an accelerating 2021 and expect organic revenue for the year to be up 6% to 8%.
This translates to an earnings per share impact of roughly $0.75 to $0.95, depending on our top-line results.
We expect our productivity initiatives to more than offset inflation, providing $0.04 of benefits.
The structural cost actions we have taken are expected to provide $0.12 of earnings per share benefit in the year.
As we move past the pandemic, we will aggressively invest in both organic and inorganic opportunities.
As business recovers, we will loosen discretionary cost controls as appropriate.
As mentioned previously, we expect approximately two-thirds of the discretionary cost to return over time.
Additionally, we will be making investments to enhance our ability to execute and integrate M&A opportunities as we view this as a critical time to enhance our capabilities, as well as continue to fund our targeted organic growth initiatives.
These discretionary add-backs and strategic investments will provide approximately $0.19 to $0.26 of pressure in our 2021 guidance.
Next, we anticipate $0.08 to $0.11 headwind from variable compensation as we reset our incentive comp for the year.
Finally, FMD has one-quarter of inorganic results, which we expect to provide $3 million of revenue but provide $0.03 of earnings per share pressure.
The structural actions we have made to improve FMD's profit profile based on the situation in the energy market will get FMD back to positive op profit in the second quarter.
Now, let's take a look at a couple of nonoperational items.
First, we expect an $0.18 headwind from tax, primarily related to discrete benefits we realized in 2020, associated with equity vesting and option exercising.
Second, we expect a 2% tailwind from FX, providing $0.13 of earnings per share benefit.
So in summary, we are projecting organic revenue growth of 6% to 8% for the year, and earnings per share expectations are in the range of $5.65 to $5.95, a 9% to 15% increase over 2020.
Moving to Slide 14.
Let me provide some additional details regarding our 2021 guidance for both the first quarter and full year.
In Q1, we are projecting earnings per share to range from $1.38 to $1.42 with organic revenue growth of 2% to 4% and operating margins of approximately 23.5%.
The Q1 effective tax rate is expected to be approximately 23%.
We expect a 3% top-line benefit from the impact of FX, and corporate costs in the first quarter are expected to be around $18 million.
Turning to some additional details for the full-year guidance.
Again, we're projecting full-year earnings per share in the range of $5.65 to $5.95 with full-year organic revenue to be up 6% to 8%, with operating margins between 23.5% to 24.5%.
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 $55 million.
And free cash flow is expected to be between 115% to 120% of net income.
Corporate costs are expected to be approximately $70 million for the year.
Finally, our earnings guidance excludes any associated cost or earnings with future acquisitions or restructuring charges.
Abel Pump is not included in these estimates, and we will revise guidance once that deal is closed.
With that, I'll throw it back to Eric for some final thoughts.
We have proven the resilience of our businesses and clearly demonstrated the impact of the IDEX difference in our operating model.
While we are not completely out of the woods, this is a time for optimism.
And I believe that our businesses are well-positioned to focus on the critical priorities that will accelerate our growth on the other side of the pandemic.

user
q4 adjusted earnings per share $1.37 excluding items.
sees q1 earnings per share $1.38 to $1.42.
orders of $678.6 million were up 10 percent compared with prior year period.
qtrly sales of $614.8 million were up 2 percent compared with prior year period.
full year 2021 earnings per share is projected to be $5.65 to $5.95.
sees q1 earnings per share of $1.38 to $1.42.
projecting 6 to 8 percent organic sales growth for full year 2021.
projecting 2 to 4 percent organic sales increase in q1.

assistant