The operator introduces the IDEX Corporation's Third Quarter 2023 Earnings Conference Call and turns it over to host Allison Lausas, who is joined by CEO and President Eric Ashleman. They will discuss the company's financial results and provide an update on segment performance and the outlook for the fourth quarter and full year 2023. The call may contain forward-looking statements and a replay will be available. Eric Ashleman has important news to share.

The speaker introduces Allison Lausas, who is serving as the interim CFO and has been with the company for over 2 years. The former CFO, Bill Grogan, has left the company and Abhi Khandelwal has been announced as the new CFO. The company had a strong third quarter, with good profitability and cash flow, thanks to cost containment and inventory reduction efforts. The company expected a destocking cycle in the industrial and municipal markets, and it played out as expected.

In the third quarter, IDEX's markets in analytical instrumentation, life sciences, pharma, and semicon were stable after a destocking cycle in the first half of the year. The company is well-positioned with typical pre-pandemic profiles and sees potential in areas such as water analytics, space broadband, and battery production. However, there is uncertainty due to macro concerns. The demand rebound for pressured businesses is expected to happen in 2024. IDEX's agility, decision-making speed, business quality, and culture will help navigate future challenges while focusing on long-term growth. M&A remains a top priority, with recent acquisitions in water analytics and thin-film optics. The company has a strong pipeline for future M&A opportunities.

In the third quarter of 2022, the company divested its Micropump business and repaid $150 million on its term note facility. This realignment is expected to benefit Micropump as it joins similar businesses. The company's orders and sales decreased overall, with organic decreases in the HST segment and organic growth in FSD. Gross margin and adjusted EBITDA margin also decreased, primarily due to lower volume leverage and unfavorable mix. However, the company's effective tax rate was lower than the previous year due to tax benefits and a tax election related to an acquisition.

The favorable rate items were partially offset by taxes on the gain from the Micropump divestiture, resulting in a net income of $209 million and GAAP EPS of $2.75. Adjusted net income was $161 million with adjusted EPS of $2.12, a decrease of $0.02 or 1%. The lower tax rate contributed to adjusted EPS favorability. Cash from operations was $227 million, up 14% due to lower working capital. Free cash flow was $207 million, up 14% with a conversion rate of 129% of adjusted net income. Adjusted EBITDA decreased by $6 million, mainly due to a 6% organic sales reduction. Price cost was accretive to margins and operational productivity offset employee-related inflation. Mix was unfavorable, and resource and discretionary spending was favorable. Reductions in variable compensation expense contributed to a negative 31% organic flow-through.

The team's focus on cost containment and resource reallocation has helped manage the revenue decline in the Fluid & Metering technology segment. Orders decreased by 5% due to a slowdown in industrial businesses and customer destocking in agriculture. Sales decreased by 1% but were partly offset by favorable performance in energy, chemical, and water. The industrial order day rates have remained steady, but customers are cautious due to recession concerns and lower energy prices. However, there are potential tailwinds from domestic infrastructure initiatives and mining. Agriculture has been impacted by distribution destocking and declining crop prices, but the company is focused on gaining targeted share. The acquisition of KZValve has been successful, and the energy and chemical markets continue to perform well.

The water business is growing and there are no signs of funding delays for municipal projects. The HST segment saw a decrease in orders and sales, mainly due to market pressures. The analytical instrumentation business is experiencing destocking and lower spending in the pharma-biopharma industry. The semiconductor market is also facing challenges, but there is hope for recovery in 2024. The space and broadband laser communication initiatives are seeing positive results. The material processing technology business is seeing some improvement in certain markets. The industrial markets and HST segment slowed down in the quarter. The Fire & Safety Diversified Products segment will be discussed next.

In the third quarter, organic orders and sales grew for the company, driven by strong results in the fire and safety sector. This led to an increase in adjusted EBITDA margins, although there were some challenges in the paint market due to the uncertain global macro environment. The company's outlook for the fourth quarter and full year 2023 includes a projected decline in organic revenue and adjusted EBITDA margins, but the company remains focused on winning through value-add offerings and standardized products.

The company is maintaining its full year guidance for organic revenue to decrease by 1% to 2%. They have raised their EPS guidance by $0.20 due to a lower third quarter effective tax rate and operational outperformance, offset by revenue timing. The company estimates a 1% to 2% decrease in organic revenue for the year, with GAAP EPS of $7.91 to $7.96 and adjusted EPS of $8.13 to $8.18. The adjusted EBITDA margin is expected to be around 27.5%, capital expenditures are anticipated to be $80 million, and free cash flow is expected to be over 100% of adjusted net income. The company's CFO news has received praise, and the operator opens the floor for questions. The company's CEO discusses macro trends and mentions that day rates have slowed in the second quarter. The company closely tracks leading businesses to monitor order rates and projects.

The paragraph discusses the current state of inventory levels in the second and third quarter, which have remained flat due to a predicted destocking cycle. The company's distributors and end users have adjusted their inventories accordingly, but the uncertain environment makes it difficult to predict when there will be an increase in demand. The second part of the paragraph addresses concerns about the Analytical Instruments Life Sciences business and the potential impact of destocking and declining end market demand. The speaker expresses confidence in the company's ability to weather these challenges and discusses the context of the current environment.

The company is experiencing challenges in their analytical instruments, life science, pharma, and semicon business segments. These challenges have been ongoing for almost a year and have been caused by aggressive demand, inventory issues, and macro forces such as China's contribution. The company believes that these challenges have reached an equilibrium and do not anticipate any further external forces affecting their business.

The speaker explains that they are open to the recovery loop ahead and the uncertainty of when it will occur. They mention that there are four different levels they are considering and that there may be some fluctuations in demand, but they believe equilibrium is achievable. They also clarify that they are inside the life science instrument at the component level and that they are now in sync with the market.

The speaker discusses the company's outlook for the next year, stating that they are in sync with the market and will face variability but have easy comps. They also mention the destocking trend and how it may affect economically sensitive parts of the business. The speaker also mentions that the industrial system is performing well but there is uncertainty due to factors such as interest rates, geopolitical risk, and the upcoming U.S. election.

In the paragraph, Allison Lausas confirms that there was a shift of $0.05 from 4Q to 3Q due to more aggressive backlog pull down. Nathan Jones asks about the decline in order rates in FMT and HST and whether it is due to a decline in customer backlogs or in end market demand. Eric Ashleman responds that order patterns are changing, with customers ordering in shorter increments and relying on faster replenishment from companies like IDEX. This has resulted in a decline in backlog but has also allowed for more flexibility in ordering.

The speaker believes that lead times are decreasing, which may impact order patterns. They also believe that the industrial side is stable but looking for the next catalyst. In terms of larger capital projects, there is uncertainty and hesitancy among customers due to rising interest rates and inflation, with many pushing back timelines to 2024. This affects planned expansions and infrastructure projects, leading to a preference for running current systems longer instead of rebuilding them.

Eric Ashleman, CEO of IDEX, discusses the current state of their analytical instrumentation and life sciences businesses, noting that while there has been a slowdown due to the pandemic, there is also a strong focus on innovation and preparing for a more positive future. He mentions that customers are investing in new projects and there is a sense of collaboration in the industry to anticipate future trends.

The speaker discusses the decision to stay fast and nimble in order to take advantage of the best opportunities and overfeed them during times like this. They also mention a small divestiture and explain that it is not a major shift in the company's portfolio strategy. They mention the importance of driving growth and integrating different parts of the company, and state that they will continue to make choices based on what seems like the right decision. A question is then asked about HST and the potential recovery of the semiconductor market in the third and fourth quarter.

The analyst asks for clarification on the trends in the life sciences and HST sectors, and how customer purchasing is affected. The company responds by stating that they expect a recovery in the semiconductor market to be pushed back to 2024, and that orders in the FSDP segment have decreased due to the replenishment cycle ending. The analyst then asks for more information on what drives customer purchasing in these sectors.

Eric Ashleman explains that the flow of their products through the life cycle is relatively stable and not very cyclical. They have a concentrated customer base and their business is platform-centric, with engineers working on different iterations of products. They have good visibility into plans for program launches, but the variable they run into is adoption and inventory positions. In regards to the general acquisition market, he notes that there has been a rise in the cost of capital for private equity, but it has not affected their business much due to their strong cash flow.

The speaker discusses the company's focus on proprietary transactions and cultivating relationships to gain an advantage in acquiring assets. They also mention that the current environment with higher interest rates has both positive and negative effects on transactions. They then address the FMT segment and their strong margins despite declining sales, and mention their plans to invest and protect margins in the future.

Eric Ashleman, the speaker, is pleased with the performance of the FMT segment in the last few quarters and attributes it to cost containment and efficient management. He believes that these businesses have been around for a long time and are well-positioned to thrive in any economic situation. He also mentions that they make investments to support growth, usually in the form of people-based initiatives, and are careful to maintain the expertise and differentiation that contribute to their high margins.

The company expects to sustain mid-30s EBITDA margins and low 30s operating margins, even if order trends continue to decline and organic sales weaken into 2024. However, they are aware of the potential for deleveraging if the business remains flat or negative. The company is currently at the best point in the price-cost cycle, but this may not continue in the future. The HST businesses are expected to have a longer-term EBITDA margin of 29% or higher, and the company anticipates a strong incremental margin as these businesses recover.

The speaker discusses the increase in opportunity funnel and its relation to fiscal stimulus and investments in infrastructure. They believe this will have a positive impact on businesses like theirs in the water sector. They also mention that HST orders have been impacted by the current economic situation, but they expect them to increase in the fourth quarter.

The speaker states that they expect to see higher orders in the fourth quarter, but it may be due to seasonal activity rather than an improvement in the market. They will closely monitor orders and plan accordingly. The speaker also mentions that they are dependent on their customers' success in various markets.

The speaker discusses the company's ability to provide timely and relevant diagnostics due to their short cycle. They will stay close to their customers and move resources around as needed. The backlog burn was accelerated this quarter, and there are opportunities for this to happen again in the fourth quarter. The company is trying to get back to their normal backlog level. The speaker thanks the team for strong execution and performance. There is uncertainty in the environment, but the company's portfolio is in good shape and growing through M&A.

The speaker believes that the company's flat and decentralized structure allows them to quickly adapt and respond to changes, making them well positioned for long-term growth. They also praise their teams and leaders, and mention the upcoming addition of a new member. The speaker ends by thanking the participants and expressing confidence in the company's future success.

This summary was generated with AI and may contain some inaccuracies.