IDEX Corporation

Greetings and welcome to the IDEX Corporation third quarter 2021 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Losses, Vice President and Chief Accounting Officer. Thank you. You may begin.

Good morning, everyone. This is Allison Losses, Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for our discussion of the IDEX third quarter 2021 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending September 30th, 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 Bill Grogan, our Chief Financial Officer. 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. 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 two hours after the call concludes by dialing the toll-free number, 877-660-6853, and entering conference ID 13712091, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to this 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 Eshelman.

Thank you, Allison. Welcome to IDEX. It's a pleasure to have you on the team. I'd like to start by thanking Mike Yates, our former Chief Accounting Officer, for his 16 years of service to IDEX. 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 six. 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 IDEXX 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. I want to thank all the IDEXX team members across the globe for your hard work, not just in Q3, but over the last 18 months of business within a pandemic. 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 technology 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 ceiling 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. Apple Pumps is fully integrated and performing ahead of expectations. The Airtek 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 seven. In our fluid and 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's 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-turning 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 FlowMD 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 FlowMD, FMT organic sales would have grown 15% instead of 7% as reported. Moving to the health and science technology 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 and safety diversified product segment is our most challenged segment right now. Price capture and volume offsets face stronger headwinds within the segment due to higher direct OEM exposure and higher levels of material intensity due to vertical integrations. In fire and 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. U.S. 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 eased. 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. With that, I'd like to turn it over to Bill to discuss our financial results.

Thanks, Eric. 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 FlowMD pressure and fluid metering Eric discussed also had an impact on overall organic sales. Excluding FlowMD, 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 Airtek 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 Airtek and Able 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 EPS of $1.51. Adjusted net income was $125 million, resulting in an adjusted EPS of $1.63, up 23 cents or 16% over prior year adjusted EPS. The tax rate movement I mentioned drives a 27 cent differential in EPS as compared to the prior year quarter. Said differently, our EPS would have expanded by 50 cents 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 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 inefficiencies, 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 EPS to range from $1.55 to $1.58. We expect organic revenue growth of 9 to 10 percent and adjusted operating margins between 23.5 and 24 percent. 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 a half a percent 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 EPS 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 a percent and a half 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 EPS guidance and report actual results excluding the impacts of after-tax acquisition-related intangible amortization. We believe reporting adjusted EPS on this basis will provide more transparency to our core operating results as well as facilitate comparisons with their peer companies as we continue on our capital deployment journey. With that, I'll throw it back to Eric for some final thoughts.

Thanks, Bill. 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 IDEXX 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 IDEXX when I say congratulations, Bill, on this well-deserved honor. Turning to the IDEXX Foundation, last month the Foundation entered a national partnership with the Boys and 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 communities. 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 and unexpected turns, we held steady 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. With that, let me pause and turn it over to the operator for your questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask your 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 Nathan Jones with Stiefel.

Please proceed with your question. I think we lost Nathan. Can you hear me?

Now we can.

Oh, okay. All's well that ends well. Um, first question, just on this discretionary reinvestment, um, you know, it was, it wasn't called out on the walk in the first quarter, ramped up in second quarter and third quarter. And I think, um, Bill said in his comments that you didn't actually spend as much in the third quarter as you intended. Um, I think that margin guidance for the fourth quarter is down a little bit. Is that all just coming from the extra discretionary reinvestment in growth that you guys are looking at in the fourth quarter?

Yeah, I know exactly. I think the teams have done a good job managing and focusing on the critical things that we need to invest within the business. You know, in the third quarter relative to, obviously there's high demand for labor across a bunch of businesses and a bunch of different geographies. and some head count and other items that we thought we would have landed in the third quarter just got pushed to the fourth quarter. So that'll come back and put a little bit of mitigation on our overall flow through, but still relatively strong.

Okay, and then one of the things I got from your press release was a quote where you said macro constraints that inhibit customer satisfaction. I assume that means that all of these constraints are leading to lower on-time delivery metrics for you guys? Can you talk about how much they've slipped? If there's any anticipation you'll be able to get them back up quickly? And if that impacts your ability to push pricing at all?

Sure. Well, it's less a function, Nathan, of on-time delivery and actually a function of extending lead times and then hitting those commitments. So, I mean, we've maintained a high say-do ratio relative to our customers. We use the 80-20 lens to provide feedback differentiated services for different levels of customers. So all of that remains constant. But in this environment, you know, the part that I think we're all struggling with is just inherently the lead times and the queue is lengthening. So it's really that. Your question around when does it resolve, I think, as we indicated, it's further out on the horizon, quite honestly. I mean, a bunch of the knobs have to turn together in material availability, labor availability across the spectrum, and logistics. So as those start to move and start to move in, and all of us can depend on higher levels of throughput, we would be able to bring lead times back in and ultimately, you know, against all of that, still maintain that high safety ratio. So it's, again, less on OTD rates and more on just lengthening lead times against expectations.

And does it impact your ability to push price at all, or are customers just conditioned at this point that lead times are extending and they just have to deal with it?

Yeah, it really hasn't interfered. I mean, one of the things we're always tracking is lead times relative to our typical traditional performance as well as then competitively. And because our model has generally been advantaged this way, it remains so on a relative basis. So as long as that holds, that generally keeps all of the arguments and the equations where we'd like them.

Great. Thanks for taking my questions. I'll pass it on.

Thanks, Nathan. Our next question comes from the line of Dean Dre with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone.

Morning, Dean.

First, welcome to Allison. Best of luck. Secondly, great to see you guys moving to cash EPS. It makes all kinds of sense for you, puts you on that level playing field with your growth by acquisition here. So great move. No surprise there. So thank you. The question, so let's just roll the clock back to last quarter. And I think you guys are one of the few that thought that the whole supply chain inflation had plateaued, but it really has not. Maybe if you could just You've kind of given the description and we've heard from everyone about inflation, supply chain, labor, etc. But where are you feeling the greatest pain? And is there, just to clarify on Nate's question, are there any, have you missed out on revenues? Can you quantify that?

Okay. So look, supply chain has been a tough story for at least six months, and it'll continue here into the fourth quarter. We didn't say it had plateaued. We said that relative to a pretty tough situation. So tough in the second quarter, tough in the third, and continued tough in the fourth with, frankly, some year-end dynamics that always make that quarter a little bit tougher. And so we're thinking of those as we project forward. Your question around what are we experiencing, well, I mean, there's a lot of variety in IDEX, but one thing that makes us all about the same is we tend to buy a lot of configured materials. We're not overly vertically integrated, so material availability is the number one challenge. And then it does vary. We've got some businesses, a few, that are more semiconductor and ship intensive. And then, as you'd suspect, those tend to be the items for those businesses. Others, it's things like, you know, motors and castings, and typically if they're coming from further away, that's a harder challenge. You know, labor availability for us, we don't have labor as a high percentage of our sales, but we do have pockets, and it tracks pretty uniformly where, you know, labor is scarce, either in the U.S. or in other geographies. And I'd say as an overlay, I'd probably say all of IDEX to some degree is continuing to try to track down scarce logistics resources. especially on smaller shipments or things that are going overseas. So I know that pretty much covers the spectrum of all possibilities. But, you know, if you wanted to just put a bow around it for us, it's material availability coming in through, you know, a supply chain of configured materials.

And then, Dean, maybe to your lost revenue comment, I think holistically, no. Obviously, we've got critical products across the portfolio that are spec'd in and high demand. This isn't a commodity application where folks, if they can get it a week faster or for a dollar cheaper, they're gonna go with that product. So relative to lost revenue or our ability to capture price, the differentiation we have with our technology continues to support our incremental price increases across the different businesses.

All right, that's all really helpful. And just last one for me is you commented on record backlog. Is there an extended lead times Is there any chance that you'll need to go back and reprice any of that backlog? Just, you know, the older it is, the more that material cost inflation weighs on it and so forth. What's your flexibility there?

Yeah, where we have the ability to do that, we're not contractually constrained. We have done that as we've progressed through the year.

Great. Thanks for all the help.

Thanks, Dean.

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

Good morning, everyone.

So a couple questions here. First, a lot of moving pieces in the environment as we sit here today. Certainly appreciate the color that you gave us. I guess in this case, literally the green and red colors you gave us on the various end markets and how those were performing. Maybe you can just start triangulating some thoughts and how you're thinking about those markets as we move into next year and maybe even through the next couple of years. You know, your concern level with all of these supply chain challenges, degrading demand, having some sort of circular challenge versus how you think about sustainability of the recovery curve as we sit here today and just how you balance all those moving pieces out internally.

Sure, sure. There's a couple of things there. Yeah, relative to kind of the green and red chart that we provide folks, you know, it hasn't changed a lot over the last couple of quarters in terms of the few areas that are lagging. So I'll just sort of leave those as those stories continue in energy and chemical, and we can go into those later if we'd like. I'd say a few things that are new here would be, you know, the automotive side did flip over to red for us. There's just no question been more disruption, more shutdowns, even on the higher end stuff where our products tend to have good presence. Again, small piece of IDEX, but it is something that's changed and changed a little different. You know, I think if you kind of come up to a segment level, I mean, as you can see from our prepared remarks and just in our numbers, I mean, the health science technology segment is doing really, really well. Very, very strong. We've got semiconductor, that's where our exposure is, that's a strong market. Anything in analytical instrumentation like science, you know, the food areas, we've got some pharma in there as well. Those are just kind of universally strong and we would expect those to continue strong going forward. I think we talk a lot, of course, when we turn over to FMT around project business and the nature of those. And we have seen some movement there. This has been a slow march of progress through the year, but I would say in the areas of food and pharma in particular, You know, you are starting to see a shift towards some intentional capacity expansion, which lends itself into discussions with folks like us and others around project business. You know, in places on the more classic FMT side of the spectrum, chemicals, energy, that's lagging on the other side. Although even in chemicals, some of the faster-turned projects, we're seeing those come about. And then in that sort of right down the middle of the fairway industrial environment where a lot of our FMT businesses play, you know, the discussions continue to move and we are starting to see a bit of that hit the order board or at least indicate that it will in the first part of 2022. So, you know, I just, I wouldn't say that the acceleration curve is different, but it continues to move more positively. Second part of your question was really around sort of this supply chain condition and its run out. I think we were just talking about this this morning. What would be interesting is Overall, I think this is playing out indicating that there's still a lot of capacity that has to be put to work in the industrial space. You've got too many places running 12 hours, 13 hours, and running their equipment into the ground. Then some of the challenges with labor scarcity, I mean, that lends itself towards automations and other things that are going to provide some support. So I do feel good about the longer range wins at our backs and others in the industrial space. The near-term challenge, of course, is that we're sitting here, and a lot of other companies are sitting with a lot of backlog, and in some ways, kind of a steady output that we wish was higher because of the supply chain challenges. Eventually, those two lines cross. I would like to think that what would happen is the throughput would continue to increase as capacity is supplied, as people come back to work and begins to catch that order rate, and then it continues in a great direction. I think that's the open question for all of us is sort of how do these things resolve, those two rates resolve over time in, let's say, the next two quarters going into 2022. And so, you know, we're going to have to watch all of the inputs and the variables that are driving that. It's a pretty complex equation, of course. But, you know, I'd end with saying continued positivity, the rates of progression are, you know, we're seeing those, feeling those, and feel good about them. It all kind of comes down to a few things that are variables in the near term.

Appreciate that. And then just usual kind of update, M&A outlook, how you think about funnel, actionability, any color around that?

Yeah. I mean, very good. As we've talked about through most of the year here, we were intentional of putting some more resources on this job. We're looking at more projects, more interesting ideas. We're out there traveling around. We're kicking the tires on a lot of things and have a strong funnel in a variety of areas, both things that apply to IDEX businesses and are in close universes, as well as kind of an open lane of things that are interesting and IDEX-like that we might consider over time. So both in good shape, and we're excited about prospects there as we go forward.

Thanks, everyone.

Appreciate it. Thanks, Mike. Our next question comes from the line of Matt Somerville with DA Davidson.

Please proceed with your question.

Thanks. With respect to the change in reporting as it relates to acquired intangible tamerization, what is that number bill for IDEX expected to be in 21? And if you have something you can give us for 22, that might be helpful. And then I have a follow-up.

Yeah, man, we'll give guidance on what that number was for 21 and our go-forward guide once we come out with our numbers late January.

Okay. And then with respect to FlowMD, the volatility you've seen in that business, Eric, seems a bit outside of what I tend to call an IDEX-like business. And I was wondering if you could just give a little more thoughts on how we should be thinking about that going forward.

Sure. Sure. Well, it has some attributes. I mean, it's very IDEX-like in terms of the problems it solves and its sort of position on the bill of materials for the you know, fossil fuels infrastructure in the country. So that is typical. But you're right, relative to the average IDEX business, you know, the unit of measure of the sale price of the product is a lot larger. These are pretty large units. In fact, you know, the nature of projects in terms of how those orders come to us are larger as well. It tends to be, you know, very much a capital intensive kind of way of doing business. And so, you know, this is a business that, remember, if we just back up over the last year when we acquired it, had really, really high levels of backlog because they captured a lot of projects long ago prior to the acquisition. Then, of course, things changed pretty dramatically in terms of how the major folks that are in charge of the pipelines in the U.S. were talking about capital spend. We burned off that backlog and now find ourselves kind of in a steady state against, you know, replenishments and maintenance projects. We do a few things internationally. But the core of this business is still ultimately around the build-out or refurbishment around pipeline infrastructure in the U.S. It comes in larger project increments, and the sale price of the end product is larger. So for all of those reasons, the magnitude year over year is a larger swing than you would typically see in IDEX. That's why we've been careful to call it out and make sure people understand it within the FMT results.

Got it. And then just one final one, just in terms of pricing, you typically get somewhere in the range of 100, maybe 150 basis points in a good year. And I'm curious as to where your realization is on a year-over-year basis at the present time and how much of that should be viewed as more as permanent in nature versus maybe some of that's more surcharge-like. So any color you could provide there would be helpful. Thank you.

Yeah, no. So we're in excess of 200 basis points this year. It'll be a record year for price capture for the organization. Majority of it is permanent price increases. Obviously, we looked at surcharges on the freight side as that's been much more variable to offset that. But most of it will continue on into our base level pricing for 2022. Great. Thank you, guys.

Take care.

As a reminder, it is star one to ask a question. Our next question comes from the line of Allison Polianek with Wells Fargo. Please proceed with your question.

Hi, good morning, and welcome, Allison. Eric, I want to go back to your comment, you know, and just kind of beat this up a little bit more. You know, supply chains, you know, tempering a little bit of the growth. I guess, one, is there a way to quantify sort of what that impact was in the quarter in terms of maybe you lost one or two points of organics? And then along with that, Bill, you talked about working capital, some increases there, and I suspect part of that's a supply chain issue. Is there an opportunity here for you guys to attack, maybe more fully in the first part of next year, some of those lead times and start to bring them in a little bit? Just any color there.

Sure, Allison. In terms of output, we could have realized with a slightly more favorable backdrop in the supply chain, probably in the range of a couple percentage points off the organic rates that we posted. You know, just simply had the order, could have made it, and can point to something that prevented it, you know, in one of those three categories that I talked to. I'll let Bill talk about the inventory. I will say, you know, we, like many businesses, you know, on critical material, if we can get it, even if it doesn't mate up perfectly with some other things, we're going to, we'll take the spot and take the material. So there's a little bit of investment and working capital there. I think the last part of your question around can we attack it, I think like a lot of other businesses, we're scrambling to lift our capacity and help our supply chain in any way we can on all dimensions. Some businesses are attacking the labor scarcity issue in very unique ways and very innovative, quite honestly. Others, and most of it comes down to, in some places, capital spend. We're doing some things and thinking through capital that we know we have to put into the business. So we kind of watch that ramp throughout the year. And that makes sense. And wherever possible, IDEX is not an easy business to automate, but we're doing it more than we have been before because it also helps solve the labor issue. You know, sometimes it comes down to design, which is something people don't think a lot about, but sometimes you can actually alter designs, whether it's in, you know, simple circuitry or even some of the other parts that we have and assist with fabrication. This is where our local proximity really helps us. So we can get in a car and drive over to a supplier and kind of have a collaborative discussion of is there a different way to solve this problem and bring material in. So, you know, it's It's pretty much every day. If you went to one of our daily management sessions, you'd probably see that 70% of the discussion is around solving problems of this nature, both in the short term and then wherever possible in longer term in terms of investments or problem solving.

Yeah, and I think there will be opportunities on the working capital side once things normalize, but time will tell when that is. We're assuming back half of next year, but we'll see.

Got it. And then just in terms of HST, you know, strong core there, and you had mentioned, obviously, investments have been starting, you know, certainly contribute to core. Is there a way to quantify sort of what that contribution to core was this quarter, as well as any, you know, comments on sort of the mixed impact that some of those investments are having in terms of those products being delivered today?

No, I'd say when you look across the portfolio, There's been robust margin expansion in almost every single reporting unit. We highlighted a couple, but there's been targeted investments in all entities within the HST segment that have – you just look at the overall margin expansion that we've experienced there as we realize some of the incremental revenue associated with it. And because of the differentiated nature of that technology, the high margin associated with it, Yeah, we did have some folks highlight sequentially the margin was down in HST, but that's really due to Airtek coming into the portfolio on a like-for-like basis. You know, margins are still at kind of those all-time highs we saw in the second quarter, and look for that on the core to continue here as we go forward.

Got it. Thank you.

Take care.

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

Hey, good morning. This is Robert in for Joe. Yeah. I just wanted to touch on orders again. Do you have any sense of how much your customers, you know, are trying to like build their inventory? And, and I guess also like how much of the order activity feels consistent with like actual demand trends?

Yeah, no, it's a good, good question. I mean, So a couple things. One is, you know, when you think about the nature of most IDEX products, it's highly configured, in some ways customized for each application. And so typically, it's not a great product to over-order lots of because you're never quite sure of how it's going to run out, you know, in the customer system. I would say, you know, what is a little different as we go through the year here in terms of typical patterns is just lengthening of, you know, sort of order horizons. So if somebody would have before given us, let's say, six months' worth of requirements, they might throw another quarter in there, recognizing, hey, this is a standard product. We know we're going to use it in this particular case, and we don't want to lose a place in line. That tracks actually with our own lead times. As we extended those lead times, most equations would work and say then that's how you would change your order patterns to accommodate it. So I really – we've never seen a – tremendous run-up of inventory IDEX material. Our distributors and channel within FMT doesn't really work that way. Most people still, as they think of planning for IDEX products, think of us as generally on the very agile, reactive end of the spectrum. And they haven't really changed their thinking around it as the entire world kind of goes through a relative change and shift outward.

That's helpful. Thank you for that. And then I guess I have a quick one also just to follow up on the M&A pipeline. Sounds like, you know, you said it's very healthy and the integration of AirTech, which is one of your largest acquisitions to date, is going well. And with all the focus that you have internally on those initiatives going forward, this might be a break from, you know, previous acquisition behavior, but Would you all be considering anything more transformational in nature, like a really big acquisition that, you know, might be like a new segment or something like that?

Well, I mean, I'd say two things there. One, you know, we always consider kind of every chapter within possibilities, things that are very small, like little pieces of technology we want to tuck in, things like an air tech or, frankly, Apple pumps, which are more typical of IDEX transactions in the past. And then we do consider from time to time things at the other end of the spectrum that are larger. I think you always want to exercise that muscle, but we're always careful to say, you know, for something in that category, it would have to have very IDEX-like characteristics, you know, to mitigate risk. And there's just not a giant universe of things that are in that particular bucket. And if there were, actionability is always somewhat of a question. And so we do consider it from time to time. We don't turn that switch off, but we recognize the probability is generally lower for the reasons that I suggested there, just thinking about how it would mix and complement IDEX and where it would attach given the large size that you're describing. But every one of those chapters is something that we kind of walk it down as a book in our own phone calls.

That's great. Thank you very much.

Thank you.

There are no further questions in the queue at this time. I'd like to hand the call back over to, oh, no, we do have another question from the line of Rob Wertheimer with Milius Research. Please proceed with your question.

Howdy, everybody. Looks like I got to work on my Hidden Star 1 skills. Sorry for that. Hi, Rob. Just a little bit curious if you can give more background around the targeted spending. You mentioned fire and safety, cost pressure, mitigation, and or whatever, and then you've been talking about the discretionary investments for a couple quarters. I know last year there was obviously some discretionary cuts, but just generally speaking, are you seeing more opportunity? Are you trying to change anything in the way you attack opportunities with these investments? Thanks.

Sure. I mean, generally, when we talk about growth investments and IDEX, they often walk on two legs. I mean, they're, you know, people that we're going to bring into the business with specific skills for the charter to go focus in front-end areas, usually on the commercial side or strategic or thinking around, you know, putting the balance sheet to work. So, you know, there are other things that we'll do, sometimes third-party services, you know, a couple of things in terms of nurturing and shaping technology, but a lot of times it comes down to people-based investments. and just amping up the ability to go out and study things, spend time in the field, get the inputs that we need to then begin to modulate the technologies that we have in-house or the others we might bring in.

Okay, perfect. That's a helpful response. And then just in fire and safety, and then just a path to, I don't know, the path and mechanisms on recapturing some of the cost pressures there, and I will stop. Thank you.

Yeah, I mean, it's just a little off the IDEXX typical. We do, as we mentioned, have a little bit more OEM concentration there. You know, this is where some of the larger project work tends to be as well. You put the two things together, and you're not as able as we are in FMT and other places to just sort of, you know, go out and make those discrete changes quickly. So it doesn't mean we don't get that capture. The margin performance over time would absolutely verify that we do. It's just it does tend to lag a little bit from the rest of the more typical IDEX locations. But the arguments, the pricing arguments around criticality of solution and leveraging our position, our number one share position within those niches and our long relationship with customers, that's basically the same equation. It's just you have to be a little bit more cognizant of the timing and the duration of projects and things that are just a little different there. So we wouldn't see this as something that's going to dramatically alter, you know, the margin performance of that company over time or those businesses, but it will take us a little longer to catch up here.

Okay, thank you. Our next question comes from the line of Glad by Strickey with Citigroup.

Please proceed with your question.

Good morning, team. Thanks for taking my call. So just wanted to follow up on some of the reinvestment that you're doing and particularly given supply chain and logistics issues you see out there now. As you're thinking about where you're targeting investment dollars evolved or changed over the course of the year, as you've seen the supply chain and inflationary pressures continue to increase and not really get any better.

Yeah, that's a great question, and the short answer is no. When you think about, when you consider the cycles of our business, one of the things that's really, really important is that even as near-term things like supply chain challenges, all the stuff we talked about, disrupt the day-to-day, and maybe that even continues for a series of quarters, the bets that you're going to make, you've got to consider as you're making them today to sometimes flourish two, three, five years in the future. And I was reflecting when we talked about all the positive aspects that are happening in HST, many of which were coming out of specific facilities that we bought for specific reasons to get it at different markets. I actually went back and checked the dates. Those were commissioned in 2016, 17, and 18, basically, and they're now at full fruition here. And we're very glad we made those bets. So we just have to be very aware of sort of longer-term trends, longer-term positioning, and make sure that we're both doing two things simultaneously, one, reacting appropriately to the disruptions in front of us, but also projecting and extending ourselves into 23, 24, 25, and making sure that those bets and those first discussions around growth are actually happening now.

Okay, that's really helpful. Thanks. And then maybe just shifting gears a bit, You know, I know Asia is a smaller piece of the mix for you versus the U.S. and Europe, but can you talk about what you saw in terms of growth trends in the region over the course of 3Q and into 4Q, given the evolving COVID situation and policy responses in countries like China and Malaysia?

Yeah, and I'd preface both. I mean, most of our areas where we play, we've got a campus in India, a campus in China, and then we've got some commercial things across broader Southeast Asia. And I would say, in general, those have performed very well for us the last few years. They have performed well in 2021. I remind everybody, it is a smaller portion of IDEX, and we attack it in a really surgical way. So, you know, we're picking specific niches, specific applications, and then mating up technologies that we have available in IDEX to go after those. that, you know, I mean, we're picking them because we think in many times they're somewhat immune to some of the ebbs and flows that you would see more day-to-day or quarter-to-quarter because, you know, they've got growth dynamics at their back. So we're doing things in air ventilators and things for high altitude or paint dispensing, you know, is a great market across all of that region for that specific reason. Now, specifically, I would say we, you know, as a backdrop, I don't think we're seeing things that are different than others have talked about in terms of you know, more moderate growth rates in China. And, you know, in a couple instances, I'll talk China specifically, you know, we have some headwinds where there's, and we mentioned this, you know, there's a build for China belief out there around certain markets and things that they are very interested in investing in. And, you know, that provides headwinds for us, but I would say that's where innovation kicks in. What we're able to offer is quite different than the local options. just means the sales cycle is extended a little longer, a little harder, but ultimately we think our differentiation wins there. It's been a great performing region for us.

Okay, that's very helpful. Thanks.

Thanks.

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

Okay, well, thank you. Again, I'd like to welcome Allison to our team and our session here, and thank everybody for your interest and your time today to hear what's going on at IDEX. As we said, it's a really interesting time, a lot of challenges out there. My closing comments would be for those IDEX associates that are on this call. Again, I really want to thank you. I know how hard this is in terms of the day-to-day challenges you have. I know you're doing the right things for the customers, for the business, and for your colleagues. and frankly your communities as well. So thanks to everybody and I wish you all safety and prosperity in the days and weeks ahead.

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.