IDEX CORP /DE/ Q3 2025 earnings call

Good morning everyone and welcome to IDEX's Third Quarter 2025 Earnings Conference Call. We released our third quarter financial results earlier this morning and you can find both our press release and earnings call slide presentation in the Investor Relations section of our website idexcorp.com. On the call with me today are Eric Ashleman, President and Chief Executive Officer of IDEX, and Akhil Mahendra, our Interim Chief Financial Officer and Vice President of Corporate Development. Today's call will begin with Eric providing highlights of our third quarter results and a discussion of our current business outlook and strategies. Akhil will discuss additional financial details and our updated outlook. Following our prepared remarks, we will open the line for questions.

Before we begin, please refer to slide two of our presentation where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties which are discussed in our press release and SEC filings. As IDEX provides non-GAAP financial information, we provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials which are available on our website. With that, I will turn the call over to Eric.

Thanks, Jim. Good morning, everyone, and thank you for joining us today. The IDEX teams across the globe collectively delivered better than expected results in the third quarter of 2025. I'm proud of our team's hard work and steadfast commitment to execution, particularly given today's challenging economic conditions. I'm on Slide 3. Regardless of the business environment, our business model and 80/20 philosophy, along with our strong balance sheet and continued robust cash generation, position us to quickly address challenges and pursue opportunities as they arise. We do this while remaining focused on driving long-term sustainable growth and value for all of our stakeholders. As we'll discuss further today, our team is laser focused on the things we can control, thoughtfully executing our strategy amid a dynamic economic environment.

Before I provide an overview into our results, I'd like to step back and highlight where we are in IDEX's evolution and frame our priorities in the months and quarters ahead. When IDEX was founded almost 40 years ago, it was effectively a holding company with a portfolio of disparate but attractive industrial businesses. These were strong brands operating independently without a clear governing framework. In phase two, we introduced a common IDEX culture and business approach powered by an operating model with 80/20 as its heartbeat. 80/20 not only enhanced the efficiency of our operations but also served as a decision-making framework and growth accelerator, guiding our focus, resource allocation, and portfolio optimization. In our current phase three, we've made a number of foundational acquisitions accompanied by complementary bolt-ons to expand our capabilities in targeted advantaged end markets.

These additions helped us establish higher growth platforms leveraged to 21st century secular trends. Today, we are intensively deploying 80/20 in these areas to enhance efficiencies and productivity and unlock integrated growth potential. We followed this playbook over the previous decade to build our IDEX Health and Science platform. Now we want to repeat the work at a faster pace with more power as we integrate new businesses and technologies into IDEX. I'd like to take a moment and shine a light on the three pillars of 80/20-driven higher growth so you can best understand our strategy to unlock sustainable value for shareholders. Please turn to Slide 4. The first pillar involves targeting high growth advantaged markets as we allocate capital within our portfolio. We acquired 11 outstanding companies over the past five years.

Each business brings one or more critical technologies to IDEX alongside a series of attractive market access points. Examples of the critical solution set that's expanded for us include support for data centers, space and defense, advanced semiconductor manufacturing, and water. Each acquired company links and integrates in some way with other pieces of IDEX, providing scale and efficiency while reducing enterprise complexity. In parallel to this work, we divested four businesses with less attractive market exposures and lower potential to scale. Our collective growth entitlement has moved to the right of traditional industrial indexes. We now have five thematic growth platforms that cover half of our revenue, and we believe they will disproportionately fuel organic growth for IDEX as we move forward.

In prior earnings calls, we talked about our build out of the intelligent water platform, expanded in the last few years with the acquisitions of Nexsight and Subterra. These businesses were a strong contributor of organic growth for IDEX in Q3. In September, we were proud to host a number of analysts and investors at the largest water industry trade show in North America. They were impressed by what we've built. We've also publicly referenced some great work at Airtech within our performance pneumatics group. The team continues to win as they support power gen applications for data centers. They were a top driver of orders and sales growth for HST this quarter. Making great businesses work together is the second pillar of Phase Three growth outperformance. Please turn to slide five. Here we integrate technologies and market access points within growth platforms.

As an active example, I'd like to take you through our integration progress within our Material Science Solutions platform. The teams there have done excellent work. They also were strong contributors to HST's growth in Q3. All of the companies within MSS map close to one of three critical jobs to do for customers. One, we form critical material properties. Two, we shape materials to create and control surfaces. Three, we add functionality by applying coatings. The platform brings these capabilities together for power. Our teams like to say if we hit one of these attributes, we can bid on a project. If we hit two, we're highly likely to get the order. If we hit all three, we can set specifications in the space and drive transformative growth within MSS.

I'd like to highlight how the team at Muon is doing a great job effectively offsetting pressures within semicon lithography to drive performance. With 80/20 at the heart of the work, Muon is improving productivity, rationalizing its cost structure, focusing on higher quality revenue, and redeploying resources towards higher value commercial opportunities. An example of tuning towards advantaged markets is the development work Muon is actively pursuing now within data center cooling applications. After recently winning business in the optical switching space, which we mentioned last quarter, we are excited about the results our 80/20 actions are driving, which notably improved Muon's profitability in the third quarter to above HST segment average. The MSS platform is well positioned to drive profitable growth going forward. Please turn to slide 6. The third key component of phase 3 of IDEX's evolution is balanced capital allocation.

Akhil Mahendra will get into more details here, but after the last few years of accelerating larger M&A to build our growth platforms, our current focus is on optimizing our business portfolio, tuning our capabilities in an ever-evolving marketplace, augmenting those efforts with strategic bolt-on acquisitions, and returning capital to shareholders. I hope you found this overview of the evolution of IDEX helpful and engaging. We are confident in the strategic plans to drive sustainable, profitable growth for shareholders in the years ahead. Now I'd like to move to our third quarter 2025 results, which demonstrate traction on these collective efforts and position us well to deliver within the guidance we set for the second half of 2025. I'm on slide 7. IDEX delivered better than expected third quarter results despite continued macro uncertainty.

Our Health and Science Technology segment, or HST, is building momentum as our teams continue to identify integrated growth opportunities. Overall, organic orders and sales increased 5% and 10% respectively year over year on the back of growth in pharma and data centers. Our most recent acquisition, Microlam, is off to a great start enhancing our capabilities in optics given their proprietary material shaping technology. As discussed earlier, we saw strength from our businesses within MSS, notably within our optics businesses and Muon. HST also drove strong margin improvement due to volume leverage and full run rate of their platform optimization efforts. We see a path for continued margin expansion going forward. While HST continues to successfully tune its capabilities towards advantaged markets, the segment's more fragmented industrial market exposures are netting to flattish, and we see little evidence of near-term improvements in Fluid and Metering Technologies or FMT.

Third quarter sales and profitability exceeded expectations, driven by strong execution and pricing. Our water businesses facing municipal markets were standouts in terms of orders and revenue growth. FMT's general industrial exposure points remained stable without signs of positive inflection. Finally, in our Fire & Safety/Diversified Products segment, or FSDP, disruptions in the funding environment and sluggish replenishment spend impacted our third quarter results and temper our expectations for near- to mid-term demand. Overall, we see a dynamic macro environment with an uncertainty overhang that we expect will continue into 2026.

It's not clear how and when broad external catalysts will line up to support more predictable and positive conditions, but at IDEX we plan to continue to make our own luck through 80/20, tuning our resources and technologies towards those opportunities with higher growth velocities and work together as a team to integrate our growth platforms, providing more solutions power for key customers. We're on track to deliver the second half of the year and look forward to continuing our momentum into 2026. With that, I'll pass it over to Akhil to discuss our financials and our updated outlook in greater detail.

Thanks Eric and good morning everyone. All the comparisons I will discuss will be against the prior year period unless stated otherwise. As Eric mentioned, in the third quarter of 2025 IDEX delivered strong financial performance. Organic revenue growth of 5% was better than we expected with momentum in HST driving the outperformance and adjusted EBITDA margin and adjusted EPS came in higher than our forecast for the company. Overall orders grew 7% organically in the quarter, our HST segment reached a record high at $390 million and both FMT and FSDP posted high single digit order growth in the quarter. While order activity was strong on a year over year basis, much was received and shipped within the quarter, leaving overall backlog levels relatively flat.

Sequentially and as a reminder, given the nature of IDEX's rapid fulfillment business model, we typically enter a quarter approximately 50% booked, which limits our overall visibility. Touching on some of the more meaningful business demand trends in the quarter, we saw strong order activity within municipal water, data centers, semiconductor, MRO, pharma and space and defense. Semiconductor lithography remained below prior year levels. In life sciences, where IDEX provides niche components for analytical instruments, we continued to see low single digit growth. Finally, while we posted order growth in FSDP, this increase was largely due to timing of orders last year. FSDP order activity was subdued in the third quarter, specifically in dispensing and fire and safety. Outside of the U.S., organic sales in the third quarter grew 5% with both positive price and higher volumes contributing versus last year's third quarter.

Strong price execution across segments was a primary driver while volumes increased in both our HST and FMT segments but declined in FSDP. IDEX adjusted gross margin contracted slightly, or 10 basis points versus last year, given unfavorable mix. These headwinds were largely offset by productivity gains across our businesses. Adjusted EBITDA margin expanded 40 basis points versus last year, reflecting productivity gains, favorable price cost and volume leverage. These more than offset unfavorable mix. Our platform optimization and cost containment efforts yielded $17 million in savings in the third quarter. These initiatives remain on track to deliver over $60 million in full year savings. Free cash flow of $189 million decreased 2% versus last year on higher working capital. Free cash flow conversion was 123% of adjusted net income and we remain on pace to achieve our target of at least 100% free cash flow conversion for 2025.

We ended the third quarter with strong liquidity of approximately $1.1 billion, and finally we deployed another $75 million to repurchase IDEX shares in the quarter, taking our total to $175 million for the first three quarters of 2025, continuing our acceleration of returning cash to shareholders. As Eric noted earlier, now quickly some color on our results by segment. I'm on slide 9. In HST, organic orders grew 5% and revenue grew 10%. Volumes increased on strength in life sciences, space and defense, semiconductor, consumables, pharma, and data centers. These areas more than offset year-over-year declines in semiconductor, lithography, and industrial businesses. HST adjusted EBITDA margin expanded 120 basis points year-over-year given strong volume leverage, platform optimization savings, cost containment actions, and favorable price cost. These more than offset the dilutive impact of unfavorable mix.

Turning to slide 10, in FMT, organic orders increased 8% and organic sales increased 4%. Orders growth was supported by our intelligent water platform, which delivered strong performance this quarter with project timing and favorable prior year comps driving results. Otherwise, looking at our leading indicator industrial order rates, they appear to be range bound and notably without any strong indication for sustainable inflection in the near term. We also are seeing continued hesitation on larger orders from customers across most of our industrial end markets. FMT achieved adjusted EBITDA margin improvement of 90 basis points driven by favorable price cost and execution of platform optimization and cost containment actions. Please turn to slide 11. FSDP organic orders increased 7% but organic sales declined by 5%.

Orders benefited from continued growth within North America, Fire OEM, and growth in banded within dispensing orders increased, but this was largely driven by timing. Organic sales declined in the quarter primarily due to soft volumes across Fire OEM, rescue tools, and dispensing, while short-term headwinds impacted sales in fire and rescue. The broader outlook for these businesses remained steady, albeit with limited catalysts for near-term acceleration. As macroeconomic and geopolitical factors weigh on order activity, dispensing volumes were also pressured, reflecting the natural progression of the business refresh cycle as customers increasingly shift towards refurbishing existing equipment rather than investing in new machinery. We anticipate continued softness in this area. FSDP experienced adjusted EBITDA margin contraction of 200 basis points, mainly due to volume deleverage. This headwind was partially offset by platform optimization and cost containment actions and favorable price cost. I'm on slide 12.

Let us turn to capital allocation for the quarter. As Eric mentioned, free cash flow generation remains strong, allowing us to continue to allocate resources towards the areas we think will generate the highest returns. We drove $189 million of free cash flow after investments for organic growth, including CapEx spend of $15 million in the quarter, and IDEX has generated 97% free cash flow conversion year to date. We ended the quarter with strong liquidity of $1.1 billion, including cash levels of about $600 million and revolver capacity of about $500 million. Our current gross leverage position sits at approximately 2.1 times, and while we feel comfortable with our current leverage and liquidity position, we intend for our leverage to migrate lower and get to our typical target range of under 2 in the next several quarters. Our balance sheet provides financial flexibility to meet capital allocation priorities.

As mentioned earlier, we accelerated our pace of share repurchases, repurchasing $75 million shares in the quarter and $175 million year to date, and in September we increased our share repurchase authorization to $1 billion. We paid approximately $54 million in dividends in the third quarter and continue to target 30%-35% of adjusted net income in dividends paid. Regarding M&A, we do not expect to pursue large acquisition opportunities in the near term after investing in the establishment of our growth platforms over the last couple of years. Instead, we will be focused on bolt-ons and portfolio optimization in the coming quarters. Please turn to slide 13. We are narrowing our full year guidance range to $7.86-$7.91, which remains within our previously communicated outlook of $7.85-$7.95.

This reflects continued strength in HST, particularly within our advantaged markets, data centers, Space and Defense, semiconductor, MRO, and pharma, which are helping offset pressure in our FSDP business stemming from funding disruptions and sluggish equipment replenishment spending. FMT continues to perform in line with expectations, contributing to overall portfolio stability. Both our organic growth expectation of 1% for the fiscal year 2025 and adjusted EBITDA margin expectation of between 26.5%-27.5% remain unchanged. Our updated guidance reflects more of a level load of sales between the third and fourth quarters, reflective of the typical historical seasonal cadence at IDEX. Our strong third quarter results have positioned us well to deliver on the second half expectations we set this summer. With that, I'll turn the call back over to Eric.

Thanks Akhil. I'm on slide 14 where we highlight the key drivers of IDEX's shareholder value creation. As I mentioned earlier, we are squarely in the midst of driving phase three of our evolution. We are applying 80/20 to drive integration, operational improvement, and enhance growth prospects across our high margin platforms. We intend to remain very selective around bolt-on acquisitions to augment our organic efforts, taking a balanced long term approach to capital allocation supported by near term intentionality. As Akhil said, our current focus here is smaller bolt-ons and returning capital to shareholders. In the past couple of years, we identified acquisition opportunities and pulled forward activity to more quickly establish attractive value-creating growth platforms. We are now acutely focused on applying 80/20 to maximize their potential.

We believe all this will drive meaningful EPS growth over the longer term, driven by organic growth we can leverage and capital deployment that amplifies IDEX's value creation potential for all stakeholders. We have outstanding and passionate teams and talent, a portfolio of highly critical and adaptable technologies in advantaged markets, a culture of operational excellence, and the heartbeat of 80/20 which powers it, all supported by a robust balance sheet that we leverage via a balanced and effective capital deployment philosophy. We believe we are in a position of strength to deliver as a premier growth compounder as we close out the decade and head towards our next phase of evolution. That concludes our prepared remarks and with that I'll turn it over to the operator to take your questions.