Idex Corporation (IEX) — Q3 2021 Earnings Call Transcript

Good morning, everyone. This is Allison Lausas, 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 30, 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 the 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 Ashleman.

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 IDEX 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 IDEX 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 Technologies 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 sealing 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. Abel Pumps is fully integrated and performing ahead of expectations. The Airtech 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 & 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 is 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-starting 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 Flow MD 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 Flow MD, FMT organic sales would have grown 15% instead of 7% as reported. Moving to the Health & Science Technologies 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 & Safety Diversified Products segment is our most challenged segment right now. Price capture and volume offsets faced stronger headwinds within the segment due to higher direct OEM exposure and higher levels of material intensity due to vertical integration. In Fire & 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. US 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 ease. 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 the second quarter, and our backlog remains at a record level. Overall, the demand environment for IDEX products is not weighed down 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 nine. 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 Flow MD pressure in Fluid & Metering, as Eric discussed, also had an impact on overall organic sales. Excluding Flow MD, 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 Airtech acquisition, adjusted gross margin was 45%, and improved sequentially. Third quarter operating margin was 22.6%, flat compared to the prior year. Adjusted operating margin was 24.3%, up 120 basis points compared to the 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 Airtech and ABEL 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 $0.23 or 16% over prior year adjusted EPS. The tax rate movement I mentioned drives a $0.27 differential in EPS as compared to the prior year quarter. Said differently, our EPS would have expanded by $0.50 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 a 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 efficiencies, 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% and adjusted operating margins between 23.5% and 24%. 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 0.5% 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 1.5% 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 our 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 IDEX 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 IDEX when I say congratulations, Bill, on this well-deserved honor. Turning to the IDEX Foundation. Last month, the foundation entered a national partnership with the Boys & Girls Clubs of America. Various US-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 community. 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.

Can you hear me?

Now we can.

Now we can.

Okay. All's well that ends well. First question just on this discretionary reinvestment that wasn't called out on the walk in the first quarter, ramped up in the second quarter and third quarter. And I think Bill said in his comments that you didn't actually spend as much in the third quarter as you intended. 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. In the third quarter relative to - obviously, there's high demand for labor across a bunch of businesses, a bunch of different geographies and some headcount and other items that we thought we would have landed in the third quarter just got pushed to the fourth quarter. So that will 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 that 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. It's not really about on-time delivery, but rather about extending lead times and meeting our commitments. We've kept a strong record in terms of following through with our customers. We use an 80/20 approach to offer different service levels for various customers, which hasn't changed. However, the challenge we're facing is that lead times are lengthening. In response to your question about when this will resolve, I think it's going to take a bit longer. Several factors need to align, including material availability, labor availability, and logistics. As these elements improve and we can achieve higher throughput, we should be able to reduce lead times while maintaining our strong commitment to customers. So, it's less about on-time delivery rates and more about the increasing lead times in relation to our 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 like them.

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

Thanks, Nat.

Thank you. Good morning, everyone.

Morning, Deane.

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, put you on that level-playing field with your growth by acquisition peers. So a 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 that we've heard from everyone about inflation, supply chain, labor, et cetera. But where are you feeling the greatest pain? And is there - just to clarify on Nate's question, have you missed out on revenues? And can you quantify that?

Okay. So look, supply chain has been a tough story for at least six months, and continued here into the fourth quarter. We did say it 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 suspect, those tend to be the items for those businesses. Others, it's things like motors and castings. Typically, if they're coming from further away, that's a harder challenge. 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 labor is scarce either in the US 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 if you want to just put a bow around it for us, it's material availability coming in through a supply chain of configured materials.

And then, Deane, 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 can get it a week faster for a dollar cheaper; they're going to 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. You commented on record backlog; is there - and extended lead times, is there any chance that you'll need to go back and reprice any of that backlog? Just 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 progress through the year.

Yes.

Great. Thanks for all the help.

Thanks, Deane.

Good morning, everyone. So a couple of 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, and the various end markets and how those were performing. Maybe you can just start triangulating some thoughts on how you're thinking about those markets as we move into next year and maybe even through the next couple of years. Your concern level with all of the 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. There are a couple of points to mention. Regarding the green and red chart we provide, there haven't been significant changes over the last few quarters in terms of the areas that are underperforming. We can delve into those later, particularly in energy and chemicals. A new development is that the automotive sector has shifted to a negative position for us, due to increased disruptions and shutdowns, even affecting the higher-end products where we have a good presence. While this represents a small portion of IDEX, it is a notable change. At the segment level, as highlighted in our prepared remarks and numbers, the Health Science Technology segment is performing exceptionally well. Our exposure to semiconductors is strong, and we see robust markets in analytical instrumentation, life sciences, and food sectors, along with some pharmaceutical presence. We expect these areas to maintain their strength moving forward. When we look at FMT and our project business, we have observed slow but steady progress throughout the year. Particularly in food and pharma, there’s a noticeable shift toward deliberate capacity expansion, which encourages discussions around project opportunities with us and others. In more traditional FMT sectors like chemicals and energy, there remains some lagging performance. However, in chemicals, we are seeing quicker turnaround projects starting to emerge. In the core industrial environment where many of our FMT activities are centered, discussions are ongoing, and we’re beginning to see orders flow in, potentially indicating an uptick in early 2022. The acceleration might not be drastically different, but it is trending positively. Regarding supply chain conditions, as we discussed earlier, there seems to be ample capacity that still needs to be utilized in the industrial space. Many facilities are operating at high hours, pushing their equipment, alongside challenges related to labor shortages. This situation is leaning towards more automation and support systems. Overall, I feel optimistic about the long-term prospects for us and other industrial players. In the short term, a lot of companies, including us, are managing significant backlogs while hoping for increased output, which is currently hampered by supply chain issues. Ultimately, I believe throughput should increase as capacity becomes available and workplaces normalize, helping to meet order rates and trend positively. The key question for all of us is how these dynamics will evolve over the next couple of quarters leading into 2022. We’ll need to monitor the various inputs and factors affecting this complex situation. In conclusion, I remain positive; we’re noticing progress and feel encouraged about the direction things are headed, though a few variables could impact the near-term outlook.

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

Yeah. No. 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 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 line 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. Just with respect to the change in reporting as it relates to acquired intangibles amortization, what is that number built 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.

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

Okay. And then with respect to Flow MD, the volatility you've seen in that business, Eric, seems a bit outside of what I tend to call on IDEX-like business. 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 sort of position on the bill of materials for the fossil fuels infrastructure in the country. So that is typical. But you're right, relative to the average IDEX business, the unit of measure of the sale price of the product is a lot larger. These are pretty large units. In fact, the nature of projects in terms of how those orders come to us are larger as well. It tends to be very much a capital-intensive kind of way of doing business. And so this is a business that, remember, if we just back up over the last year when we acquired it, had 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. We're talking about capital spend. We burned off that backlog and now find ourselves kind of in a steady state against 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 US. It comes in larger project increments, and the sale price of the end product is larger. So the - 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.

Yes. No. So we're in excess of 200 basis points this year. It will 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 into our base level pricing for 2022.

Great. Thank you, guys.

Thank you.

Hi, good morning. And welcome, Allison. Eric, I want to go back to your comments and just kind of beat this up a little bit more. Supply chains 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 lost one or two points of organic. Then I guess - and then along with that, Bill, you talked about working capital, some increases there, and I suspect part of that is a supply chain issue. Is there an opportunity here for you guys to attack, and 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. Regarding our output, we could have achieved slightly better results with a more favorable supply chain environment, possibly gaining a couple of percentage points in our organic rates. We had the orders in place and would have fulfilled them if not for issues in one of the three areas I mentioned. I’ll let Bill discuss inventory. I can say that like many companies, we are securing critical materials whenever possible, even if it doesn’t completely align with other needs, so we're investing a bit more in working capital. To address your question about attacking these challenges, we, like many others, are working hard to increase our capacity and support our supply chain in every possible way. Different companies are tackling the labor shortage creatively and innovatively, while others are focusing on capital expenditures. We are also examining our capital investments closely as we proceed through the year. Although automating our business is challenging, we're making progress because it also addresses some labor concerns. Design alterations can assist with fabrication, which is often overlooked. Our local presence enables collaborative discussions with suppliers, allowing us to explore alternative solutions for material procurement. In fact, during our daily management sessions, you would find that a significant portion of our discussions—about 70%—is dedicated to resolving these types of issues in both the short and long term through investments and problem-solving efforts.

Yes. 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. In terms of HST, it was a strong quarter. You mentioned that investments are starting to contribute to core. Can you quantify the contribution to core for this quarter and share any insights on the mix impact from those investments regarding the products being delivered today?

No. When reviewing the portfolio, we have seen significant margin improvement in every single reporting unit. There have been strategic investments across all entities within the HST segment, which have contributed to the overall margin growth we've observed as we capitalize on the additional revenue from these efforts. The unique characteristics of that technology bring substantial margins. Some have pointed out that sequentially, the margin in HST decreased, but this is primarily due to the addition of Airtech to the portfolio. When comparing like-for-like, margins remain at the historic highs we achieved in the second quarter, and we expect this trend to continue in the core as we move forward.

Got it. Thank you.

Thank you.

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 are trying to build their inventory? And I guess also like how much of the order activity feels consistent with actual demand trends.

Yeah. No, it's a good question. I mean, so a couple of things. One is when we think about the nature of most IDEX products, it's highly configured, somewhat customized for each application. And so typically, it's not a great product to over-order lots because you're never quite sure of how it's going to run out when the customer system. I would say what is a little different as we go through the year here in terms of typical patterns, it's just lengthening of sort of order horizon. 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 in shift outward.

That's helpful. Thank you for that. And then I guess I have a quick one also, just a follow-up on the M&A pipeline. It sounds like you said is very healthy, and 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 previous acquisition behavior, but would you all be considering anything more transformational in nature, like a really big acquisition that might be like a new segment or something like that?

Well, I mean, I'd say two things there. One, 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 Airtech or, frankly, ABEL 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, for something in that category, it would have to have very IDEX-like characteristics 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 follow-up calls.

That’s great. Thank you very much.

Thank you.

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.