Idex Corporation (IEX) — Q2 2025 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to IDEX's Second Quarter 2025 Earnings Conference Call. We released our second 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 second quarter results and a discussion of our current business outlook and strategies, and Akhil will discuss additional financial details and our updated outlook for 2025. Following our prepared remarks, we will open up the line for questions. But before we begin, please refer to Slide 2 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. I'm on Slide 3. The IDEX teams across all three segments delivered better-than-expected results in Q2 despite continued macro uncertainty. I'd like to thank our teams around the world for their hard work and strong execution as they navigated a very fluid environment. Our teams are bound together with a simple value creation equation that adapts quickly to address challenges and deliver on opportunities. We deliver differentiated critical impact from low points in our customers' bill of materials, typically at the component level, allowing us to quickly shift towards advantaged applications and increasingly so with integrated growth opportunities, most often driven by changes in customer demands. I'd like to walk through a real-time growth example of this dynamic tuning at Airtech, a business acquired in 2021 within HST to illustrate our team's agility and action. Airtech delivers customer value through pneumatic solutions, most often in the form of specialty blowers or valves. It sits next to our outstanding gas business with some light integration within channels to market and functional leadership. Four years ago, at the time of acquisition, their product lines were growing within mutually exclusive application sets, supported by good operational performance with room for targeted improvements. Today, they are growing much faster as they've helped their customers shift their core businesses towards solutions within data center applications, specifically fuel cell power support and thermal management via liquid cooling. Airtech's two product lines benefit from joint exposure to this fast-growing space, and the leadership team at Gast is leaning in to help them drive process efficiency to fully leverage profitability to support group performance. Finally, applying 80/20 has helped them focus and fully resource these applications in a powerful way, which in turn is multiplying their impact. As data center solutions scale, our customers have experienced additional pain points outside the scope of pneumatics. This is where other IDEX capabilities come in. And in this case, Airtech is looking to Mott to address a key technical problem to drive significant system efficiencies. Their solution is currently under review by a key customer. Finally, they are also exploring operational opportunities that leverage IDEX's infrastructure and world-class capabilities in India. This is a great story that advanced in the second quarter. It demonstrates the power of our dynamic business model, our commitment to 80/20 and the leverage of IDEX's global capabilities with proprietary capital deployment via M&A as the key catalyst. We're confident in the pneumatics team's plans to drive even more growth and value creation in the quarters and years to come. Turning to an overview of business conditions. We saw some impactful patterns play out in Q2 and July that help us think about our likely path to close out the year. First, we have some areas of healthy demand, including food and pharma applications within IH&S and MPT, space and defense applications in Mott and Optical Technologies, North American fire, downstream energy custody transfer, intelligent water, and data center thermal management within pneumatics. Weaker areas include chemicals, auto, semiconductor lithography and agriculture. The rest of the portfolio was pretty steady. Within Q2, there were some strong demand inputs in the form of trade policy positioning statements that were unpredictable, shocking the system and setting up sign waves of up and down order patterns. Daily demand levels move dynamically between policy announcements and negotiation deadlines as customers attempted to derisk tariff and pricing exposure. In the end, we see two implications. First, the patterns are moving around a relatively stable baseline that didn't line up well with the quarter end point. However, in July, we saw a modest order recovery build through the month. Second, and most important for us, the sudden and unpredictable shifts in policy are slowing down decision-making and conviction for larger orders. This has the highest go-forward impact for us in some more recently acquired areas of IDEX, where strong growth funnels supported earlier expectations of accelerating back half revenue and margins. As a result, we are lowering our back half financial projections to better reflect this dynamic. We're very confident in the quality of our businesses. They are set up to solve some of the most complex challenges in advantaged markets. Coupling this with our long-established operational capabilities, we believe we are very well-positioned to drive attractive growth and value for all of our stakeholders. I'm now on Slide 4. Before Akhil covers the financial details of both our Q2 performance and our updated guidance, I'd like to step back and help you understand our journey and the progress we are making towards long-term revenue and margin acceleration through growth platforms. Our goal is simple: extend IDEX's growth potential through variable levels of integration to win in advantaged markets where customers are demanding more solutions impact than any one single business unit can provide alone. Here are two examples. First is HST's IDEX Health and Science platform that we built through thoughtful capital deployment over the last 20 years. Today, IH&S is an integrated global platform of world-class technologies that has added thin film optics, system integration, and microfluidic capabilities to its core fluidics portfolio. We've divested some small non-core businesses along the way, consolidated like businesses together in a state-of-the-art greenfield site in Rochester, New York, and integrated commercial and technical teams across the platform. This work has driven strong value for customers and shareholders over the years and is well positioned to meaningfully do so in the years to come. An example of this work in action today involves a key win for integrated sample prep within a cutting-edge protein analysis instrument. Our team designed a metal-free ceramic valve for cutting-edge core performance. Then a cross-business development team enhanced overall systems performance by incorporating a suite of our platform's fluidic connection technologies. They even pulled on nanofiltration technologies from Mott to take everything one step further. Finally, they collaborated with a customer to integrate all the technology deeply within the front end of their instrument. The initial response to the customer's product line has been outstanding. Our second example is the strong value created over time through the build-out of Optical Technologies, a cornerstone within HST's Materials Science Solutions platform. We built the Optical Technologies Group over the last 14 years, both organically and through multiple transactions, broadening its capabilities. We're taking another step forward today with our news of the acquisition of Micro-LAM, a high-quality bolt-on that brings proprietary difficult-to-machine forming capabilities into our already advantaged technical toolbox. Over the years, we helped drive a culture of 80/20 to each individual company entering IDEX to drive focus around core capabilities while rapidly improving profitability. In later stages, we increasingly encourage joint commercial and technical collaboration between units to attack emerging applications within semiconductor lithography and metrology. Most recently, the group is accelerating its growth by working together to support advanced space and defense applications. Micro-LAM is very complementary here given their customer access points and technical capabilities. Moving to Slide 5. Since 2020, we have focused a greater portion of capital deployment towards M&A to accelerate building and expanding our growth platforms. In the last 3 years, through several acquisitions, we created HST's material science solutions platform. And last year, we added Mott, which is highly complementary to many HST businesses, adding nanofiltration technologies at scale, a meaningful and very attractive capability for us. I'd like to dive a bit deeper into both of these areas to illustrate the strong links to our past success and frame the potential for even faster growth. I'll first discuss our value creation journey building MSS. We started with a highly optimized optical technologies business, which we just discussed. Next, we applied 80/20 and operational improvement tools to our acquisitions of STC and all businesses within the Muon Group. As a reminder, a large piece of our cost optimization work this year is substantially complete within these areas. Today, our teams are focusing resources on the best customers and solutions as we align teams commercially and technically to win in advanced markets. While our growth and margin expansion acceleration has hit a near-term air pocket as our strong positioning with advanced semiconductor lithography has caught up in geopolitical tensions, we continue to be excited about our funnel of growth opportunities overall and in particular, attractive markets like data center optical switching. Here, the Muon team recently secured a multiyear win through collaboration between two of its units, a great example of our integrated growth strategy at work. And teams are attacking other attractive opportunities within a variety of advanced semiconductor applications, space and defense, sustainable energy and precision forming. The businesses within the MSS Group are truly outstanding. They are highly differentiated and complement each other well as they provide trusted solutions to advantaged markets. Turning to Mott. We are aggressively deploying 80/20 as we help the business grow and optimize profitability. Mott has an outstanding track record of deploying its core specialty filtration capabilities in a variety of end markets to build important scale advantages. The solutions have ranged from differentiated components like high-purity gas filtration elements that serve as critical consumables within semiconductor lithography to large-scale filtration solutions that embed Mott's core technology within engineered skid-based solutions. Both lines of businesses are strong within their own relative merits, but our collective teams are leveraging 80/20 and product line strategy to tune towards more IDEX-like highest differentiation, highest margin component level solutions. This should even out the growth path over time and best fuel Mott's development resources towards growth with the highest return profiles. Mott's acceleration has slowed a bit this year as the larger, more complex opportunities within their funnel were impacted by the policy-driven demand uncertainties described earlier. We expect Mott's growth will continue to accelerate this year, but we've recalibrated its growth potential for the back half of the year given the pause we are seeing in customer decision-making. As the team works through these headwinds, they are attacking a rapidly growing set of opportunities within space and defense and high-purity semiconductor applications that match all screening elements for the best IDEX-like businesses. The core differentiation of Mott's nanofiltration technology deployed at scale is powerful. We continue to love the business and the team and confirm that the acquisition will be accretive exiting the year. Putting our past and present together, you can see that we're following a simple and powerful growth formula that's long driven value for IDEX, but we're more intentional today as we deploy capital and integrate more rapidly to support the emerging needs of today's fastest-growing markets. And while we didn't dive into them today, I'd like to mention that our Intelligent Water and Fire and Safety platforms are very well positioned in this regard with very similar stories of focused cross-business collaboration. I'll pass it over to Akhil to discuss our financials and our updated outlook in greater detail.

Thanks, Eric, and good morning, everyone. Let's turn to Slide 6. As Eric mentioned, in the second quarter of 2025, IDEX delivered strong financial performance. While revenue came in toward the midpoint of our guidance, we outperformed on both adjusted EBITDA margin and adjusted EPS. Now all the comparisons I will discuss will be against the prior year period, unless stated otherwise. In the second quarter of 2025, orders grew organically by 2%. We saw positive demand in our pharmaceutical, energy, and agriculture end markets, along with continued stability in diversified industrial and water. However, softness persisted in our automotive, rescue tool and parts of our semiconductor businesses. Organic sales in the second quarter increased 1% year-over-year. We benefited from positive price across all three of our segments as well as favorable results in businesses serving aerospace, defense, data centers, pharmaceuticals, and North American fire OEMs. Strength in these areas isn't fully visible given challenging prior year comparisons within our FMT and FSD businesses as well as continued weakness within semiconductor and automotive. Adjusted gross margin declined 10 basis points year-over-year, primarily due to the near-term dilution from the Mott acquisition, unfavorable mix, and volume deleverage. These effects were partially offset by favorable price/cost and operational productivity net of employee-related costs. Adjusted EBITDA margin declined 40 basis points to 27.4%, reflecting our gross margin performance and lower variable compensation expense in the second quarter last year. Our platform optimization and delayering initiatives and cost containment efforts delivered a combined $14 million in savings during the quarter, in line with our plans. Both of these remain on track to achieve $62 million or $0.63 per share in full year savings. Additionally, we continue to work our baseline productivity improvements planned for this year, some of which are going to be influenced by volume. Free cash flow of $147 million increased 25% year-over-year and represents 94% conversion versus adjusted net income. The increase was driven by higher earnings and favorable timing of receivables, partially offset by payments related to our platform optimization and delayering actions. We ended the quarter with strong liquidity of approximately $1.1 billion, including $568 million in cash and $541 million in undrawn revolver capacity after paying down $100 million in long-term debt and $12.5 million in short-term borrowings during the quarter. Finally, we deployed another $50 million to repurchase IDEX shares in the second quarter, taking our total through the first half of the year to $100 million. Now quickly, some color on our results by segment. I'm on Slide 7. In HST, second quarter organic orders increased 2% and organic sales increased 4%. Revenue growth was supported by positive price as well as volume increases within our pharmaceutical, space, defense, and data center focused businesses. Demand for advanced semiconductor lithography solutions and automotive continued to face headwinds. Adjusted EBITDA margin of 26% increased sequentially by 40 basis points, but tracked lower than we anticipated, given mix pressure within our Materials Science Solutions and Mott businesses. Turning to Slide 8. In FMT, organic orders increased 7% and organic sales declined 2%. From an orders perspective, we experienced growth in our downstream energy, agriculture and municipal water businesses. As we said earlier, our industrial distribution businesses posted daily order rates in line with our expectations through May, but pulled back in June, weighing on our expectations near term. On the revenue side, our chemical, energy, and agriculture businesses declined against challenging prior year comparables. Semiconductor remains challenging and water was down year-over-year, which we attribute mostly to timing. Positive price was a partial offset. Adjusted EBITDA margin of 35% increased 130 basis points year-over-year as positive price cost and productivity improvements more than offset volume deleverage. I'm on Slide 9. FST organic sales grew 2%, but organic orders declined 7%. Our Fire and Safety business continues to benefit from strong OEM demand and strong adoption of our integrated solutions, but order patterns are somewhat choppy near term, which we attribute mostly to timing in both our Fire and Safety as well as dispensing businesses. Adjusted EBITDA margin of 29.4% increased 40 basis points year-over-year given positive price/cost, which more than offset net productivity, volume deleverage, and mix headwinds year-over-year. Now please turn to Slide 10 for our updated full year and third quarter guidance. We are adjusting our organic sales growth guidance for the full year to approximately 1% versus 1% to 3% previously, given the up and down day rates, slower customer decision-making on larger orders and a key semiconductor customer lowering their growth expectations. Adjusted EPS guidance moves to $7.85 to $7.95 versus prior guidance of $8.10 to $8.45 for the year. We are adjusting our profitability outlook for the second half of 2025 given the flow-through impact from lower volumes and expectations for continued mix headwinds near term. In the third quarter, we expect 2% to 3% organic revenue growth and adjusted EPS of $1.90 to $1.95. Our third quarter revenue guidance reflects our recent order performance and current backlog. We expect that revenue will be relatively flat in the third quarter versus the second quarter across each of our segments. Our adjusted EBITDA margins and adjusted EPS are expected to decrease sequentially, driven by anticipated timing of corporate costs and slightly lower volumes and related deleverage. From a tariff standpoint, we have updated our 2025 tariff impact to be approximately $50 million with about 2/3 of it recognized in 2025. We expect to fully mitigate tariff-related inflation with price increases and additional sourcing and supply chain savings we are actively pursuing. Our 2025 guidance does not include the possibility of additional tariffs. We expect to take mitigating actions as needed to offset these additional tariffs if or as they occur. Now please turn to Slide 11 for our capital allocation strategy. We maintain a purposeful and return-focused approach to capital allocation, supported by a strong balance sheet, robust cash flow generation and meaningful borrowing capacity. Organic investments remain our highest priority as we look to consistently drive innovation across our platforms. From an inorganic standpoint, our current focus is on opportunistic tuck-in M&A to scale and expand critical capabilities in advantaged markets. We continue to work in active funnel to broaden our capabilities and we'll continue to seek opportunities to leverage 80/20 and operational improvements, which together enhance the IDEX advantage moving forward. In addition, we are focused on returning capital to maximize shareholder value. We have a long track record of growing our dividend as we grow earnings. We also consistently evaluate additional return of capital through share repurchases. June year-to-date, we have paid $106 million in dividends and repurchased $100 million of common stock, including $50 million in the past quarter. And we have $440 million remaining in our current authorization. As we focus on leveraging the larger platform-building investments made over the past few years, we expect a more balanced approach to capital deployment in the near to immediate term. With that, I will now turn it back over to Eric.

Thanks, Akhil. I'm on Slide 12, where we highlight the key value drivers for IDEX shareholders. While we have recalibrated our financial expectations for the second half of 2025, primarily due to the pause in customer decision-making, we are paving the way for sustainable value creation with all three pillars here contributing and thoughtful capital allocation to drive attractive shareholder value and returns sustainably going forward. Thank you. And with that, I'll turn it over to the operator to take your questions.

I guess I'll start with the delayed orders on the semiconductor side. Obviously, there was plenty of disruption going on in the second quarter. We are starting to get a bit more clarity on trade and tariffs. Maybe you can just talk about that as a catalyst for getting some more decision-making going on that front. And we have been waiting for these orders to improve in the back half. What is your level of confidence that these things will actually come through in the next couple of quarters? I mean projects can be deferred indefinitely. So maybe just talk about your confidence on those projects coming through versus continuing to be deferred.

Sure, Nathan. You initially mentioned semiconductors, but your question seems to focus more generally on large orders. I'll address it that way and start from the outcome. As we mentioned in our prepared remarks, we’ve noticed some fluctuations in both small order patterns and decision-making related to those announcements and negotiation deadlines. What’s reassuring is that, as of early July, we received clarity that progress was being made, which gave everyone insight into where the order patterns are likely to stabilize. Throughout July, we observed a recovery in both small orders and larger decision-making processes. Our confidence stems from our understanding that while there are still announcements pending, there’s a predictable pattern emerging regarding how things will unfold. We’ve seen this reflected in the discussions we’re having with customers and decision-makers. Thus, our confidence mainly derives from the patterns we’ve seen in the current quarter, particularly in July. One reason we’ve focused on the newly acquired larger businesses within HST is that they significantly impact our revised guidance. Those businesses, especially in Mott, have a robust lead pipeline. They typically operate in a non-linear fashion, aiming toward year-end. In Q2, there were many stalled decisions, but most of those were resolved by July. Now, it’s a matter of determining how much they can deliver in Q4. Moreover, we’re beginning to receive orders from that business as well as others, and we saw similar recovery in water in July, indicating stability as we move into the latter part of the year. While there will likely be fluctuations, the baseline appears stable for both sides of the business. Regarding semiconductors, our exposure varies across businesses. The segment putting the most pressure on us, particularly concerning semiconductor mix in HST, is related to the Muon business in our MSS platform, which involves advanced lithography components. A customer previously focused on inventory timing in the first half of the year seems more settled now, expecting steadiness, partly due to geopolitical tensions and restrictions. Other semiconductor segments within IDEX are thriving, especially in areas like metrology and optics, resulting in a mixed outlook. However, we’re feeling some pressure from a portion of high-quality business that seems poised to be flat for a while.

I assume that the segment you're referring to has very high margins and significant incremental margins. You've reduced the full-year margin guidance by 100 basis points, suggesting a potential impact of 200 basis points in the second half. Is this really due to the underperformance of high-margin businesses that aren't achieving the expected volume? When that volume and those orders do come in, should we anticipate a recovery in margin improvement?

That is definitely a piece of it, especially on the HST side. That's some of the best business that we have in the acquired group. Some of the opportunity that I mentioned is a partial offset the great work they're doing on things like data center switching. I mean it's equally attractive and over time, will also complement it. But there's no doubt a return to growth there will really, really help profitability in that particular platform and in HST. I'd say the second half of it, though, is really the acceleration of Mott. We're tuning that business a lot. We've taken some cost out there, and they were heading already for a lot of volume and still are in the back half of the year. That's where you get full leverage. And so I think those two things together, tuning and revenue and acceleration at Mott and then ultimately, a release on the really good margin business towards more acceleration would be the two chief components here that we'd be looking for.

I guess, Eric, could you provide more details on what is currently included in the guidance? Is it a continuation of existing trends? You mentioned more predictability regarding policy, but how are you approaching the possibility of any additional volatility or decrease in the day rate trends that have fluctuated recently?

Yes, I believe we will be discussing HST quite a bit because the FMT and FSD segments have performed steadily, which is where we initially projected them to be. They are doing exceptionally well. We managed to navigate the second quarter and came out positively in July. There might be slight pressure in the third quarter, and we would have preferred to speed things up a bit. Eventually, the recovery should support our needs, and we have those segments running smoothly going forward. In HST, we were initially optimistic about faster growth, especially with the two recently acquired businesses. We've adjusted our expectations slightly, but they continue to progress. This progress largely stems from a strong fourth quarter for Mott, which we have confirmed will be beneficial to our business. Looking back to the start of the year, we mentioned a significant project that was recorded in Q1. Part of that will start to contribute to revenue in Q4. Some previously delayed orders are now secured and will help support that as well, which aligns with the natural trend of that segment. While we see some acceleration, we've moderated that expectation, and the other two segments remain steady.

That makes sense and is quite helpful. I have a follow-up regarding FMT specifically. You mentioned positive growth in agricultural orders for the quarter, but I noticed there's still a concern indicated for that sector. Could you clarify what you are observing and what your expectations are for that particular market?

Sure. I'm just reminding everybody that for us, we've got two businesses there, the largest of which, while it has an OEM component, it's the smaller piece of the business. A lot of it just depends on it's components that farmers retrofit as they go and as they're planning and harvesting. So it's a little less tied to the dynamics of heavy CapEx and OEMs, but it's all related certainly. I would say, look, it's still a rough cycle for agriculture. However, it's kind of played out better than we originally had hoped. And I think a lot of that is coming from a bit more confidence. The growing season has been pretty good. And our team there has done a really good job on the commercial side of things in terms of channel management and things that they're doing, expansion in Europe. So put it down as still a business that's in the lower part of the cycle, but performing above kind of the lower expectations that we had coming into the year.

Not to belabor here. I just want to, Eric, make sure I understand the moving pieces. So it's not so much that there's been a deterioration. It's just that the pace of growth that you're assuming as you move to the back half of the year is slower than you originally would have thought on top of some of those project pushouts where I don't think that your optimism over a medium term has really changed. It's just the timing or the duration of when those actually hit has shifted. Is that a fair characterization?

Yes, that's accurate. We are very close to our customers, and we have multiple businesses that are rapidly transforming their components. We tend to notice any changes more quickly than others. Recently, we experienced significant fluctuations, including periods of indecision followed by moments of resolution, particularly in July. Overall, my confidence has improved as it seems everyone is recognizing the patterns that are emerging. We can see a clearer path than we could at the start of the quarter, and we’re receiving feedback from customers, distributors, and end users that supports this view. Typically, we enter quarters with a certain amount of backlog secured, and then we seek to fill the rest. This decision-making process affected us in the second quarter. Notably, we had strong pipelines in our recently acquired businesses, but we faced pauses, which resolved similarly in July. My confidence level is solid, although there was a period of fluctuations and unusual patterns for us, which may be more pronounced than for some other companies.

That makes sense. And then just on the capital deployment side, maybe just some thoughts on the funnel of opportunity. I know the tenor or the tone has been a little bit more measured about the pace of M&A. Is that a reflection of where the balance sheet is, a reflection of the opportunity set as you sit in the market today? And just maybe a little bit broader thoughts on the opportunity set holistically.

Yes. Well, I mean, obviously, we talked about bolt-ons, tuck-ins and then, of course, we announced one. I think it's largely the output from what the funnel looks like. Because if you think about it, if you step back here, I mean, as we dove in and talked about the Materials Science Solutions platform, we took essentially an optics platform that we built over the time horizon that I talked about in my remarks, 14 years. And then we built the second half largely pretty aggressively here over the last couple of years with the acquisition of the businesses that form that unit. Now that it exists, essentially the next move and the piece we've been getting ready for are those tuck-ins and technology fillers that really then bolt-on to a really great framework. And so it was always kind of the plan is to get it to this level, complete it with the technologies that we have and then put complementary businesses like Micro-LAM right next to it. Mott is a little different. It was kind of unusually scaled business. It presented technologies that we've not had in the portfolio. So one of the things we see there is just wide applicability to almost everything we have in HST. So we're actually not forcing that one at the moment. We're getting a read on where it kind of fits the best, where it complements things the most. We're using it as sort of, as I said in the comments, something in the toolbox for everybody to exploit. But I think the nature of capital deployment is really reflective of just whether it's fire and rescue, water, IH&S and now MSS, these incredible platforms that have multiple touch points that we're attempting to take advantage of.

I appreciate all the color you're providing here because it is kind of an unusual choppy, mixed kind of signals, and you guys are really good historically at being able to identify them and versus expectations. So in the spirit of that, can you give us any calibration on the day rates? Just you said May was as expected, June declined, July, was it up or stabilized? And any kind of sizing of that just because it's really important this quarter to get a sense of like the amplitude, how far was June down? And how much has July come back and what the implications are?

Yes. I appreciate it, Deane. I mean, look, it played out with each month kind of had its own little story over the last 4. I think in April, we talked about it. We probably like a lot of business, experienced some pull ahead pre-tariffs after the initial announcement. In May, as expected, we saw some of that come back, and we were probably at about the position we thought we'd be at the end of May. We always knew June was going to be a pretty key month, particularly with some big announcements sitting right in the beginning of July, concurrent with the holiday. And so the backlog reductions that you see overall for IDEX, all of it came out of the month of June, really over kind of the last 3 weeks, I'd say, right into that U.S. holiday that we had at the beginning of July. Then we got the news. The news said, hey, things are delayed. You start to get more clarity on like how this is ultimately probably going to play out. And then all through July, you saw a steady build back. And I'd say as we closed July, in that 4-month period, we ended about exactly where we thought we would. It's just the patterns themselves were pretty dynamic, pretty different. And certainly, as we said, at least from a larger decision-making perspective, I think froze some people as they were really putting their concentration towards ups, downs, and things that they could do to try to mitigate potential tariff hits or things like that. That's ultimately what was playing out.

Good. That's helpful. And look, we've all seen periods in the macro where customer decision-making slows down. You need extra signatures, it's just longer to get to yes. But it really does sound like for your guidance cut, it's concentrated in Mott. So how much of the guidance cut is attributed specifically to Mott?

I would say there are two main areas to consider, both in terms of revenue and profitability flow-through. One is the MSS group, which I previously mentioned alongside Mott. The challenge there isn't so much with revenue itself, but rather with the mix. We have a significant portion of our semi lithography business that has plateaued, and we had hoped it would pick up again. Although revenue remains solid and is even growing, it's not at the same quality of mix. As for Mott, historically it has been a non-linear business, typically starting lower and ramping up throughout the quarter. We expected this trend to continue into 2025. They have a large pipeline that is more than they actually need for the latter half of the year. However, the decision-making freeze in the second quarter has delayed the production potential as we approach year-end. This is where a lot of the margin growth is occurring alongside the increasing volume. These two factors represent the significant change compared to our earlier calls. Additionally, the slower order patterns we experienced might have given us more momentum into Q3 if they had gone differently. We had to ramp up in July to reach a stable point, but I see that as a lesser concern moving forward.

Okay. That's really helpful. And just last question for me is the past couple of years, most of the consternation was around life sciences and the kind of destocking extended demand falloff that we went through. And that doesn't seem to be the case here. Can you just refresh us where has the Life Sciences gone during this period when, I guess most of the focus here has been on semiconductor, but just an update there? Are you seeing any blanket order changes as well?

Really, I'd say the Life Science story is playing out exactly like we thought it would be. It's a slow recovery off the bottom. It's growing low single digits. There are some areas that are weaker, but they're generally offset by things that are stronger. So for talk around NIH funding and academia, that's definitely under a bit of pressure, but it's a smaller piece of our business. Those applications that are targeted to pharma drug discovery are strong and generally offsetting them. And then that core kind of moderate recovery heading to something better in the future is playing out exactly as we thought it would be.

You mentioned that water was down in the quarter, which is a little bit of a surprise. I guess if I heard correctly, that was attributed to timing. Hoping you can offer a little more detail on water performance in Q2. And then more importantly, what your team is seeing on an underlying basis, where there's opportunity versus perhaps risk in terms of platform demand and what level of growth you expect in the back half?

I'm glad you asked that. What I identified is that water, which has some larger components compared to the rest of IDEX, experienced similar timing challenges in Q2 that we discussed earlier. Much of this was resolved in July and hasn't negatively affected the overall positive trend of that business. We anticipate good numbers for it moving forward. There was really no slowdown in water; I just wanted to highlight that this dynamic was also present there and improved nicely for us in July.

Okay. Understood. Regarding Micro-LAM, that's an intriguing acquisition. I'm not very familiar with the technology. Could you provide more detail on how it aligns strategically and what synergies it has with the MSS platform? Additionally, as we consider your acquisition strategy moving forward, how does Micro-LAM measure up against the typical candidates in your pipeline in terms of deal size, revenue generation, and so on?

It's Akhil here. I'll take this one, and then Eric can add any insights. When we consider Micro-LAM, it operates within the same workflows as our optical businesses. Currently, much of our optics work involves coatings, but Micro-LAM specializes in precision optics manufacturing, producing optics that can be coated afterward. This creates a great synergy and strategic alignment between our Optical Technologies business and Micro-LAM, which, as you know, will be part of our MSS platform. The unique touch points we have here present interesting opportunities to create value. Regarding Micro-LAM's future, we have a broad range of prospects we are actively exploring across our platforms, backed by a solid foundation we have built. We aim to strategically identify opportunities that will fill capability gaps, help us scale, or open new customer avenues. Our focus will be on acquiring companies that have existing connections with our current IDEX businesses. Thus, we will concentrate on targeted tuck-in acquisitions where we can integrate these businesses into our platform. We're also aiming for strong returns, and as for Micro-LAM, we expect it to be accretive in the first full year of our ownership.

Just a couple of other comments here that while the technology is really, really complementary, I would oversimplify and say they're really good at making the optics. We're really good at polishing, coating and assembling them. That's kind of the high-level where this fits. They also have outstanding customer touch points that are really complementary in the space and defense sphere based on the technologies they have. So we've been actually working with these guys for a while now. Our teams know them really well. Everybody in optics knows each other. And so we're going to hit the ground running here.

So similar to last quarter, I felt the messaging indicated confidence in the margin trajectory due to actions we've already implemented, which we expect to lead to results, and the acceleration in the latter half is no longer reliant on larger semi orders. However, the commentary you're providing today regarding Muon appears consistent with what was shared last quarter, yet the outcome seems different now. Could you provide us with more insight into how that messaging is evolving?

Yes. I think once again, similar to Nathan's question, the only part of the semiconductor business that is really significant is the high-margin segment in the Muon business. This has been a topic of discussion for us. Initially, we mentioned there was an inventory correction, and there was considerable customer feedback indicating an acceleration after that, suggesting that based on our interactions, we don't anticipate a boost from that segment at this time. The semiconductor landscape elsewhere is not a major concern; it involves different dynamics. So, it's primarily about that segment and the growth of Mott. Historically, we had a strong plan for them, but we are currently experiencing a pause in some order flow, leading to a challenging situation as we approach the end of the year. Nevertheless, we expect a robust Q4 for them, similar to last year. The sales pipeline remains strong, and in fact, it is more than adequate for our needs. However, the delays in decision-making for that specific business do have an impact on us.

Thank you for the insights about customers; they've been very helpful. I have a quick follow-up. When you speak with them, is the uncertainty primarily related to tariffs? While there are other sources of uncertainty globally, could resolving tariff issues have contributed to the improvement we saw in July? Additionally, regarding your M&A activity, it's been impressive. Are you experiencing any slowdown in M&A deals either for your company or for other buyers and sellers due to the current uncertainties?

Yes. I would estimate that about 90% of all discussions are focused on trade policy. As we review Q2, it really comes down to two key aspects. For those dealing with larger orders, it’s important to remember that we are just a component in a much larger context. This creates a stacking issue, becoming primarily about the costs involved and the need for clarity on that. It’s critical to understand if there will be changes again. While other factors exist, they didn’t come up much in conversation, particularly in the second quarter. It was mostly about where things are heading, what the outcome will be, and timelines for changes—whether it will be in 10 days, 20 days, or 30 days. This affects how we can adjust our operations. Generally, we manage rapid fulfillment on our end, so there's little lag in our discussions, which largely shaped our experiences. I do believe that having certainty in this area is beneficial for us and for others. When I mention certainty, I mean a reasonable range that helps us anticipate outcomes based on what we discuss and the possible scenarios that could arise. This is quite encouraging.

And on the M&A front, look, I would say that early on in the quarter, when all of these tariff announcements went into play, there was really a freeze in the market, and we saw a number of sales processes that were due to come to market get halted. And now I would say that's all thought out and activity is starting to pick up, and that's just really a general, I think, view of the market at the moment.

I just again, want a little more clarity here. That $20 million in cost containment was a hedge against what exactly, if it wasn't a hedge against some of the things you're describing on the call as driving down your EPS guidance for the year? And then I have a quick follow-up.

Yes. Matt, this is Akhil. So this was a hedge against a downturn in volumes. Now it only captured a certain sort of downtrend in volume. And what we're calling here is slightly more than that. So that containment action is in place. It is supportive of our back half. And again, it does ramp this quarter, and then it will be fully at run rate in the fourth quarter.

Okay. And then throughout your prepared remarks and a few times during the Q&A, Eric, you referenced your data center-related exposure. Can you maybe size that up for us in terms of roughly how much revenue that will generate for IDEX in '25? And again, just kind of big picture, where that can sort of go over the next 2 to 3 years for the company?

Yes. Look, it's not a giant part of IDEX. It's a decent part of the Airtech business that I talked about. You really don't see it over in gas. So if you're looking at performance pneumatics, Airtech is only a portion of that, and this is becoming a larger portion of their business. So that starts to dimensionalize it too. It's important for that business, not yet rising to a major catalyst for IDEX. What's interesting, though, is then we're starting to see it in other places. I mentioned the win in the Muon group. Again, these are very peripheral kind of applications. It's not that massive stuff that you see around the center of a data center, but it's interesting little niches off to the side. What it can become from here? I'm great to see these initial wins because as you know in this space, I mean, often, you can take something that's working and delivers performance and efficiency in one area and run to lots of others and deliver that as well. So I mean our commercial teams are doing that. I think as it goes, we'll certainly probably work to dimensionalize this a little better, talk about the funnel, but these are some interesting initial wins that are pretty early for us that we're going to continue to drive forward.

Just first one on China, pretty sluggish here in the quarter still based on results thus far. I know IDEX exposure isn't huge there, but you do have some larger landed exposure indirectly into China and HST. So just any color on what you're seeing in the region? And then what are the expectations for the second half of the year there?

Yes. I mean, certainly, we wouldn't say that it's different conditions there. I mean we're seeing the same thing in terms of not really, really strong. It again, is a small piece of what we do, about 6% overall of revenue. We kind of surgically attack that a product line at the time. Probably the areas of pressure that we would note, you mentioned one of them. For our HST customers, that's an area they've long been talking about and are concerned about in terms of rates and when it might recover and how stimulus programs may help that. We do a little bit of direct shipping there that has been softer. Some rescue, we talked a little bit about the rescue business. We've got a decent franchise up there that's also been impacted by some of the slowdowns. The core that we have around it, I mean, they're generally really appropriate. They do incredible things for that local economy, and they're kind of branded at a level that's long been localized for the geography. So I would say it's pressured. It's small for IDEX. We're treating it accordingly as we think of resourcing investments. In many ways, kind of our Asia Pacific concentration is China and India, very surgical and specific. And the India side has more than offset that from just really strong fundamentals.

Great. And then maybe shifting back over to tariffs. So you're moving from the $100 million to the $50 million. Could you just expand a bit on some of the underlying assumptions there? Are you assuming the incremental copper tariffs embedded in that assumption? And then any other color on some of the regional tariffs would be great.

Yes. What isn't included here is the copper, as you noted, and the finalized rules regarding Europe and Japan, which we're still waiting for clarification on. Also, any changes concerning Taiwan and China compared to the current situation are not reflected here. However, if there are any additional tariffs, we plan to offset those on a one-to-one basis with price adjustments.

Apologies if I missed this, but what were your expectations for Mott's growth into the year? And then where do you see that playing out for the full year? What will the growth be?

From Mott's perspective, when we announced the transaction last year, we anticipated improving the business's margins over time and expected high single-digit growth. Currently, due to a pause, we consider the business to be flat, indicating a different growth path ahead. However, we remain optimistic about the business's potential. The team is still in place, and we still aim to achieve double-digit returns in the long term.

Got it. Many of the detailed questions have been addressed, so I'd like to ask a broader question. We are noticing trends across the industrial sector where some competitors are trying to simplify their operations and are making strategic decisions accordingly. How do you assess your portfolio at this juncture, considering the significant changes in the world over the past five years, especially the last three, during which your earnings growth hasn't met expectations? Is there an opportunity for discussions regarding this, or are those discussions already taking place about potentially divesting assets or reviewing your portfolio instead of pursuing acquisitions?

Look, we always consider all the pieces of our portfolio along the year, while we've talked a lot about the things we've added, and we've added things more aggressively over the last 4 years. We've pruned small- to medium-sized assets along the way as well because, honestly, they're not going to scale. And to your point, they become more complex over time if, in fact, they become relatively smaller as the business goes. And so I do think we consider both sides of the equation. I think really here, though, what you see is we haven't talked a lot about FMT. We haven't talked a lot about FSDP. I mean, to your point on complexity, I mean, we've taken a ton of complexity out of those two particular platforms, and they're performing really, really well. What we're doing within HST is we're arguably trying to move this portfolio over towards faster-growing, more inherently advantaged markets and doing it the connection points between each business, in some ways, is taking complexity out of the equation as well because it's taking a large suite of end markets and things where we could go attack them single units at a time to more concentrated energy towards handful of really, really good markets where we're trying to set those initial specification points to generate the same kind of annuity streams that we had elsewhere in industrial businesses in the two segments that we're not spending as much time talking about. So we're kind of very active work on the HST side now. We're talking about it appropriately, but it's really to put it in a state where it's frankly inherently simpler than it is today. And then through all of it, looking at both sides of the equation, each unit has got to kind of earn its relative merits, and we talk about that constantly as we go.

Thank you all for being here today. We covered a lot of the efforts we're making to integrate IDEX for enhanced growth. We reflected on our history, including the development of IH&S and Optical Technologies over many years. We also addressed our current situation with Airtech and the various HST interactions we have with Mott. While we didn't discuss them today, there is significant progress happening with the extended intelligent water platform and automation in fire and safety. Looking ahead, there is much work in the MSS group and within the larger Mott group in collaboration with HST. These are examples of how individual units or platforms can work together to solve challenges in ways that are difficult for any single unit to achieve, and we believe this will drive the company forward. Thank you for your interest in IDEX, and have a great day.