Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related notes in this quarterly report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A, “Risk Factors” in the Company’s most recent annual report on Form 10-K and under the heading “Cautionary Statement Under the Private Securities Litigation Reform Act” discussed elsewhere in this quarterly report.

This discussion also includes certain non-GAAP financial measures that have been defined and reconciled to their most directly comparable U.S. GAAP measures later in this Item under the headings “Non-GAAP Disclosures” and “Free Cash Flow.” This discussion also includes Operating working capital, which has been defined later in this Item under the heading “Cash Flow Summary.” The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

Overview

IDEX is an applied solutions company specializing in the manufacture of fluid and metering technologies, health and science technologies and fire, safety and other diversified products built to customers’ specifications. IDEX’s products are sold in niche markets across a wide range of industries throughout the world. Accordingly, IDEX’s businesses are affected by levels of industrial activity and economic conditions in the U.S. and in other countries where it does business and by the relationship of the U.S. dollar to other currencies. Levels of capacity utilization and capital spending in certain industries and overall industrial activity are important factors that influence the demand for IDEX’s products.

During the six months ended June 30, 2022, the Company achieved record sales driven by robust demand. Teams continued to navigate the difficult economic environment arising from material availability and logistical challenges in order to deliver for customers. The Company expanded operating margin as its highly differentiated product portfolio enabled strong price capture amid inflation pressures and its focus on operational productivity yielded positive results. Finally, the Company deployed additional capital, both within its existing portfolio and with the acquisitions of Nexsight and KZValve to the IDEX family of businesses as well as through share repurchases.

Select key financial results for the three months ended June 30, 2022 when compared to the same period in the prior year are as follows:

  • Sales of $796.1 million increased 16%; organic sales (which excludes acquisitions/divestitures and foreign currency translation) were up 12%.

  • Operating income of $186.6 million increased 18%. Adjusted operating income increased 14% to $189.8 million.

  • Operating margin of 23.4% was up 30 basis points. Adjusted operating margin decreased 60 basis points to 23.8%.

  • Net income attributable to IDEX of $138.2 million increased 35%. Adjusted net income attributable to IDEX increased 15% to $153.6 million.

  • Adjusted EBITDA of $219.2 million was 28% of sales.

  • Diluted EPS attributable to IDEX of $1.81 increased $0.47, or 35%. Adjusted EPS attributable to IDEX of $2.02 increased $0.27, or 15%.

Select key financial results for the six months ended June 30, 2022 when compared to the same period in the prior year are as follows:

  • Sales of $1.5 billion increased 16%; organic sales (which excludes acquisitions/divestitures and foreign currency translation) were up 12%.

  • Operating income of $374.2 million increased 19%. Adjusted operating income increased 16% to $377.4 million.

  • Operating margin of 24.2% was up 70 basis points. Adjusted operating margin increased 10 basis points to 24.4%.

  • Net income attributable to IDEX of $278.2 million increased 29%. Adjusted net income attributable to IDEX increased 18% to $303.4 million.

  • Adjusted EBITDA of $433.9 million was 28% of sales.

  • Diluted EPS attributable to IDEX of $3.65 increased $0.84, or 30%. Adjusted EPS attributable to IDEX of $3.98 increased $0.62, or 18%.

  • Cash flows provided by operating activities of $192.0 million were down due to increases in working capital, partially offset by higher earnings. Free cash flow of $160.3 million was 53% of adjusted net income attributable to IDEX.

Results of Operations

The following is a discussion and analysis of the Company’s results of operations for the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021.

Performance for the Three and Six Months Ended June 30, 2022 Compared with the Same Periods in 2021

Three Months Ended June 30,Six Months Ended June 30,
(Dollars in millions, except per share amounts)20222021% / bps Change20222021% / bps Change
Net sales$796.1$686.016%$1,547.2$1,338.016%
Cost of sales439.2379.916%847.8739.315%
Gross profit356.9306.117%699.4598.717%
Gross margin44.8%44.6%20 bps45.2%44.7%50 bps
Selling, general and administrative expenses167.5144.616%321.8279.515%
Restructuring expenses and asset impairments2.83.2(13%)3.45.4(37%)
Operating income186.6158.318%374.2313.819%
Operating margin23.4%23.1%30 bps24.2%23.5%70 bps
Other expense (income) - net—17.2(100%)(2.3)16.4(114%)
Interest expense9.511.2(15%)19.021.9(13%)
Income before income taxes177.1129.936%357.5275.530%
Provision for income taxes39.027.741%79.560.631%
Effective tax rate22.1%21.3%80 bps22.2%22.0%20 bps
Net income attributable to IDEX$138.2$102.235%$278.2$214.929%
Diluted earnings per common share attributable to IDEX$1.81$1.3435%$3.65$2.8130%

Net Sales

Sales in the second quarter of 2022 increased 16%, reflecting a 12% increase in organic sales, a 7% increase from acquisitions (KZValve - May 2022, Nexsight - February 2022 and Airtech - June 2021) and a 3% unfavorable impact from foreign currency translation. Sales increased 31% domestically and 4% internationally, and sales to customers outside the U.S. were approximately 48% of total sales in the second quarter of 2022 compared to 54% during the same period in 2021.

Sales in the first six months of 2022 increased 16%, reflecting a 12% increase in organic sales, a 6% increase from acquisitions (KZValve - May 2022, Nexsight - February 2022, Airtech - June 2021 and ABEL - March 2021) and a 2% unfavorable impact from foreign currency translation. Sales increased 28% domestically and 5% internationally, and sales to customers outside the U.S. were approximately 49% of total sales in the first six months of 2022 compared to 54% during the same period in 2021.

Cost of Sales and Gross Margin

Cost of sales in both the three and six months ended June 30, 2022 increased due to higher sales volume, inflation and acquisitions. Both gross profit and gross margin increased primarily due to higher volume leverage and strong operational productivity together with favorable price/cost, partially offset by higher employee-related costs. Gross profit also increased as a result of acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in both the three and six months ended June 30, 2022 increased primarily due to the impact from acquisitions, including amortization as well as higher discretionary spending, resource investments and employee-related costs compared with the same periods in 2021. Additionally, the three and six months ended June 30, 2021

included a $3.9 million charge related to recording a contingent reserve for a Corporate transaction indemnity that did not reoccur in 2022.

Restructuring Expenses and Asset Impairments

Restructuring expenses and asset impairments decreased in both the three and six months ended June 30, 2022 primarily due to lower severance benefits related to employee reductions.

Operating Income

Operating income for the second quarter of 2022 increased 18%, reflecting a 15% increase in organic operating income, a 5% increase from acquisitions (KZValve - May 2022, Nexsight - February 2022 and Airtech - June 2021) and a 1% favorable impact from lower restructuring costs, partially offset by a 3% unfavorable impact from foreign currency translation. The increase in operating income is attributable to the operating margin drivers discussed below.

Operating income for the first six months of 2022 increased 19%, reflecting a 17% increase in organic operating income, a 4% increase from acquisitions (KZValve - May 2022, Nexsight - February 2022, Airtech - June 2021 and ABEL - March 2021) and a 1% favorable impact from lower restructuring costs, partially offset by a 3% unfavorable impact from foreign currency translation. The increase in operating income is attributable to the operating margin drivers discussed below.

Operating Margin

Operating margin for the second quarter of 2022 increased 30 basis points, reflecting a 60 basis point increase in organic operating margin, a 10 basis point favorable impact from lower restructuring costs and a 10 basis point favorable impact from foreign currency translation, partially offset by a 50 basis point decrease due to acquisitions primarily driven by higher amortization. The increase in organic operating margin is primarily due to the gross margin drivers discussed above, partially offset by higher discretionary spending and resource investments.

Operating margin for the first six months of 2022 increased 70 basis points, reflecting a 90 basis point increase in organic operating margin and a 20 basis point favorable impact from lower restructuring costs, partially offset by a 40 basis point decrease due to acquisitions primarily driven by higher amortization. The increase in organic operating margin is primarily due to the gross margin drivers discussed above, partially offset by higher discretionary spending and resource investments.

Other Expense (Income) - Net

Other expense (income) - net decreased in both the three and six months ended June 30, 2022. The three and six months ended June 30, 2021 included a $9.7 million noncash loss related to the termination of the U.S. pension plan and an $8.6 million loss on early debt redemption. Additionally, the first six months of 2022 included $2.6 million of gains on the sale of assets.

Interest Expense

Interest expense decreased in both the three and six months ended June 30, 2022 primarily due to lower interest rates on the Company’s indebtedness, partially offset by an increase in the amount of debt outstanding compared with the same periods in 2021.

Income Taxes

The provision for income taxes increased in both the three and six months ended June 30, 2022 compared with the same periods in 2021 primarily due to higher earnings. The effective tax rate increased to 22.1% and 22.2% for the three and six months ended June 30, 2022, respectively, compared with 21.3% and 22.0% during the same periods in 2021. The increase in both periods is primarily due to a decrease in the excess tax benefits related to share-based compensation.

Results of Reportable Business Segments

The Company has three reportable segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”).

  • The FMT segment designs, produces and distributes positive displacement pumps, valves, small volume provers, flow meters, injectors and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food, chemical, general industrial, water and wastewater, agriculture and energy industries.

*•*The HST segment designs, produces and distributes a wide range of precision fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems, pneumatic components and sealing solutions, high performance molded and extruded sealing components, custom mechanical and shaft seals, engineered hygienic mixers and valves, biocompatible medical devices and implantables, air compressors and blowers, optical components and coatings, laboratory and commercial equipment, precision photonic solutions and precision gear and peristaltic pump technologies. HST serves a variety of end markets, including food and beverage, pharmaceutical and biopharmaceutical, cosmetics, marine, chemical, wastewater and water treatment, life sciences, research and defense markets.

  • The FSDP segment designs, produces and distributes firefighting pumps, valves and controls, rescue tools, lifting bags, other components and systems for the fire and rescue industry, engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications and precision equipment for dispensing, metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world.

Within its three reportable segments, the Company maintains 13 reporting units where the Company focuses on organic growth and strategic acquisitions. Management’s primary measurements of segment performance are sales, operating income and operating margin. The table below illustrates the three reportable segments and the reporting units within each segment.

FMTHSTFSDP
PumpsScientific Fluidics & OpticsFire & Safety
WaterSealing SolutionsDispensing
EnergyPerformance Pneumatic TechnologiesBAND-IT
ValvesMaterial Processing Technologies
AgricultureMicropump

The table below illustrates the percentages of the share of sales and operating income contributed by each segment on the basis of total segments (not total Company) for the three and six months ended June 30, 2022.

Three Months Ended June 30, 2022Six Months Ended June 30, 2022
FMTHSTFSDPIDEXFMTHSTFSDPIDEX
Sales38%41%21%100%37%41%22%100%
Operating Income(1)40%41%19%100%40%41%19%100%

(1) Segment operating income excludes unallocated corporate operating expenses of $22.7 million and $39.6 million for the three and six months ended June 30, 2022, respectively.

Fluid & Metering Technologies Segment

Three Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/Div**(1)**RestructuringForeign CurrencyTotal
Net sales$299.9$251.319%13%9%—(3%)19%
Operating income82.963.531%29%3%1%(2%)31%
Operating margin27.7%25.3%240 bps330 bps(120) bps20 bps10 bps240 bps
Six Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/Div**(1)(2)**RestructuringForeign CurrencyTotal
Net sales$571.9$494.616%12%6%—(2%)16%
Operating income163.3126.429%27%2%2%(2%)29%
Operating margin28.6%25.5%310 bps360 bps(80) bps30 bps—310 bps

(1) Acquisitions included KZValve - May 2022 and Nexsight - February 2022.

(2) Based on the timing of its acquisition, ABEL results for the first two months of 2022 are reflected in the acquisitions/divestitures column while the remaining year-over-year fluctuation is included in the organic column.

  • The change in organic sales for both the three and six months ended June 30, 2022 was attributed to increases in the Pumps reporting unit due to continued favorable demand in the industrial market and a rebound in the energy market, in the Agriculture reporting unit due to favorable commodity prices and global demand for crops and in the Energy reporting unit due to a rebound in the refined fuel, liquefied petroleum gas and aviation markets.

  • Sales in the second quarter of 2022 increased 30% domestically and 8% internationally. Sales to customers outside the U.S. were approximately 43% of total segment sales in the second quarter of 2022 compared with 48% during the same period in 2021.

  • Sales in the first six months of 2022 increased 22% domestically and 8% internationally. Sales to customers outside the U.S. were approximately 44% of total segment sales in the first six months of 2022 compared with 47% during the same period in 2021.

  • Operating margin of 27.7% for the second quarter of 2022 increased 240 basis points compared with 25.3% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin increased 330 basis points due to higher volume leverage and strong operational productivity together with favorable price/cost, partially offset by increases in employee-related costs, discretionary spending and resource investments.

◦Acquisitions negatively impacted operating margin by 120 basis points primarily due to:

▪Incremental intangible asset amortization of $2.0 million related to the Nexsight and KZValve acquisitions, which unfavorably impacted operating margin by 60 basis points; and

▪The dilutive impact from the Nexsight and KZValve acquisitions on overall FMT operating margin.

◦Lower restructuring costs favorably impacted operating margin by 20 basis points.

◦Foreign currency translation favorably impacted operating margin by 10 basis points.

  • Operating margin of 28.6% for the first six months of 2022 increased 310 basis points compared with 25.5% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin increased 360 basis points due to higher volume leverage and strong operational productivity together with favorable price/cost and positive mix, partially offset by increases in employee-related costs, discretionary spending and resource investments.

◦Acquisitions negatively impacted operating margin by 80 basis points primarily due to:

▪Incremental intangible asset amortization of $2.5 million related to the ABEL, Nexsight and KZValve acquisitions, which unfavorably impacted operating margin by 50 basis points; and

▪The dilutive impact from the ABEL, Nexsight and KZValve acquisitions on overall FMT operating margin.

◦Lower restructuring costs favorably impacted operating margin by 30 basis points.

Health & Science Technologies Segment

Three Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/Div**(1)**RestructuringForeign CurrencyTotal
Net sales$326.0$275.019%12%10%—(3%)19%
Operating income86.576.014%7%8%1%(2%)14%
Operating margin26.5%27.6%(110) bps(90) bps(60) bps10 bps30 bps(110) bps
Six Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/Div**(1)**RestructuringForeign CurrencyTotal
Net sales$641.2$525.422%14%11%—(3%)22%
Operating income170.1142.619%12%8%1%(2%)19%
Operating margin26.5%27.1%(60) bps(30) bps(70) bps20 bps20 bps(60) bps

(1) Acquisitions included Airtech in June 2021.

  • The change in organic sales for both the three and six months ended June 30, 2022 was attributed to increases in the Scientific Fluidics & Optics reporting unit due to strong market demand across analytical instrumentation, life sciences, core diagnostics and semiconductor markets as well as targeted growth initiatives tied to satellite broadband. Additionally, increases in the Sealing Solutions reporting unit were driven by strong demand in the semiconductor, oil and gas and industrial markets and increases in the Performance Pneumatics Technologies reporting unit were driven by strength in the industrial market as well as price capture.

  • Sales in the second quarter of 2022 increased 39% domestically and 5% internationally. Sales to customers outside the U.S. were approximately 52% of total segment sales in the second quarter of 2022 compared with 59% during the same period in 2021.

  • Sales in the first six months of 2022 increased 49% domestically and 4% internationally. Sales to customers outside the U.S. were approximately 52% of total segment sales in the first six months of 2022 compared with 61% during the same period in 2021.

  • Operating margin of 26.5% for the second quarter of 2022 decreased 110 basis points compared with 27.6% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin decreased 90 basis points as higher volume leverage and favorable price/cost were more than offset by higher employee-related costs, resource investments and discretionary spending.

◦Acquisitions negatively impacted operating margin by 60 basis points as the contributions of the Airtech business were more than offset by incremental intangible asset amortization of $3.9 million, which unfavorably impacted operating margin by 130 basis points.

◦Lower restructuring costs favorably impacted operating margin by 10 basis points.

◦Foreign currency translation favorably impacted operating margin by 30 basis points.

  • Operating margin of 26.5% for the first six months of 2022 decreased 60 basis points compared with 27.1% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin decreased 30 basis points due to higher volume leverage and favorable price/cost which were more than offset by higher employee-related costs, resource investments and discretionary spending.

◦Acquisitions negatively impacted operating margin by 70 basis points as the contributions of the Airtech business were more than offset by incremental intangible asset amortization of $7.9 million, which unfavorably impacted operating margin by 130 basis points.

◦Lower restructuring costs favorably impacted operating margin by 20 basis points.

◦Foreign currency translation favorably impacted operating margin by 20 basis points.

Fire & Safety/Diversified Products Segment

Three Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/DivRestructuringForeign CurrencyTotal
Net sales$171.2$160.87%11%——(4%)7%
Operating income39.942.8(7%)(1%)—(2%)(4%)(7%)
Operating margin23.3%26.6%(330) bps(290) bps—(50) bps10 bps(330) bps
Six Months Ended June 30,Components of Change
(Dollars in millions)20222021ChangeOrganicAcq/DivRestructuringForeign CurrencyTotal
Net sales$335.9$320.35%8%——(3%)5%
Operating income80.487.4(8%)(3%)—(1%)(4%)(8%)
Operating margin23.9%27.3%(340) bps(310) bps—(20) bps(10) bps(340) bps

  • The change in organic sales for both the three and six months ended June 30, 2022 was driven by an increase in the Dispensing reporting unit due to North American project volume and strong demand in the paint market. Additionally, increases in the Fire & Safety reporting unit were due to targeted growth initiatives and increases in the BAND-IT reporting unit were due to strong performance in the transportation, energy and industrial markets.

  • Sales in the second quarter of 2022 increased 18% domestically but decreased 3% internationally. Sales to customers outside the U.S. were approximately 50% of total segment sales in the second quarter of 2022 compared with 55% during the same period in 2021.

  • Sales in the first six months of 2022 increased 10% domestically and 1% internationally. Sales to customers outside the U.S. were approximately 52% of total segment sales in the first six months of 2022 compared with 54% during the same period in 2021.

  • Operating margin of 23.3% for the second quarter of 2022 decreased 330 basis points compared with 26.6% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin decreased 290 basis points due to higher employee-related costs and discretionary spending as well as compressed price/cost due to long-term original equipment manufacturer contracts, partially offset by higher volume and positive mix.

◦Higher restructuring costs unfavorably impacted operating margin by 50 basis points.

◦Foreign currency translation favorably impacted operating margin by 10 basis points.

  • Operating margin of 23.9% for the first six months of 2022 decreased 340 basis points compared with 27.3% during the same period in 2021. The change in operating margin was attributed to the following:

◦Organic operating margin decreased 310 basis points due to higher discretionary spending and employee-related costs as well as compressed price/cost due to long-term original equipment manufacturer contracts, partially offset by higher volume.

◦Higher restructuring costs unfavorably impacted operating margin by 20 basis points.

◦Foreign currency translation unfavorably impacted operating margin by 10 basis points.

Liquidity and Capital Resources

Liquidity

Although the COVID-19 pandemic (including the emergence of variant strains) has impacted and may continue to impact the Company’s operating cash flows, based on management’s current expectations and currently available information, the Company believes current cash, cash from operations and cash available under the Revolving Facility will be sufficient to meet its operating cash requirements, planned capital expenditures, interest and principal payments on all borrowings, pension and postretirement funding requirements, share repurchases and quarterly dividend payments to holders of the Company’s common stock for the foreseeable future. Additionally, in the event that suitable businesses are available for acquisition upon acceptable terms, the Company may obtain all or a portion of the financing for these acquisitions through the incurrence of additional borrowings.

At June 30, 2022, working capital was $1,037.5 million and the Company’s current ratio was 3.0 to 1. At June 30, 2022, the Company’s cash and cash equivalents totaled $557.8 million, of which $473.5 million was held outside of the United States. As of June 30, 2022, there was no balance outstanding under the Revolving Facility and $7.2 million of outstanding letters of credit, resulting in a net available borrowing capacity under the Revolving Facility of $792.8 million. The Company believes that additional borrowings through various financing alternatives remain available, if required.

Cash Flow Summary

The following table is derived from the Condensed Consolidated Statements of Cash Flows:

Six Months Ended June 30,
(In millions)20222021
Net cash flows provided by (used in):
Operating activities$192.0$245.6
Investing activities(260.1)(609.3)
Financing activities(197.1)64.0

Operating Activities

Cash flows provided by operating activities decreased $53.6 million to $192.0 million, primarily due to increases in working capital discussed below, partially offset by higher earnings.

Operating working capital, calculated as accounts receivable plus inventory minus accounts payable, is used by management as a measurement of operational results as well as the short-term liquidity of the Company. The following table details operating working capital as of June 30, 2022 and December 31, 2021:

(In millions)June 30, 2022December 31, 2021
Receivables - net$425.7$356.4
Inventories457.4370.4
Less: Trade accounts payable214.4178.8
Operating working capital$668.7$548.0

Operating working capital increased $120.7 million to $668.7 million at June 30, 2022, with acquisition, divestiture and foreign currency translation impacts driving a net $34.3 million of the increase. Excluding these impacts, accounts receivable increased $47.7 million as a result of higher volume; inventories increased $62.4 million to support production amid supply chain difficulties; and trade accounts payable increased $23.7 million due to higher inventory purchases.

Investing Activities

Cash flows used in investing activities decreased $349.2 million to $260.1 million, primarily due to lower cash outflows for acquisitions with the addition of KZValve and Nexsight in 2022 compared to Airtech and ABEL in 2021 and higher proceeds from asset sales in 2022 compared to 2021.

Financing Activities

Cash flows used in financing activities in the six months ended June 30, 2022 were $197.1 million compared to cash flows provided by financing activities of $64.0 million in the prior year period. During 2022, the Company repurchased 622,190 shares at a cost of $115.8 million, of which $5.4 million did not settle until July, and paid $86.9 million in dividends. During 2021, the Company issued $500.0 million of 2.625% Senior Notes, redeemed $350.0 million of 4.20% Senior Notes and paid $79.2 million in dividends.

Free Cash Flow

The Company believes free cash flow, a non-GAAP measure, is an important measure of performance because it provides a measurement of cash generated from operations that is available for payment obligations such as planned capital expenditures, interest and principal payments on all borrowings and quarterly dividend payments to holders of the Company’s common stock as well as for funding acquisitions and share repurchases. Free cash flow is calculated as cash flows provided by operating activities less capital expenditures.

The following table reconciles free cash flow to cash flows provided by operating activities:

Six Months Ended June 30,
(Dollars in millions)20222021
Cash flows provided by operating activities$192.0$245.6
Less: Capital expenditures(31.7)(30.6)
Free cash flow$160.3$215.0
Free cash flow as a percent of adjusted net income attributable to IDEX(1)52.8%83.7%

(1) Free cash flow as a percent of adjusted net income attributable to IDEX reflects the impact of excluding acquisition-related intangible asset amortization, net of related taxes, from adjusted net income attributable to IDEX in both periods presented.

The decrease in free cash flow as compared to 2021 is due to the increases in working capital discussed above, which more than offset higher earnings.

Cash Requirements

Capital Expenditures

Capital expenditures are generally expenditures for machinery and equipment that support growth and improved productivity, tooling, business system technology, replacement of equipment and investments in new facilities. Cash flows from operations were more than adequate to fund capital expenditures of $31.7 million and $30.6 million in the first six months of 2022 and 2021, respectively. The Company believes it has sufficient operating cash flow to continue to meet current obligations and invest in planned capital expenditures.

Share Repurchases

During the six months ended June 30, 2022, the Company repurchased 622,190 shares at a cost of $115.8 million, of which $5.4 million did not settle until July. There were no share repurchases during the six months ended June 30, 2021. As of

June 30, 2022, the amount of share repurchase authorization remaining was $596.2 million. For additional information regarding the Company’s share repurchase program, refer to Note 15 in the Notes to Condensed Consolidated Financial Statements.

Subsequent to June 30, 2022 and through July 22, 2022, the Company has repurchased 140,112 shares at a cost of $25.8 million.

Covenants

There are two key financial covenants that the Company is required to maintain in connection with the Revolving Facility, the 3.20% Senior Notes and the 3.37% Senior Notes, a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1. At June 30, 2022, the Company was in compliance with both of these financial covenants, as the Company’s interest coverage ratio was 23.38 to 1 for covenant calculation purposes and the leverage ratio was 1.40 to 1. There are no financial covenants relating to the 2.625% Senior Notes or the 3.00% Senior Notes; however, both are subject to cross-default provisions.

Credit Ratings

The Company’s credit ratings, which were independently developed by the following credit agencies, are detailed below:

  • S&P Global Ratings affirmed the Company’s corporate credit rating of BBB (stable outlook) in June 2021.

  • Moody’s Investors Service affirmed the Company’s corporate credit rating of Baa2 (stable outlook) in December 2021.

  • Fitch Ratings reaffirmed the Company’s corporate credit rating of BBB+ (stable outlook) in March 2022.

Critical Accounting Estimates

As discussed in the Annual Report on Form 10-K for the year ended December 31, 2021, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. There have been no changes to the Company’s critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2021.

Non-GAAP Disclosures

Set forth below are reconciliations of each of Organic sales, Adjusted gross profit (and adjusted gross margin), Adjusted operating income (and adjusted operating margin), Adjusted net income attributable to IDEX, Adjusted diluted earnings per share (“EPS”) attributable to IDEX, Earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA to its respective most directly comparable U.S. GAAP measure. Management uses these metrics to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as fair value inventory step-up charges, restructuring expenses and asset impairments, gains on sales of assets, a charge related to recording a contingent reserve for a Corporate transaction indemnity, the loss on early debt redemption and the noncash loss related to the termination of the U.S. pension plan. Adjusted net income attributable to IDEX and Adjusted diluted EPS attributable to IDEX also exclude acquisition-related intangible asset amortization. Management also supplements its U.S. GAAP financial statements with adjusted information to provide investors with greater insight, transparency and a more comprehensive understanding of the information used by management in its financial and operational decision making. The reconciliation of segment EBITDA and Adjusted segment EBITDA to net income was performed on a consolidated basis due to the fact that the Company does not allocate consolidated interest expense or the consolidated provision for income taxes to its segments.

This report references organic sales and organic operating income, non-GAAP measures, that exclude (1) the impact of foreign currency translation and (2) sales and operating income, respectively, from acquired or divested businesses during the first 12 months of ownership or prior to divestiture. The portion of sales and operating income attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and organic operating income, respectively, and (b) the period-to-period change in organic sales and organic operating income, respectively, after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales and organic operating income provides useful information to investors by helping to identify underlying growth trends in the

Company’s business and facilitating easier comparisons of the Company’s revenue and operating performance with prior and future periods and to its peers. The Company excludes the effect of foreign currency translation from organic sales and organic operating income because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because they can obscure underlying business trends and make comparisons of long-term performance difficult due to the varying nature, size and number of transactions from period to period and between the Company and its peers.

Given the acquisitive nature of the Company, which results in a higher level of amortization expense from recently acquired businesses, management uses EBITDA as an internal operating metric to provide another representation of the businesses’ performance across the Company’s three segments and for enterprise valuation purposes. Management believes that EBITDA is useful to investors as an indicator of the strength and performance of the Company and a way to evaluate and compare operating performance and value companies within the Company’s industry. Management believes that EBITDA margin is useful for the same reason as EBITDA. EBITDA is also used to calculate certain financial covenants such as EBITDA interest coverage, which is EBITDA divided by consolidated interest expense. In addition, this report presents Adjusted EBITDA, which is EBITDA adjusted for items that are not reflective of ongoing operations as discussed above and Adjusted EBITDA interest coverage, which is Adjusted EBITDA divided by consolidated interest expense. Management believes that Adjusted EBITDA is useful as a performance indicator of ongoing operations. The Company believes that Adjusted EBITDA is also useful to some investors as an indicator of the strength and performance of the Company and its segments’ ongoing business operations and a way to evaluate and compare operating performance and value companies within the Company’s industry. The definition of Adjusted EBITDA used here may differ from that used by other companies.

This report also references free cash flow. This non-GAAP measure is discussed and reconciled to its most directly comparable U.S. GAAP measure in the section above titled “Cash Flow Summary.”

The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

1. Reconciliations of the Change in Net Sales to Organic Net Sales
Three Months Ended June 30, 2022
FMTHSTFSDPIDEX
Change in net sales19%19%7%16%
- Net impact from acquisitions/divestitures9%10%—7%
- Impact on foreign currency(3%)(3%)(4%)(3%)
Change in organic net sales13%12%11%12%
Six Months Ended June 30, 2022
FMTHSTFSDPIDEX
Change in net sales16%22%5%16%
- Net impact from acquisitions/divestitures6%11%—6%
- Impact from foreign currency(2%)(3%)(3%)(2%)
Change in organic net sales12%14%8%12%
2. Reconciliations of Reported-to-Adjusted Gross Profit and Margin
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Gross profit$356.9$306.1$699.4$598.7
+ Fair value inventory step-up charges0.41.80.42.5
Adjusted gross profit$357.3$307.9$699.8$601.2
Net sales$796.1$686.0$1,547.2$1,338.0
Gross margin44.8%44.6%45.2%44.7%
Adjusted gross margin44.9%44.9%45.2%44.9%
3. Reconciliations of Reported-to-Adjusted Operating Income and Margin
Three Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
Reported operating income (loss)$82.9$86.5$39.9$(22.7)$186.6$63.5$76.0$42.8$(24.0)$158.3
+ Restructuring expenses and asset impairments1.70.11.0—2.81.90.50.10.73.2
+ Fair value inventory step-up charges0.4———0.41.8———1.8
+ Corporate transaction indemnity————————3.93.9
Adjusted operating income (loss)$85.0$86.6$40.9$(22.7)$189.8$67.2$76.5$42.9$(19.4)$167.2
Net sales (eliminations)$299.9$326.0$171.2$(1.0)$796.1$251.3$275.0$160.8$(1.1)$686.0
Reported operating margin27.7%26.5%23.3%n/m23.4%25.3%27.6%26.6%n/m23.1%
Adjusted operating margin28.4%26.5%23.9%n/m23.8%26.7%27.8%26.7%n/m24.4%
Six Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
Reported operating income (loss)$163.3$170.1$80.4$(39.6)$374.2$126.4$142.6$87.4$(42.6)$313.8
+ Restructuring expenses and asset impairments1.70.11.0—2.82.81.10.21.35.4
+ Fair value inventory step-up charges0.4———0.42.5———2.5
+ Corporate transaction indemnity————————3.93.9
Adjusted operating income (loss)$165.4$170.2$81.4$(39.6)$377.4$131.7$143.7$87.6$(37.4)$325.6
Net sales (eliminations)$571.9$641.2$335.9$(1.8)$1,547.2$494.6$525.4$320.3$(2.3)$1,338.0
Reported operating margin28.6%26.5%23.9%n/m24.2%25.5%27.1%27.3%n/m23.5%
Adjusted operating margin28.9%26.5%24.2%n/m24.4%26.6%27.3%27.3%n/m24.3%
4. Reconciliations of Reported-to-Adjusted Net Income and Diluted EPS
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Reported net income attributable to IDEX$138.2$102.2$278.2$214.9
+ Restructuring expenses and asset impairments2.83.22.85.4
+ Tax impact on restructuring expenses and asset impairments(0.7)(0.9)(0.7)(1.4)
+ Fair value inventory step-up charges0.41.80.42.5
+ Tax impact on fair value inventory step-up charges(0.1)(0.5)(0.1)(0.7)
- Gains on sales of assets——(2.7)—
+ Tax impact on gains on sales of assets——0.6—
+ Corporate transaction indemnity—3.9—3.9
+ Tax impact on Corporate transaction indemnity—(0.9)—(0.9)
+ Loss on early debt redemption—8.6—8.6
+ Tax impact on loss on early debt redemption—(1.8)—(1.8)
+ Termination of the U.S. pension plan—9.7—9.7
+ Tax impact on termination of the U.S. pension plan—(2.1)—(2.1)
+ Acquisition-related intangible asset amortization16.913.532.224.5
+ Tax impact on acquisition-related intangible asset amortization(3.9)(3.1)(7.3)(5.6)
Adjusted net income attributable to IDEX$153.6$133.6$303.4$257.0
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Reported diluted EPS attributable to IDEX$1.81$1.34$3.65$2.81
+ Restructuring expenses and asset impairments0.040.040.040.07
+ Tax impact on restructuring expenses and asset impairments(0.01)(0.01)(0.01)(0.02)
+ Fair value inventory step-up charges—0.02—0.03
+ Tax impact on fair value inventory step-up charges—(0.01)—(0.01)
- Gains on sales of assets——(0.03)—
+ Tax impact on gains on sales of assets——0.01—
+ Corporate transaction indemnity—0.05—0.05
+ Tax impact on Corporate transaction indemnity—(0.01)—(0.01)
+ Loss on early debt redemption—0.11—0.11
+ Tax impact on loss on early debt redemption—(0.02)—(0.02)
+ Termination of the U.S. pension plan—0.13—0.13
+ Tax impact on termination of the U.S. pension plan—(0.03)—(0.03)
+ Acquisition-related intangible asset amortization0.220.180.420.32
+ Tax impact on acquisition-related intangible asset amortization(0.04)(0.04)(0.10)(0.07)
Adjusted diluted EPS attributable to IDEX$2.02$1.75$3.98$3.36
Diluted weighted average shares outstanding76.176.476.276.4
5. Reconciliations of EBITDA to Net Income
Three Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
Reported operating income (loss)$82.9$86.5$39.9$(22.7)$186.6$63.5$76.0$42.8$(24.0)$158.3
+ Other income (expense), net0.21.20.5(1.9)—(5.6)(0.3)(2.1)(9.2)(17.2)
+ Depreciation and amortization9.815.83.70.129.47.912.63.80.124.4
EBITDA92.9103.544.1(24.5)216.065.888.344.5(33.1)165.5
- Interest expense9.511.2
- Provision for income taxes39.027.7
- Depreciation and amortization29.424.4
Reported net income$138.1$102.2
Net sales (eliminations)$299.9$326.0$171.2$(1.0)$796.1$251.3$275.0$160.8$(1.1)$686.0
Reported operating margin27.7%26.5%23.3%n/m23.4%25.3%27.6%26.6%n/m23.1%
EBITDA margin31.0%31.8%25.8%n/m27.1%26.2%32.1%27.7%n/m24.1%
EBITDA interest coverage22.714.8
Six Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
Reported operating income (loss)$163.3$170.1$80.4$(39.6)$374.2$126.4$142.6$87.4$(42.6)$313.8
+ Other income (expense), net1.81.42.1(3.0)2.3(5.6)0.1(1.8)(9.1)(16.4)
+ Depreciation and amortization17.431.87.50.256.915.023.17.70.246.0
EBITDA182.5203.390.0(42.4)433.4135.8165.893.3(51.5)343.4
- Interest expense19.021.9
- Provision for income taxes79.560.6
- Depreciation and amortization56.946.0
Reported net income$278.0$214.9
Net sales (eliminations)$571.9$641.2$335.9$(1.8)$1,547.2$494.6$525.4$320.3$(2.3)$1,338.0
Reported operating margin28.6%26.5%23.9%n/m24.2%25.5%27.1%27.3%n/m23.5%
EBITDA margin31.9%31.7%26.8%n/m28.0%27.5%31.5%29.1%n/m25.7%
EBITDA interest coverage22.815.6
6. Reconciliations of EBITDA to Adjusted EBITDA
Three Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
EBITDA**(1)**$92.9$103.5$44.1$(24.5)$216.0$65.8$88.3$44.5$(33.1)$165.5
+ Restructuring expenses and asset impairments1.70.11.0—2.81.90.50.10.73.2
+ Fair value inventory step-up charges0.4———0.41.8———1.8
+ Corporate transaction indemnity————————3.93.9
+ Loss on early debt redemption————————8.68.6
+ Termination of the U.S. pension plan—————6.3—1.81.69.7
Adjusted EBITDA$95.0$103.6$45.1$(24.5)$219.2$75.8$88.8$46.4$(18.3)$192.7
Adjusted EBITDA margin31.7%31.8%26.4%n/m27.5%30.2%32.2%28.9%n/m28.1%
Adjusted EBITDA interest coverage23.017.2
Six Months Ended June 30,
20222021
FMTHSTFSDPCorporateIDEXFMTHSTFSDPCorporateIDEX
EBITDA**(1)**$182.5$203.3$90.0$(42.4)$433.4$135.8$165.8$93.3$(51.5)$343.4
+ Restructuring expenses and asset impairments1.70.11.0—2.82.81.10.21.35.4
+ Fair value inventory step-up charges0.4———0.42.5———2.5
- Gains on sales of assets(1.2)—(1.5)—(2.7)—————
+ Corporate transaction indemnity————————3.93.9
+ Loss on early debt redemption————————8.68.6
+ Termination of the U.S. pension plan—————6.3—1.81.69.7
Adjusted EBITDA$183.4$203.4$89.5$(42.4)$433.9$147.4$166.9$95.3$(36.1)$373.5
Adjusted EBITDA margin32.1%31.7%26.6%n/m28.0%29.8%31.7%29.8%n/m27.9%
Adjusted EBITDA interest coverage22.817.0

(1) EBITDA, a non-GAAP financial measure, is reconciled to net income, its most directly comparable U.S. GAAP financial measure, immediately above in Table 5.

Cautionary Statement Under the Private Securities Litigation Reform Act

This quarterly report on Form 10-Q, including the “Overview,” “Results of Operations” and “Liquidity and Capital Resources” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements may relate to, among other things, the Company’s expected organic sales growth and expected earnings per share, and the assumptions underlying these expectations, anticipated future acquisition behavior and capital deployment, availability of cash and financing alternatives, the intent to refinance or repay the Notes using the available borrowing capacity of the Revolving Facility, the anticipated benefits of the Company’s acquisitions, including the acquisitions of Airtech, Nexsight, KZValve and ABEL, and are indicated by words or phrases such as “anticipates,” “estimates,” “plans,” “guidance,” “expects,” “projects,” “forecasts,” “should,” “could,” “will,” “management believes,” “the Company believes,” “the Company intends” and similar words or phrases. These statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from those anticipated at the date of this report. The risks and uncertainties include, but are not limited to, the following: the impact of health epidemics and pandemics, including the COVID-19 pandemic, and the impact of related governmental actions, on the Company’s ability to operate its business and facilities, on its customers, on supply chains and on the U.S. and global economy generally; economic and political consequences resulting from terrorist attacks and wars, including Russia's invasion of Ukraine and the global response to this invasion, which, along with the ongoing effects of the COVID-19 pandemic, could have an adverse impact on the Company's business by creating disruptions in the global supply chain and by potentially having an adverse impact on the global economy; levels of industrial activity and economic conditions in the U.S. and other countries around the world, including uncertainties in the financial markets; pricing pressures, including inflation and rising interest rates, and other competitive factors and levels of capital spending in certain industries, all of which could have a material impact on order rates and the Company’s results; the Company’s ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis; the relationship of the U.S. dollar to other currencies and its impact on pricing and cost competitiveness; political and economic conditions in foreign countries in which the Company operates; developments with respect to trade policy and tariffs; interest rates; capacity utilization and the effect this has on costs; labor markets; supply chain backlogs, including risks affecting component availability, labor inefficiencies and freight logistical challenges; market conditions and material costs; risks related to environmental, social and corporate governance (“ESG”) issues, including those related to climate change and sustainability; and developments with respect to contingencies, such as litigation and environmental matters. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included in the Company’s most recent annual report on Form 10-K and the Company’s subsequent quarterly reports filed with the Securities and Exchange Commission (“SEC”) and the other risks discussed in the Company’s filings with the SEC. The forward-looking statements included here are only made as of the date of this report, and management undertakes no obligation to publicly update them to reflect subsequent events or circumstances, except as may be required by law. Investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here.

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