IDEX Corporation (IEX) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to IDEX Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Lausas, Vice President and Chief Accounting Officer. Thank you. You may begin.

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX second quarter 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ended June 30, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We will begin with Eric providing an overview of the state of IDEX's business. Then Bill will discuss IDEX second quarter financial results and update on segment performance in the markets they serve and our outlook for the third quarter and full year 2022. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing toll-free number, 877-660-6853 and entering conference ID 13724804, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to safe harbor language in last night's press release and in IDEX' filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

Thank you, Allison, and good morning, everyone. I'm on Slide 6. IDEX delivered outstanding results in the second quarter. We achieved record sales levels, 12% organic growth supported by double-digit contributions from each of our operating segments. Our backlog grew by 43 million, and we now sit at record levels to continue momentum into Q3. Core profitability continues to be strong even as we return to more normal discretionary spend levels, allowing us to fully invest in our best growth investments. We delivered record adjusted EPS of $2.02, an increase of 15% over the prior year's second quarter. Last quarter, I described how our IDEX teams leveraged 8020 to accelerate throughput within a challenging supply chain environment. That positive momentum continued in the second quarter as our teams improve their ability to execute and deliver for our customers. Our decentralized operating model, which aligns decision-making at the point of impact close to the customer, drives the speed and agility required for us to outperform. Our lead times were a competitive advantage and enabled share gain in pockets across the company. Inflationary pressures remain, but the rate of increase decelerated, while we continue to capture price equivalent with our differentiation. Gross price capture increased and we expanded our price/cost spread trending back towards historic levels. We remain committed to our capital deployment strategy and M&A remains a top priority for us. This quarter, we closed on the acquisition of KZValve, a complement to our agriculture business within FMT. Our pipeline is strong, and we continue to evaluate opportunities in higher-growth markets that support our style of competition. We have a healthy balance sheet and are confident that we can continue to put our capital to work. We're also deploying capital organically across our portfolio to drive operational efficiencies and increase capacity to support our growth. We continue to make investments in commercial, engineering and M&A resources that enable us to execute on our strategy. During the quarter, we increased our share repurchases and deployed $88 million to buy back 475,000 shares of IDEX stock. We remain disciplined with our methodology to create long-term value for shareholders when we see a disconnect between our intrinsic assessment of IDEX enterprise value and our public valuation. Lastly, in the second quarter, our Board approved an 11% increase in our dividend. Rising interest rates, continued inflation and geopolitical dynamics all present some uncertainty for us as we consider and head into the second half of the year, but we're not yet seeing any major signals of near-term slowing within our commercial environments. We have good line of sight to the next 90 days, and we continue to see strength in almost all our end markets. As we look across the industries we serve and our portfolio of differentiated technologies, we're confident that IDEX is well positioned to outperform during any short-term market volatility. It's been a really strong first half of the year, and our teams have a lot to be proud of, but it's not easy to overdeliver in this environment. I'd like to thank our IDEX employees around the globe for their hard work, diligence and agility as they execute for all our stakeholders. With that, let me turn it over to Bill to discuss our financial results.

Thanks, Eric. I'll start with our consolidated financial results on Slide 8. Q2 orders of 839 million were up 12% overall and up 7% organically. We experienced strong orders growth in HST and FMT, but saw contraction in FSD driven by dispensing North America's strong replenishment orders received last year. Second quarter sales of $796 million were up 16% overall and up 12% organically. We experienced record sales with double-digit increases across all 3 of our segments. Second quarter operating margin was 23.4%, up 30 basis points compared to prior year. Adjusted operating margin was 23.8%, down 60 basis points. Incremental amortization related to Airtech, Nexsight and KZValve acquisitions unfavorably impacted adjusted operating margin by 80 basis points. Second quarter net income was $138 million, which resulted in EPS of $1.81. Adjusted net income was $154 million, resulting in an adjusted EPS of $2.02, up $0.27 or 15% over prior year. Finally, free cash flow for the quarter was $97 million or 63% of adjusted net income. This reflects higher accounts receivables driven by the significant increase in sales versus last year as well as elevated inventory levels. Inventory has increased to buffer supply chain challenges and leveraged material availability as a competitive tool to take share in the market. We have spent a lot of time with our teams reviewing their inventory reduction plans and are targeting to bleed down our inventory positions in the second half of the year. Moving on to Slide 9, which details the drivers of our adjusted operating income. Second quarter adjusted operating income increased $23 million compared to last year. Our 12% organic growth contributed approximately $22 million flowing through at our prior year gross margin rate. We levered well on the volume increase. Our teams drove operational productivity, and we had strong price capture to offset inflation headwinds. Price cost was accretive to margins and is trending towards our historic levels. We experienced positive mix of $2 million across the portfolio. We reinvested $4 million, mainly in the form of engineering and commercial resources, to drive long-term growth and additional resources to support our accelerated M&A activity. Lastly, discretionary spending increased by $9 million versus last year and up $7 million versus the first quarter of 2022. Our teams across the globe are back to in-person partnering with our customers, actively marketing our products and investing to support innovation. As we look ahead to the second half of the year, we do not expect this level of sequential increase to continue. We've now ramped to our pre-pandemic spending rate, but on significantly higher sales. Our organic flow-through was 23%, in line with the flow-through expectations we set at the beginning of the year, but most likely the lowest rate we will experience this year. Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX getting us to a reported flow-through of 21%. With that, I'd like to provide a deeper look at our segment performance. I'm on Page 10. In our Fluid & Metering Technologies segment, we experienced a strong second quarter for both orders and sales with organic growth of 8% and 13%, respectively. FMT adjusted operating margin expanded by 170 basis points versus last year. The increase included 60 basis points of headwind due to incremental amortization related to the Nexsight and KZValve acquisitions. Volume leverage, strong operational productivity and favorable price costs were the main drivers of the increased adjusted operating margin. Our industrial markets are exhibiting stable demand with consistent quote activity over the last few quarters. We are seeing small to midsized projects coming through in the oil and gas and petrochemical markets as well as in applications tied to mining, asphalt and lithium-ion battery production. Agriculture continues to perform well. Farmers are experiencing record inflation and look to our technology and precision ag to drive productivity. The KZValve integration is going extremely well, and our automation project at Banjo is on track. Market conditions remain favorable in our municipal water business. We continue to see a strong commercial funnel and long-term optimism, driven by government funding and ESG initiatives. On the energy side, upstream markets are experiencing healthy demand with oil prices providing strong support. Midstream investments have yet to see a bump in activity due to customer supply chain constraints and caution our long-term price sustainability. Moving on to Health & Science/Technology. Stellar commercial performance continues with organic orders up 13% and organic sales up 12%. HST adjusted operating margin contracted by 130 basis points versus the second quarter of 2021. Incremental amortization related to the Airtech acquisition unfavorably impacted adjusted operating margin by 130 basis points. Additionally, adjusted operating margin was driven by strong volume leverage and positive price cost, partially offset by increased employee-related costs, discretionary spending and resource investments. HST continues to benefit from strong secular growth trends within life science, analytical instrumentation, semiconductor and food and pharma markets. The life sciences market is experiencing strong demand for next-gen sequencing instruments and consistent core diagnostic market performance. Analytical instrumentation and material processing results remain strong on continued pharma and biopharma demand. On the semiconductor side, we continue to see growth, but at a slower pace. We've been able to offer shorter lead times than our competitors, enabling share gain across a variety of applications. We continue to see strong growth in our optics businesses tied to broadband satellite technology and strength in our industrial businesses similar to the FMT results. Finally, turning to our Fire & Safety/Diversified product segment. Orders contracted by 5%, but sales were strong with an organic increase of 11%. FSD adjusted operating margin contracted by 280 basis points versus the second quarter of last year. This was driven by higher volume being more than offset by higher employee-related costs and discretionary spending as well as pressure on price cost due to aged OEM backlogs on the fire side and automotive exposure with more metal content within BAND-IT. As we noted in prior calls, we have taken action to address this gap and expect the price/cost will improve in the second half of 2022 as those increases pull through our backlog. Our dispensing business performed well, driven by delivery of North American project volume and an overall positive global paint market. BAND-IT had strong results across the industrial, automotive and oil and gas markets. On the automotive side, we continue to outperform the market and capture share on new platforms. In Energy, we see strong downhole market demand and capture share due to material availability with shorter lead times for our customers. Within Fire & Safety, we are seeing strong demand with our E3 rescue tools. On the fire side, core North American and European markets remain choppy due to OEM supply chain constraints, but we are starting to see some modest improvement. With that, I'll like to provide an outlook for the third quarter and our full year 2022 results. I'm on Slide 11, which lays out our updated guidance. For the third quarter of 2022, we are projecting organic revenue growth of 9% to 10% and operating margin of approximately 24%. Q3 forecasted op margin is up slightly versus second quarter due to improved price cost, partially offset by lower seasonal volume leverage. We expect GAAP EPS to range from $1.80 to $1.85 and adjusted EPS to range from $1.98 to $2.03. Turning to the full year. Given our strong performance in the first half of the year, we are raising our full year guidance. We now expect full year organic revenue growth of approximately 10%. This reflects our confidence in line of sight for the third quarter, but some caution in the fourth quarter due to the short-cycle nature of our business. We expect GAAP EPS to range between $7.19 to $7.29 and adjusted EPS to range from $7.88 to $7.98. Our operating margin for the full year is expected to be approximately 24%. We are expecting free cash flow as a percent of adjusted net income to range from 75% to 80%, down from our previous guidance. With our higher revenue expectations for the back half of the year, elevating our year-end receivables balance and a slower-than-expected inventory bleed, this is our best estimate as we head into the second half of the year. Our long-term goal remains to be above 100% and consider the current guidance a reflection of the volatile external environment versus a structural shift in our cash generation capabilities. With that, let me pause and turn it over to the operator for your questions.

[Operator Instructions]. Our first question comes from the line of Mike Halloran with Robert W. Baird.

So let's start with the comment, Eric, that you said you're really not seeing anything yet in terms of deterioration. Things are going well, and you can certainly hear that from all the end market commentary you guys gave. And then balance that with the guidance outlook that says you're taking a little bit more of a cautious outlook into the fourth quarter given short-cycle business and you don't know what you don't know. So -- maybe just talk about those 2 competing things and what things you're looking for in your portfolio to say that things are going to keep this pace, maybe decelerate, could be the BAND-IT business, could be something else, but would love to kind of compare and contrast, all that stuff?

Yes. Well, thanks. So we're always looking at what we refer to as our canaries in the coal mine businesses. Those are the shortest cycle, more industrial businesses that are very, very close to the actual consumption that's going on out there in the industrial landscape. And those have held up really, really well. I mean, I think that's the story of this whole post-pandemic recovery is just the industrial system that's been working feverishly to try to catch up. So that, for us, is always something that we're looking at first to see if there's an indicator of weakness there that usually sends up a signal and then you start to see things come after that. And so far, as I said in the comments, that's holding in. And then I'm sure we'll talk about this more in the call, but then we balance that with some of the exposure we have across a whole host of markets on the project side. That's more of an indicator for us of overall future confidence where how people are tilting towards uncertainty, those things. And there's a couple of places where we've seen that slow down. I mean, it's an interesting story overall, where in many ways, it's -- that kind of business has just struggled to get traction in this whole recovery cycle. But other than a few indicators and pockets there, we're sending point out a bit further into the future, we sort of keep a look at all of those and then look at our own backlog support on top of all of it that gives us at least the assurance in the short term. And of course, we'll always adjust that and recalibrate it, and that's the joy of a short cycle business. You can do that pretty quick.

Yes. And just to frame that, I mean our implied guidance, like, is kind of a 1 percentage sequential deceleration in Q4. So it's small, just a little bit of noise that could potentially be out there. But right now, what we have line of sight to and the confidence in our order patterns, we still think the back half is going to be really strong.

No, that makes sense. And I think you said the backlog built in the quarter by $39 million, something like that. Is that -- are you seeing lead times extend come in? Is that more a reflection of that underlying order strength through the quarter? Maybe just talk a little bit about the backlog piece.

I mean, it's really broad-based. We're looking at the other day to see if it was kind of in pockets and chunks, and it's not. I mean, it's kind of layered across a lot of things. Our lead times in aggregate are holding or decelerating. I mean, we made a comment there that we are seeing some pockets where frankly, our advantaged lead times that are reducing are giving us some opportunity to go grab some share in things. So I'd say on balance, we're not doing anything to drive that in the wrong direction. It's going in the right direction. And the backlog build is very, very broad-based.

Last question for me. You made a comment there that you invested to support accelerated M&A processes. Is that a reflection of a pretty healthy pipeline? I know the environment has gotten a little more challenging on the M&A side. So I would like to understand what you're seeing and what you hope those investments could get you.

Yes. I'd say -- I mean, look, I think the environment for high-quality assets is held up pretty well as we've gone through this. But a lot of this is very deliberate work on our part to say that we want to go deeper, frankly, into our insight into those sort of concentric circles that surround our best applications. So there's a purposeful step-up in work of that type, in both resources and some things we're doing with third-party analytics to make sure that we understand it as well as we can, in an environment that so far is holding up pretty well for high-quality assets.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Maybe we could start with the free cash flow guidance cut there. And look, we're seeing this across the sector. This is getting to be pretty familiar, but the idea of carrying more buffer inventory and then the expectation with all this demand likely resulting in higher receivables towards year-end. So we get the way the math works. But Bill, can you expand on the time frame for bleeding the inventory down? I guess it really does depend on how the supply chain begins to normalize. But just take us through the math on that.

Yes. No, I think that's exactly right. As we sit here now and lead times, as Eric just talked about on our side are improving, we're starting to see that across the broader aspects of our supply chain. So our increased purchases to buffer some of the longer lead times to continue to deliver for our customers is shrinking. Now it's just catching up with our production and getting that through our system. So -- as we look at third quarter, there will be some improvement, but more material decreases in the fourth quarter leading into the first part of next year. So again, we've spent a lot of time with the teams to understand and calibrate around still having this robust demand, measuring what our vendors and their capabilities are from a lead time perspective and then drawing down our open POs, and then increasing the throughput as we have here in the second quarter to the first and maintaining that as we progress through the back half of the year.

Is there anything on product shortages, semiconductor-related where your inventory is -- you've got nearly finished goods, but they're waiting on a particular product that's adding to your inventory? Is that an issue at all?

Yes. That is a component as we've had customers who other suppliers for them haven't then is capable to produce have held up some of their receipts. So we have finished goods at a higher level than we have had historically because of issues our customers are facing with other suppliers.

And maybe, Dean, to the extent you were -- I think you were also asking about maybe unfinished things that we have in our own factories or something waiting on a part, much like you see in the auto world. I mean, I wouldn't say that it's completely devoid of our environment, but you don't see it all that often because we have pretty quick rapid turn one piece flow kind of build so it doesn't do well with something that's half done, there's really nowhere to put it. And our production process is quick enough, you're better off not starting it just because in general, most of our businesses, that's how we produce things.

That's helpful color there. Because you do hear like for the autos, where they've got all these cars lined up that still need semiconductors and...

We wouldn't put a pump or something into the build schedule because we'll make 40 of them in a couple of hours, those kind of things.

Good. Last question for me, Eric, you kind of begged the question earlier to Mike's when he's asking about the macro, you said there are some pockets of slowing on projects. So -- and absolutely, that's a reflection of kind of what we say CEO confidence. Are they going to move ahead? I think you made a reference to midstream, and we've heard plenty of that. It just really hasn't realized in full kind of spending given oil prices. But where and how would you describe some of these pockets of projects slowing or just not getting the release that you thought you were going to get?

Yes. I'd say probably more of the second category, not getting the release or not coming on the line, something we've been thinking about or projecting for a while now and some of these just get extended out. So you mentioned the midstream side. I mean, there's some pockets in our chemical markets exposure, maybe more on the European side than elsewhere. A little bit in the paint dispensing area. We're just kind of coming off the end of a big replenishment cycle there. And then a few things in just specific industrial markets, food expansion, places like that. I mean, they're pretty isolated. It's not a massive part of our business, but they're good indicators, things to watch. And I would just say it's been interesting over the cycle here is this category never really took off. I think in the beginning, it was very much clouded with uncertainty. The nature of the recovery, then it turned into a kind of a bandwidth issue. Can anybody put together the materials or the time and energy to work on it? Maybe here in the later innings of it, it's sort of all of those factors. Uncertainty creeping in back a bit, the bandwidth issue is still there and now inflation and the cost of these projects is causing some recalibration for -- in certain markets where people have to kind of go back and run the math again.

Our next question comes from the line of Allison Poliniak with Wells Fargo.

Keeping in line with that project comment. I know you talked verticals, but is it any like weighted towards a specific geography? Or does it seem very broad-based by vertical at this point just in terms of what you're seeing?

Well, I mean, I'd say broad-based in terms of the way I just described it. I mean, we are seeing a bit more geographic strength in North America than Europe for all the reasons I think we would suspect in terms of things people are watching there on the geopolitical side, the energy side, those things. But both are positive for us. But if I had to call it, I would say, a little bit more positive on the North American side than Europe.

Great. And then just kind of going back to the free cash flow and just CapEx in general, tepid start to sort of the approach to that $90 million. You talked about Banjo and then investment in emerging markets. I mean, are those still on track? Or do you kind of risk that some of that gets pushed to next year just because of the uncertainty right now?

No, that's what's going to drive the increased spend in the back half. We're expecting both the India and China facilities to open later this year. And then Banjo I think is kind of late third quarter, early fourth quarter. So there's -- those projects, I think, are on track. Obviously, that's a subset of the $60 million ramp -- $30 million ramp, $60 million spend in the back half that. Relative to supply chain delays and things, we have seen some items smaller as pushed from the first half to the second. So there's a little bit of play in that number. But for the large ones, we're confident that those will hit here in the next couple of months.

Our next question comes from the line of Rob Worthermeier with Melius Research.

My question is just a little bit more on M&A. Can you talk about just what the feel is like from potential sellers out there, whether -- I don't know whether things get repriced as you kind of edge through different parts of the process and the market is corrected and interest rates are higher? I don't know if there's a standoff as people adjust to different pricing or not? And then any comment you'd make on how big your funnel and kind of pipeline are versus prior periods?

Yes. So as I said before, I mean, all this is bracketed a bit by the step up in intentionality and work that we're doing. So in that respect, again, there's a lot of things we're looking at, a lot of analysis that we're doing and a lot of conversations that we're having. You would say our -- that just activity level is north of where it has been, much of it driven by our work. Now in those conversations, probably much like the conversations you have, there is definitely more discussions around near-term prospects and what's going on with the forecast and how do you see the sales tracking out and to the extent that all links back to valuation, it's just more intense than it has been for all the reasons you'd suspect. As Bill and I have always said, though, when you're looking at assets of the quality that we look at, you're generally looking at a history that's very sharp, well positioned, driving in strong ways. And then a reasonable projection path, especially if we're the owners that kind of picks that up again. So -- that doesn't mean that both sides are going to be able to see that and get through it. So that's always a possibility, but our perspective is very long term in nature for the kind of assets that we're looking at. So long story short, more activity on our part, which means I think a strong funnel for us, a lot of activity, engaging with people more near-term discussions around what this all means and where it's going to go, but then kind of just take a deep breath, stare over the horizon and be confident that for quality, I think ideally both sides see it that way and stay engaged.

Perfect. And if I can, I guess, follow up on that on the uncertainty and so forth. You touched on backlog earlier. I don't know if you're willing to give any more color on where your backlog stands versus prior cycles or versus prior record levels, et cetera. It seems there's a bit of a standoff and that everybody is uncertain about the future, but the future doesn't look bad currently. I don't know if the backlog will help us triangulate that a bit?

No, definitely. I mean, our backlog is kind of 2x of what it has been historically. And normally, we'd go into a quarter with 50% of the quarter sales in backlog. We've got close to 2/3 now. So we have a lot more visibility to temper any dramatic short-term falloff. So again, relative to the next couple of months, we're fairly confident in our numbers. So I don't think there's a huge pause that would come because our backlog could support any short-term decrease in orders.

Our next question comes from the line of Matt Summerville with D.A. Davidson.

Just a couple of quick questions. With respect to price, can you comment on where you were price realization second quarter year-over-year? And how much incrementally on top of that you expect to realize in the back half? And then I have a follow-up.

We're a little over 4% here in the second quarter, which ramped from a little over 3% in the first quarter. We don't guide the balance of the year price, but we're really confident in what the teams have gone out with to combat inflation, which seems to have leveled off. So I mentioned we have an expectation that our price cost is going to continue to improve through the back half of the year to support some of our higher-margin profile expectations.

In certain areas of the commodity markets, certainly in metals, steel, aluminum, copper, things have come off their highs pretty materially, still elevated from historical standards, but certainly off-peak. When does some of that start to actually add some incremental benefit to your P&L?

I would say a couple of things. One, relative to -- we only have a couple of businesses that have direct exposure to commodity prices. From a materiality level, we're buying components that are a couple of phases through that value stream. So obviously, we didn't have the vast inflation impact on the way in that a lot of other companies did. Again, 4% price increase is still price cost positive, and we're building. So -- that will, I think, wean out over time, it will be a material impact, but we will keep all the incremental pricing that we've had. Again, we've holistically gone out with price increases versus surcharge. So we like where we're positioned here going forward.

Our next question comes from the line of Jeff Sprague with Vertical Research.

Eric, can we come back to what you said really on deal cultivation, right, in the activity being more of a function of your internal efforts? Maybe you could elaborate on that. Have you significantly up resourced the deal teams? Does this heavy level of activity indicate any interest in kind of pursuing new adjacencies? Just maybe a little bit of kind of strategic and tactical color on what's going on there.

Yes. I mean, we're not a massive center-led kind of organization. Never have been. So this might sound more dramatic than it probably is from a headcount perspective. I mean, it's a few well-positioned ads from the outside work that we're doing on the third-party side. And then frankly, the biggest component is just a higher level of engagement overall business to business. I mean, this is something we've been driving now for a couple of years. And we really focus to combine growth outperformance on top of our just sort of institutional great well-deserved execution shops. And so a lot of it is that way. In terms of where we're looking and what it looks like, I mean, we've always favored. I always come back to this analogy of concentric circles around these applications that we kind of currently sit in. We know these environments really well. We know what's to the right or left of us, and the best work for me is really starting to understand where is this market heading, should we make a move slightly left or right and how would we do that. The recent acquisitions that we've layered into the company are perfect examples of that. As we said before, we're also thinking about the broader world in general and where problems are presenting themselves and where IDEX like styles of competition could come in play, and maybe that would open up a flank for us and some applications that are new to the company. So that's in the mix as well. But if you really had to overgeneralize it and think of it, think of it as just radiating circles from the best parts of the company with more intensity, a lot of it from the ground up. That's the way we like to do it.

Yes. I think those actions, the depth and quality of the funnel is probably at an all-time high. Like that work that the team has done across a variety of different end market applications, those concentric circles that Eric highlighted, and one of the main reasons why we are so confident in our ability to deploy capital much more consistently as we progress.

Great. And unrelated, just back to this -- I mean, everybody's got their hair to the ground trying to snip out an issue with the economy. Any gut feel that actually these improving lead times are actually the canary in the coal mine? And anything happening in just kind of the supply dynamics and kind of order the shipment dynamics or anything that maybe are an earlier precursor of some deceleration?

That's a good question. I mean, it's hard to say, though, because in many ways, we've been running us, others at such a hot level. It's pretty abnormal. Pulling back from that in any way, even if it's just simply the deceleration of the tremendous acceleration we've been feeling is going to have a material noticeable impact inside just how it feels in the business. But I don't know that, that's the same thing as a broader call on economic conditions, maybe more than it's just, okay, it's not at peak levels. We can catch a breath. We can actually be a little bit more planful, mindful. And that's for us and that's for others as well. So think of it more in those terms but then let's say, since there's nothing else to do, we can get product quicker. I don't see it as an indicator of that.

Our next question comes from the line of Vlad Bystricky with Citigroup.

So I just wanted to ask, kind of following up on these macro-related questions. In your businesses that go through distribution, can you give us some color on what you're seeing and hearing in terms of distributor inventories and whether there are any areas where you're more concerned about a potential for destocking in the event of a slowdown?

Yes. Well, I always kind of preface this question with a reminder that we have a lot of configured customized products with quick replenishment, which means not a ton of our inventory on shelves. So it's a small number. I will say we've got some good visibility to at line of sight minimum. You can see it visually when you go visit them. So you can see some slight increases there for our product. I would assume that's applicable to more stockable components as well. In our world, we think of that as if ultimately that bleeds off over time, in some ways, it's pretty similar the way that it works in our own business. It takes a while because of the wide variety of SKUs that are out there. None of it's really clumped around a standard solution that if you made a deterministic call on it would just flow out in a big pocket or chunk. So we think about it a lot for IDEX, mainly just as more of an indicator of health overall. But from a meaningful impact to the numbers up or down, it extends over a large time horizon. It's not a giant piece of the business, and it usually is kind of lost in the math, to be honest.

Okay. That's helpful. And then maybe just stepping back. So you talked about obviously, the intent to bleed down some inventory here over the back half and into '23. But your availability has been, I think, a competitive advantage for you. So can you talk about what you're seeing in terms of your own supply chain availability and logistics that gives you the confidence to begin to bring down inventory without giving up any of the competitive advantage that you've gained through the recovery?

Yes. Well, I mean, some of it -- the impends are fact-based. So we can see and we track our own -- our suppliers' performance and their lead times and their on-time delivery to us. So you basically start there and say, "Well, we can see factually some improvement." The logistics loops are quite a bit better than where they have been on the first part of the year. And frankly, our teams are really good now, at navigating them when they kind of run astray. I think the biggest thing for us and anybody that wants to go tackle this now is, in some ways, you got to take advantage of the ability to take a breath. I would say as we've improved throughput, momentum, and we're executing stronger here, that does buy us a little bit of time, space and energy to go back and recalibrate the systems, which is what you actually have to do to go attack inventory. You've got to go change demand signals. That's part by part. It's -- you do it on lines of paper laid out across the desk. And so -- and Bill talked about our engagement with our teams, that's the kind of work we're making sure is happening. People are kind of racking and stacking it 80s to 20s and making the calls based on fact-based patterns that they can see, and taking advantage of the time and energy, they have to go do it.

And then some of the areas we have been able to take shares, it's because we have an 80 position with that vendor. And we're getting a higher allocation than some of our smaller competitors. So if they don't have the material availability, we're able to go in and take their volume.

Our next question comes from the line of Nathan Jones with Stifel.

Let's start with a question on Health & Science and the organic order growth that you're seeing there. Everybody is focused on the economy going up and down at the moment but that's a business that's less cyclical for you and still showing extremely strong orders. Maybe you can just talk in a bit more detail about what's driving those? Are these product cycles that have a specific duration? What the outlook is for continued growth there? Just any more color you can give us on the strength around that business.

Yes. I mean it's exactly the way you described it. I mean it's very much tied to strong trends that we're going to, I think, see run out for quite some time here. So we -- like everything else in IDEX, we break it down into all sorts of little components and drivers and specific application sets. Some of the ones that are going well there, the AI space is healthy. That's a decent part of the business -- sorry, analytical instrumentation. And then the genomics space has been very, very active. A lot of that is involving initially COVID and COVID surveillance. I think now as the pandemic has kind of moved on and entering in its third year. We're seeing now some more targeted work around taking some of that technology and applying it for things like targeted medicine and all the things that were always out there for that field of study. So those have been healthy as well. We continue to have some isolated pockets where we do support for vaccines and things of that nature that stayed strong to the duration as they're continuing to work on different targeted vaccines and things like that for both COVID as well as other things. So it's definitely picking up most of the macro dynamics and trends that we have long known are out there, and it's why we spend a lot of time investing in it and talking about it.

Maybe one on gross margins. I mean you obviously have very strong gross margins for an industrial company to begin with. They've been pretty consistent over the last few years in this 45%, plus or minus kind of range. Is there a negative impact that you've seen to gross margins with all of the disruptions around supply chain in COVID that maybe are less related to price cost but modest in efficiencies within your manufacturing that maybe go away that could lead to higher gross margins or anywhere else that you see opportunities to expand gross margins?

Yes. No, I think the biggest pressure has been price/cost. With 45% gross margins, you have to have a price cost spread well in excess of that to expand. So that has put constant pressure. And then we continue to invest in engineering resources, which to remind everyone, that is included in our gross margin number. So we've been able to maintain through robust productivity across the portfolio to offset some of those headwinds. So I do think price cost getting back to historical levels and then our continued volume leverage that we get on the high contribution margins we have in our business. Once we stabilize a little bit from an operations perspective, we'll be able to pull through some increases. With, again, just the very difficult operating environment we've been in, the ability to have discrete productivity projects across the portfolio that we've historically been able to execute on has been muted a little bit too here is another point. So I think as things normalize, we'll get another kicker off of that.

Our next question comes from the line of Scott Graham with Loop Capital.

Congratulations on what was a really good quarter from you guys. I have one quick one for Bill. Kind of can you give us an idea of where sort of your sales are running OpEx versus CapEx?

We don't really disclose that externally to be honest. We don't look at it internally. It goes a little bit to the project comment that Eric talked about a little bit earlier. It's not a huge part of our business. So I would say, holistically, most of our projects are OpEx, replacing like-for-like, current IDEX volume and then some incremental market share gains that we have. The CapEx, we have some specific things that we would be able to realize with plant expansions, new plant creation. But overall, relative to our portfolio, it's not an overly material number. So the short answer would be, holistically, it's more OpEx-related on our sales.

Got it. So now I want to maybe understand dispensing a little bit. There's a comment in the deck, talks about non-repeat orders, quarter back, maybe 2 quarters back, you talked about how dispensing should weaken fairly materially in the second half of this year. I'm just trying to triangulate what that means now for the second half of the year. How does dispensing look? Is it -- does it look better now or not?

No, I think it's in line with our expectations that we had at the beginning of the year. I mean orders pressure in the second quarter will have more pressure in the third, but they'll continue to have sales growth in the third quarter with sales finally fallen off a little bit kind of post those replenishment projects in the fourth quarter. So still a great business. Very global. Still having wins in emerging markets. They're launching new technologies on the software side. So although they're going to lose the replenishment, their core business continues to grow. So it's been cyclical over its life span, but a little bit of pressure here in the short term as those projects roll off. But holistically, lots of additional opportunity through software and emerging markets growth.

Got it. And if I could just squeeze this last one on the fire business, where the OEMs, your customers are still saying that they're pretty supply chain restrained. Has anything changed in the last couple of quarters there as it's a pretty good business for you guys, particularly now with your having a nice little beachhead in Europe? Could you give us an idea of where that business goes in the next couple of quarters?

Yes, I'd say the headlines there, the supply chain constraints and some of the larger folks that are in that space are still there, still challenging, still fighting that. I will say that there's kind of smaller to medium specialty players have done a decent job jumping in. So that's helped us a bit, just not the biggest part of the market. We remain really, really focused in that business on technology. So there's only so much we can do to help out on the supply chain side. Eventually, that will come to a better place. As it does, we want to be ready with all of the automation that we've been talking about, not only the pieces that we have in the water path of the mobile platform, but we've got a nozzle now that's got connectivity in it and diagnostics. We're doing the same thing on the rescue tools piece. So we've got some really, really good things there just presented in a giant global show here in the second quarter. So that for us is kind of the longer-term headline on an industry that we think will ultimately start to dial in and improve.

Our next question comes from the line of Brett Linzey with Mizuho.

Just wanted to come back to the orders. So the underlying run rates in the quarter very strong, even more encouraging on a 2-year stack basis. What is your expectation for year-over-year order growth in the second half as customers are no longer advanced ordering or some of this backlog in mind? I mean do you think you can grow orders and anything that July would inform you here?

Obviously, back half, we've got much tougher comps. In the third quarter, at least relative to we have visibility. We think we'll still be positive from an organic perspective, highlighted a little bit of the dispensing pressure that will continue. But overall, IDEX still positive. And from a July perspective, no material changes versus the trends that we've experienced here across the portfolio.

Okay. Great. And then I just was hoping you could spend a moment on the KZValve acquisition, how that performed on a stand-alone basis heading into the close relative to expectations? And then what are you calibrating for accretion within the guidance framework for this year?

Sure. I'll cover kind of the general state of the business, let Bill answer the financial question. So I mean that has been a really, really strong acquisition, strong integration process. It is a very, very close complement to our Banjo franchise in the ag space within FMT. It's conveniently not very far away. And so the teams have really attacked it. It's performed strong as all our agricultural businesses have both in North America and Europe. And so this has been, in some ways, one of the easier integrations because the commercial linkage is so strong in the business, and everybody is speaking the same -- on the same page with technology and the broader market supports it. So very, very strong out of the gate. Excited on the long-term prospects here, and I'll let Bill talk about the specifics.

Yes. EPS in the back half, $0.02 to $0.03.

Yes.

Our next question comes from the line of Michael Anastasio with Cowen.

Congrats on the strong quarter. You mentioned the strength you're seeing more broadly, but obviously, the macro is deteriorating. What types of initiatives are you doing internally to prepare for those macro data points, ultimately, if they start impacting the business?

Yes. No, thanks for that. So I mean we've seen a lot of these cycles before. We have kind of a standard way that we look at it. I think -- for us, the first lever would be looking at discretionary spend. We've called that out a few times because we came off a base with almost none of it. Now we are out engaging with customers going to trade shows. So it's elevated a bit. But we know, frankly, if we learned anything over the last couple of years, you can make it through with a much lower level of discretionary spending. That would be the first lever. As Bill mentioned, I think there is an opportunity here for a pretty hard look at productivity across a factory setting. If things were to cool off a bit, and we actually got some bandwidth back on the team's perspective, rethought how flow is working, how different product lines are in different positions than where they may have been a couple of years ago. So we go there next. The one area that might be a little bit different. We have been talking about it a lot is on the headcount side, on the people side. I mean even today, we still have -- we're still looking for people. The war on talent is real. Some of the communities we live and work in, it's been harder to find labor. I mean that's improved here more recently, but it's still -- there's still pressure in that area. So that's probably the area, given all the focus we have on growing the company long term and that dynamic, we would be the most thoughtful about where we would make choices, investments and things along the way. Otherwise, I'd say it's a pretty familiar process for us. The short-cycle nature helps us get at it fast. And -- so it's never far away the playbook to run that. Anything, Bill, you'd add there?

No, I think you said it well. It is -- at least our expectation for decrementals will be a little bit higher than they have been historically because of us relative to current profit levels and the war on talent that Eric highlighted. So maybe we would historically have been in the low 30s. We're probably closer to 40% here if there's a slight pickup here as we progress over the next couple of quarters.

That's really helpful. Just one more, if I may. I know we had mentioned orders before, but declining sequentially over the past quarter. What are you seeing from a cadence perspective going forward?

Yes, I think there's always our first quarter, we generally get our annual blankets from a lot of our customers. So it's generally inflated relative to sequential profile of the balance of the year. So -- that's the real driver from the Q1 to Q2. For us now, it's kind of leveling off with keeping an eye on just our daily order rates, which have sustained here in the month of July.

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

Okay. Well, thanks, everybody, for joining today. We're really, really proud of our first half performance here. And as I close, just -- I guess the one thing I'd want you to take away is it's really a story of "and" not "or" here at IDEX. I mean we've long, I think, earned our reputation for tactical execution, good times, difficult times. We're seeing that in the performance that we're addressing here today. And we're working deliberately to drive growth outperformance as an additive component of value creation on top of it. We basically do that by picking the top bets that align really, really well to the macro trends that are going to be great over the long haul. We rally resources around those. And then here, as I spoke a few times, we very deliberately complemented those efforts with organic and inorganic investments, and we'll continue to do that as we go forward. So I think you're seeing it play out. We're seeing it play out in the acquisitions we made that celebrate precision ag or alternative energy in the pneumatic space or water solutions and what that can be. So you're seeing that come together. And I just want to highlight the additive component of those 2 things, and we'll continue to talk about that as we move forward. Thanks very much for your interest in joining today.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.