Greetings and welcome to IDEX Corporation's Third Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I will now hand it over to your host, Allison Lausas. Thank you. You may begin.

Good morning, everyone. This is Allison Lausas, Interim Chief Financial Officer and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third quarter 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending September 30, 2023. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today is Eric Ashleman, our Chief Executive Officer and President. Today, we will begin with Eric providing an overview of the state of IDEX's business. I will then discuss IDEX's third quarter financial results, an update on segment performance in the markets they serve, and our outlook for the fourth quarter and full year 2023. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes, by dialing the toll-free number (877) 660-6853 and entering conference ID 13734464, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will now turn this call over to our CEO and President, Eric Ashleman.

Thanks, Allison, and good morning, everyone. I have some important news on Slide 5. Before turning to our results and outlook, I'd like to introduce Allison Lausas, who is serving as our interim CFO. Allison has been with us for over two years, serving as our Vice President and Chief Accounting Officer. She also leads our Investor Relations and financial planning and analysis functions. During her tenure at IDEX, Allison has done an outstanding job, serving as a strong partner to our former CFO, Bill Grogan, and myself. Thank you, Allison, for all you're doing in your expanded interim role. And I'd also like to thank Bill for his many years of service at IDEX. Also, as you saw in our release yesterday, we are pleased to announce that Abhi Khandelwal is joining IDEX in November as our next CFO. Abhi joins us from Multi-Color Corporation, a global packaging services and label solutions provider, where he served as CFO. Prior to that, he served as Senior Vice President and CFO of CIRCOR International. He previously worked at IDEX for over 10 years, serving as my financial partner during most of my term as COO. We're thrilled to have him back with us, and I consider us very fortunate to have leaders like Abhi and Allison at the top of our finance organization. With that, I'll turn to our Q3 performance. I'm on Slide 7. IDEX delivered strong results in the third quarter, delivering robust profitability in an environment where volumes are stabilizing at lower levels. We also generated excellent cash flows as we continue to execute on our cost containment and inventory reduction plans. I'd like to thank our IDEX teams around the globe for their contributions in driving these outstanding results. This was solid execution in a difficult environment. Recall that we expected our industrial and municipal markets within FMT and FSDP to reach the end of an elongated and moderate destocking cycle within the third quarter. That played out as expected. Our analytical instrumentation, life sciences, pharma, and semiconductor markets within HST largely held at equilibrium in Q3 and bounced along the bottom after an unprecedented rapid destocking cycle in the first half of the year. Taken together, this moves IDEX into a very natural position, where lead times, backlogs, and next quarter visibility all aligned with typical pre-pandemic profiles. Looking forward, we continue to see divergence between end market prospects. There are discrete attractive opportunities within each of our segments, many of which are tied to transformational catalysts within environmental sustainability or critical infrastructure. Examples include water analytics, space broadband, and battery production. These sit within a broader framework of uncertainty driven by macro concerns that include higher interest rates and expanding geopolitical risk. More specifically, demand rebounds for our most pressured HST businesses appear to have moved out a bit into 2024. We continue to believe that organizational agility, speed of decision-making, outstanding business quality, and a strong culture serve us well to navigate the twists and turns ahead. We can dynamically assign capital and resources to our best near-term opportunities while we stay focused on our long-term strategy of profitable growth outperformance. In terms of capital deployment, M&A continues to be a top focus. Within our funnel builds, we are aggressively following complementary threads between our most growth advantaged businesses and technologies as we seek to build our breakthrough competitive advantage. We did this recently with our Nexsight acquisition, expanding our reach within water analytics through enhanced hardware and software capabilities. Our Iridian acquisition earlier this year boosted integrated capabilities within thin-film optics. Our inorganic pipeline is robust and of high quality, allowing us to engage in M&A with discipline and strong strategic intent. And our balance sheet has ample capacity to continue to execute on our best opportunities. Finally, we divested our Micropump business during the quarter and repaid $150 million on our term note facility. As we continue to focus on long-term growth, occasional portfolio realignment will occur. We expect this transfer of ownership will better position Micropump as it joins a collection of like-minded businesses focused on similar technologies and customers. I would like to express my appreciation for all the Micropump team has done since joining IDEX in 1995. With that, I'll turn it over to Allison to discuss our financial results.

Thanks, Eric. Moving on to our third quarter consolidated financial results on Slide 9. All comparisons are against the third quarter of 2022 unless otherwise stated. Orders of $712 million were down 9% overall and down 11% organically. We experienced an organic decrease within our HST and FMT segment and organic growth in FSD. Sales of $793 million were down 4% overall and down 6% organically. We experienced a 15% organic decrease in HST and a 1% decrease in FMT. FSD revenues grew organically by 3%. Gross margin of 44.1% decreased by 220 basis points compared with last year. Adjusted gross margin decreased 90 basis points, primarily due to lower volume leverage and unfavorable mix, which was partially offset by strong operational productivity and price cost. Adjusted EBITDA margin was 28.4%, down 30 basis points. I will discuss the drivers of adjusted EBITDA on the next slide. On a GAAP basis, our Q3 effective tax rate of 20.2% was lower than our effective rate in the third quarter of 2022 of 21.8%. The rate was driven down by both the finalization of research expenditure capitalization treatment that served to increase tax benefits on foreign source income and a tax election related to the Muon acquisition that reduced our minimum tax on foreign earnings. These favorable rate items were partly offset by tax recorded on the gain from the Micropump divestiture and are not expected to have a significant impact on our fourth quarter rate. Net income was $209 million, which resulted in GAAP EPS of $2.75. Adjusted net income was $161 million, with adjusted EPS of $2.12, which is down $0.02 or 1%. The lower tax rate contributed $0.11 of adjusted EPS favorability in the current quarter compared to both the prior year and the midpoint of our third quarter guidance. Finally, cash from operations of $227 million was up 14%, primarily due to lower working capital driven by inventory reductions. Free cash flow for the quarter was $207 million, up 14% versus last year and achieved a conversion rate of 129% of adjusted net income. We drove over $25 million of inventory out of the business in the third quarter through our targeted reduction efforts, and we saw inventory turns remain consistent with last quarter due to lower sales. Moving on to Slide 10, which details the drivers of our third quarter adjusted EBITDA. Adjusted EBITDA decreased by $6 million compared to the third quarter 2022. Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $37 million flowing through at our prior year adjusted gross margin rate. Price cost was accretive to margins, and we drove operational productivity that offset employee-related inflation. Mix was unfavorable by $6 million, mainly centered in HST due to continued volume declines in our analytical instrumentation, life science, and semiconductor components. Resource and discretionary spending was favorable versus last year, as we continue to execute on our cost containment plan given the top-line pressure we are experiencing. Reductions in variable compensation expense contributed $8 million of benefit in the quarter. These results yielded a negative 31% organic flow-through. Overall, our team's focus on cost containment and resource reallocation has effectively managed our revenue decline, ensuring continuity of our most valuable resources has IDEX well positioned to recover and grow back stronger than before when market dynamics turn favorable.

With that, I'll provide a deeper look at our segment performance. I'm on Page 11. In our Fluid & Metering technology segment, orders decreased by 5% organically, mainly due to an expected slowdown in our industrial businesses and continued customer destocking in our agriculture business. Sales decreased by 1% organically, driven by this destocking impact, partly offset by favorable energy, chemical, and water performance. We began to see our industrial order day rates decline in the second quarter of this year, and they remain steady at that level throughout the third quarter. Although our customers continue to exercise caution due to recession concerns and lower energy prices, we see tailwinds tied to domestic infrastructure initiatives and within mining. Within agriculture, we continue to experience the impact of distribution destocking, exacerbated by declining net farm incoming crop prices. Our delivery continues to outperform our competitors, and we are focused on targeted share gain to offset this pressure. Additionally, the acquisition of KZValve and the adoption of its automated actuation technology is delivering strong results. On the energy side, we continue to execute well, driving down backlogs and lead times. Underlying market demand remains steady, but we expect to see revenue declines versus the third quarter as our backlog position normalizes. In the chemical market, we continue to see positive results across the U.S., Europe, and Asia, with pharma and battery applications providing opportunities for growth. Our water business continues to exhibit growth. Our opportunity funnels are increasing, and we see no signs of municipal project funding delays as we approach 2024. Adjusted EBITDA margin expanded 50 basis points compared to last year, primarily due to strong price cost and favorable operational productivity more than offsetting lower volume leverage. Moving to the HST segment. We experienced a 24% organic orders decrease and a 15% organic sales decrease, mainly due to pressure across the life sciences, analytical instrumentation, and semiconductor markets as well as industrial market performance similar to that within FMT. Adjusted EBITDA margins contracted by 410 basis points, primarily due to lower volume leverage and unfavorable mix, partially offset by strong price cost and favorable operational productivity. Our analytical instrumentation business continues to experience customers destocking, which remains driven by China softness, lower pharma-biopharma spending, and overall caution around the global economy. We expect that performance will remain stable at this level in the fourth quarter, with improvement in 2024. We see a similar trend within our life science business. Semiconductor continues to experience softness with the expectation that the market has reached a bottom in the third quarter. We anticipate a broader market will begin to recover at some point in 2024. We continue to see positive results stemming from our space broadband laser communication initiatives, which are bolstered by Iridian's technological capabilities. Our material processing technology business continues to experience softness across pharma markets but are seeing some early signs of improvement within biopharma, food and nutrition as well as tailwinds connected to leveraging our technology and battery production application. Industrial markets and HST slowed in the quarter, in line with FMT's results. Finally, turning to our Fire & Safety Diversified Products segment. Organic orders grew by 2% versus the third quarter last year and organic sales grew 3%, with strong fire and safety results more than offsetting destocking at BAND-IT. Adjusted EBITDA margins expanded by 150 basis points, primarily due to strong price cost and favorable operational productivity, partially offset by unfavorable mix and lower volume leverage. The paint market remains mixed. The uncertain global macro environment is driving consumer confidence lower, while at the same time, the construction market in North America remains strong. Within our fire business, we do not see any significant changes to North America fire OEM production capacity. We continue to win through value-add integrated systems and technology and standardized offerings that enable higher OEM throughput. Our Europe and Asia businesses remain steady. Rescue performance remains steady as well, although we are seeing some signs of North American budget delays and inventory reduction due to high borrowing costs. BAND-IT continues to outperform a relatively flat U.S. auto market due to having content on high-priority vehicles. There is some pressure on the energy side, driven by lower oil prices, and we experienced some destocking within aviation.

With that, I would like to provide an update on our outlook for the fourth quarter and full year 2023. I'm on Slide 12. In Q4, we are projecting GAAP EPS to range from $1.50 to $1.55 and adjusted EPS to range from $1.74 to $1.79. Organic revenue is expected to decline 8% to 9% and adjusted EBITDA margins are expected to be about 26%. We expect that our HST revenues will be slightly unfavorable versus our previous guide, offset by FMT volumes landing better than expected. Equally, our strong execution in the third quarter allowed us to work through our backlog faster than expected. This is driving an equal and offsetting $0.05 of impact to third-quarter results and fourth-quarter expectations. Turning to the full year 2023. We are maintaining our full-year organic revenue guidance of down 1% to 2%. At the midpoint, we have raised our EPS guidance by $0.20, with approximately $0.11 driven by lower third-quarter effective tax rate and the remainder coming from third-quarter operational outperformance, partly offset by $0.05 of revenue timing due to accelerated backlog burn in the third quarter. In summary, we estimate full-year organic revenue contraction of 1% to 2% to yield GAAP EPS of $7.91 to $7.96 and adjusted EPS of $8.13 to $8.18. Adjusted EBITDA margin is expected to be approximately 27.5%. Capital expenditures are anticipated to be about $80 million, and free cash flow is expected to be 100-plus percent of adjusted net income. With that, I'll turn it over to the operator for your questions.

Our first question comes from Deane Dray with RBC Capital Markets.

First, start with congratulations on the CFO news. We've heard from a couple of former IDEX executives who are singing obvious praises. So that's fabulous you got him to rejoin. And then can I add my thanks to Allison for all her help in her role as interim CFO.

Thanks for both comments.

Thank you.

So maybe, Eric, for some big picture questions, macro. You're great at kind of synthesizing all the different inputs here and having noted that macro is giving us a lot of mixed signals. But maybe just click through like the day rates, that started to slow in the second quarter. What's your take on that? Lead times and anything from your leading businesses, like BAND-IT and Warren Rupp, that suggests how things are going to play out over the near term?

Yes. Well, I mean, we often refer to those as the canaries in our coal mine. And we discretely track about five of those businesses and keep an eye on weekly order rates and do it at the sort of small order flow day-to-day stuff level. We parse out projects. What we can see in there is, frankly, between the second and the third quarter, they're almost dead flat. So the moderate destocking cycle that we predicted at the beginning of the year, I think, largely played out through the first half of the year and frankly, moderated. Even quarter to month-to-month within the quarter, we didn't see a lot of changes there. So what that says is kind of our distributors because there's a lot in that world, our end users, all of us were back to the right inventory position based on our quick replenishment, our fast lead times. And now I think it goes into the question of sort of an uncertain environment, when does it start to flex upward? Those would be the businesses. Of course, we would watch to see early indications of that. So for right now, it's flattened out. It's holding. There's decent activity out there. There's certainly opportunities here and there, but not signaling any further trouble and waiting to see if it brings forth some more encouraging signs.

The second question is about the Analytical Instruments Life Sciences segment of HST. I want to note that no one has accurately assessed this situation yet. Companies like Thermo and Danaher have faced a lot of fluctuations. I’d like to understand your level of confidence that we are at the bottom, as there are indications that this isn’t just about destocking; there may also be a decline in end market demand for this type of equipment, particularly in the analytical instruments sector, which seems to have worsened in October. How do you gauge this situation and how does it affect your outlook for the first half of 2024 for this business?

I want to take a little time here because I think I got to set our context in relation to those comments in the environment you described. First of all, as I said in the prepared remarks, I mean, we're talking about four buckets of business primarily that kind of fall into this category. Analytical instruments, life science, of course, that's the larger piece of it. Pharma exposure as well as semicon, that's about half of HST, and that's the piece that we're describing when we walk through this. Then I want to back up and say, if you think about the timeline, you actually have to go back, we're almost a year into this, for us. Because of the short clinical nature, we actually saw some of this noise in Q4 of last year. And as you said, we and others, I think, have to get our heads around the fact that it's actually been a series of additive components that's played out here over the course of that year. Initially, thought it was just simply aggressive demand turning to something more moderate. Of course, we felt that in our businesses in Q4. Then it was a reexamination of inventory positions and just frankly, seeing way too much of it at many points. And of course, that destocking played out. I think here in the second and third quarter, it's been kind of a second or third inning, if you will, of some concerns about some macro forces, probably the most significant being China's contribution or lack thereof as we go forward relative to what it has been in earlier periods. So there's kind of three things that played out. What I think that's done for us is, of course, we felt that pretty aggressively in the earlier piece. So there's a lot of businesses because of the component nature of the products we make. And here more moderately in the last quarter, and I can see that our backlog position, our visibility within the quarter, our kind of inventory position in factories where we supply, that's in equilibrium. So I don't see any more external forces or things that would come in there simply trying to unwind the past. That does mean, frankly, that we're kind of open to the recovery loop that's ahead of us and the uncertainty of when it will occur and how it might play out. And again, Deane, I back up a little bit and say, we're hitting that from four different levels. So while there could be some things that fall off in other places as people kind of think about demand and where they may go, maybe some of those are in the life science arenas, that we're going to have some other things that are going to potentially be working against that, that may wash that out in the interim. So equilibrium is a little bit more of a variable term for us. But I think those abnormal shocks to the system that we saw play out over the last year or so, we're essentially seeing that those are behind us. And now, like everybody else, we can lean forward, go and kind of poke the customer level and take a look at what people are doing in innovation streams and start to plan our course from here.

Our next question is from Mike Halloran with Robert W. Baird.

So I want to follow up to both those questions Deane asked. So just to make sure I'm clear on what you're saying on the life science analytical instrumentation side. You're not necessarily saying that you're expecting the end market to recover from here in some sort of linear fashion or anything like that? You're just saying sell-in is at the point where it's matching with sell-out? Or am I misinterpreting that?

No, I think that's good. You probably summarized it a little better than I did, but I was trying to make sure people can understand that context for us. Again, we're what's really important to recognize here, we're inside the life science instrument at the component level or inside the lithography instruments. So these are critical items, very fast replenishment. And so yes, I was describing us kind of unwinding a series of unnatural patterns, but we are now in sync. And we're in sync and essentially open to the same variability that, that end market is at this point.

Exactly. And so as you get into next year, that's where the variability hits, but at least the comps are easy starting from, call it, mid-4Q onward type range?

Well, yes, certainly, as the year progresses, the comps get increasingly easier.

Got it. You mentioned the short cycle aspect, which makes sense from a destock perspective. Looking at a higher level, how do you view the economically sensitive segments of your business as we approach 2024? The risk profile seems stable, and day rates don't indicate significant deterioration, though the destock situation might be obscuring some of that. Any insights as we consider the overall picture would be helpful.

Yes, it is interesting. The industrial system is still performing quite well. The day rates we're discussing show that the business remains healthy, indicating that people are working and factories are producing. However, conversations about long-term commitments or events expected in the spring of next year are more challenging due to the uncertainty people are experiencing. Factors such as higher interest rates, increasing geopolitical risks, and the potential impact of the upcoming U.S. election contribute to this uncertainty. Many individuals are focused on day-to-day developments while adopting a cautious approach towards future forecasts because of the unpredictability beyond the immediate horizon.

Yes, makes sense. One quick follow-up, a clarification for Allison. Did you say that $0.05 shifted from 4Q into 3Q? I just want to clarify what that statement was, Allison.

That's correct, Mike. So we can find more aggressive backlog pull down in the third quarter. So it's just a shift of timing within the back half of the year.

Our next question comes from Nathan Jones with Stifel.

I guess I'll ask a question about the order rates here. The order rates in FMT, the actual dollars ordered is a bit lower in 3Q than in 2Q, and orders in HST in 3Q a bit lower than 2Q. Is it possible for you to kind of separate out what you think is a decline in customer backlogs versus what actual decline in end market demand? And I guess what I'm trying to get at here is, if you're talking about inventory correction having happened and we moved to selling more towards sell-through, wouldn't that imply then that you should see sequential improvement in the actual dollars of orders in both of those businesses as we move into the fourth quarter?

Yes, I believe our early indicator businesses provide valuable insights into how the system is running daily. The stability we're seeing is significant. In this environment, order patterns are shifting slightly. Customers are opting for shorter order increments, and with quicker replenishment from companies like IDEX, our customer satisfaction metrics remain strong. If there's uncertainty, customers don't need to provide the same level of visibility into their order requirements as they did a year ago. We've noticed a trend towards ordering as needed, which affects order profiling. We have worked through a considerable backlog, and as lead times decrease, this influences order patterns. Overall, these factors suggest we're in a stable environment, particularly on the industrial side, though we are looking for the next catalyst.

I guess my follow-up question, I know you guys don't do a lot of large projects, but you have stuff that goes into larger projects. And I think investors have been concerned that rising interest rates business in inflation are changing the dynamics, changing the ROI for customers on those investments. Can you talk about what you're seeing on customers' willingness to let out these larger capital projects? I know historically, you've seen people hesitate in these kinds of environments. So just any color you can give us on what you're seeing there.

Yes, that's likely part of the answer to your previous question. The certainty surrounding projects like these is not very strong. Some people continue to discuss them, but they are starting to extend the timeline. As we approach 2024, it becomes a significant reference point for when these projects may materialize. While this is not representative of all our businesses, we do see it as part of a planned expansion or something related to food or infrastructure. Those specific projects that require substantial capital will need extensive planning, and there is considerable uncertainty involved. Instead, the approach may be to operate the existing system more efficiently and for a longer duration before making significant changes, given that same level of uncertainty.

Our next question comes from Allison Poliniak with Wells Fargo.

So Eric, I just want to go back to HST. One of the things IDEX has been known for is investing through the cycle. Could you maybe talk to the new product development cycle in analytical instrumentation, life sciences? Or maybe even how you're thinking about that investment? Has that slowed at all? Should we expect maybe a slower organic coming out of this? Just any thoughts there.

Well, I'm actually glad you mentioned that because, in many ways, at ground level in those businesses, you kind of see two realities sitting side by side, and they're actually quite different. One is the near-term reactive reality of what's happened over here in the last year, where order levels are and what daily requirements are, lots of cost containment and being super crisp around productivity and just getting the product out. But even at the customer level, I think you see that entire world is spending a lot of time thinking through, okay, what do we need to do to innovate to get ahead of the game in the next cycle? Because I can't find anybody that doesn't see that there's going to be something more positive coming here. The same mega trends that have been driving that sector forever are not very far out ahead of us and will occur again. But when they do, we're seeing at the customer level and within our business a real step-up in terms of innovative steps to get after it. I was talking to Terra Teresa, who runs our businesses there, and she's describing some of the projects that we're working on in conjunction with really significant customers. And it's some of the highest degrees of innovation jumps that I've frankly seen in the last few years. So I think there's actually a very purposeful, collaborative arrangement here to talk about where this industry is going to go. And as it comes out, this is one of the reasons I think we try to stay as fast nimble as we can, so we can put capital and resources to those best opportunities and, frankly, overfeed them in times like this. So you've actually called it exactly how we see it at a ground level.

That's great. That's good color. And then a small divestiture, as you think of the portfolio today, obviously, a very unusual cycle here. Was this sort of just a one-off? Or is this something that you think we might see more of as we go forward here? Just any thoughts.

I believe it’s a nice little business, but we don’t have much similar technology and didn’t see a clear path to scale it. Larger versions tend to be in less attractive markets for us. We constantly evaluate these considerations, which may occasionally manifest in our decisions. However, I don’t see this as a significant transformational change for IDEX. Our focus is on driving growth outperformance and enhancing integration within IDEX. We will carefully assess standalone entities that lack scalability and, if it seems appropriate, we will make the right decisions moving forward. However, I wouldn’t characterize this as a more aggressive strategy than that.

Our next question comes from Vlad Bystricky with Citigroup.

So maybe just one more on HST. I know you previously talked about an expectation for semicon markets to stabilize during 3Q with recovery, I think, beginning in 4Q. I don't know if I missed it, but maybe you can give us more color on how semicon markets specifically are trending versus your prior expectations and your views on the likely trajectory of semicon-related demand going forward?

Yes, it's an important aspect of IDEX, but it constitutes less than 10% of our business. I believe that the recovery in this sector will extend further into 2024. Currently, the situation is stable. We are engaged at multiple levels, including fabs, metrology instruments, and memory, and we analyze it from various perspectives. However, it appears that the recovery will take a bit longer, likely into 2024. We maintain close relationships with our customers who rely heavily on our parts and components, which helps us gather valuable insights. I anticipate that the order increases will begin sometime in 2024.

Okay. That's helpful. And then maybe just shifting to FSDP. Again, on the orders that FSDP took a step down sequentially. So I guess just any color on, is there something seasonal there? Or just how you're thinking about FSDP orders evolving into 4Q and going forward?

Sure, Vlad. No, I can take that. That's really the step down due to dispensing as that replenishment cycle did come to an end there. So you see that slowdown in the third quarter. You'll see it also a bit into fourth. But also in fourth quarter, we've got a bit of seasonality in Fire & Rescue, fewer production days.

Our next question comes from Rob Wertheimer with Melius Research.

I joined the conversation and the education on life sciences and HST has obviously been a bit more volatile than many expected. And I wonder if you could do almost like a 101, what normalization looks like? With the simpler question is, what drives customer purchasing? Is it your customers' volumes? Is it innovation cycles? Is it CapEx cycles and confidence cycles? Just how your products flow through that life cycle?

I appreciate your question, Rob. This is a very direct business with a relatively concentrated customer base of leading OEMs, which sets it apart from other parts of IDEX. Prior to the pandemic and recent trends from the last few years, this industry was not typically cyclical. It has generally remained stable, growing in the mid- to high single digits, with the exception of the semiconductor segment. You can view this as a platform-centric business; innovation often drives our customers to upgrade their instruments or lithography machines. Our engineers collaborate closely during the design cycle, focusing on specifications to secure the project. Once we are part of a platform, we remain involved throughout its lifespan while continuously working on various iterations, whether they are at an early or late stage of development. This alignment provides good visibility into program plans and launch schedules. However, you do encounter variables such as adoption rates, the longevity of devices, and inventory positions, which we have discussed over the past year. Yes. I mean we've tried here for the last two or three years to be very, very focused on, frankly, cultivating proprietary transactions. We're taking advantage a little bit of the environment where we're comfortable. We were planning components in niche environments. We often see things and interact with people that maybe are not as well-known in the outside world. So we depend on multiyear relationships and conversations to try to get ourselves to a position where frankly, there aren't a lot of competitors in line as we're looking at an asset. That's not always possible to the extent it isn't. I would agree that you've seen something quite different here with higher interest rates. There's obviously some levels because people that need a lot of debt financing can only get to and can't pass. That will allow a property to probably stay out and play longer with strategics like us and others that might be taking a look at it. So you could view that as quite positive. I would say on the other side, though, too, because of that environment, maybe here more recently, you see some others that are a little bit more reluctant to transact in that way because they want to wait for a recovery loop or better demand curves that would support higher valuations in terminal values. So I think it's probably a little bit of wash on that side. But in many ways, we've always considered this better for us if we're working it much more discretely a bit more in the weeds and ideally in a proprietary way.

Our next question comes from Andrew Buscaglia with BNP.

In your FMT segment, your margins were quite strong despite a decline in organic sales. I am curious, similar to a question regarding HST, how you plan to invest moving forward given that your orders are either moderating or decreasing as we approach year-end. How do you link that to your margins while protecting them? Your outlook seems to indicate that everything is proceeding as expected, so will you continue to invest in this area? I'm interested in your perspective on the market trends and what impact they may have on margins.

I'm glad you noticed that the FMT segment has shown fantastic performance recently. In the last couple of quarters, Q3 was particularly strong. We've managed reasonable cost containment, and we operate these businesses quite leanly. It's easier to maintain a steady state now compared to the previous few years, which has allowed us to deliver strong results. Our teams have stepped up to contribute significantly to this performance. From an investment standpoint, many of these businesses are long-established and well-positioned, thriving under various economic conditions. We prioritize innovation and ensuring we have the right partnerships and market presence. When we discuss growth investments, they typically focus on people and are often specific efforts, such as supporting battery production for the mobility sector. We will adjust our investments based on our perspective of the external environment. However, we remain focused on the core aspects of our business, ensuring that the expertise that underpins our positioning and high margins is robust in any situation.

Is the mid-30s EBITDA margin and low 30s operating margins sustainable in your view, even if order trends continue to decline and organic sales weaken into 2024?

There are a few important points to consider. Historically, when our business approaches flat or negative growth, managing deleveraging becomes challenging due to strong contribution margins and our commitment to preserving core operations. Therefore, we need to remain vigilant about market trends. Currently, we are in a favorable position in the price cost cycle. The price spread we see today is unlikely to persist in the future. Our company has always been successful in maintaining pricing, and we've seen more aggressive pricing recently due to inflation. As it stands, these prices are stable, and we are experiencing some moderation in input costs. This period is optimal for pricing, making it a strong phase for the company. However, we should be cautious about assuming this favorable state will last indefinitely, as it represents just a peak in the cycle.

Our next question comes from Brett Linzey with Mizuho.

Just one more on HST. So encouraging to see the stabilization and certainly, the recovery path is going to take some time to play out and figure out. But just in terms of the profit recovery on the other side, should we think of the businesses yielding a stronger-than-average incremental margin as they do or when they do recover? Or do you need some cost to come back? Any way to dimension that?

As we recover, they'll lever nicely. And so a longer-term expectation for the HST set of businesses is more in the EBITDA margins of 29%-plus.

Okay. Great. And then just shifting over to the comments you made on water. It sounds like the opportunity funnel is increasing. You might be able to size that. And is it related to some of the fiscal stimulus or other independent factors driving that strength?

The water sector has remained stable. It's intertwined with our investment efforts in infrastructure, which has reached a critical state that cannot be ignored, especially in major U.S. cities. These factors together create a supportive environment for industries like ours. Investment in this area takes time; projects require extensive planning and implementation. Thus, even with any sudden influx of funding, the impact will unfold gradually. We see this as a reassuring foundation for businesses in the sector, and we've observed consistent performance in this quarter. To give you a clearer picture, water represents a significant part of IDEX's portfolio, and we expect it to remain on the higher end of our growth projections.

Our next question comes from Joe Giordano with TD Cowen.

I just want to clarify something. Many of your customers in HST and the currently weak areas have indicated that October has become more challenging. While you mentioned that inventory levels and destocks have stabilized, how did your actual orders in October compare to the rest of the quarter? Should we expect HST orders to increase in dollars compared to the third and fourth quarters? Does that make sense?

Look, I'll let you go ahead, Allison.

Sure. No, I think, on a pure dollar basis, we should expect to see some higher orders in the fourth quarter. But there is some blanket activity also that happens as we wrap the year.

Okay. So that maybe not necessarily a sign that things are improving, it's just kind of a seasonal order uptake?

That's right. We'll need to keep a close watch.

At what point, considering the nature of the business and the fact that you're running below a book-to-bill ratio of one, can we anticipate that an organic decline in HST will be factored in for 2024? When do orders need to start improving for that to theoretically result in a positive number?

I believe we need to keep a close watch on this through the remainder of the fourth quarter. Typically, everyone follows similar planning cycles, so this is our best chance to engage with customers and discuss their programs, new launches, and their confidence in these initiatives. We want to track it on a quarterly basis and stay closely connected to the situation. These markets are our most dynamic. Referring back to earlier comments, we’ve removed all inventory-related issues, which belong to the past. If the industry shifts in different directions, we will align with it. We are a crucial supplier for those developing sophisticated instruments across various markets and regions. Our success hinges on their performance and perspective on market trends. On our end, we aim to provide timely and relevant insights, mainly due to our short cycles, allowing us to detect changes sooner than most. Therefore, it’s important for us to maintain close relationships with them. We are aware that our four business segments may fluctuate at different rates, and we have the flexibility to reallocate resources as necessary. We'll observe how this evolves as we move through 2024.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Eric Ashleman for closing comments.

Thank you all for joining our call. I want to express my gratitude to the IDEX team for their strong execution and performance this quarter. There is a lot of uncertainty in the environment that will require patience. However, when I assess IDEX and the factors within our control, I see a well-positioned portfolio that is growing through acquisitions and ready to support long-term growth. Our flat and decentralized structure allows us to be agile and responsive, enabling us to allocate resources quickly and efficiently. Our teams and leaders are exceptional, and with Abhi joining us in November, I expect further enhancements. As circumstances evolve, we are well-prepared to support IDEX's growth and adapt to emerging trends. Thank you for your support, and have a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.