Greetings. Welcome to the Fourth Quarter 2022 IDEX Corporation Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to 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 fourth quarter and full year 2022 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the 3 months and full year ending December 31, 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. We will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance.

Bill will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023. Eric will then close the call with our key priorities for 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 2 hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13734461 or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder.

This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman..

Thank you, Allison, and good morning, everyone. I'm on Slide 6. 2022 was a record year for IDEX. We experienced double-digit organic growth every quarter, driving all 3 of our segments to record sales levels and achieved strong record profitability, driven by solid execution. This year was not without its challenges.

We experienced unprecedented inflation as well as a difficult supply chain environment. Despite these obstacles, we achieved some of the strongest financial results we've ever posted. I'd like to thank our IDEX employees around the globe for their efforts and hard work.

We also deployed more capital than ever before, investing in our businesses, acquiring new ones and returning capital to our shareholders. We deployed a record $950 million for the acquisitions of Nexsight, KZValve and most recently, the Muon Group.

We reinvested back into our core business to increase capacity to support growth and drive productivity and made investments in the commercial engineering and M&A resources that enable us to execute on our best opportunities.

We also repurchased 795,000 shares of IDEX stock for $148 million as we followed our opportunistic disciplined approach to buybacks. As we turn to 2023, we are prepared to build upon a very solid foundation. We have strong backlog positions overall, and we continue to leverage innovative technologies to drive targeted growth opportunities.

We have healthy price carryover in addition to new price actions to capture the value our products bring to our customers. Finally, we have an opportunity to drive strong productivity as we bring process-driven normalcy back to our operations through the application of the IDEX operating model.

However, we're a short-cycle business and with that comes limited visibility. The broad-based supply chain constraints experienced last year have created some new dynamics around order patterns and customer delivery timing. And we predict that 2023 will be an uncertain period of transition as we dynamically calibrate with our customers.

Additionally, there are likely to be pockets of demand softness due to a variety of intersecting economic and geopolitical factors. Regardless of these challenges, we will execute and deliver growth above-market entitlements. The short cycle and decentralized nature of our business supports quick adaptation and alignment to shifting conditions.

And we will course-correct quickly and effectively when needed. Our balance sheet has ample capacity to support our M&A strategy as well as organic reinvestment. Our extended M&A and strategy team continues to build conviction around our best opportunities, and our funnel is strong and of high quality.

We've also identified areas where we will deploy capital organically to expand capacity, capture market share and drive operational productivity. IDEX had a strong finish to an outstanding year in 2022. Our agility, resiliency and our fundamental ability to execute has IDEX exceptionally well positioned to outperform as we move forward.

With that, I'll turn it over to Bill to discuss the outlook for our segments on Page 7..

Thanks, Eric. In our Fluid & Metering Technology segment, industrial day rates were steady in the fourth quarter, and we expect they remain at this level in the near term with strong price support. We've seen initial signs that customers are returning to a book-and-bill order pattern, consistent with pre-pandemic behavior.

We continue to monitor day rates to evaluate longer-term expectations as this is our most short-cycle market exposure. We expect another strong year in agricultural business with strong farmer sentiment and high crop prices.

We continue to see positive signals from both our OEMs and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs. We are on our next phase of process automation at Banjo and see continued improvement in delivery and efficiencies putting us in a good position to capture share.

Our outlook for our municipal water business continues to be favorable. The healthy quoting activity we experienced over the past few quarters is expected to translate into 2023 growth. And we continue to identify opportunities to leverage our technology to capture new programs.

The EPA just received record funding and the Infrastructure Bill could provide a tailwind in the back half of the year. The chemical markets overall are soft. We see opportunities for growth in U.S.

green energies and strong project activity in the Middle East, but this is offset by softer European demand due to higher energy costs and cuts to production capacity. In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support.

However, customers continue to delay larger investments as they focus on cost, inventory and supply chain issues. The strong price capture and productivity achieved in 2022 as well as new pricing actions in '23 will continue to drive improvements in FMT margins with some risk of offset from lost volume leverage, depending on the second half volumes.

Moving on to the Health & Science Technology segment. We expect HST to remain our highest growth segment. Our life sciences and analytical instrumentation businesses will continue to grow in '23 due to strong next-gen sequencing applications and continued expansion of cell-based therapies in various chromatography and mass spec applications.

In the short term, however, several of our OEM customers are holding excess inventory, driving volume out of the first quarter and into the balance of the year. We believe this is a short-term issue, and the overall market outlook remains extremely positive for this sector.

Our targeted growth initiatives tied to a wide variety of applications from satellites and space, to energy-efficient fuel cells continue to perform well, and our industrial businesses are seeing market trends similar to FMTs.

We are seeing some slowing in semiconductor market, driven by higher memory device inventory levels and declining customer chip spending. Fabrication spending and new fab construction are both expected to be down for the year.

That said, we provide critical consumable components for a large installed base, which tends to be more stable despite end market and CapEx cycles. Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market.

We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects. Customers are hesitant to make larger investments given inflation and higher interest rates. India continues to accelerate and the easing of China restrictions could drive growth and recovery in the region to offset some.

Lastly, our auto business is expected to perform well. Global auto production is stable, and our presence in premium vehicle segments in EV and hybrids is driving a faster recovery as compared to the overall market.

HST margins will expand in '23 due to pricing, productivity and volume, partially offset by continued reinvestment in our highest growth businesses and some mix headwinds in the short term due to expected life science AI demand patterns.

Finally, we expect our Fire Safety and Diversified Products segment will experience growth towards the lower end of our guided range. In fire safety, U.S. and European fire OEM volumes remain constrained by supply chain and throughput issues, but backlogs are strong and volumes are steady.

We expect continued share gain with smaller builders that are coming online to capture surplus demand. Our rescue business remains positive with strong NPD, and we continue to leverage our integrated model to drive distribution growth.

We expect our Banjo business to continue to outperform across industrial, automotive and energy markets as it leverages its inventory and differentiation to capture share.

Finally, our dispensing business has achieved strong results for the last 2 years, but will be down in 2023, driven by lower North American project volume as customer equipment refresh cycles approach their final innings. We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia.

For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in the segment. With that, I'll discuss our financial results. Moving on to our consolidated financial results on Slide 9. Q4 orders of $803 million, were up 1% overall and up 1% organically.

We experienced continued orders growth in FMT, driven by strong water and energy results and an FSD due to strong fire and rescue orders as well as the receipt of a large project order for dispensing in the quarter. HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier.

For the year, orders were up 8% overall and up 5% organically. We experienced positive orders growth across all 3 of our segments. Fourth quarter sales of $811 million, were up 13% overall and up 12% organically. We experienced nearly 20% organic growth in HST and strong growth across both FMT and FSD.

Full year sales of $3.2 billion, were up 15% overall and up 13% organically. We saw strong double-digit growth across FMT and HST and 9% growth in FSD. Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021 and adjusted gross margin of 43.6% contracted by 40 basis points.

This was driven by unfavorable mix within HST and FSD, the dilutive impact of acquisitions, employee-related inflation and unfavorable productivity in HST, partially offset by volume leverage and strong price cost.

For the full year, gross margins expanded by 50 basis points, and adjusted gross margins expanded by 10 basis points to 44.8%, primarily driven by strong volume leverage, positive price/cost and productivity, more than offsetting employee-related inflation and engineering resource investments.

Fourth quarter adjusted EBITDA margin was 27%, up 10 basis points versus 2021. A bridge of Q4 adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation. Full year adjusted EBITDA margin of 27.9%, is up 20 basis points versus 2021's adjusted EBITDA of 27.7%. This represents record profitability for IDEX.

I will discuss the drivers of full year adjusted EBITDA on the next slide. Our Q4 effective tax rate of 20.5%, decreased versus last year's effective tax rate of 22.5%, primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Muon Group acquisition.

Our full year effective tax rate of 21.7% also included tax benefits from the sale of our Knight business and was down from the 2021 effective tax rate of 22.5%. Fourth quarter net income was $130 million, which resulted in an EPS of $1.71 Adjusted net income was $153 million, with an adjusted EPS of $2.01, which was up $0.30 or 18% over prior year.

Full year net income was $587 million, which resulted in an EPS of $7.71. Adjusted net income was $618 million, resulting in an EPS of $8.12, up $1.25 or 18% over prior year adjusted EPS. Finally, free cash flow for the quarter was $147 million, 96% of adjusted net income, mainly driven by improved working capital performance.

For the year, free cash flow was $489 million, down 1% versus last year and coming in at 79% of adjusted net income. mainly driven by higher net working capital, partly offset by higher income. As we exit the year, we made progress in reducing core business inventories and have momentum behind us to continue to drive further reduction into next year.

Moving on to Slide 10, which details the drivers of our total year adjusted EBITDA. Full year adjusted EBITDA increased $119 million compared to 2021 and Our 13% organic growth contributed approximately $91 million flowing through at our prior year gross margin rate.

We levered well on the volume increase and had record price capture to offset record inflation. Price/cost was accretive to margins and has returned to historic levels. As we exited the year, all 3 of our segments posted positive price/cost results.

We drove operational productivity to offset supply chain-driven inefficiencies and realized the benefits of our energy and Italian site consolidations. Mix was a small positive for the year. We saw unfavorable mix pressure in the fourth quarter of about $3 million that were reversed a majority of the year-to-date favorability.

We invested $20 million taking in the form of engineering and commercial resources in the business and M&A and diversity equity inclusion resources in corporate. Tracking to the lower end of the $0.20 to $0.25 of full year spend we highlighted at the beginning of the year.

Discretionary spending increased by $25 million versus last year, closer to the high end of the $0.20 to $0.25 range on significantly higher sales than our original guide. We exited the year with a solid 30% organic flow-through.

ABEL, Nexsight, KZValve and Muon acquisitions, net of the Knight divestiture and FX contributed an additional $14 million of adjusted EBITDA. Inclusive of acquisitions, divestitures and FX, we also delivered 30% flow-through. With that, I would like to provide an update on our outlook for the first quarter and full year 2023. I'm on Slide 11.

We expect full year organic revenue growth to be in the range of 1% to 5%. This range reflects the uncertainty in the second half of the year given the short-cycle nature of our business. This organic growth rate equates to $0.12 to $0.60 depending on the top line results.

This range includes price cost, which we anticipate will be positive for the year and some mix pressure stemming from HST and dispensing volume in FSD. We expect that our operational productivity will more than offset pressure from employee-related wage and benefits inflation.

We operated in a challenging supply chain environment in 2022, and we expect the easing of these conditions as well as driving our own internal productivity funnel will deliver $0.06 to $0.08 of net productivity for the year.

In 2022, we returned to a more sustainable level of discretionary spending post-pandemic and invested in the people needed to drive our strategy. Travel and external services did not fully rebound until the second quarter of 2022. And we hired an increasing rate as we move through the year.

Although our spend is only moderately increased versus our 4Q exit rate, we'll see pressure of approximately $0.09 on a year-over-year basis. This impact is entirely felt in the first quarter of 2023. Although not to the same level as in 2022, we will continue to invest for the future.

People, new products as well as applications for existing products, and these investments will provide up to $0.20 of pressure in 2023, depending on top line results. The range indicates how we will focus on resource allocation and an uncertain period and dial in our investments appropriately.

Net of the divestiture of our Knight business last year, we expect acquisitions to contribute $168 million of revenue and $0.43 of EPS. Now let's look at a couple of non-operational items. Interest expense associated with the Muon acquisition represents a headwind of $0.12, and we expect FX to be a small impact, providing $0.02 of EPS pressure.

So in summary, we are projecting organic revenue growth of 1% to 5% for the year, adjusted EPS expectations are in the range of $8.50 to $8.80, a 5% to 8% growth over 2022. The midpoint of our guidance implies a solid 30% adjusted EBITDA flow-through. Moving on to Slide 12.

We I'll now provide some additional details regarding our 2023 guidance for both the first quarter and full year. In the first quarter, we are projecting GAAP EPS to range from $1.74 to $1.79 and adjusted EPS to range from $1.98 to $2.03, with organic revenue of 3% to 5% and adjusted EBITDA margins of approximately 27%.

Our guidance includes $0.07 of pressure from accelerated recognition of share-based compensation as well as a delay in HST OEM shipments to the latter part of the second quarter that is lowering our organic growth expectations for the quarter.

These factors, plus the carryover item I mentioned on the previous slide, mutes our year-over-year flow-through for the quarter, but expect to deliver solid flow-through for the year. Turning to the full year 2023. We project GAAP EPS of $7.55 to $7.85 and adjusted EPS to range from $8.50 to $8.80.

We expect full year organic revenue growth of 1% to 5% and adjusted EBITDA margins to be 28% or higher. Capital expenditures are anticipated to be about $70 million, in line with 2022 spending as we continue to identify opportunities to reinvest in our core businesses. And free cash flow is expected to be 100-plus percent of adjusted net income.

With that, I'll turn it back to Eric..

Thanks, Bill. I'm on the final slide, Slide 13. Before we open the call for questions, I'd like to wrap up with a summary of our 2023 focus areas.

First, we are refocusing our efforts on a foundational set of practices and tools that link us together the IDEX operating model as we exit 2 intense years of double-digit organic growth within an environment of temporal barriers and obstacles. This is a year to double down on the core execution elements that make us an excellent company.

The use of daily management, monthly business reviews, goal deployment and other tools have long been a source of efficiency, innovation and growth for IDEX as market conditions, particularly within supply chains, begin to return to historic norms, we must seize the opportunity to optimize our process-driven fundamental business practices to best support future growth and outperformance.

Second, we are committed to growing our talent at an even faster rate to fuel future IDEX growth. Our excellent execution is led by incredible leaders around the world who are committed to our core values to developing top-performing talent and creating an inspiring company culture that attracts and retains the best people.

Diversity, equity and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work each and every day. One talent note I want to address is the recent departure of Melissa Aquino.

If you recall from our last session together, I introduced her as the new leader of the FMT and FSD segments. Melissa made a difficult decision to go back to a previous employer to take an opportunity she felt she could not pass up. We wish her well in her new endeavors and continue the search for her replacement.

In the meantime, the gap has allowed me to step in, get closer to our businesses and spend time with an outstanding group of business leaders. Lastly, we've deployed $1.5 billion over the last 2 years on high-quality growth businesses, and we look forward to deploying additional capital in 2023.

Our M&A teams have made tremendous progress identifying compelling portfolio extensions. Our funnel is in the best shape it's been over my tenure at IDEX and our strong operating cash flow and balance sheet put us in a great position to continue to capitalize on those opportunities.

Although the short-term economic picture might be uncertain, I could not be more excited as I consider the next few years of our story. I believe we're headed into an extended period of growth and above-market performance fueled by a combination of technology-driven tailwinds and our own high-quality business potential.

Our businesses are first rate, our teams are outstanding, our culture is special. With that, let me pause and turn it over to the operator for your questions..

[Operator Instructions] Our first question is from Allison Poliniak with Wells Fargo..

I just want to go back to your comment on optimizing processes and how we should think about that inventory is certainly a one that's been a target just because you've had to build it up to deal with some of the supply chain issues. But maybe a little bit more color about how you're thinking about that..

Yes. And that's probably the area with the best example. We're coming off an environment where a lot of even the best intentional processes kind of turn into chasing things, looking for parts and waiting for the truck to come in at noon, all of that kind of stuff.

So as that moderates and gets better, we just want to be intentional to make sure that we're going back and putting in those process-based fundamentals, the right people in the right room, having the right kind of conversations. That's actually how we're going to -- we frankly made a nice turn here in the fourth quarter on inventory.

We got a long way to go, but we're really excited about that potential for us moving forward. But I think it's just -- I think everybody should be very thoughtful of recognizing that the way things have worked the last couple of years, if you're not intentional about reorienting it back to something that operates in a higher plane, it's going to lag.

And so we're taking that opportunity..

Got it. And then just turning to free cash flow, still a little bit below historical performance for IDEX in terms of that conversion.

Is it really just that inventory holding it back? I would say, what would be the lever to drive it higher at this point and sort of back to normal for you guys?.

Yes. So in the fourth quarter, we talked to the third quarter inventory stabilized. It wasn't a detriment to cash flow. Here in the fourth quarter, it added about $20 million of free cash flow, the movement we made on our position, and we continue to see that momentum.

I think we've got line of sight to a half a turn to a full turn of inventory improvements as we progress through the year.

It will be a significant driver of our cash flow performance as we go from, obviously, less than historical averages on our free cash flow conversion to last year being 100-plus percent, which will yield somewhere between 30% and 40% increase in free cash flow year-over-year. So I think that's a huge win as we progress through the year..

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

So a couple of questions here. First on the guidance. Obviously, the commentary on the first quarter and some pushouts, plus a lot of the commentary about basically expected volatility through the year.

How have you cadence that guidance? Is it relative to normal seasonality? I mean how do you think about first half, back half versus a normal year? Not that we've had a lot of normal years lately, but any kind of context you give to how you're thinking about what that cadencing looks like and how much kind of caution maybe you've put in there given what that backdrop looks like?.

Yes. I think we're generally first half, second half is fairly close, 49, 50, 51, 49, something like that. So this year, I think the implied guide is a stronger first half with volume starting to decline in the back half.

We've got pretty strong price carryover and price capture that will put in place here in the first quarter that will carry at least the price side. And then just the implied volumes in the back half are down somewhere between 2% to 4%..

Great. That's helpful. Makes sense. And then the comment on order volatility expected is the -- essentially the booking to shipment time period compresses or return to normal.

Are you essentially suggesting that you're going to be seeing some pretty volatile order patterns in a year, but maybe a little bit more linear demand patterns as we work through the year relative to the kind of front half, back half comments you just made, Bill? Is that basically a warning sign for -- in your view for what those order rates might be, but don't over extrapolate relative to the underlying demand?.

Yes. No, I think that's well said. I mean it's a recalibration year, just like we had dynamic recalibration on the way up and recovery from the pandemic and supply chain issues and things like that, stimulus. Now we -- I think we're going to be returning to more normal patterns.

But given the nature of IDEX, that's liable to play out at differentiated rates. So we see some more of it, as you'd expect, in some of those OEM-centric markets within HST, where we're a lot closer to the customer. It's more high velocity anyways. And you can see a bit of a pause there to take a breath, take some inventory out of their system.

And then those are healthy markets on the other side of them. Some of our industrial businesses that are a little further away from the end customer, lots of distribution between us and them, lots more fragmentation. I think you'll see some of those same things play out over time, but probably a little further down the road.

And so what we're kind of expecting here is that from a high level, you'll see things return to more normal rates were off in the backlog or the order rates and the sales rates are pretty tightly linked for us, unless we're sort of beginning or ending the cycle. But I think that what's a little unusual here is just the way it will play out.

The nature of it, given just the differentiated pockets of IDEX, and so we're prepared for all of that. What we're trying to do on one side is look at it, adjust to it, course correct, but then always looking on the other side so that we don't over interpret something in the short end.

Think it means something that's sustainable for 2, 3 years when it doesn't, and we keep resources aligned in places that have the best growth prospects for us..

Appreciate that. One quick one, just a clarification. Slide 7 with the arrows within the range.

Are those arrows implying high end and lower of the range for the HST and FSD? Or are you suggesting a little bit above, a little bit below and then the green clarification?.

Yes, exactly. HST on the high end of the range, FMT in the middle and then FSD at the lower end of the range..

Got it. But still the range..

Our next question is from Nathan Jones with Stifel..

I'm just going to -- I'm going to follow up on Mike's question -- last question there and follow up on this recalibration of orders and things like that. IDEX doesn't typically have a lot of inventory, a lot of channels. But I'm sure there are some pockets of the business where there are some inventory in new channels.

How are you thinking about the potential for your customers to destock some of their inventory and for that to be a pause in demand for you guys? Is that something that you baked into that down 2% to 4% volume in the second half?.

Yes. I mean there's definitely some of that in there. I think, as you know, we're kind of low on the food chain. We do a lot of component work for people who then turn it into subsystems in terms of the final system. So at any point, along that food chain, there's the potential for accumulation and then frankly, the normalization of it along the way.

I think what we're thinking about, though, is when you think of how order patterns are generated many of them are actually done in an automated way. There actually isn't a lot of human intervention. And the two factors that drive it, the most are, of course, lead times and whether or not they're pulling in, and we're seeing that.

We're seeing that kind of across the supply base. We're experiencing as well. A factor a lot of people don't consider as much though is volatility or variability. And so even when lead times are pulling in, if you still have an inability to count on it, it will tend to keep driving higher demand requirements throughout the system.

So we're kind of monitoring both of those. And as any one of them comes to something more normal, almost always, you're going to see an impact on that on the other side for a short cycle business like ourselves. I don't think it's a massive number because, as you say, most of the things we make are customized and they don't stock well anyways.

But we're coming off a pretty robust time here. I do think this calibration matters. It will play out over time through much of IDEX.

Again, I think the focus for us is to understand it make sure that our own inventory positions and resources are calibrated right, but then be very, very focused on end market demand, what's driving that, what's the actual consumption rate on the other side because that ultimately is what you want to dial in to..

I think maybe the question on supply chain. I think over the last couple of years, generally, all of these lead times have stretched out. But for IDEX's businesses, the delays have really been up your supply chain because you buy these highly value-added components. So there's a number of steps for them to go through.

And as they compress, that's compressing the order to ship time.

So can you talk about where your supply chain is relative to where it was in 2019 chain? How much better it's got, how much there is still to go? And what your general assumption is now for getting back to something like normal? Does it happen in '23? Does it happen in '24?.

Yes. Sure. I mean, I would say, in general, it's improved a lot and pretty close to where we were in 2019 with a few commodity exceptions. I'd put probably put electronics still at the top of that list. But frankly, we're not the most electronics intensive business. So it matters, but it's not widespread across the company.

I think I would also remind everybody on the call, we have a lot of local supply. So we're typically dealing with people we've known a long time that are not far away all through the kind of the worst of it. In many cases, we were helping them. We were kind of sending people over to figure things out, help improve their flow.

It's those kind of relationships. So -- and given that, that sort of topology, these are the kind of companies that can course correct a little better and generally have. I would say we're not yet normalized to 2019 levels all across IDEX. We're definitely past the halfway line.

So depending on how the year plays out, you could see us basically articulating a normal condition, I think, closer to year-end, certainly as we begin the next year, absent any other force that we can't see..

Our next question is from Deane Dray with RBC Capital Markets..

I was hoping we could unpack the margins in HST. I know you gave some of the color in the prepared remarks. You certainly had the top line. And -- but you didn't get the margin read-through. It's unlike price/cost was positive. You gave some of the other data points.

Was mix a factor? Just -- and how much of this was temporary versus how you expect it to play out the rest of this year?.

Yes. I think there's 3 things there, Deane. One, we continue to face some of the inefficiencies. We talked about here as we progress through the back half of the year. Some of those businesses have grown 20% and still calibrating on some of the manufacturability of some of this cutting-edge technology that they have.

Two was some mix within the portfolio. We talked about some of the short-term OEM pushouts. A lot of that has been kind of our book and ship components that are higher margin. And then the last one, just the addition of Muon, they were only in the portfolio for a month.

They were shut down to do a full physical inventory that, that diluted margins a little bit. The Muon on will go away in the first quarter. I think we're making progress on the productivity piece, but the mix, I think, is still a component that we'll experience in the first quarter.

Yes, so we've got the volume impact and then that mix carrying through at least through the next 3 months..

Got it. That's helpful. And just expectations on price cost into '23.

Is there more pricing initiatives you need to put through? Or is this all-carryover benefit?.

No. We've got carryover and the incremental pricing actions that we took to kick off the year. Obviously, that's part of our normal process and cadence to continue to capture the value for our products. So I think we're in a really good position from a price cost.

We said in the fourth quarter, we're back to historic levels, and we think that will continue here as we progress through the year. If something were to change, obviously, we go back to the customers with an incremental increase, but we're well positioned here as we kick off the year..

Great. Just last question, I'm not sure how specific you can get, and I really appreciate the prepared remarks and some of the earlier questions about fleshing out the transition period year. Just right from the supply chain normalizing changes, order behavior, we get that. But we just saw the ISM taking another step down, orders another step down.

With all your short-cycle businesses, this is a great canary in a coal mine company to like gauge lead time changes, and you've given fabulous color here.

If we total up the collection of soft pockets of business, is this a demand deterioration you're seeing broadly? Could it be the early signs of it? Or do you feel like these are more temporary? Just kind of step back and say, okay, from seeing these trends, how does it look to you for the businesses that you touch play out for the course of the next couple of quarters?.

Yes. I'd say, Deane, it's still pretty early. I mean everything we're kind of talking about here near term that there was some exposure in Q4 and some carry into Q1. That's very much a temporal condition and otherwise very active and strong markets where you can see, hey, people are taking a pause for all the reasons that you just suggested.

Those bellwethers that we have on the industrial side, most of which their order side is coming through the small order flow side, honestly, those are holding up.

We're simply, in some cases, projecting that if you combine a couple of things, we kind of know where those inventory levels are, we know how they think about planning, we know where we are from a lead time perspective.

We're saying at some point, we expect we'll have some of that moderation there, but it really isn't in front of us as we sit here today. And then back half of the year is more of a macro call than anything else as we think about kind of floor and top end of the range for all of IDEX.

So I think your question is helpful because it helps us kind of parse that we'll at least put out there, hey, we're seeing some of these things from an early indication standpoint, but most of them are in a temporal spot.

We can imagine some things that would be bigger pieces of IDEX, more industrial in nature that would kind of follow the same calibration. And then ultimately, like everyone else, we're kind of thinking about where does the future go back half of the year, it's more of a macro question..

Yes. That's exactly the color I was looking for. Very helpful..

Our next question is from Rob Wertheimer with Melius Research..

Your order commentary has been very clear and helpful. And I appreciate it. I'm sorry to sneak in one more on it. But just in general, HST, a vertical that had more excess inventory given some of the, the disruptions across the whole vertical.

And then do you have a sense that supply chain has actually gotten a lot better or orders like coming in as people anticipated getting better? I'm just wondering if that's already happened, where people can feel more confidence in lead times, I guess, across the businesses, or whether it's an anticipation of that? And then I had an M&A question, if I could..

Okay. Well, I think the first question, I wouldn't say that those businesses in the HST world, have more inventory. I would say that they have more sophisticated planning. I think that we've typically seen in any cycle, there's just -- they're bigger organizations, they're a little bit more formal, they're usually a little quicker to react to cycles.

And when they do it, that's a more of a concentrated industry anyways. So it tends to be kind of amplified that way. So there's nothing that tells me that somehow that they're sitting on more than anywhere else. And it's in any way, frankly, unusual from some other patterns we've seen when things change. So I'd say that's number one.

Remind me again on the second question, I want to make sure I get the exact essence. You talked about supply chain confidence..

Exactly. Yes.

So whether spy chain has already gotten better and that lets people have more confidence in lead times and thus destock a bit or whether that's not happened yet?.

Yes. No, again, I think, think of it as 2 variables. One is lead time compression, that's absolute. And I think people are seeing that. They're seeing that quoted to them when they call and ask about things. I would say the second component that I mentioned that is important, though, is the performance against those quotations.

Neither one of them yet are kind of back to where they need to be. They're both improved, but they both work together. And frankly, that second piece, the one about sort of assurance and delivery against commitments, has a huge psychological impact. And I think it's one of the -- I think it's actually the more powerful of the two.

So if people say, hey, it's still longer, but I know I'm going to get it exactly want to ask for it, they'll actually make that move in a more fundamental way. If they're still getting surprised from time to time, that tends to fuel a little bit of this. I'm going to keep some things, I'm going to protect some things. So both are moving.

And as we continue to talk through the year, you'll hear us talk about both sides of that..

That was very helpful. Just in general, we've had, I think, a reasonably solid level of deal activity you guys have done great over the last year. Your characterization of buyers market just among potential targets for acquisition and whether PE matters for you guys and whether there's less intense competition there. And I will stop..

Yes. I mean -- so in general, our story is a good one here. I mean we've had some good performance over the last couple of years, some great businesses we brought in.

I've talked from time to time about the intention of work we've done to sort of build strategic conviction in a really, really formal way that contributes to the basic business intelligence that we have from all the businesses across IDEX. So the things that we control are in a great spot.

As we think of them engaging with the outside world, we've always been careful to help people understand that we're fishing in a very high-quality universe that I think, in some ways, holds up and it doesn't move around as much in terms of valuations and even timing of transactions, particularly to do this work well.

So -- on the PE front, they're often competing with us for properties like this. They too are attracted to companies like this. And I will say it's probably a little less activity competitively there or people that have been able to raise funding and be in the game.

But we've long aspired with this work that we're doing to sort of be ahead of that anyway with cultivation on a proprietary nature, talking to people that we meet at the trade shows, those kind of things so that we're not actually in kind of a classic bake-off with lots of people anyways.

It's an efficient market, so it doesn't always happen when it does. I think the dynamic around PE activity is absolutely true. Valuations overall still pretty rich because, again, we're looking for high-quality companies like the last 3 that we've brought into the business..

Our next question is from Scott Graham with Loop Capital Markets..

And Eric, thank you for all that transparency that was great. So the question is -- maybe I missed it because I was writing away because you talk -- saying so many things.

Did you tell us what pricing was in the quarter?.

No, no one asked it. It was over 5%..

And the gap was it that still about like 50-ish?.

On price cost?.

Yes..

Yes. We said it was back to our historical level, so right around there..

Okay.

And then the carryover for next year, can you tell us what that would be?.

Yes. I mean overall price next year is somewhere around 3% to 4%, about half of it is carryover..

Got it. So I was just wondering also with the -- thank you, Bill.

I was just wondering also with the step-down in the first quarter organic, is that mostly FMT and maybe secondarily, FSD in the organic?.

No, it's mostly HST. We highlighted just some of the temporal moves from some of the OEMs as they recalibrate order patterns and inventory levels, that's the major driver..

Okay. And then I guess my sort of last question here is also on the M&A environment, I mean, in the past, you guys have sort of talked about what's available and a little bit about the funnel.

Is there anything more you can say than what you've already said on M&A? Is that still the spreads been kind of coming in a little bit? Or anything changed?.

No. I mean, as I said just a minute ago that we're still looking for high-quality properties. Those valuations tend to hold up over time. because of the long track record usually predating our conversation and the expectation you'll have a good trail on the other side.

I just think from an availability front, we've got more than ample capacity, even though we've deployed a lot over the last 2 years. The great part of being IDEXX is we generate that capacity each and every day. And then I think our targets, we really have not changed. We kind of are comfortable with a band of about $0.5 billion to $1 billion.

And if long considered that to be a good target for us here in the next couple of years, sort of regardless of the cycle and they're generating all the right work to go realize that..

Our next question is from Bryan Blair with Oppenheimer & Company..

I was wondering if you could offer a little more of a profile on the lung group, maybe a rough breakout of key end market exposures across semi, med tech, food and beverage and others.

-- where historical growth rates have been -- how the current market environment impacts '23 expectations and where there's the greatest opportunity to extend or accelerate growth within the IDEXX portfolio going forward?.

Brian, we said about 2/3 of the business is in those major categories you started with on the medical, semi and food side, the balance in a variety of different applications. We've said it's grown at double digits here the last several years.

It's got line of sight to continue to do that here as we progress even with some of the noise out there in the semicon market, where they play in this space is still healthy. They've got innovative technology that they continue to roll out.

So we remain bullish on their growth profile both on core products and some of the NPD applications that we've gotten to know a little bit more as we progress through the last couple of months of our ownership..

And then really past that, I mean, we did say there's some customer points that we have that they don't have that over time, we think, are interesting and we could exploit those. And that's very interesting things on the kind of codevelopment fronts, but the cycle of those are going to be further out in the future.

So this always kind of was a game of capitalizing on the near-term strength and success of that business in those markets with sort of this additive element that we're going to work over time to enrich it with all the IDEXX assets..

Definitely makes sense. And given the composition of Man Group, the -- from what I can see at least 5 businesses, I'm not certain divisions or platforms they're in. Are there any unique aspects of integration that you would call out? And I guess just to level set, obviously, this is a growth opportunity.

But are there cost synergies?.

I mean, not so much within the IDEXX topology and things like that. I mean some certain things we do to leverage back office and being part of the company. But it's not kind of a classic story of us kind of putting things together and moving plants around.

The -- as you often see in businesses like this, I mean a lot of that technology is resident in people. I think the single biggest lever that we anticipate pulling here absent that 1 is 80-20. I mean it's just the implementation of that model.

And I can absolutely assure you their profile is very IDEX-like out of the gate, which means there are opportunities there to streamline and simplify it..

Okay. Excellent. And 1 last one, if I can. You've called out an increase in project activity in municipal water. -- over recent quarters, there's obviously a lot of funding for domestic projects.

Are you willing to offer some finer points on that front? How much the project funnel has expanded anticipated 2023 growth? Anything along those lines?.

Yes. I mean it's -- of course, it manifests itself across a series of franchises and very kind of different technologies that we have. So I would probably just roll back to very, very positive.

The quote activity has been strong here at the end of last year continues into this year for all of the dynamics that you're citing, everything from EPA funding and enforcement possibilities, which has always been a catalyst for the businesses that we own now.

as well as broader infrastructure support over time, which always takes a little longer to land but also has a potential to extend some of the growth time frames that we're thinking about into the future. So we're well positioned. We're continuing to kind of work those assets together.

And then -- and this is an area of focus for us as we think about deploying some capital to..

Our next question is from Brett Linzey with Mizuho Americas..

Just wanted to come back to the excess OEM inventory comment.

Any sense in terms of months or weeks of inventory on hand at those OEs that needs to get worked down? And then -- any color or specific product customer segments that you're referring to there?.

No.

I think from a segment, I think it's most of -- we described within some of the comments within our life sciences and total instrumentation, the folks in that group from a magnitude perspective on what they're holding in from inventory, I wouldn't speak to that other than just conversations with them, there is a calibration period that we're going through.

As Eric highlighted earlier in the call, this isn't atypical to what we've seen historically we've gone through really robust cycles of growth. There is a quarter or 2 of recalibration to normalize and then back off.

I think as you hear any of the external commentary for those large customers, they are still bullish on their equipment deliveries and the growth that they're going to see in 2023..

All right. Makes sense. And then just shifting to the resource investment you contemplated for the guide. $0 to $0.20. I mean certainly a wide range given the macro and understand that. But historically, I'd say IDEX consistently invested regardless of the state of the environment.

What type of situation really drives you to that lower end? And then maybe just a little color on some of the various projects that are being contemplated there..

Absolutely. We always think of investing and investing for the future and investing to grow. One of the great things about a company like ours, though, is we can move things around sideways. -- a lot to help us kind of hit the lower end of that range and still make the right choices for the right businesses.

And so whenever you see us talking about stuff like a 0, it's actually still very dynamic here. it's just to be candid, we would take businesses that are in softer parts of the universe, and we would quite intentionally like pull those down, lead them out a lot.

And redistribute those costs elsewhere to parts of IDEXX that are stronger, sometimes literally taking the same people. and putting them over in stronger parts of IDEXX. So we actually have that nice optionality down at the lower end of the range, but keeps it all moving and allows us to kind of weather a storm if it happens..

And our final question is from Joe Giordano with Cowen and Company..

Just a couple of follow-ups on orders here. So if I look at HST, obviously, the orders there on an organic basis, the weakest across the portfolio, but the growth for the year on revenue expected to be the best.

Like -- so when -- at what point kind of as you get through the year, do you need to see orders start to stabilize or start accelerating again before like you get a little bit more concerned about the organic revenue profile going forward..

Yes. I think we have a while. HST is our biggest backlog. They've built the most backlog out of the 3 segments. So really comfortable with their position here as we go through the first half of the year. We said this calibration on the OEM inventory levels is generally a quarter maybe it spreads into the second.

So we're confident that we're going to see that start to pick up and move as we progress into the back half of the year..

And then similar on FMT -- sorry, on diversified dispensing is a headwind this year on a revenue basis, but it looks like orders kind of picked back up to almost essentially peak levels that you saw like a year ago.

So are you starting to see that? Like do you feel more comfortable about the visibility? Are those like 24 orders, I guess, essentially for dispensing that you're getting on..

No, the Q4 we got for dispensing will book in the second and third quarter of this year. Yes, Dispensing orders were up 25%, but their sales were down 20-plus percent in the fourth quarter.

So this is -- that was the 1 last order to give us kind of the full set of visibility to still reasonable performance, but down, that's going to mask a little bit of the strong organic growth that we expect from Fire & Safety and Bandon next year..

You'd expect the dispensing orders to move back down --.

I mean, sorry, verified orders to move back down from like fourth quarter levels..

Yes. Yes, definitely..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments..

Okay. Well, thank you all for joining and listening to our story. And I know there were a lot of moving pieces there in an environment that's got some pluses and minuses and things that are playing out. So I'll keep this really, really simple. I want to, again, thank all the folks from IDEXX. 2022 was a great year.

I mean really, really outstanding year, incredible growth, focused on the right things, getting capital to work, and we grew our people, we grew our culture. I think 2020, this is going to be an equally great year, and it really sets us up for the future to come. We talked a little bit in my last framing comments there about the power of execution.

We're really excited about that. We think we've got a chance here to go establish even a little bit more competitive advantage as we jump on this and recalibrate to the world to come. So we're all over it. We're doing that actively.

And then just as passionately, we've got a number of teams that are thinking about the future, what comes in 5 years, what comes in 10 years, and we're going to make the choices that we have to to capitalize on those too. So -- thanks for your support and interest, and have a great day..

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