IDEX CORP /DE/ (IEX) FY 2022 MD&A

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes in this annual report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this annual report.

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

2022 Overview

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

In 2022, the Company achieved a record year in sales driven by robust demand. The Company’s ability to capture price amid inflation pressures and its focus on execution drove record earnings per share. Finally, the Company deployed record capital, within its existing portfolio, with the acquisition of three businesses - Nexsight, KZValve and Muon Group - and through share repurchases to support our future goals.

Select key financial results for the year ended December 31, 2022 when compared to 2021 were as follows:

•Sales of $3.2 billion increased 15%; organic sales were up 13%.

•Net income of $586.7 million increased 31%; Net income margin of 18.4% increased 210 basis points.

•Diluted EPS attributable to IDEX of $7.71 increased $1.83, or 31%; Adjusted diluted EPS attributable to IDEX of $8.12 increased $1.25, or 18%.

•Adjusted EBITDA of $884.2 million increased 16%; Adjusted EBITDA margin of 27.9% increased 20 basis points.

•Cash flows provided by operating activities of $557.4 million were down as higher earnings were more than offset by an increased investment in working capital. Free cash flow of $489.4 million was 79% of adjusted net income attributable to IDEX.

Focus for 2023

During 2023, the Company’s primary focus will be on:

•Foundational Execution. During 2021 and 2022, the Company experienced both double-digit organic growth and a challenging operating environment characterized by global supply chain constraints, record inflation and continuing effects of the COVID-19 environment. In 2023, the Company will renew its focus on the core elements of its operating model that are designed to drive efficiency, innovation and growth. As market conditions continue to evolve, the Company believes it will leverage its process-driven fundamental business practices to drive above-market growth and operational excellence.

•Building Great Global Teams. The Company’s teams have demonstrated their ability to quickly adapt to challenges and changing conditions as well as to solve critical problems for customers. The Company is committed to cultivating talent to fuel future growth and onboarding leaders who are committed to IDEX core values, talent development and creating an inspiring Company culture. Diversity, Equity and Inclusion continues to be an area of focus, creating environments where people feel they belong and can bring their true selves to work every day.

•Capital Deployment. The Company deployed $1.5 billion over the last two years on growth business opportunities, will continue to identify both organic and inorganic opportunities and believes there will be a high quality pipeline for potential acquisitions. The Company believes that its strong operating cash flow and balance sheet enable deployment

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of additional capital to acquire IDEX-like businesses in 2023 to further strengthen its portfolio. The Company anticipates that 2023 organic investment opportunities will be in line with 2022 spending.

Results of Operations

The following is a discussion and analysis of the Company’s results of operations for the year ended December 31, 2022 compared with the year ended December 31, 2021. For the discussion related to the consolidated results of operations for the year ended December 31, 2021 compared with the year ended December 31, 2020, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on February 24, 2022.

Performance in 2022 Compared with 2021

Net Sales

Sales increased 15%, reflecting a 13% increase in organic sales, a 5% increase from acquisitions (Muon Group - November 2022, KZValve - May 2022, Nexsight - February 2022, Airtech - June 2021 and ABEL - March 2021) net of divestitures (Knight LLC and its related affiliates (“Knight”) - September 2022), a 1% increase from the acceleration of previously deferred revenue related to the exit of a COVID-19 testing application (see Note 15 in the Notes to the Consolidated Financial Statements for further detail) and a 4% unfavorable impact from foreign currency translation. Sales increased 23% domestically and 7% internationally, and sales to customers outside the U.S. were approximately 48% and 52% of total sales in 2022 and 2021, respectively.

Cost of Sales and Gross Margin

Cost of sales increased due to higher sales volume, inflation and acquisitions. Both Gross profit and Gross margin increased primarily due to higher volume leverage, favorable price/cost and productivity and the acceleration of previously deferred revenue related to the exit of a COVID-19 testing application, partially offset by increases in employee-related costs. Gross profit also increased as a result of acquisitions, net of the Knight divestiture, partially offset by an unfavorable impact from foreign currency translation.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased primarily due to the impact from acquisitions, including amortization, as well as higher discretionary spending, resource investments and employee-related costs. Additionally, the prior year included a $3.5 million impact of a settlement for a corporate transaction indemnity that did not reoccur in 2022.

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Restructuring Expenses and Asset Impairments

Restructuring expenses and asset impairments increased primarily due to an asset impairment related to the exit of a COVID-19 testing application, partially offset by lower severance costs in 2022. See Note 15 in the Notes to the Consolidated Financial Statements for further detail.

Operating Income

Operating income increased 18%, reflecting a 19% increase in organic operating income, a 2% increase from acquisitions net of divestitures (Knight - September 2022), a 1% favorable net impact from the exit of a COVID-19 testing application, partially offset by a 4% unfavorable impact from foreign currency translation. The increase in organic operating income is attributable to higher volume leverage, favorable price/cost and operational productivity, partially offset by increases in employee-related costs, discretionary spending and resource investments.

Operating Margin

Operating margin increased 60 basis points, reflecting a 130 basis point increase in organic operating margin, partially offset by a 70 basis point decrease due to acquisitions primarily driven by higher amortization. The increase in organic operating margin is primarily due to higher volume leverage, favorable price/cost and operational productivity, partially offset by increases in employee-related costs, discretionary spending and resource investments.

Gain on Sale of Business

In the third quarter of 2022, the Company completed the sale of Knight for proceeds of $49.4 million, net of cash remitted, resulting in a pre-tax gain on the sale of $34.8 million. The Company recorded $5.5 million of income tax expense associated with this transaction as Provision for income taxes in the Consolidated Statements of Income during the year ended December 31, 2022.

Other (Income) Expense - Net

Other (income) expense - net was $3.9 million of income in 2022 compared to $16.2 million of expense in 2021. The prior year included an $8.6 million noncash loss related to the termination of the U.S. pension plan, net of curtailment and an $8.6 million loss on early debt redemption. Additionally, 2022 included $3.1 million of gains on the sale of assets and $2.5 million of foreign currency transaction gains, partially offset by $2.3 million of losses on trading securities.

Interest Expense

Interest expense decreased primarily due to lower weighted average interest rates on the Company’s indebtedness, partially offset by an increase in the amount of debt outstanding compared with 2021 due to borrowings under the Term Facility and the Revolving Facility, both of which were used to fund the acquisition of Muon Group. Additionally, the prior year included $1.6 million of interest expense for the interest rate contract associated with the 4.20% Senior Notes that did not reoccur in 2022.

Income Taxes

The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state, and foreign income. The provision for income taxes increased $32.2 million to $162.7 million in 2022 as compared with $130.5 million in 2021 due to higher earnings. The 2022 effective tax rate of 21.7% decreased compared with the 2021 effective tax rate of 22.5% primarily due to tax benefits realized from the divestiture of Knight as well as from realizing foreign currency impacts in connection with the funding of the acquisition of Muon Group.

Results of Reportable Business Segments

The Company has three reportable segments: Fluid & Metering Technologies (“FMT”), Health & Science Technologies (“HST”) and Fire & Safety/Diversified Products (“FSDP”). For a detailed description of the operations within each segment, please refer to Part I, Item 1, “Business” of this Annual Report on Form 10-K.

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Within its three reportable segments, the Company maintains 13 reporting units where the Company focuses on organic growth and strategic acquisitions. Management’s primary measurements of segment performance are sales, Adjusted EBITDA and Adjusted EBITDA margin.

During the fourth quarter of 2022, the Company changed the segment measure of profit and loss used by the Chief Operating Decision Maker ("CODM") in accordance with Accounting Standards Codification ("ASC") 280, Segment Reporting, from operating income to Adjusted EBITDA. The change in segment measure of profit and loss aligns with how the CODM allocates resources and evaluates the performance of the business. It also allows the Company to better assess operating results over time since it excludes items that are not reflective of ongoing operations. For further discussion related to the Company’s change in the segment measure of profit and loss used by the CODM as well as the definition of Adjusted EBITDA, refer to Note 14 in Part II, Item 8, “Financial Statements and Supplementary Data.”

Fluid & Metering Technologies Segment

(1) Acquisitions included KZValve in May 2022, Nexsight in February 2022 and ABEL in March 2021. Divestitures included Knight in September 2022. Based on the timing of its acquisition, ABEL results for the first two months of 2022 are reflected in the acquisitions/divestitures column while the remaining year-over-year impact is included in the organic column.

•Sales increased 24% domestically and 9% internationally. Sales to customers outside the U.S. were approximately 43% and 47% of total segment sales in 2022 and 2021, respectively.

•The change in organic sales was attributed to increases in the Pumps reporting unit due to continued favorable demand in the industrial and energy markets as well as strong price capture. Additionally, there were increases in the Energy reporting unit due to a continued rebound in the refined fuel, liquefied petroleum gas and aviation markets as well as improved operational performance, increases in the Agriculture reporting unit due to strong market performance driven by favorable commodity prices and global demand for crops and increases in the Water reporting unit due to an overall positive municipal water market and water-saving targeted growth initiatives.

•Adjusted EBITDA margin of 32.1% increased 240 basis points compared with 29.7% in 2021. The change in Adjusted EBITDA margin was attributed to the following:

◦Organic Adjusted EBITDA margin increased 280 basis points due to strong price/cost, favorable productivity and higher volume leverage, partially offset by increases in employee-related costs, discretionary spending and resource investments.

◦Acquisitions negatively impacted Adjusted EBITDA margin by 40 basis points due to the dilutive impact from acquisitions on overall FMT Adjusted EBITDA margin.

Health & Science Technologies Segment

(1) Acquisitions included Muon Group in November 2022 and Airtech in June 2021. Based on the timing of its acquisition, Airtech results for the first six months of 2022 are reflected in the acquisitions/divestitures column while the remaining year-over-year impact is included in the organic column.

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(2) Includes the impact of the acceleration of previously deferred revenue of $17.9 million as a result of a customer’s decision to discontinue further investment in commercializing its COVID-19 testing application. See Note 15 in the Notes to Consolidated Financial Statements for further detail.

(3) Adjusted net sales is calculated as net sales less the acceleration of previously deferred revenue related to the exit of a COVID-19 testing application. It is used in the calculation of Adjusted EBITDA margin for the full year 2022. Refer to Non-GAAP Disclosures in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.

•Sales increased 32% domestically and 10% internationally. Sales to customers outside the U.S. were approximately 52% and 56% of total segment sales in 2022 and 2021, respectively.

•The change in organic sales was attributed to increases in the Scientific Fluidics & Optics reporting unit due to strong demand across the analytical instrumentation and life sciences markets, favorable but slowing demand in the semiconductor market and targeted growth initiatives tied to Next Gen Sequencing and satellite broadband, in the Performance Pneumatics Technologies reporting unit driven by strength in the industrial market, price capture and targeted growth initiatives tied to fuel cells and in the Sealing Solutions reporting unit due to favorable performance in the semiconductor, oil and gas and automotive markets.

•Adjusted EBITDA margin of 31.2% decreased 50 basis points compared with 31.7% in 2021. The change in Adjusted EBITDA margin was attributed to the following:

◦Organic Adjusted EBITDA margin decreased 70 basis points due to increases in employee-related costs, discretionary spending and resource investments, partially offset by higher volume leverage and favorable price/cost.

◦Foreign currency positively impacted Adjusted EBITDA margin by 20 basis points.

Fire & Safety/Diversified Products Segment

•Sales increased 8% domestically and 2% internationally. Sales to customers outside the U.S. were approximately 50% and 51% of total segment sales in 2022 and 2021, respectively.

•The change in organic sales was attributed to increases in the Fire & Safety reporting unit due to acceptance of targeted growth initiatives, price realization and backlog execution, in the BAND-IT reporting unit due to strength in the energy market driven by increases in oil prices and in the automotive market driven by share gain as well as continued favorable industrial performance and in the Dispensing reporting unit due to continued favorable paint market, North American project volume and strong performance in India.

•Adjusted EBITDA margin of 27.1% decreased 160 basis points compared with 28.7% in 2021. The change in Adjusted EBITDA margin was primarily attributed to organic Adjusted EBITDA margin which decreased 140 basis points due to increases in employee-related costs and discretionary spending as well as compressed price/cost, partially offset by higher volume leverage.

Performance in 2021 Compared with 2020

Due to the change in segment measure of profit and loss discussed above, the following discussion and analysis of the Company’s segment results of operations for the year ended December 31, 2021 compared with the year ended December 31, 2020 has been updated to include Adjusted EBITDA margin for comparative purposes.

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Fluid & Metering Technologies Segment

(1) Acquisitions included ABEL in March 2021 and Flow MD in February 2020. Based on the timing of its acquisition, Flow MD results for the first quarter of 2021 are reflected in the acquisitions/divestitures column while the remaining year-over-year impact is included in the organic column.

•Sales increased 5% domestically and 19% internationally. Sales to customers outside the U.S. were approximately 47% and 44% of total segment sales in 2021 and 2020, respectively.

•The change in organic sales was attributed to increases in the Pumps reporting unit due to recovery within the industrial market, in the Water reporting unit due to recovery of the municipal water market and water-saving growth projects and in the Agriculture reporting unit due to increased global demand, partially offset by a decrease in the Energy reporting unit due to a decline in capital spending in the oil and gas markets.

•Adjusted EBITDA margin of 29.7% decreased 60 basis points compared with 30.3% in 2020. The change in Adjusted EBITDA margin was attributed to the following:

◦Organic Adjusted EBITDA margin decreased 10 basis points due to increases to inventory reserves associated with COVID-19 new product development opportunities not materializing and resource investments, partially offset by higher volume leverage and favorable price/cost.

◦Acquisitions negatively impacted Adjusted EBITDA margin by 40 basis points due to the dilutive impact from acquisitions on overall FMT Adjusted EBITDA margin, which was primarily driven by the Flow MD acquisition.

◦Foreign currency negatively impacted Adjusted EBITDA margin by 10 basis points.

Health & Science Technologies Segment

(1) Acquisitions included Airtech in June 2021.

•Sales increased 27% domestically and 24% internationally. Sales to customers outside the U.S. were approximately 56% and 57% of total segment sales in 2021 and 2020, respectively.

•The change in organic sales was attributed to increases in the Scientific Fluidics & Optics reporting unit due to recovery within the analytical instrumentation market as well as increased microfluidics and optics demand, in the Sealing Solutions reporting unit due to strength in the semiconductor market and improvements in the automotive market and in the Material Processing Technologies reporting unit due to increased demand in the food and pharmaceutical markets.

•Adjusted EBITDA margin of 31.7% increased 370 basis points compared with 28.0% in 2020. The change in Adjusted EBITDA margin was attributed to the following:

◦Organic Adjusted EBITDA margin increased 390 basis points due to volume leverage and favorable price/cost, partially offset by targeted reinvestment.

◦Foreign currency negatively impacted Adjusted EBITDA margin by 20 basis points.

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Fire & Safety/Diversified Products Segment

•Sales increased 17% domestically and 13% internationally. Sales to customers outside the U.S. were approximately 51% and 52% of total segment sales in 2021 and 2020, respectively.

•The change in organic sales was attributed to increases in the Dispensing reporting unit due to strong demand in the paint market and in the BAND-IT reporting unit due to improvements in the aerospace, energy and industrial markets, partially offset by a decrease in the Fire & Safety reporting unit due to a lack of large tenders for rescue tools and North America Fire OEM supply chain constraints slowing order to revenue conversion.

•Adjusted EBITDA margin of 28.7% was flat compared with 2020. The change in Adjusted EBITDA margin was attributed to the following:

◦Organic Adjusted EBITDA margin decreased 10 basis points due to unfavorable price/cost and mix, partially offset by higher volume.

◦Foreign currency positively impacted Adjusted EBITDA margin by 10 basis points.

Liquidity and Capital Resources

Liquidity

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

At December 31, 2022, working capital was $855.7 million and the Company’s current ratio was 2.6 to 1. At December 31, 2022, the Company’s cash and cash equivalents totaled $430.2 million, of which $373.1 million was held outside of the United States. At December 31, 2022, there was $77.7 million outstanding under the Revolving Facility and $7.9 million of outstanding letters of credit, resulting in a net available borrowing capacity under the Revolving Facility of $714.4 million. The Company believes that additional borrowings through various financing alternatives remain available, if required.

Cash Flow Summary

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

Operating Activities

Cash flows provided by operating activities decreased $7.9 million to $557.4 million in 2022 as higher earnings were more than offset by an increased investment in working capital.

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

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Operating working capital increased $156.8 million to $704.8 million at December 31, 2022. Acquisitions, divestitures and foreign currency translation contributed $31.9 million to the increase in operating working capital. Excluding those items, Receivables - net increased $63.1 million as a result of higher volume; Inventories increased $79.0 million to support production amid supply chain challenges; and Trade accounts payable increased $17.2 million due to higher inventory purchases.

Investing Activities

Cash flows used in investing activities increased $219.1 million to $917.2 million in 2022, primarily due to higher cash outflows for acquisitions with the addition of Muon Group, KZValve and Nexsight in 2022 compared to Airtech and ABEL in 2021, partially offset by proceeds received from both the sale of Knight and the sale of marketable securities in 2022 as well as higher proceeds from asset sales in 2022 compared to 2021.

Financing Activities

Cash flows used in financing activities increased $28.3 million from $9.5 million in 2021 to $37.8 million in 2022. During 2022, the Company repurchased 795,423 shares at a cost of $148.1 million, paid $177.4 million in dividends, borrowed $210.4 million under the Revolving Facility and $200.0 million under the Term Facility and repaid $135.0 million of the Revolving Facility. During 2021, the Company issued $500.0 million of 2.625% Senior Notes, redeemed $350.0 million of 4.20% Senior Notes and paid $161.1 million in dividends.

Free Cash Flow

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

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

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

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

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Cash Requirements

Contractual Obligations

The Company’s contractual obligations include borrowings and related interest, purchase obligations, pension and post-retirement medical benefit plans, rental payments under operating leases, payments under capital leases, a transition tax payable and other obligations arising in the ordinary course of business (such as acquisition commitments). There are no identifiable events or uncertainties, including the lowering of the Company’s credit rating, which would accelerate payment or maturity of any of these commitments or obligations. For a description of the funding requirements related to the Company’s contractual obligations, refer to Note 4 (transition tax payable), Note 7 (borrowings and related interest), Note 10 (lease obligations) and Note 18 (pension and post-retirement obligations) in the Notes to Consolidated Financial Statements, respectively. As of December 31, 2022, the Company’s purchase obligations, consisting primarily of inventory commitments, totaled approximately $364.4 million, of which $336.4 million is expected to be settled during 2023 and the remainder thereafter.

Capital Expenditures

Capital expenditures generally include machinery and equipment that support growth and improved productivity, tooling, business system technology, replacement of equipment and investments in new facilities. The Company believes it has sufficient operating cash flows to continue to meet current obligations and invest in planned capital expenditures. In 2022 and 2021, cash flows from operations were more than adequate to fund capital expenditures of $68.0 million and $72.7 million, respectively. The Company recently invested a significant amount of capital to expand the China facility which was completed in late 2022 and the India facility which is expected to be completed in early 2023, ultimately doubling the Company’s historic capacity in each of these countries. Otherwise, management considers its facilities suitable and adequate for the Company’s operations and believes it has ample capacity in its plants and equipment to meet demand increases for future growth in the intermediate term, especially given its operational improvement initiatives that usually increase capacity.

Debt Repayment

As of December 31, 2022, the Company has $100.0 million of 3.20% Senior Notes due June 2023. The Company expects to either refinance or repay the Notes using the available borrowing capacity of the Revolving Facility, due November 2027.

Share Repurchases

The Company repurchased 795,423 shares at a cost of $148.1 million in 2022. There were no share repurchases in 2021. As of December 31, 2022, the amount of share repurchase authorization remaining was $563.8 million. For additional information regarding the Company’s share repurchase program, refer to Note 12 in the Notes to Consolidated Financial Statements.

Covenants

The key financial covenants that the Company is required to maintain in connection with the Revolving Facility, the Term Facility and the 2016 Private Placement Notes, are a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.50 to 1. At December 31, 2022, the Company was in compliance with both of these financial covenants, as the Company’s interest coverage ratio was 24.39 to 1 for covenant calculation purposes and the leverage ratio was 1.55 to 1. There are no financial covenants relating to the 2.625% Senior Notes or the 3.00% Senior Notes; however, both are subject to cross-default provisions. For a discussion of the Company’s Revolving Facility and Senior Notes as well as the associated covenants, refer to Note 7 in the Notes to Consolidated Financial Statements.

Credit Ratings

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

•S&P Global Ratings affirmed the Company’s corporate credit rating of BBB (stable outlook) in August 2022.

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

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

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Dividends

The Company increased its quarterly cash dividend by 11% from $0.54 per common share in 2021 to $0.60 per common share in 2022. Total dividend payments to common shareholders were $177.4 million in 2022 compared with $161.1 million in 2021.

Critical Accounting Estimates

The Company believes that the application of the following accounting policy, which is important to its financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of the Company’s accounting policies, including the accounting policy discussed below, see Note 1 in the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”

Goodwill and intangible assets — The Company’s business acquisitions result in recording goodwill and other intangible assets, which affect the amount of amortization expense and possible impairment expense that the Company will incur in future periods. The Company evaluates the recoverability of certain noncurrent assets utilizing various estimation processes. The Company follows the guidance prescribed in Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets, to test goodwill and intangible assets for impairment. The Company determines the fair value of each reporting unit utilizing an income approach (discounted cash flows) weighted 50% and a market approach (consisting of a comparable public company multiples methodology) weighted 50%. The Company uses the relief-from-royalty method, a form of the income approach, to determine the fair value of its indefinite-lived intangible assets. The relief-from-royalty method is dependent on a number of significant management assumptions, including estimates of revenues, royalty rates and discount rates. To determine the reasonableness of the calculated fair values, the Company reviews the assumptions to ensure that neither the income approach nor the market approach yielded significantly different valuations. Based on the results of the Company’s annual impairment test at October 31, 2022, all reporting units had fair values substantially in excess of their carrying values.

The key assumptions are updated every year for each reporting unit for the income and market approaches used to determine the fair value. Various assumptions are utilized including forecasted operating results, annual operating plans, strategic plans, economic projections, anticipated future cash flows, the weighted average cost of capital, market data and market multiples. The assumptions that have the most significant effect on the fair value calculations are the weighted average cost of capital, market multiples, forecasted EBITDA and terminal growth rates. The following assumption ranges were utilized by the Company in 2022 and 2021:

See Note 6 for further discussion on goodwill and indefinite-lived intangible assets.

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Non-GAAP Disclosures

Set forth below are reconciliations of each of Organic sales, Adjusted net sales, Adjusted net income attributable to IDEX, Adjusted diluted earnings per share (“EPS”) attributable to IDEX, Consolidated Adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and Consolidated Adjusted EBITDA margin to its respective most directly comparable U.S. GAAP measure. Management uses these metrics to measure performance of the Company since they exclude items that are not reflective of ongoing operations, such as fair value inventory step-up charges, restructuring expenses and asset impairments, the impact from the exit of a COVID-19 testing application, gain on sale of a business, gains on sales of assets, the impact of the settlement of a corporate transaction indemnity, the loss on early debt redemption, the noncash loss related to the termination of the U.S. pension plan, net of curtailment and acquisition-related intangible asset amortization. Management also supplements its U.S. GAAP financial statements with adjusted information to provide investors with greater insight, transparency and a more comprehensive understanding of the information used by management in its financial and operational decision making.

This report references organic sales and organic operating income, non-GAAP measures, that exclude (1) the impact of foreign currency translation and (2) sales and operating income, respectively, from acquired or divested businesses during the first 12 months of ownership or prior to divestiture and (3) the impact from the exit of a COVID-19 testing application. The portion of sales and operating income attributable to foreign currency translation is calculated as the difference between (a) the period-to-period change in organic sales and organic operating income, respectively, and (b) the period-to-period change in organic sales and organic operating income, respectively, after applying prior period foreign exchange rates to the current year period. Management believes that reporting organic sales and organic operating income provides useful information to investors by helping to identify underlying growth trends in the Company’s business and facilitating easier comparisons of the Company’s revenue and operating performance with prior and future periods and to its peers. The Company excludes the effect of foreign currency translation from organic sales and organic operating income because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because they can obscure underlying business trends and make comparisons of long-term performance difficult due to the varying nature, size and number of transactions from period to period and between the Company and its peers. The Company excludes the impact from the exit of a COVID-19 testing application because it is not reflective of ongoing operations and can obscure underlying business trends.

Management believes that Adjusted EBITDA, which is EBITDA adjusted for items that are not reflective of ongoing operations, is useful as a performance indicator of ongoing operations. The Company believes that Adjusted EBITDA is useful to investors as an indicator of the strength and performance of the Company and its segments’ ongoing business operations and a way to evaluate and compare operating performance and value companies within the Company’s industry. Management believes that Adjusted EBITDA margin is useful for the same reason as Adjusted EBITDA. The definition of Adjusted EBITDA used here may differ from that used by other companies.

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

The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures prepared in accordance with U.S. GAAP. Due to rounding, numbers presented throughout this and other documents may not add up or recalculate precisely. The financial results prepared in accordance with U.S. GAAP and the reconciliations from these results should be carefully evaluated.

(1) Represents the acceleration of previously deferred revenue of $17.9 million as a result of a customer’s decision to discontinue further investment in commercializing its COVID-19 testing application. See Note 15 in the Notes to Consolidated Financial Statements for further detail.

(1) Represents the net impact of the acceleration of previously deferred revenue of $17.9 million and an impairment charge of $16.8 million as a result of a customer’s decision to discontinue further investment in commercializing its COVID-19 testing application. See Note 15 in the Notes to Consolidated Financial Statements for further detail.

(1) Represents the net impact of the acceleration of previously deferred revenue of $17.9 million and an impairment charge of $16.8 million as a result of a customer’s decision to discontinue further investment in commercializing its COVID-19 testing application. See Note 15 in the Notes to Consolidated Financial Statements for further detail.

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