Nordson Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 23, 2022

Key Takeaways

  • Positive Sentiment: Record Q3 results with sales up 4% to $647 M (7% constant currency), EBITDA at 32% of sales above target, and adjusted EPS of $2.49 (+3%).
  • Positive Sentiment: Announced CyberOptics acquisition to enter 3D optical inspection for front-end semiconductors, with $6 M of cost synergies and expected close in Q1 FY23.
  • Neutral Sentiment: Backlog remains elevated above $1 billion for the seventh consecutive quarter as customers extend shipment dates amid supply-chain constraints.
  • Neutral Sentiment: Maintained full-year guidance for 8–9% revenue growth and 18–21% adjusted EPS growth despite stronger currency headwinds.
  • Positive Sentiment: Board approved a 27% dividend increase for Q4 FY22, marking the 59th consecutive year of dividend hikes.
AI Generated. May Contain Errors.
Earnings Conference Call
Nordson Q3 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation Third Quarter Fiscal Year 20 22 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

20. Thank you. Ms. Mahoney, you may begin your

Speaker 2

conference. 20.

Speaker 3

Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Nagarajan, our 2, President and CEO and Joseph Kelly, Executive Vice President and CFO. We welcome you to our conference call today, 22 Q3 results. 20.

Speaker 3

You can find both our press release as well as our webcast slide presentation that we will refer to during today's call 2 on our website at www.nordson.com/investors. 20. This conference call is being broadcast live on our investor website and will be available there for 14 days. 20. There will be a telephone replay of the conference call available until Tuesday, August 30, 2022.

Speaker 3

20. During this conference call, references to non GAAP financial metrics will be made. A reconciliation of these metrics 20. Before we begin, 20. Please refer to Slide 2 of our presentation, where we note that certain statements regarding our future performance 20.

Speaker 3

That are made during this call may be forward looking based upon Nordson's current expectations. 20. These statements may involve a number of risks, uncertainties and other factors as discussed 2019. In the company's filings with the Securities and Exchange Commission that could cause actual results to differ. 20.

Speaker 3

Moving to today's agenda on Slide 3, Naga will discuss 3rd quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the two business segments. 20. Joe will also discuss the balance sheet and cash flow. Naga will then share a high level commentary about our enterprise performance, 2, including an overview of the CyberOptics acquisition announcement.

Speaker 3

He will conclude with a review of the fiscal 2022 full year guidance. We will then be happy to take your questions. 2. With that, I'll turn to Slide 4 and hand the call over to Naga.

Speaker 4

Good morning, everyone. 20. Thank you for joining Nordson's fiscal 2022 Q3 conference call. Before we begin, I'd like to congratulate 20. Thank you, and good morning everyone.

Speaker 4

As you may recall, 20. We reported record sales and profitability in the Q3 of fiscal 2021. 20. The fact that the team delivered above this result is a true testament to our differentiated precision technology, 2 customer centric model, effective deployment of the NBS Next Growth Framework and the dedicated Nordson employees who are driving our strong profitable growth. 20.

Speaker 4

I'll speak more about the business in a few moments, but first, I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.

Speaker 5

20. Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see Q3 fiscal 2022 sales 20.4

Speaker 1

percent

Speaker 5

compared to the prior year's 3rd quarter sales $647,000,000 The increase was primarily related to 4% organic volume growth

Speaker 4

12, plus the NDC

Speaker 5

acquisition, offset by unfavorable currency impact of 5%. 20. On a constant currency basis, our sales increased 7% compared to prior year Q3, 20, which was the previous quarterly sales record. The organic growth was broad based 20. Across most end markets and geographies except for Asia Pacific, which was impacted by the Shanghai, China 20.5 months of this fiscal third quarter as expected.

Speaker 5

20. We are very thankful for the outstanding efforts of our China employees as their return in full force 12. Helped offset a significant portion of the lockdown impact and contributed to the record sales quarter. 20. Gross profit for the Q3 of fiscal 2022 totaled $366,000,000 20, or 55 percent of sales, a slight increase compared to the $365,000,000 or 57 percent of sales and the prior year Q3.

Speaker 5

Excluding one time restructuring costs, 20. Adjusted gross profit totaled $368,000,000 or 56 percent of sales. 20. The team continues to actively manage the price cost dynamic in these inflationary periods 20, in addition to unfavorable currency impacts. Operating profit totaled $185,000,000 in the quarter.

Speaker 5

20. During the quarter, we recorded one time restructuring costs associated with the facility consolidation in the EFD division 20 20 20 20 20

Speaker 1

20 20 20 20 20 20 20 20 20 20

Speaker 5

20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Speaker 1

20 20 20 20 20

Speaker 5

20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 2018. Excluding these non recurring items was $188,000,000 in the quarter or 28% of sales 20 compared to the strong prior year Q3 operating profit of $188,000,000 20. Organic sales volume leverage contributed to the operating profit result and was offset by unfavorable currency impact and inflationary pressures. EBITDA for the 3rd quarter 20 was $213,000,000 or 32% of sales, which is ahead of our long term target of 30%. 20.

Speaker 5

Looking at non operating expenses, other net expenses decreased $3,000,000 20, primarily driven by lower non operating pension costs and foreign currency exchange gains. 20. Tax expense was $39,000,000 for an effective tax rate of 21% in the quarter, 2019, which is in line with our prior year Q3 rate and the forecasted full year rate for 2022. 20. Net income in the quarter totaled $142,000,000 or $2.45 per share.

Speaker 5

20. Adjusted earnings per share excluding severance and facility closure costs totaled $2.49 per share, 20, a 3% increase from the prior year. This improvement is reflective of the year over year increase in sales and more importantly, the consistent application of the NBS Next Growth Framework, 20, which leads to steady profitable growth. Now let's turn to Slide 67 to review the Q3 2022 segment performance. Industrial Precision Solutions sales 20.

Speaker 5

$341,000,000 decreased 1% compared to the prior year Q3, 12, but grew 5% on a constant currency basis, with the NDC acquisition providing a 7% sales increase, which was offset by an organic volume decrease of 1%. The unfavorable currency impact 20 on this segment was 7%. The organic 1% decrease needs to be properly interpreted 20. As ITS' Q3 2021 was a very strong quarter, 10% 20.8% above the quarterly average in fiscal 2021 as it was inclusive of several large 2.2. Also, the IPS segment's China 2.

Speaker 5

Operations are headquartered in Shanghai, and therefore, the segment was disproportionately impacted by the COVID lockdowns in May June of this year. The organic growth, excluding these factors, was driven by robust demand for packaging and product assembly product lines in the food and beverage industry 20 and Industrial End Markets in most geographies. Operating profit for the quarter was $120,000,000 20.5 percent of sales, which is a decrease of 3% compared to the prior year operating profit of $124,000,000 20. Unfavorable currency negatively impacted operating profit despite comparable sales 22. Moving now to Advanced Technology Solutions.

Speaker 5

20. Sales were $321,000,000 a 7% increase compared to the prior year Q3 20 and sequentially beat the 2nd quarter 2022quarterlyrevenuerecord 20 for this segment. The record quarterly sales included an increase in organic sales volume of 10%, 12, offset by unfavorable currency impacts. Growth was across all major product lines, 20, but particularly strong in the electronics dispense and biopharma fluid component product lines. 20.

Speaker 5

All geographies contributed to this quarter's growth with particular strength in the international regions. 20.3rd quarter fiscal 2022 results for ATS included $2,500,000 of non referring facility closure expenses associated with the consolidation 12 of manufacturing operations within the EFD division. This consolidation will enable improved operating efficiency and customer service levels to support the growth of this division once complete. 20. 3rd quarter adjusted operating profit excluding the consolidation expense was $89,000,000 or 28 percent of sales, an increase of 10% over the prior year operating profit $81,000,000 The profit growth was driven by sales volume leverage, offset partially 20.

Speaker 5

This segment continues to deliver impressive sales growth 12 at very attractive 40% plus incremental operating profit margins. Deployment of our NBS Next Growth Framework 20. Continued to be a key element in the success of this segment delivering profitable growth. 20. Finally, turning to the balance sheet and cash flow on Slide 8.

Speaker 5

20. Our Q3 balance sheet includes cash of $129,000,000 and net debt 20 was $675,000,000 resulting in a 0.9x leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity 20. We continue to pursue organic and inorganic growth opportunities such as the CyberOptics acquisition announced on August 8. 20.

Speaker 5

Free cash flow in the quarter was $111,000,000 or a conversion rate on net income of 78%. 20. As strategic investments are being made in inventory to address portions of the current supply chain constraints and increased capacity to address the growing backlog. Dividend payments were $29,000,000 in the quarter 2017. And our Board approved a 27% increase in the annual dividend effective in the Q4 of fiscal 2022.

Speaker 5

20. This marks the 59th consecutive year the company has increased its dividend. 20. The significant increase of 27% reflects the strength of our financial results, 20, which are driven by our continued progress in executing the Ascend strategy, combined with 20. The desire to maintain targeted payout and yield ratios.

Speaker 5

The annual dividend yield now will be slightly over 1% at current market prices. Also, with the ongoing market volatility, We again capitalized on the opportunistic repurchase of shares. Year to date, we have spent over $230,000,000 20.5% on share repurchases averaging a price of $2.19 per share. 20. For modeling purposes, in fiscal 2022, assume an estimated effective tax rate of 21% and capital expenditures of approximately $50,000,000 I will now turn the call back to Naga.

Speaker 4

20. Thank you, Joe. We are working through incredibly dynamic times, yet our teams continue to meet the needs of our customers. 2. It is their dedication and focus on our customers that resulted in another record breaking quarter.

Speaker 4

20. I want to pause and say thank you to our employees. You make these results possible. 20. We continue to manage through the challenges of the short term macro environment and we are making solid progress on our Ascend strategy.

Speaker 4

As illustrated on Slide 9, we announced our decision to realign 12. Our business segments should better focus on our best profitable growth opportunities. 20. Effective August 1, we reorganized into 3 financial reporting segments. 20.

Speaker 4

Industrial Precision Solutions led by Jeff Penbrook will focus on proprietary 20 Dispensing and Processing Technology for adhesives, coatings, paints, 20.5 Finishes and Other Materials across diverse end markets. Jeff joined Nordson in 2,005 and has driven growth in multiple businesses across Nordson. He also was instrumental 2019 in the development of our medical platform. The new Medical and Fluid Solutions segment 20. We'll include Nordson's fluid management solutions for medical, high-tech, industrial 20 and other diverse end markets.

Speaker 4

This remains one of the company's growth engines 12, both organically and acquisitively. This segment is being led by Stephen Loewas. 20. Steven joined Nordson in 2016 as the leader for Industrial Coating Solutions Business. 20.

Speaker 4

In 2020, he was appointed the Head of our Strategy and Corporate Development Group, where he has actively advanced 20. Finally, our Advanced Technology Solutions segment 20. We'll focus on test and inspection, precisely controlled dispensing and surface treatment for electronics 2 Applications. Srini Subramaniam is leading the segment. 20.

Speaker 4

Srinivasan in 2006 and has served in roles of increasing responsibility 20 in Corporate Development, Business Management and Global Market Development. Srinivas most recently 2, Vice President of the Electronics Processing Solutions Division, where he is successfully driving the execution 12 of the NBS NEX Growth Framework. Our new reporting structure will give 20. Better visibility into our medical and electronics platforms, which have grown significantly through both organic and acquisitive opportunities. I'm also pleased that this structure gives us the opportunity to recognize and promote from within Nordson and advance our winning team strategy.

Speaker 4

20. We will share historic financials reflecting this new segmentation after the 3rd quarter fiscal 202210 Q filing. 20. Turning to Slide 10, I'm pleased to highlight the new acquisition agreement that we announced 20. Earlier in August, Nordson has a very disciplined acquisition strategy.

Speaker 4

20. We are focused on acquiring businesses with differentiated precision technology 2019 that serve attractive high growth end market applications. We have been building platforms in 2 end markets 2019 that meet the strategic criteria, medical and test and inspection. 2017. In the Test and Inspection platform, we have built a significant product offering 20 for our electronic customers in X-ray and acoustic inspection.

Speaker 4

Using the NBS MAX growth framework, 20. The Test and Inspection division identified optical inspection as a high growth application in this end market. 20. Further, our deep understanding of the semiconductor customer and industry trends 20.4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to

Speaker 1

4% to 4% to 4%

Speaker 4

to 4% to 4% to 4% to 4% to 4%. 20. Optical inspection, which takes a picture of the surface level of an application 20. Such as semiconductors or printed circuit boards is an efficient 2 Non Invasive Inspection Method. CyberOptics, which has established itself as a leading 20 Global Developer and Manufacturer of high precision 3 d optical sensing 20.

Speaker 4

Technology Solutions provides a new growth platform for us with existing and new customers 20 in the electronics end market. CyberOptics utilizes a proprietary sensor technology 22, called MRS, that significantly reduces reflection to create higher quality 3 d images 20. In diverse electronics applications, the innovative cyberoptics sensors 20. Combined with advanced software results in high quality images at market leading speed, 20. The company also has introduced 20.

Speaker 4

VAPOR SENSE technology, which is a wireless diagnostic tool that provides real time data 20 to ensure the calibration and process reliability of wafer production systems. 20. Today, this type of inspection requires machines to go offline. 20. So WaferSense offers in line diagnostic inspection that will improve 20.

Speaker 4

This technology will allow Nordson 20. To further expand into the front end of the semiconductor manufacturing process 20, where Nordson has limited presence today. We are very excited 20. To soon add CyberOptics differentiated technology into Nordson's portfolio, 20. This acquisition meets the strategic and financial expectations we outlined during our Investor Day 20.

Speaker 4

In March 2021, we expect this deal to close in our Q1 of fiscal 2023. 20. We will invest in this business to extend the technology to meet emerging customer needs and scale their global sales and service infrastructure to make their technology accessible

Speaker 1

22 to

Speaker 4

a broader range of electronics customers. Now let's

Speaker 1

2. Let's turn to

Speaker 4

our updated fiscal 2022 outlook on Slide 11. Order entry remained strong throughout the 3rd quarter with a favorable book to bill ratio maintaining backlog at over $1,000,000,000 20. This growth in backlog is partially related to the ongoing extended shipment request dates for large customer orders in electronics, industrial and medical end markets. 20. For the full year fiscal 2022, we are confirming our previously provided revenue guidance 12.8% to 9% growth and adjusted earnings growth in the range of 18% to 21% 2019.

Speaker 4

Our fiscal 2021 despite the increased currency headwinds. 20. This is approximately 20% earnings growth following a record 2021 Financial Performance. It is a testament to our dedicated employees and the solid execution of BSN strategy. Our financial results and expectations for profitable growth is rooted in our differentiated precision technology, customer centric model and diversified end markets.

Speaker 4

20. Additionally, the ongoing implementation of NBS Next is making sure 20. We have a crystal clear view of our best growth opportunities and we remain 20. As always, 20. I want to thank our customers, shareholders and the Nordson team for your continued support.

Speaker 4

20. With that, we will pause and take your questions.

Operator

20. 20. Your first question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.

Speaker 2

20. And your results certainly bucked that trend and your commentary about 2. Any differences that you're seeing maybe some of your earlier cycle, order entry slowing, just Any dynamics that you're seeing that maybe you're raising some red flags in your head? And I guess in line with that, how do you view this portfolio now that you've built 20. Through cycles, it seems much significantly more defensible as we go forward here with particularly strength in that medical and some of the technology businesses.

Speaker 2

So just any thoughts there? 20.

Speaker 4

Allison, we missed earlier part of the question. If you don't mind, could you Repeat it, maybe I missed it.

Speaker 2

Yes. I would just say, just any red flags that you're starting to see. I know you talked to order entry being pretty strong still, but just any sort of normalization or slowing or some cautiousness around some of your customers that are out there today?

Speaker 4

20. Sure. In general, as we indicated and our results show, it was a very broad based demand 20 environment that we are experiencing today. And points of strength as we indicated electronics, 2 Medical. We also saw some really good strength and solid order entry as well as 20 revenue profiles in our industrial businesses.

Speaker 4

Our consumer facing businesses in North America were particularly strong as well. 2. As you think about orders, our comps are beginning to get difficult, 20. Right. If anything, that's probably what you would see.

Speaker 4

But in general, very solid 2. In electronics, very solid in medical, pretty good strength in industrial. So

Speaker 1

20. Got it.

Speaker 5

And I would just in the quarter, our order entry from a 20. Standpoint was again a favorable book to bill. So that's a 7th consecutive quarter where we've been adding to backlog. So despite the record sales order entry was north of our sales.

Speaker 2

Got it. And then the new segment structure that's put out there, And I just recall ATS kind of before that push into medical was extremely volatile. How should we think of that volatility in ATS today? Is that 2. Inspection balancing some of that volatility that you've historically seen there?

Speaker 4

Yes. If you think about our electronic business and we've talked about this now tour sometime here. Our electronics dispense business as such has gotten more broader and more diverse in the applications as well as test and inspection is less volatile when compared to dispense and hence

Speaker 1

20. What you find

Speaker 4

really is less cyclical than before, but it is still 12. EdTech facing business, it still has some cyclicality, might be amplitude of the cycles being muted 20 is our expectation.

Speaker 2

Understood. Thank you.

Operator

20. Your next question comes from the line of Connor Lynagh. Your line is open.

Speaker 6

20. Yes. Thank you. I was wondering if we could dive in on the CyberOptics acquisition a little bit more. 2.

Speaker 6

Could you maybe discuss the competitive positioning of the company, sort of why you found it to be an attractive target? And then Sort of second portion of this, if you could just detail some of the cost synergies, it seems like that was a meaningful portion of the deal.

Speaker 4

Yes. If you think about CyberOptics, 2. CyberOptics is a leading global design developer of 3 d optical inspection. 20. And the reason we call that out as 3 day optical inspection is that they have some unique technology around something called as MRS, which is really which suppresses the reflection of coming off of shiny surfaces.

Speaker 4

So 2. What you find really is they are really strong in this and that leads to highly precise, 22. At greater speeds of 3 d images than their competitors. So their 20. Competitive advantage really is on speed, precision and resolution.

Speaker 4

What we find is 2. They're about $100,000,000 company in a market space about $1,000,000,000 20. We felt or we believe that there is a opportunity for here for us to continue to expand their wonderful technology 20. And 2 place and certainly continue to solve problems for our existing customers. So from our perspective, 20.

Speaker 4

It is the 3 d inspection is a double digits growing part of 2nd Test Inspection Technology. So a much faster growth rate than our existing Test Inspection Technologies, which are still 20. Growing nicely at high single digits, but 3 d optical inspection is growing at double digits. So really like the growth rate, really like the technology, really like the market position and hence 20. A combination of CyberOptics technology with Nordson's market presence and commercial infrastructure.

Speaker 4

I believe that this is a really good addition to our 2 portfolio. And Joe, do you want to take the question on synergies? 20.

Speaker 5

Yes. Thank you, Naga. Yes, so when you think about the $6,000,000 of cost synergies, I would tell you 20. There's 2 main buckets. 1 is greater than 50% of those cost synergies are simply eliminating the public company cost.

Speaker 5

20. As you're aware, CyberOptics is a public company and so there's some cost synergies there that are north of 50% of the total. 2. The other one I would tell you is when you look at Nordson's global sales infrastructure, 20. There's opportunity there to leverage our physical infrastructure around the world to more efficiently to support their existing sales force and start to leverage their presence in other geographies.

Speaker 5

And that's the remainder, I would tell you, of

Speaker 4

the $6,000,000 cost synergies. 20. I'd add one more thing on CyberOptics and it is an important piece of why we have decided to go this route 20. The technology of CyberOptics is exceptional in our mind and 20. We intend to continue to invest in this technology to meet customer emerging customer 20 needs.

Speaker 4

And so yes, we have the synergies, but it's also equally important to remember that this is the reason we acquired 20. CyberOptics is really to invest in the technology and support the growth that they have experienced, which is

Speaker 6

2. Makes sense. Thank you. I was wondering, just broadly speaking within this value chain, are there any other areas that you see as particularly high growth, particularly compelling, for further capital allocation?

Speaker 4

20. There are a number of other opportunities out there that we continue to evaluate. 20. So the opportunity profile pipeline looks pretty good. But in terms of this area, 20.

Speaker 4

Traditionally, we have spent most of our time in the back end of the semiconductor manufacturing. 20. And also we spent more time in components as well as PCBs. What CyberOptics brings us is more exposure to the front end where we have limited opportunities. 20.

Speaker 4

And so the front to middle part of semiconductor manufacturing still is 20. An area where Nordson's capabilities align, yet our presence are limited. So we do see opportunities there.

Speaker 1

20.

Speaker 6

All right. Thanks very much. I'll turn it back.

Operator

Your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.

Speaker 7

Thank you. Good morning. 2. Congrats on the deal. And I was curious on the longer cycle side of business, you mentioned industrial markets along with electronics 2.

Speaker 7

But in the industrial markets with the kind of long lead time large orders, I'm curious if you could 20. Kind of differentiate among your industrial end markets where you're seeing those kind of long lead time larger orders land?

Speaker 4

20. If you think about our Industrial Coatings business, it is just one of those businesses where we have 20. We have customers placing orders much into 2023, 20. Right. And so really, we find and these not only are industrial, but they're also consumer facing.

Speaker 4

For example, 20. Our container coating business is doing really well and the backlog is pretty strong. As we look forward into 2023, we see Some pretty good strength. Similarly, what you on a broader basis, this is a trend 2. That has been talked about, but continue to emerge, which we see some strength in the U.

Speaker 4

S. Is that 20. As our customers think about supply chain constraints and as they begin to 20. We do see opportunities for our industrial businesses to continue to have 20 strength and opportunities to grow. And our newly acquired 20.

Speaker 4

NDC Technologies, which is which we call it as the measurement controlled systems business within Nordson We're also seeing some pretty good strength here. Just as a reminder, what we manufacture here are sensors 20. Our sensing technologies that go on automated lines of manufacturing. So if you're in the food and beverage industry, 20. Our sensors detect and ensure that the chips, for example, has the right Christmas and 2.

Speaker 4

If you are in a film cast line, it measures the thickness of the film to make sure that high quality film is produced. So 2. Again, our sensor technology is aiding automation, another secular trend that we are very excited

Speaker 7

20. Great. Thanks. And I just wanted to touch on the short cycle industrial space, 2. How you're seeing the continuity there, particularly on some of the consumables, the OEM 2.

Speaker 7

Content that you sell.

Speaker 4

Yes. So if you think about our OEM 2. Consumer facing businesses, especially in our adhesive business. We have new applications that we're very excited about in electric vehicle. We're starting to gain some traction there.

Speaker 4

Electric vehicle battery manufacturing is not completely 2 solidified yet, but number of emerging applications that are very beneficial to Nordson's hot melt adhesive and other technologies. So very excited about that. 20. On consumer packaging, interestingly enough in North America, our businesses continue to have pretty good strength. In Europe as well, we seem to have good 12.

Speaker 4

But in Europe, it gets muted by the currency that we are facing right now.

Speaker 8

20. Thanks for all the color.

Speaker 1

Yes. If I

Speaker 5

could just add a little color in number terms, I mean, if you look at our growth rate in the United States, 20. It was up organically 5%, which is accelerating from our year to date growth rate in that business.

Speaker 1

20.

Speaker 4

Got you.

Speaker 7

Thanks, Joe.

Operator

20. Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. 20.

Speaker 9

Hey, good morning, everyone.

Speaker 5

Good morning, Jeff. Good morning.

Speaker 9

So just back on the order front, 20. Any indications you're getting from customers that they're going to start to kind of normalize the order patterns and kind of get away from this 2. Less long dated focus or is that continuing to play out? And then just separately, 2. I think, Naga, you said electronics still very strong, but we've gotten a lot of mixed 20.

Speaker 9

Messages on semi CapEx and just wondering how you're kind of looking behind the scenes to kind of 2. I understand any cracks there.

Speaker 4

Yes. So let me take the electronics question first and then we'll 2. So in terms of electronics, what you're beginning to find is that 20. Based on what we see with our customers, you know our sales model, which is direct sales model, so we have direct interactions with our 2. Customers don't have distributors in between.

Speaker 4

The order entry still looks pretty solid 20 and still continues to be robust for our teams, both in the dispense side of the business as well as in test and inspection. 2. The thing to remember is something that has changed about electronics and digital businesses is that 20. Now electronics is just not limited to consumer goods, right? Electronics is much broader, a bigger part, 2.

Speaker 4

A significantly bigger part about how people conduct business, right. Think about the 20. Explosion in cloud, think about number of different technologies now have become 20. A common part of doing business, be it a Zoom call or a Teams call, all of this has 20. So our teams find that 20.

Speaker 4

Our electronic businesses and the need for electronics and in this digital economy is much more broader than it ever has been. 20. And so, that might be part of the explanation why we continue to see strength in electronics for a longer period than before. That is 1. And the second is the complexity of these devices, 20.

Speaker 4

Semiconductors, there is a lot of work going on to ensure throughput and quality of these devices and hence we see 12. Our Test and Inspection businesses benefit from this trend about not quite 100%, but pretty darn close to 20 more in line examination and inspection than offline sampling, right. So you see that benefit. So from an electronic business, from what we can see, what we have visibility to do and we do have a lot of visibility because of our direct sale model, 20. We feel really good about where the business is at today.

Speaker 4

In terms of our customers and 20. Order pattern changing, we have not seen it normalize yet that people coming back. Now in the past, we used to have backlog 20 4, a quarter ahead. But now we have several quarters in front of us, right? And 20.

Speaker 4

I think unless at least this is just my personal perspective, as we resolve 20. And people feel more confident about our supply chain, not just Nordson supply chain, 20 Global Supply Chain. This is not going to change. So, till we have that, it is going to be 20. This long dated orders is just people feeling I need to get 20.

Speaker 4

So 20. I wish I could give you a more clearer answer, but that is that's where we're seeing. We continue to see our customers 20. Keep the same pattern that we have seen in the last 4 to 6 quarters. 20.

Speaker 4

That's sort of reflected in this large slug we have and I've not seen it normalize yet.

Speaker 9

20. No, that's great color. And then just maybe a preview on the segment change. Any light you can shed on like rough 20. I don't know if the businesses ex CyberOptics are going to be fifty-fifty between medical and electronics or kind of size those and should we expect 22.

Speaker 9

A material difference in the margin profile or the growth profile of those businesses.

Speaker 5

Yes. Jeff, shortly after filing our 10Q. We're going to issue a press release, which will give you all the historical information financially for the new segments going back Quarterly 2019, 2020 2021. So, I'll be in that release.

Speaker 1

20. Okay.

Speaker 9

And then just a housekeeping, corporate expense was a little bit higher. How should we think about that run rate into 4Q?

Speaker 5

20. Yes, I would just take and think about the average corporate expense on a

Speaker 1

20. Thanks so much.

Speaker 10

Thanks.

Operator

Your next question comes from the line of Saree Boroditsky with Jefferies. Your line is open.

Speaker 11

20. Thanks. Good morning. Just building on the last question on the new reporting structure, can you just talk through How you are thinking about the independent long term growth outlooks for the medical and fluids business and then ATS? And then How should we think about incremental margins on the separate businesses?

Speaker 5

Yes. So kind of like we highlighted in our Investor 2. Today, when you think about the medical business and the long term growth rate there, if that was your question, Sari, that has, I think, a higher growth rate, 12. Given the megatrends in that market and the applications with which we serve, and so that's slightly higher than our 22. ATS business and the new segmentation, which is predominantly on the electronics side.

Speaker 5

So I would tell you it's probably about 200 basis 20. And then as it relates to incremental margins, as You're aware, on organic growth, we have committed to 40% to 45% incremental margins on our organic growth. 20. And you see that as a little bit higher in the IPS segment as of over the recent quarters, past several quarters. Going forward, I would commit to the 40 to 45 in all three of our segments.

Speaker 11

Great. Thank you. And then you mentioned a facility closure in Quarter, I think in ATS, would you expect to see a margin benefit from this closure and could you quantify that for us?

Speaker 5

Yes. It is The margin benefit, as we consolidate that facility, I don't think there's going to be a material change in that. It's predominantly to support the growth and 2nd quarter. Supporting that growth at the incremental margins of 40% to 45%. So I would tell you as kind of a capacity play as we consolidated into and expanded an existing facility and consolidated from a separate facility.

Speaker 11

20. Great. If I could just squeeze one more in. I think the earnings guidance still has kind of a wide range for the Q4. Could you just talk through the assumptions at the bottom and top end of the range?

Speaker 11

And what would you need to see to hit the high or lower end? Thank you.

Speaker 5

You bet. Yes, so when you think about 2. Our Q4 2022 guidance,

Speaker 1

first of

Speaker 5

all, I would tell you maintaining the guidance range 20. Just an increase in the organic growth forecast given the fact that FX is a greater headwind than it was when we initially gave the guidance. 2. And so when you think about Q4, our guidance at the midpoint suggests about 10% sales growth and about a 20% earnings growth. 12.

Speaker 5

And so considering the 5% FX headwind, that's about a 15% constant currency growth rate in Q4. So, sorry, to answer your question, on the lower side, who knows where the exchange rates are going to move. 20. There was some volatility as you saw in Q3 and that has continued in Q4. And then I would tell you there's just some overall, 20.

Speaker 5

I would say uncertainty in the marketplace, whether it's geopolitical, if you look at the COVID lockdowns that we experienced in Q3 12. In Shanghai and what if that will have any recurring impact in Q4, we don't know. 20. And so as just the overall, I would tell you volatility of the supply chain, which continues to be a challenge, as well as currency, Which kind of has us maintaining the lower end of the range. If you look at the upper portion of our guidance range, 2.

Speaker 5

It kind of suggests that Q4 from a sales standpoint should be comparable to Q3 at the record level $662,000,000 2. And then as we also look at the upper end of our guidance range from an earnings perspective, it suggests, let's just say, 23% growth. 20. However, sequentially, it's the earnings is down from Q3. And I would tell you there's 2 main factors 20.

Speaker 5

Given the composition of the backlogs and items scheduled to ship, this is sequentially has a negative impact on profitability when you compare it to Q3 specifically. And then secondly, the stronger U. S. Dollar, I mean with the euro at near parity or below 20. For the forecast for Q4, compared to where it was in Q3, this again has a negative impact and earnings when you look sequentially compared to Q3.

Speaker 5

So those are some of the thoughts that went into our guidance 12. Maintaining our guidance, which is really increasing our organic growth forecast.

Speaker 11

Great. I really appreciate the color. Thanks, guys.

Operator

20. Your next question comes from Mike Halloran with Baird. Your line is open.

Speaker 8

20. Hey, good morning, everybody. This is Paz on for Mike.

Speaker 4

Hi, Paz.

Speaker 8

Wanted to dig into the backlog a little bit. 2. Just wanted to clarify, I believe you said backlog was up sequentially based on the commentary. And then also mentioned 20. Spending, is that shortening?

Speaker 8

Is that about the same? And then also, could you maybe discuss the composition of backlog, 20. Maybe how that's changed quarter over quarter?

Speaker 5

Yes, I guess Specifically, order entry exceeded our sales. So it was a very slight, but it was an increase in our backlog. And so it remains north of $1,000,000,000 I would tell you it's basically maintaining the timeline that we saw in 20. In Q2, in terms of getting in line order entry and backlog, it's predominantly, I would say, disproportionately heavily weighted on the system side, 20. Where the longer lead times are, some of our parts and consumables are more book and ship as you know.

Speaker 5

And so there's not a heavy 2 backlog there. But when you look at some of our systems businesses, it's going out, as Naga mentioned, into 'twenty three. 20. And your question, has it changed? It has that dynamic hasn't changed from Q2 to Q3.

Speaker 5

22. It remains the same, I would tell you.

Speaker 8

And then could you maybe discuss how that's changed your visibility 20. Going into F 2023, obviously, backlog is elevated versus prior years going into sorry, calendar 2023. Obviously, backlog is elevated going into next year relative to prior years. Does that give you a little bit more 2. Comfort in the strength or the excuse me, the sales conversion in the front half of next year and does that give you a little bit more visibility on the front 2.

Speaker 9

Yes. I would tell you

Speaker 5

for the systems business, yes, it does give us better visibility if think

Speaker 1

2. We used to run with $400,000,000 backlog,

Speaker 5

and now we're running with a backlog of $1,000,000,000 20. Clearly, on the heavy systems businesses, there's greater visibility. I would also tell you in some of our medical There's better visibility than there used to be in the past. And so that does, I would tell you, 20. Help us in terms of our forecasting accuracy.

Speaker 5

That being said, there is a large portion of our business which remains 20 with a shorter cycle time of book and ship. And so it's not even across the board, like I said earlier.

Speaker 1

20.

Operator

20. 20. Your next question comes from the line of Chris Dankert with Loop Capital. Your line is open.

Speaker 10

Hey, good morning everyone. Thanks for taking my questions here. I guess, now you've given us some really great color on CyberOptics and just some of the unique capabilities there. But I guess wafer level Test inspection, it's a much more competitive space and some of the back end niche stuff that Nordson has been doing historically. I mean, 2.

Speaker 10

Is it because

Speaker 4

of the unique capabilities that

Speaker 10

we moved into this or is there really an impetus to move further into the wafer level inspection and kind of get into space in a much more meaningful way. And then just how should we think about the TAM for T and I following this deal?

Speaker 4

Yes. If you just think about 22. Just the TAM for CyberOptics, it's about $1,300,000,000 There are two things 20. Very unique about CyberOptics. The 3 d inspection, it's something that Nordson does not have, right?

Speaker 4

We have a small optical business, 20. Wafer level inspection is an great opportunity, but in some of the wafer level opportunity for CyberOptics 2. Really, they sell the critical component, which is the MRS sensor to their customers who build the broader system, 20. So it kind of resembles some of our other businesses where we sell the critical component into a major machine that 21 of CyberOptics customers markets, right. So that's an example of it.

Speaker 4

Our interest in this 2 business is that CyberOptics also sells 3 d inspection systems in the back end. It is not just exclusively To the front end, right. The reason we highlight front end is that because we already do back end and middle end, we don't do the front end. 20. That's really what I was trying to do.

Speaker 4

So it is not about that we want to move exclusively into front end or greater 20. It is just and what we do in the back end, right. So that's sort of how I think about it. The other exciting technology that CyberOptics brings to Nordson is very different, which is their WaferSense technology, which is an online 20. Of manufacturing systems in wafer production, right.

Speaker 4

And so those that is completely new for us. And I think that again puts us in a place where it's a small device, but performs a very critical function, 20. It's a lot of value. So 2 exciting technologies we bring into the company, continuing to expand our test and inspection portfolio 20. And all rooted in this secular trend of things becoming smaller, things becoming more complex and hence, Test and Inspection becoming more in line, more 100 percent rather than sampling.

Speaker 4

So a good secular trend for us and adding more capability. 20. Optical and one more thing on optical inspection is that optical inspection is viewed as something that doesn't 20. So if you think about our X-ray inspection, it impacts not the first time, but at The 10th time it would impact the component it is inspected, but after the inspection that does not happen. So inherently, after the inspection 22.

Speaker 4

Continues to grow as an inspection method and we wanted to make sure that we have a presence in that space.

Speaker 10

20. Got you. Thank you, Naga. It's very helpful color. It sounds like you are really kind of picking your spots in that front end space.

Speaker 10

So thank you. 20. I guess a way of follow-up, and again, no, we're not talking about fiscal 2023 yet. But just given the size of the backlog, is there any lumpiness to keep

Speaker 5

2nd. Yes, I would tell you if you look at our guidance for Q4 and what we just delivered in Q3, different than last 20. In the back half when you saw lumpiness in terms of our Q3 performance versus our Q4, it's really starting to, I would say, level out. 2. You also saw that in our strong Q1 compared to historically lighter Q1s, if you go back several years.

Speaker 5

So From a lumpiness, I would tell you it started to level out as opposed to increase. 2. Yes, got it. There's one other point I'd like to make a little bit of follow-up on Siri's question on our Q4 guidance and properly interpreting our Q3 results. 2.

Speaker 5

When you look at Q3 profitability by segment, there were changes in inventory valuation 20 related to switching from LIFO method to FIFO method and obsolating older product line. The net impact of the adjustment was immaterial 20. Since favorably impacted IPS and unfavorably impacted ATS by about 100 basis points. 20. So when thinking about our Q3 performance and forecasting into Q4, I think that's important to understand 20.

Speaker 5

Despite the fact that it was immaterial to the consolidated Nordson.

Speaker 10

That's really helpful, Joe. Thank you so much for that.

Operator

20. Your next question comes from the line of Matt Summerville with D. A. Davidson. Your line is open.

Speaker 6

20. Thanks. Just two quick questions. First, can you comment on where Nordson stands right now, price 2. And then maybe just a quick word on the M and A pipeline beyond CyberOptics comment on 20.

Speaker 6

Kind of go forward actionability, what the funnel looks like, multiples you're seeing. Thank you.

Speaker 5

20. Maybe, Doug, I'll take the price versus cost, again, was favorable in terms of we were successful in passing through the cost 20. Increase in terms of pricing, but it was negative impact from a margin standpoint because 20. It's not like remaining cost increased plus 56% on top of it. It was simply favorable from a pass through standpoint.

Speaker 4

20. In terms of our pipeline, continues to be very active, continues to be pretty strong. 2. We have a very disciplined acquisition strategy, very focused strategically around our medical businesses and our test and inspection businesses. 2.

Speaker 4

Clearly, if we find a core technology that is adjacent to what we do, we certainly will Take a look at them, but we remain focused on medical test and inspection. The pipeline itself is pretty good. 20. Actionability, it is very difficult to say. Given the kind of volatility, 2.

Speaker 4

It seems that it's difficult to predict. So I wouldn't comment much about the 2. Other than we continue to cultivate our pipeline, continue to and CyberOptics was the greatest example, right? We had CyberOptics for a number of years. We just had a nice opportunity to take that 2 opportunity and convert it to get to a place where we were able to have an agreement.

Speaker 4

So 20. Actionability depends is the best way I could say it, but we are very pleased 2. In some areas, it may have at least public equities look like they're moderated, but we are playing in highly differentiated businesses, highly differentiated end markets as well as technologies. We expect to play market multiples, 20. But we're going to be highly disciplined on our financial return metrics.

Speaker 4

And so hopefully, our last two 12 deals that we have announced NDC as well as CyberOptics. It's a good indicator of entering markets where it is very strategic to us and has a great opportunity for us to grow the company, 20, but at the same time very financially

Speaker 1

disciplined. Got it. Thank you, guys.

Operator

20. There are no further questions at this time. Naga, I turn the call back over to you.

Speaker 4

20. Our continued performance reflects the strength of our differentiated precision technology, 2 customer centric model and diversified end markets. Again, I want to thank Nordson's employees for their perseverance and commitment, 2019, which makes these results possible. The continued deployment of NBS Next and the Ascend strategy 20. We'll ensure we remain well positioned in this dynamic environment.

Speaker 4

Thank you for your time and attention on today's call. 20. Have a great

Operator

day. This concludes today's conference call. You may now disconnect.

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