Nordson Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Nordstrom Corporation fourth quarter and fiscal year 2020 conference call. At this time, all participant lines are on mute. Please be advised that today's conference is being recorded. After this, there will be a question and answer session. To ask a question during the session, you will need to press start one on your telephone. If you would like Any further assistance, please press star zero. I would now like to turn a call over to speaker today. Laura Mahoney, please go ahead.

Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Navarajan, our President and CEO, and Joseph Kelly, Executive Vice President and CFO. Hello. We welcome you to our conference call today, Wednesday, December 16th, 2020, to report Northen's fiscal year 2020 fourth quarter and full year results. You can find both our press release as well as our new webcast slide presentation that we will refer to during today's call on our website at northen.com forward slash investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until December 30, 2020. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metrics has been provided in the press release issued yesterday. Before we begin, please refer to slide two of our presentation, where we note that certain statements regarding our future performance that are made during this call may be forward-looking based upon Norton's current expectations. These statements may involve a number of risks uncertainties, and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. Moving to today's agenda on slide three, Naza will discuss fourth quarter and full year 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. Joe also will talk about the year-end balance sheet and cash flow. Naga will conclude with high-level commentary about our enterprise performance, as well as our fiscal 2021 first quarter guidance. We will then be happy to take your questions. With that, I'll turn to slide four and hand the call over to Naga.

Good morning, everyone. Thank you for joining Norton's fiscal 2020 fourth quarter and full-year conference call. In this unprecedented fiscal year, we did not just weather a challenging macro environment. We advanced our long-term strategy and achieved solid financial results. First, I want to thank our Nolson employees for their flexibility, resilience, and commitment as we navigated fiscal 2020. From the beginning of this pandemic, our leadership team has worked together to protect the health and safety of our employees and respond to the needs of our customers. Representatives from our global teams came together to share best practices and lessons learned as COVID-19 spanned the globe. We implemented new protocols of social distancing and face coverings, as well as regular cleaning and temperature checks. all of which continues to this day. By protecting our employees, we were able to offer uninterrupted service to our customers, many of whom were deemed to support critical infrastructure. Norton products serve a very diverse set of end markets, including medical, electronics, consumer non-durables, and general industrials. This diversity helped us drive the relative stability of our results. They've also stayed invested in our direct sales, application, and service model and committed to the innovation in our precision technologies. For the full year, sales decreased only 3% compared to prior year, which is commendable in this environment. Simultaneously, we made meaningful progress on our long-term objectives. We built and started to deploy the next generation of Norton business system, which we are calling NBS Next, our growth framework. Using critical insights generated by NBS Next segmentation tools, our divisional leaders are prioritizing investments in our best growth opportunities and simplifying non-value-added tasks in operations to deliver best-in-class product quality and delivery. Use of this data-driven growth framework led us to take actions that could strategically position our portfolio for sustainable long-term profitable growth. In September, We announced the technology acquisition of Vivamos, which designs, develops, and fabricates high-end image sensors that would further differentiate our X-ray inspection product offering. Earlier this year, we acquired Florotech, a precision plastic extrusion manufacturer in medical device industry. Florotech brings highly differentiated PTFE medical tubing expertise, which is complementary to our current value-added component offering for minimally invasive therapies, such as heart valve replacement. Scaling up our highly differentiated testing inspection and medical product lines will continue to be a priority of our capital deployment strategy. We also took actions to simplify our portfolio in less differentiated areas. On December 3rd, we announced the divestiture of our screws and barrels product line from our polymer processing systems division to Altair Investments. While this business is a respected leader in the plastic industry, it does not meet Norton's long-term profitable growth objective. We believe it will be better positioned with Altair. By divesting this business, we will focus our resources on growing more differentiated, profitable product lines that will deliver on our long-term growth objectives. We believe our remaining PPS division has the right degree of differentiation and related technical competitive advantages to deliver Norton-like growth and returns. I'll speak more about the business in a few moments. But first, I'll turn the call over to Joe to provide more detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. As Laura mentioned, we have provided slides to complement the narrative during today's earnings call. On slide number five, UC fourth quarter 2020 sales were $559 million, a decrease of 5% compared to the prior year's fourth quarter sales of $585 million. The decrease was primarily related to organic volume, offset by favorable currency and benefits from the Floortec and VivaMoss acquisitions. Test and inspection product lines were solid again this quarter, and we continue to see growth in our product lines serving medical and markets. Sales declines in the quarter were largely driven by weakness in the industrial and automotive and markets. Gross profit totaled $297 million, or 53% of sales in the quarter. compared to $319 million, or 54% of sales in the prior year. The 100 basis point decrease in gross margins primarily relates to the $1.3 million in amortization of acquired inventory step-up from the fiscal 2020 acquisitions. Looking sequentially, gross margins improved 100 basis points, As the manufacturing inefficiencies related to our response to the COVID-19 pandemic and unfavorable product sales mix experienced in the third quarter of 2020 were primarily temporary in nature. Operating profit was $37 million in the quarter. This included an $87 million non-cash impairment charge related to classifying the screw and barrel product line within the IPS segment as assets held for sale. This classification aligns with the company's strategic decision to divest this product line to improve the ongoing earnings and overall profitable growth profile of the business. Excluding this item, plus cost reduction actions and the amortization of acquired inventory step-up, adjusted operating profit totaled $130 million or 23% of sales. EBITDA for the fourth quarter was $159 million or 29% of sales, which is 5% below the prior year EBITDA of $168 million. Looking at non-operating expense Net interest expense decreased $4 million or 37% from the prior year levels associated with lower effective borrowing rate. Other net expense increased $2 million driven primarily by a $1 million increase in pension costs. Tax expense in the quarter totaled $8 million or an effective tax rate of 30% in the quarter Excluding the tax impact on non-recurring items and the $2 million discrete tax benefit associated primarily with stock option exercises, the fourth quarter and full year normalized tax rate is approximately 21%. Net income in the quarter totaled $18 million, or $0.31 per share. Adjusted net income and earnings or $93 million, or $1.59 per share. This represents an 11% decrease from the prior year adjusted earnings, reflective primarily of a 5% year-over-year decrease in sales. Turning to slide number six, I'll now share a few comments on our full year results. Sales for the full year of 2020 were $2.1 billion, a decrease of 3% compared to the prior year. This change in sales included a decrease in organic volumes of 4%, offset by growth related to acquisitions. The full year impact of currency translation differences was not significant. Excluding the non-cash impairment charge, cost reduction initiatives, acquired inventory step-up amortization, and the discrete tax benefits, adjusted operating profit was $454 million and diluted earnings per share were $5.48, a 7% decrease from the prior year adjusted earnings of $5.87. EBITDA for the full year was $567 million, or 27% of sales, which is in line with our prior year EBITDA margin percent of sales. Now let's turn to slide seven and eight to review the fourth quarter 2020 segment performance. Industrial precision solution sales of $308 million decreased 8% compared to the prior year fourth quarter. This decline was driven in part by weaker demand in industrial and automotive and markets, where we had record sales in the prior year fourth quarter. Currency was favorable 2%, primarily driven by the strengthening of the euro, offset by an organic volume decrease of 10%. Adjusted operating profit for the quarter was $92 million, or 30% of sales, which excludes the $87 million non-cash impairment charge and $4 million in structural cost reduction actions. Despite the decrease in sales volume, cost control measures and sales mix improvements enabled the segment to deliver the same 30% operating margin as the prior year fourth quarter. Structural cost reductions taken in the fourth quarter were primarily related to early retirement incentives offered to employees in the industrial coding systems division. These actions will generate $3 to $4 million in annualized savings starting in fiscal 2021. Advanced technology solutions sales of $250 million increased approximately 1% compared to the prior year fourth quarter. This change included a decrease in organic sales volume of 3%, an increase of approximately 2% related to acquisitions, and a 1% increase related to currency. Continued sales volume growth in test and inspection product lines increased serving electronics and markets, and steady demand in medical product lines were offset by weakness in fluid dispense product lines serving industrial and automotive and markets. Reported operating profit for the segment was $51 million, excluding one-time charges associated with the amortization of acquired inventory step-up. Adjusted operating profit was $52 million, or 21% of sales. The year-over-year decrease of 100 basis points in operating margin in the fourth quarter and the full year was driven by unfavorable product-sales mix within the segment. Finally, turning to the balance sheet and cash flow on page 9. We ended the quarter with a strong balance sheet and plenty of available borrowing capacity. Cash total $208 million and net debt was $898 million. Ending the quarter with a 1.6 times leverage ratio based on the trailing 12 months even down. Free cash flow in the quarter was $178 million. This brings the full year 2020 free cash flow total down. to $452 million, a conversion rate on adjusted net income of 141%, as working capital liquidation and lower cash taxes paid contributed favorably to free cash flow in 2020. For modeling purposes in fiscal 2021, assume an estimated effective tax rate of 21%, and capital expenditures of 50 to 55 million. In summary, our top line has held up well considering the unique challenges of fiscal 2020. The team has taken constructive actions to manage costs while also aligning our resources and product portfolio with the best profitable growth opportunities. We continue to maintain a strong balance sheet with sufficient liquidity to allow us to stay focused on long-term strategic initiatives to drive profitable organic and inorganic growth. I will now turn the call back to Naga.

Thank you, Joe. Let's turn to slide 10. We're well positioned going into fiscal 2021. We have been operating safely and efficiently in this pandemic environment. We also have found creative ways to connect with our customers, whether it is virtual training and tech support or safely distance on-site product implementations. For example, our adhesive team recently participated in the annual Pack Expo, which is the largest North American packaging trade show. They rose to the challenge of this virtual event, showcasing our recent innovation through virtual demonstrations and videos. No matter the environment, Knotson employees remain focused on innovation and delivering on the needs of our customers. I'm also pleased with the engagement of the team in adopting our MBS Next growth framework. This is truly about making a strong Norton even stronger. Fundamental to this framework is to select and invest in the best profitable growth opportunities. This data-driven customer and product segmentation approach, which we refer to as strategic discipline, identifies where we create the greatest value for our customers. It is the new capability that our team is learning. Using a data-driven segmentation approach in a consistent and disciplined way, division leaders across Nordstrom have been working to define their strategic business priorities. This framework empowers our division leaders to take action on the data and focus on the areas where we win. Our decision to divest the screws and barrels product line was based on critical insights gained from this data-driven segmentation approach. Realigning our portfolio is another step forward in positioning Norton for long-term profitable growth. This divestiture will improve earnings on a go-forward basis. It also gives our PPS leaders more time and energy to focus their resources on their differentiated and profitable product lines. This action exemplifies the power of NBS Next. Identify our business's core. Simplify the areas that distract you from focusing and growing with your core strength. The consistent deployment of a data-driven growth framework will complement Norton's great strengths of innovation, customer passion, and culture and values. We'll continue to strengthen our newer capabilities by unleashing an entrepreneurial mindset at the division level while also building deep and diverse winning teams. We're excited to announce that we will be hosting a Virtual Industry Day on March 30th, 2021. At this event, we will share more details about our long-term strategy, our differentiated product portfolio, and our growth objectives. We will be sharing more information about the details of this event in January. But please save the date on your calendars for the morning of March 30th. Now for the outlook on slide 11. As I previously mentioned, we are well positioned entering 2021. During the challenging year of 2020, we remained invested in what makes Norton strong, the direct sales model and our innovative position technology portfolio. Additionally, we were successful in advancing several aspects of our long-term growth strategy. As we begin fiscal 2021, backlog has increased approximately 5% compared to the same period a year ago, and the trailing 12-week order entry is 5% above prior year levels. That said, it remains a dynamic environment and our business conditions are changing frequently as the world responds to the challenges of resurging COVID-19 virus. Given these factors, we're not providing annual guidance at this time. However, we have a good line of sight to the fiscal 2021 first quarter. Based on current order entry trends, backlog amounts, and the correlation to sales timing, we expect the first quarter of 2021 sales growth to be approximately 2% to 3% with adjusted earnings growth in the range of 15 to 20% as compared to fiscal 2020 first quarter. As always, I want to thank our customers, employees, and shareholders for your continued support. With that, we will pause and take your questions.

Thank you. At this time, we will be conducting a question and answer session. In order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Alison Poliniak with Wells Fargo. Alison, your line is open.

Great, thanks. Good morning, guys. In the 5% order rate for this past couple of weeks, is there a noted vertical that's driving that, or is it fairly broad-based here?

Yeah, Alison, good morning. Thank you. Thank you for your question. Let's just maybe talk in terms of specific end markets. That's probably the better way to answer that question. So if you think about our consumer non-durable business, what you're really finding is, you know, this is a recession-resilient end market for us, food and beverage packaging. These have been trending slightly up, and so our expectations are, you know, this is a better growth than what we have seen in some time. In the medical business, you know, order rates remain stable, it still remains a dynamic environment. You know, remember, there are parts of our medical business that is suddenly impacted by elective surgery, so selective surgeries. But we also have fluid component parts of our business that has been serving biopharma and markets and disposable single-use plastics as well. So that part of it is doing really well. So overall, medical is stable, still continuing to grow. In electronics, I would tell you the test and inspection business is really doing extremely well. They're driven by advanced components in semiconductors, camera modules. In the quarter, we experienced double-digit growth. My expectations would be slightly lesser than that, but certainly high single digits is sort of where this is trending. Our industrial business, I will tell you, is growing. you know, challenged, but things are starting to look up. You know, we expect some recovery in the first quarter. Our OEM businesses are moderating and automotive is a small part of the company. So it's not one single vertical, but differing rates of growth and trends that are trending up based on the end market.

Got it. That's helpful. And then just in touching on the divestiture, you know, I know your comment about it not necessarily being quartered nor some longer term. Is there somewhat of a mixed impact that you guys are thinking about when looking at these businesses as well in terms of the long-term profitability of the company, or is that sort of just an aside at this point?

Joe, you want to take this one?

Yes. So when you think about the divestiture, you know, as Megan mentioned in his script, this divestiture, which we hope to conclude, I would say at the end of Q1 or early Q2, it will improve the ongoing earnings. uh of norton and specifically i guess to your question the ips segment uh and will also improve therefore the profitability profile but i will tell you no different than naga mentioned in a script the most important i think impactful is the prioritization and the allocation of resources to those more attractive growth opportunities And so that's what really came through the NBS Next portfolio analysis and driving that focus in terms of a growth framework going forward.

Great.

Thanks so much.

Thank you.

Your next question comes from the line of Matt Somerville with DA Davidson. Matt, your line is open.

Thanks. A couple questions. Maybe just to follow up on the last point, this internal review process that led to this investiture announcement, have you fully concluded that at this point? And should we expect any additional portfolio shaping actions here in the more immediate term?

Yeah, Matt, thank you for your question. On NBS Next, portfolio analysis is a core part of NBS Next, which is really what we call strategic discipline. It is based on product segmentation and customer segmentation. It is an ongoing process. So based on what we looked at today with our PPS business, our decision was this part of the business doesn't really fit the kind of long-term differentiation as well as the growth potential that we are looking to have in a business. So that's sort of what it is. But there are parts of our PPS business in this analysis, we figured out that it has some pretty strong differentiation characteristics, some technical advantages, which we believe will allow us to continue to grow this business with a Nordstrom-like profitability. You know, for the rest of the businesses, this is an ongoing process, and there's not so much about what you're not going to do. It is as much as what you're going to do more of, right? So as you think about our businesses, each of our divisions are going through portfolio analysis, and they figure out what are the best growth opportunities. Where do we create the greatest value? How do we win? and focus disproportionately our resources and investments in that part of the company. So it's an ongoing process, and hopefully that gives you some cover.

Yes, thank you. And then as a follow-up, when you look at kind of your implied, you know, organic guidance for the first quarter, probably flat to maybe down slightly because you'll have some FX tailwind and then some acquisition tailwind. Can you maybe talk about, you know, square that up a little bit with respect to your trailing, you know, order entry being up mid-single digits? And you mentioned some things maybe around, you know, the correlation with timing, et cetera. Can you maybe expand on that a little bit, Knox?

Yeah, I guess let me expand on some of that. Maybe, Naga, you can expand on the trend that you're seeing in the orders. But you are correct. I mean, if you look at our Q1 guidance as it relates to the revenue, we assume they're FX rates similar to what we had experienced in Q4. And so, therefore, when you look at the Q1 guidance, the FX and acquisition will be favorable to about the same degree they were in our Q4 performance, which, to your point, implies organic growth. relatively flat on a year-over-year basis. Now, I'll point out that organic growth of relatively flat is a significant improvement from the 7% decrease that we saw organically in Q4 and the 4% organic decrease in the full year 2020. Also, I would add, if you look at what the Revenue forecast implies for Q1 2021, not only is it up 2% to 3% over 2020 Q1, but it's also up over Q1 2019. So said differently from a run rate standpoint, we're starting out the year north of 2019 levels. And then one other comment I would make is in your observation, 5% on the order entry and the 5% on That 5% is calculated on a constant dollar basis. So that's really what's driving our optimism and our attitudes and our positive outlook as we enter Q1 2021. Now, that being said, you clearly see there is a difference between timing and lead times in terms of shipments and order entry and backlog. And so that all has to be taken into consideration when we give the Q1 guidance. But when we look at that backlog and that order entry trend, that's what provides us that optimism heading into 2021.

Hopefully that makes sense. Matt, what I would add to that is really that timing really depends on various different businesses, right? There are certain businesses like a medical business. It's pretty much not a backlog kind of business. It's more a book and ship kind of business. But if you contrast that with an ICS business, that is more backlog-oriented. You get the order, then you have a large system that you have to put together. And then our aftermarket parts revenues are pretty much book and ship. And in our adhesive businesses, somewhere in between. It is more standard products that you're, you know, customizing or configuring to sell. So depending on a business, depending on where it is, you know, there is a correlation of timing that we talk about. Thank you, guys.

Your next question comes from the line of Jeff Hammond with KeyBank. Jeff, your line is open.

Hey, good morning. Good morning, Jeff. Maybe just give us a 5G update. We're seeing new phones get rolled out with 5G. Just, you know, what are you seeing in terms of a CapEx cycle on the mobile side as well as 5G infrastructure? Yeah.

Let me talk about that broadly, Jeff. What we are seeing in the business is 5G related, but more broadly, digital acceleration is really driving the electronic supply chain within our businesses. And most prominently where we are seeing this kind of activity in digital acceleration is in the semiconductor side of the business. So in the semiconductor business, we're seeing some incredible, really nice demand patterns that are emerging for our test and inspection business. And that is really what you're seeing the strength of. In terms of 5G, you know, some of the Semicon are related to 5G, but not entirely, right? This is really mostly because of a contact-free economy that is beginning to emerge, virtual conferences, virtual investor discussions. how you order your Christmas gifts, how you order your grocery. All of this is really an example of how this contact-free economy and digital acceleration that is really driving the growth of semiconductors. So you want to think about our electronic business not so much With the mobile revolution, how we thought about our business then, you know, in the last decade, where mobile revolution was really the biggest growth driver for us. But going forward, you want to think about our electronic business more in terms of digital acceleration. So that would mean two to three times GDP kind of growth over the long cycle. And on infrastructure, it is still slow. You know, we're continuing to get orders. We're continuing to work on those things. But it is not at the same rate as one you would expect, you know. So 5G in our mind is still an emerging opportunity.

Okay. And then medical you characterize as stable, and I guess I think it's businesses historically kind of a high single-digit, low double-digit grower, and maybe I'm just assuming stable means a little bit of growth. But I'm just trying to understand how you think the growth rate shapes up for medical and kind of these puts and takes around that. Elective surgeries, you know, maybe coming back as we get, you know, vaccine distribution versus kind of comps from, you know, PPE equipment, et cetera.

Yeah. So I think that's a great question, Jeff. In terms of our medical business, there are really two parts to the medical business that sort of allow us to have flat to low single digits. But you've got to remember the context. The context really is our med device customers are down 10%, 15%. So that's the context. And so why are we doing better than in that context? It's really because we have a fluid component business, which is really serving the biopharma end markets as well as fluid components for COVID-type therapies. So what you're finding is our fluid component business is doing incredibly well, which is muting some of the declines we're seeing in our interventional component business, which is directly correlated to the selective surgeries and elective surgeries. So big picture, if you think about our elective-selective component business is down a little bit, you know, down a bit. In the long term, all of the drivers, aging population, single-use component, outsourcing of med device components, all of those are intact as things normalize. We will return to mid to high single-digit kind of growth of this business, and that's our expectations. And right now in this transition, if you think about elective surgeries, you know, in July they were down about 75%. You know, there were 75% of pre-COVID levels elective surgeries were. And our expectation was they were going to improve, but they have not. So as, you know, as these elective surgeries improve, what you're going to find is that we will benefit from it. and we will return to our, you know, mid-single digits, high-single digits kind of growth in the medical business. So let me stop there. You know, if you have any follow-up, I'd certainly be happy to.

No, that's great. Just maybe last one, you know, I understand the uncertainty. Just give us a sense of, you know, what you need to see or, you know, I don't know if it's just a couple more quarters before you, you know, kind of flip to a more, you know, full-year kind of outlook. Thanks.

Yeah. Joe, you want to take that?

Yeah. Our hope is that, you know, our visibility will improve, or I should say our confidence. as it relates to the volatile time that we're in with the pandemic, you know, here in Q1 and Q2. And so our hope is that by the time we have our investor day that Naga referenced, we will resume annual guidance at that time.

Okay. Thanks so much, everyone. Thank you.

Thank you. Your next question comes from the line of Andrew Vistaglia with Barenburg. Andrew, your line is open.

guys i wanted to ask on you know digging a little deeper in that electronics component within ats um so you know there's a lot of last year there's a lot of optimism brewing into 2020 and obviously you know there's a lot of things you got to navigate um you're dealing with trade and um then the pandemic so i guess into into this year i guess how do you how do you How do you view things on a relative basis versus historical cycles for that segment? And as the year progresses, I guess, what are some of the times we should be on a bullet-cut board, seeing how that business shapes up?

Yeah. Andrew, thank you. The electronic business, what has happened with our electronic business is something that we've been talking about for a while. If you think about historical... Go back, you know, a decade ago, over the last decade, Norton benefited by this incredible mobile revolution where you went from 30 million phones to about 1.5 billion phones worldwide. It was an incredible time of change, incredible amount of things changing in the mobile technology. Norton played, contributed incredible technology and value to our customers, benefited from it, and that's what we saw. As you think about the next decade, and that's sort of what we are in right now, that mobile revolution is a once-in-a-lifetime kind of event. And what you're going to see is a much more normal kind of growth, still pretty strong growth, two to three times GDP. And so the way we plan and think about our business is we think about two to three times growth across the electronic supply chain not just mobile but really in our view as we work with our customers and what we see in our businesses what we find the greater drivers are digital exploration which virtual conferences, virtual way of doing business, virtual way of buying grocery, virtual way of ordering Christmas gifts, many different ways you think about it. This virtual economy, this contact economy is continuing to grow, which is leading to digital acceleration on infrastructure in capabilities. Certainly all of this adds to supply, you know, improvement and order trends that are across the supply chain. And Norton has done a really nice job over the last decade to diversify from just one particular product category to multiple, you know, semiconductors, components, end products, PCBs. So we're diversified across the electronic supply chain, and so we'll benefit from that. And, you know, we diversified it to test and inspection. And so what you really see is this digital acceleration, all of this leading to complex devices, complex components leading to 100% inspection, inline inspection in some cases, all leading to a test and inspection business doing really well. So our expectation is two to three times. And it is a different kind of growth when compared to what you experience in the

last decade yeah okay um you know with this uh mbs next you know using data to kind of understand your business a bit better you know you obviously found a divestment in there but what about you know is this influencing any change adjacent you know some segment that you'd like to be in, or is the focus going to remain on testing, infection, and medical?

So as you think about it, we did talk about this when we clarified our focus is going to be on testing, infection, and medical. But really, that is what was behind. You know, at that time, did not publicly talk about NBS next because we were still in the process of building it. But really what drove our focus to focus on customer inspection and medical is really a concerted view inside the company on how the portfolio was and where was the greatest growth opportunities, what were the most differentiated parts of the company, which had the greatest growth potential is sort of what it led us to this focus around testing inspection and medical you know we have it's looking for new market spaces that have uh characteristics that are very similar to norton you know do we like the company potential? What is the level of differentiation? So, you know, you know, should we ever run out of ideas? You know, we don't rule out the opportunity to expand into a newer space. Should that need to happen? Thanks, Nadia. Thank you, Andrew. Appreciate the question.

Your next question comes from line of Sri Boroditsky with Jeffrey Sri. Your line is open.

Thank you and good morning.

Good morning, Terry.

As part of the FBS Next portfolio analysis, was there any businesses or product lines that you found were being underfunded that you want to focus on growing organically going forward?

I think that's a great question. You know, that is one of the things that we're really laser focused on is this decision also, you know, there are two ways to think about this. One, it's a consistent, disciplined way of looking at opportunities in the company. But more importantly, that analysis and that decision-making now happens at our division level. At the company level, it is great to understand where you want to be, but it is even more powerful when you look at the businesses and you look at sub-segments within the business where the greatest opportunities are. And as our division leaders have set their strategic growth priorities, what we are finding is that our leaders are making those decisions you know the company has done a really nice job of staying invested in customer passion and staying invested in innovation so i wouldn't say it is a complete um you know switch but but are we discovering opportunities yes and and i think I am more excited about the fact that now these decisions are made much closer to the customer, much closer to action and knowledge. I think that's probably the shift that we are making.

Thank you. And then lastly, as we think about the backdrop for industrial spending next year, what are you hearing from customers as far as appetite for capital spending?

As we talked a little bit about our industrial business, you know, it remains challenged. But we're starting to, you know, from the middle of the year to now, sequentially the orders have continued to improve and continue to grow. And we see some of that in our industrial businesses. So as we think about it, it remains a dynamic environment, but our expectations are that it is trending up And, you know, we expect some recovery in the first quarter.

Great. Thanks so much for answering my question.

I would just add to your comment on the NBS Next. If you look at our SG&A, you know, we did take several actions during the back half, particularly of 2020, to lower our structural cost. That said, those actions were very strategic, focused on business as identified in areas identified through the NBS Next Framework. At the same time, it also allowed us areas where we wanted to invest, as Naga mentioned. So if you look at our product development costs on the full year and the quarter, it was actually flat for the full year up in the quarter. So, you know, there are areas where we continue to invest, and there are areas where we are taking strategic, I would say, structural cost reduction actions.

Thank you. Your next question comes from the line of Mike Halloran with Baird. Mike, your line is open.

Good morning, everyone. Good morning. So some thoughts on the margin profile as you work through fiscal 21. Maybe just help with some puts and takes. How do you think about incremental margins with some of these structural cost improvement initiatives can provide as a tailwind mix? Any other puts and takes we need to think about? Obviously, the investors coming up that will help with the mix. But beyond that, how should we think about some of the key buckets in the fiscal 21?

Mike, I think in general, let me give you broadly how we think about this and then Joe can walk you through the percentage and all of that, right? So in general, the expectation for us is that as our revenues grow, you know, our expectation on incremental should be north of 45%. That's sort of how we're thinking about it in the business. So that allows us, you know, with a 54% growth margin, an ability to invest back in the business to continue to grow. So with that, why don't I get Joe to talk to you about the details of the various puts and takes.

Yeah, so When you think about the incremental margins, I mean, our guidance here in Q1, I think, you know, are high incremental margins sequentially and are, I should say, on a year-over-year basis because, you know, that is where you're seeing the benefits of some of those structural cost reduction actions in the Q1 numbers. But I would go back to Q4, and I'd just point out, I mean, quite pleased with the IPS numbers. 30% OP as a percent of sales. And that was nice, nice sequential incremental margins there when you look at it compared to Q3. And so it just highlights that, you know, that particular business, you know, some modest growth can really drop some nice incremental margins north of 50%. And so that 30% is back to the Q4 2019 level. But also, even if you look at Q2, Q3 back in 19, when that business is north of $300 million, doing 29%, 30% margins is something it can do. So it was nice to see that bounce back from the Q3, which was a little bit depressed. Some of those items we viewed as temporary. It was nice to see that they were temporary in nature.

And then on the capital deployment side, on the external, obviously internal is the priority, but what's the acquisition side look like? How are you thinking about buybacks, anything like that, and what the prioritization looks like internally, as well as what the opportunity set and how realistic would it be to move the needle on the acquisition side?

Yeah. So, you know, from a priority standpoint, As you mentioned, organic generally generates the best return at the lowest risk. And so we continue to organically invest in business. That being said, it's relatively capital light and doesn't demand a lot from our free cash, you know, of our cash flow from operations, which are quite strong. And so we're a committed dividend payer, as you know, and dividend increaser. We would like to do share buybacks to offset dilution. But beyond that, we're really focused on the acquisition side. And, you know, it's been a challenging 2020 in the M&A market. That being said, quite pleased that we were able to make progress with the floor tech, with VivaMoss, And, you know, then they announced divestiture as well. I will tell you, no different than the factories are learning how to operate and produce products safely in this environment, the M&A community is also figuring out how to do deals in this environment. And so the market for M&A, I would tell you, our activity level is improving. And so we do remain active. We are very strategically focused based on, you know, the MBS Next framework that NAGA has reviewed with you and where our growth opportunities are. So we are actively, I would say, Mike, actively working to deploy capital through the acquisitions. And, you know, the pipeline is growing, as I would characterize it.

Appreciate the time and the callers. Thank you. Thank you, Mike.

Your next question comes from the line of Christopher Glenn with Oppenheimer. Christopher, your line is open.

Thanks. Good morning. I had a question about the – I just want to kind of go for a high-level revisit of the T&I momentum and review of the compounding dynamics you have there. I'm really curious about, you know, what you're driving in terms of, succession pattern of new capabilities versus, you know, adoption of the iterations, the technology iterations you've introduced over the past year plus, and, you know, how those two factors converge towards this ideal of 100% online testing capabilities.

Yeah. And I think it's a great question, Chris, and it's an area that we are doing a lot of work in, and it is an area that has a lot of promise for the company. Just sort of if you step back a bit, if you think about our testing inspection business today, it is, you know, it has two major, sort of maybe three major product technologies. First is X-ray inspection. Second one is acoustic imaging. Third one is mechanical testing where we do some wire bond testing. We do optical inspection as well, but it is a smaller part of the company. So major product lines really be our X-ray imaging, think about acoustic imaging, and then think about mechanical testing. We fundamentally believe that the acoustic imaging and X-ray imaging are going to continue to grow for us as these devices get more complex And a couple of applications, so if you take a little bit one more step deeper into the product application, so if you think about a complex semiconductor package that is being manufactured, you know, in the past they were sampled and, you know, you ensured that the manufacturing process was stable and the product quality was really good. But as these devices get a lot more complex, now you're really interested in, because these devices now have greater functionality, the risk of failure and the potential impact on the customer's experience is so high that these semiconductor packages are now getting inspected 100 so that's sort of the need in terms of what is it our customers are looking for the customers are really looking for not only whether the bonds were made but they're more looking for you know all the things that they need is it in there Is it in the right size? So now all of a sudden, 3D metrology with X-ray inspection becomes a lot more creative and real and online rather than what was a good feature to have. So as it translates to the company, what it really means is, do we have the resolution, which we've always been really good at? Do we have the speed? And do we have the lowest signal noise level right so those three things really now matter as you think about the new acquisition we made it was a technology acquisition with cmos sensor image sensor and it provides all those three provides a unique combination of higher speed higher resolution and lower noise and so you know so as we build out our inspection capability you're going to find us add technologies that allow us to help our customers inspect things more in real time and at a faster rate, higher resolution, lower noise level. And we're going to add capability that allows us to do more 3D metrology than we've done in the past. So that's another one that's coming about. And I would say the third is today our business is very focused around electric. We do, and we're beginning early stages of diversifying that exposure into adjacent end markets. And this real mass acquisition allows us to now think about, you know, is it possible for us to become a component supplier? It allows us to sell our products. image sensors and allows us to sell our tubes into end markets to other OEMs in end markets that we don't have a right to play in. But we have a right to be a component supplier because we have the best resolution in the market. We have the best, lowest noise level in the market. We have higher speed. So it's an exciting time in the test and inspection business. It's an area where we will continue to invest in. One that we did not talk about is, you know, some early days here is defect classification. is another big thing, right? You know, I talk to you about image speed, low noise, but also defect classification is important because that allows our customers, again, to identify whether it's a good ship package or a bad ship package. So a lot of details there, but hopefully that gives you how we're thinking about this business, where it is headed. It clearly has some good opportunities for organic growth, and you know, opportunities for us to acquire. Again, we'll be really thoughtful as always around what we acquire, how we acquire, you know, we're going to be disciplined around acquiring things that makes Norton stronger. You know, we're not going to acquire for growth's sake. We're not going to acquire undifferentiated commoditized products in test and inspection. We're going to be very focused around what makes Nordstrom strong, which is precision technologies, customer intimacy, you know, really customer-critical applications and how we add value and create value. And so that's where we're going to be focused on.

That's great detail and great bang for the buck on the question. Thanks. Just a little housekeeping to close up on. DNA and bias on working capital through the cash flow statement for fiscal 21. Any comment there, Jeff?

Yeah, so quite pleased with our progress on working capital liquidation there in 2020, particularly the strength in Q4. You know, we improved, I would say, our efficiency around the AR side. And so when you look at the cash flow statement, you'll see it was on the AR. And it's not just the focus. selling, you know, 3% or 5% less than we did in Q4, I should say. It was really improving the DSI. As we implement NBS next and see that roll out, I think going forward, there's an opportunity on the inventory side. So really anxious as we go into 2021 to continue to focus on the cash flow and do feel that there's some opportunities from an inventory efficiency side there.

Thanks. Do you have a DNA figure for fiscal 21?

DNA, I don't have a figure yet. It's going to depend on the timing of this XLOI, or I should say the screw and barrel divestiture. Okay, thanks. Yeah.

Your final question comes from the line at Chris Dankert at Longbow Research. Chris, your line is open.

Hey, Maureen. Thanks for fitting me in here. I ran over this quickly, but I just want to make sure I'm understanding the dynamics. When we're looking at the ATS business specifically, as you characterized, medical, stable, test and inspection up, double digits, high singles, that really does kind of give the sense that dispense was extremely weak in the quarter, kind of despite some of the other strength going on in PCBs and semis. Am I thinking about that right? And I guess just what was the key driver of the weakness in the quarter then on that core dispense business and advanced technology?

Yeah, I think it's a good question, Chris. Our dispense business, as you think about it, benefited in the last decade from this mobile revolution. you know, this incredible investment on mobile revolution. So, you know, we are benefiting from some projects that are related to semiconductor in that business, certainly benefiting from some projects in some newer features, but not to the same extent as we benefited in the past. So you had a comp issue there for that business that, you know, we're working our way through. In general, our expectation for that business is as this get worked out, what you're going to find is it's going to be a nice 2% to 3% grower. It's not going to be the same kind of grower that it was, but the company was very thoughtful in diversifying into test and inspection, and so test and inspection all of a sudden is a really nice growth engine for us in the semiconductor side, and we'll benefit from it. And hopefully that gives you how we're thinking about it internally.

That's fair. That's fair. Thanks, Naga. And then I guess just lastly for me, when we look back at the other half of the business, heat of dispensing, I guess, the coatings business versus hot melt, my assumption is that coatings is down pretty substantially and really driving the weakness in the fourth quarter here. And hot melt was much more stable. Is that correct? And just kind of thoughts going forward.

Yes, yes. I think, but you want to remember our codings business was one of those businesses that had an order, you know, substantial amount of orders slipped from third quarter of 19 to fourth quarter of 19. So if you think about fourth quarter by itself, yes, the codings business had a significant headwind, but if you look at it, from second half perspective for the coatings business, it was about mid-teens. Still pretty high and, you know, was essentially one of the things. So there's a comp issue and there is an industrial exposure issue. And you're right about it being in a much better place. Joe, you want to add some color to it?

Yeah, I would just add one thing. You know, your two questions there, the fluid dispense within ATS and then the ICS business within ATS, IPS, sorry, you know, sequentially we're seeing, you know, some nice improvements there. Those are the businesses that have the heavier industrial exposure. And so when you talk about NAGA's comments as we went to the back half of 20, you know, we saw that steady improvement in order rate. So while it's down year over year, from a trend standpoint, those businesses are seeing some improvements sequentially.

Got it. That's all very helpful, Carlos. Thanks so much, guys. And best of luck into 21 here. Thank you, Chris.

This concludes our question and answer session. I will now turn the call back over to Naga for closing remarks.

All right.

Thank you for your time and attention on today's call. We're well-precision going into fiscal 2021. We remain focused on our long-term objective of making a strong Norton even stronger as we deploy NBS Next growth framework to prioritize organic and acquisitive growth opportunities while also unleashing an owner mindset within our customer-focused divisions. We wish you a happy holiday season. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.