Nordson Corporation

Please press star 1 again. Thank you. Laura Mahoney, you may begin.

Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Nagarajan, our President and CEO, and Joseph Kelly, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, December 16th, 2021, to report Nordson's fiscal year 2021 fourth quarter and full year results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at nordson.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 30th, 2021. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric 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 Northam'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, Naga 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 sheets and cash flow. Naga will conclude with high-level commentary about our enterprise performance, including an update on the Ascend strategy, as well as our fiscal 2022 first quarter and full year 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 Nordstrom's fiscal 2021 fourth quarter and full year conference call. On the heels of 2020, a year marked by the COVID pandemic, I don't think anyone knew what to expect coming into 2021. We were well positioned, having both remained invested in our customer-centric businesses and started deployment of MBS Next growth framework. Our focus remained sharply on protecting the health and safety of our employees while also meeting the needs of our customers. The successful deployment of NBS Next ensured we were able to fully participate in the accelerated economic recovery experienced in 2021. Our division leaders use strategic discipline to identify and then focus on the best opportunities for profitable growth in their respective businesses. As a result, we surpassed Our prior record annual performance in sales by $108 million and in operating profit by $111 million. This new record was achieved through broad-based growth across most end markets and geographies. Fourth quarter was a solid finish to this record year. Sales were in line with our expectations, particularly in light of the timing of the approximate $25 million customer order that had been pulled forward into fiscal third quarter. Looking at the back half of fiscal 2021, we delivered 15% organic sales growth and 36% adjusted profit growth compared to the prior year second half. I'll speak more about the businesses 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. On slide number five, you'll see fourth quarter 2021 sales were $599 million, an increase of 7%. compared to the prior year fourth quarter sales of $559 million. The increase was primarily related to 10 percent organic volume growth and favorable currency, offset by headwinds from the Screws and Barrels product line divestiture. When excluding the divested product line in the prior year for comparability purposes, sales growth would have been 11% in the current year fourth quarter. This double-digit organic sales increase was driven by solid growth in all product lines, with particularly strong demand in electronics, industrial, and medical, and markets. Test and inspection and consumer non-durable product lines delivered single-digit growth in the quarter. highlighting the continued stable demand in these markets. Geographically, all regions except Japan grew steadily. Gross profits totaled $331 million or 55% of sales in the quarter compared to $297 million or 53% of sales in the prior year fourth quarter. This 200 basis point increase in gross margin was driven by improved sales mix from the divested screws and barrels product line, sales volume leverage, and process enhancements from our NBS Next growth framework. On a sequential basis, we experienced some pressure on gross margin from the third quarter to the fourth quarter. primarily due to elevated freight costs stemming from this dynamic macroeconomic demand environment. Additionally, we incurred approximately $2 million in non-recurring costs as we aligned our medical fluid components business with its best growth opportunities. We believe these negative impacts on gross margins are largely temporary in nature. and we are taking appropriate pricing actions in fiscal 2022 to offset inflationary pressures. Our differentiated product offering and market positions, organizational agility, and disciplined approach to cost control, combined with consistent deployment of the Ascend strategy, is allowing us to successfully navigate these challenges and continue to deliver profitable growth. Operating profit was $151 million in the quarter, or 25% of sales, a 16% increase from the prior year. Double-digit organic growth, favorable sales mix, and continued benefits from structural cost reduction actions taken in fiscal 2020 all contributed to incremental operating profit margins of 52% in the quarter. EBITDA for the fourth quarter was $177 million or 30% of sales. Looking at non-operating expenses, net interest expense decreased $2 million or 31% from the prior year driven by reduced debt levels. Other net expenses increased $2 million, primarily driven by currency translation losses. Tax expense in the quarter was $30 million for an effective tax rate of 21% in the quarter, in line with the full year and forecasted rate. Net income in the quarter totaled $110 million, or $1.88 per share, representing a 19% increase from the prior year adjusted earnings. This improvement is reflective of the 7% year-over-year increase in sales and, more importantly, consistent application of the NBS Next growth framework, which leads to steady, profitable growth with attractive incremental margin. Turning to slide number six, I'll now share a few comments on our full year results. Sales for the fiscal year 2021 were a record $2.4 billion, an increase of 11% compared to the prior year. This change in sales included an increase in organic volume of 11% and favorable currency impact of 3%. offset by the net unfavorable acquisition and divestiture impact of 3%. Also, company records, operating profit was $615 million and diluted earnings per share were $7.74, a 36% and 41% increase respectively from the prior year. EBITDA for the full year increased 27% to $719 million, or 30% of sales. Now let's turn to slide 7 and 8 to review the fourth quarter 2021 segment performance. Industrial precision solutions sales of $314 million increased 2%

compared to the prior year fourth quarter.

Organic volume growth in the quarter was 8%, offset by an unfavorable divestiture impact of 7% and favorable currency of 1%. Robust demand, steady growth in the consumer non-durable end markets for hot melt adhesive dispensing products drove this quarter's results. From a regional perspective, growth was strongest in the U.S., the Americas, and Europe. Operating profit for the quarter was $103 million, or 33% of sales, which is an increase of 12% compared to the prior year adjusted operating profit of $92 million. This growth was driven by favorable sales mix and manufacturing efficiencies gained in part from the divestiture of the screws and barrels product line.

I also want to remind investors that it was this segment, IPS, that had strong third quarter fourth quarter into third quarter per the customer's request. Therefore, this segment second half 2021 organic sales growth of 15% and adjusted operating profit growth of 34% are more reflective of what this business is delivering. Advanced technology solution sales

of $285 million increased 14% compared to the prior year's fourth quarter. This change included an increase in organic sales volume of 13% and a 1% increase related to favorable currency impact. Growth was particularly strong in product line serving electronics and medical and markets. Fluid dispense product lines serving industrial and automotive end markets also generated double-digit growth in the quarter. All geographies contributed to this quarter's growth, with particular strength in the international regions. Fourth quarter operating profit was driven by sales volume leverage and realization of benefits from cost control measures taken in fiscal 2020. Deployment of our NBS Next Growth Framework continues to be a key element in the success of this profitable growth.

Finally, turning to the balance sheet and cash flow on page nine. Through our disciplined approach to capital deployment, we ended the quarter with a strong balance sheet and abundant borrowing capacity. Cash totaled $300 million, partially in anticipation of the $180 million NBC technology acquisition

which we completed on November 1st. Net debt was $516 million, resulting in a 0.7 times leverage ratio based on the trailing 12-month EBITDA. Free cash flow in the quarter was $116 million. which brings the full year 2021 free cash flow total to $508 million, or a conversion rate on net income of 112%. As a reminder, the 2021 full year free cash flow is inclusive of a net pension contribution totaling greater than $90 million. For modeling purposes in fiscal 2022, assume an effective tax rate of 21%, capital expenditures of approximately $40 million, and pension contributions of approximately $10 million, well below the fiscal 2021 levels. In summary, our focus on disproportionately investing in the most profitable growth year of solid execution and record performance. While we continue to navigate the near-term challenges presented by this dynamic macroeconomic environment, we remain diligent in implementing the NBS Next Growth Framework and broader Ascend strategy. We are pleased with our focus and progress on these strategic initiatives and remain committed to delivering top-tier revenue growth with leading margins and returns. I'll now turn the call back to Naga.

Thank you, Joe. Let's turn to slide 10. Again, I want to thank our team for managing safely through another year of COVID-19, as well as managing issues related to supply chain, labor, and other macro concerns. With their dedication, passion, and focus on making Norton stronger, not only did we achieve record results for the full year, we also made to deliver top-tier revenue growth with leading margins and returns, the Ascend strategy

encompasses three interconnected pillars. MBS Next, Norton's growth framework.

Owner Mindset, our entrepreneurial division-led organization which empowers our divisions to make decisions as close to the customer as possible. And Winning Teams, Norton's talent strategies. All three pillars are built on the foundation of what makes Norton special, our culture and values. The successful execution of the Ascend strategy will deliver our financial targets of $3 billion in sales and 30% EBITDA by 2025. Through the cycle, we expect to achieve sales growth of 7% plus through an equal mix of organic and acquisitive growth. 2021 was a record year with double-digit organic growth and EBITDA margins ahead of our targets. We're just beginning to make progress on our acquisitive growth targets. On November 1st, we completed the acquisition of NDC Technologies. This test and measurement business as a differentiated product portfolio that is leveraged through a customer-centric business model. It is a great fit with our strategic and financial criteria for M&A. The integration is off to a solid start. In November, the NDC leadership team received their initial training on NBS Next. They are leaning in and asking good questions about how to incorporate our growth framework into their business. It is proving to be a good cultural fit, and I'm very pleased with the level of engagement I'm seeing at all levels of the NDC organization. M&A is a very important part of our growth strategy. we are looking forward to executing upon our pipeline as the right opportunities present themselves. We have a strong balance sheet and are well positioned to do so. Over the past year, investors have asked if we will adjust our long-term financial targets following the strength of this year. We strongly believe that these continue to be the right targets, and we are pleased to have executed a very strong first year against them. Our divisions are focused every day on delivering profitable growth, and these long-term targets will not govern our potential to act on the best market opportunities. Before I end, our new ESG report. As discussed in more detail in the report, our ascent strategy and ESG priorities are closely integrated and depend on each other to refine and improve our overall performance. The underlying elements of ESG have been central to Knotson's culture and success throughout its 60-plus year history. Knotson is a light assembly manufacturer, and we are committed to identifying ways to minimize our own environmental footprint while helping our customers do the same. Throughout our long history of designing and developing precision dispensing technology, we have sought to reduce our customers' material cost and consumption by increasing yields and reducing scrap during their manufacturing processes. This has been a vital part of our success. We're also bringing solutions to the market that address environmentally conscious market opportunities such as advanced battery manufacturing to support renewable energy and manufacturing processes that utilize plant-based manufacturing materials. This report is a new foundation for our ESG strategy, influenced by leading ESG frameworks. It details our efforts to better understand our environmental footprint while also highlighting our progress on social and governance initiatives. We look forward to building upon this foundation in future reports. Now for the outlook on slide 11. As we look to the full year, we are conscious of the dynamic environment with strong levels of demand creating labor, material, logistic availability challenges similar to what many of our peers are experiencing. Our entrepreneurial, division-led organizational structure has enabled us to address these ever-changing dynamics head-on. Our teams are agile in identifying solutions around labor, material availability, and transportation challenges to meet our customers' expectations. The strategic discipline element of the NBS Next Growth Framework is undoubtedly helping the teams prioritize and deliver on the best growth opportunities within each division. We expect 2022 to be another record-breaking year with sales growth in the range of 6% to 10% and adjusted earnings growth in the range of 8% to 18% both as compared to fiscal 2021. We feel very confident going into the fiscal first quarter. As we first mentioned in the fiscal third quarter, we are still seeing extended shipment request dates in conjunction with large orders from our customers. This increased backlog approximately 90 percent compared to the same period a year ago, and the trailing 12-week order entry was 25 percent above prior year levels. As a result of these evolving order patterns, traditional seasonality where the first quarter is much softer than the prior year fourth quarter is not applicable. First quarter 2022 should be comparable to the financial performance in the fourth quarter of 2021 and the year-over-year growth rate comparable to the second half 2021 growth rates. Based on anticipated sales timing, we expect the first quarter of 2022 sales growth to be approximately 14% to 16% as compared to the fiscal 2021 first quarter with adjusted earnings per diluted share in the range of $1.80 to $1.95. 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. As a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Mike Halloran with Baird. Your line is open.

Hey, good morning, everyone. Good morning. Hey, thanks. Can we pick up where you left off there? So, you know, you look at the guidance, and obviously first quarter growth rate's a little stronger than what you're assuming for the rest of the year. You certainly gave some context on why the seasonality would be different, but maybe talk about two things here. One, just how you're thinking about what is assumed in guidance for how you think the rest of the year plays out by segment. And then my second question and related would just be, how put this backlog in context? I mean, it's significantly bigger than what we would have seen historically before. How much of this should have shipped last year? How much of this is just pulled forward through the rest of the year and just try to give some context? Those are my two questions that are related, so I ask them at the same time.

Okay, great. Thanks, Mike. And, you know, what we want to talk a little bit about as we go into the year, you know, we feel really good about first quarter just given the kind of environment that our customers are in and the order patterns we're seeing. So, Our first quarter is going to be more reflective of the back half of 21. And in terms of, if you think about the various end markets, let me start with electronics. Electronics is customer order entry patterns and demand levels are pretty strong. Medical, particularly biopharma and our interventional businesses, order entry patterns are really strong. If you think about our industrial and consumer non-durable businesses, early part of the year, we feel really good about it based on the backlog we have. But as we look into the back half of the year, we do see those two end markets returning or normalizing to historic levels that we shared at our investor day. So that's, hopefully that answers the first part of your question, which is, you know, feel really good about the full year guidance, which is going to be at the midpoint, 8% growth on a record year. And that is really underpinning the strong demand patterns in medical, electronics, and, you know, back half expecting some tapering off in industrial and consumer non-dual. In terms of the backlog, these are historical highs, as you indicated. We do believe this backlog is really forward-dated or extended lead times that we normally don't have in our businesses. So our customers are asking us or giving us orders for shipments almost into the second quarter of next year, which is normally not the case. our demand patterns are such that people will ask us if a quarter out, right? And now, you know, people are putting their orders to be in line. And there is some amount of back and forth where customers are asking for some things to be shipped out ahead. So that's why some things get pushed forward or pushed back. But most often it's getting pulled forward than anything else. So hopefully that answers the question, Mike.

Yeah, no, it does. I mean, if I could put that last part in context, basically it seems what you're saying is you feel really good about where the order patterns are and the backlog patterns are, but don't overplay the magnitude of the backlog here because of the extended lead times, but you feel good about the visibility that you have going into the second quarter, which is more than you would normally have. Is that a fair interpretation?

That is very fair, and that's exactly what we're seeing. And, you know... You know, I wouldn't add anything more unless you have something else to add to it.

Yeah, I guess I just, when you think about the backlog, Mike, it is largely on the system side with these longer lead times. And there's a direct correlation when you look at our customer advance payments. So our customer advance payments year over year are also up, you know, 84%. So it's in line with the increase in the order backlog. So we think about the backlog as largely system orders, not necessarily past due items. And we've got prepayments on those at 10% of last year's backlog and 10% of this year's backlog.

Good. Thank you. Really appreciate it.

Our next question is from Connor Lina with Morgan Stanley. Your line is open.

Yeah, thanks. I was wondering if you could give a little bit of context on the logistics costs that you called out. And just specifically, you know, is one of the segments more disproportionately impacted by this? And, you know, is this something that was sort of isolated to the quarter? Or are you sort of accounting for this persisting in next quarter's guidance?

Yeah. Um, let me address that. I guess, you know, holistically when we think about the 55.3% gross margin, you know, first of all, that that's gross margins coming off of a 10% organic growth and delivering 52% incremental margins at the old P line. But when you look at the 55.3 compared to where we were running Q two and Q three, it is down about 170 basis points. And when you think about that sequential drop, I would tell you it's roughly threefold. There's three relatively evenly split things, one of them being the spike in freight costs. And freight costs, it's inbound, it's outbound, but it's also internal within the Norton facility. And so we saw this, as did the rest of the environment, spike in Q4. I can tell you it spiked above where we had estimated, and it's starting to subside in the marketplace already from those elevated levels that we saw in Q4. But we are addressing this with pricing actions in the first half here of 2022. The other impact I would tell you was the non-recurring write-off associated with aligning the factory, and that was all in ATS. To answer your specific question around the segments, that factory alignment was in our medical business, and so that approximately $2 million impact on gross margins impacted ATS. The freight is felt across both segments, but I would tell you it's heavier on the IPF side proportionally. And the remaining, the third factor I would tell you is mix. And so, you know, if you look at our gross margins over the history here, we view prior to the screw and barrel divestiture, we were running about 53% to 55% gross margin on any given quarter depending on mix. For the last now three quarters, we've been running 55 to 57 based on the new mix post the divestiture of the screw and barrel business. So when we give our guidance for 2022, I would tell you you should think about operating between that 55 and 57% gross margin range depending on mix on any given quarter. But those were the main factors I would tell you in the Q4 gross margins.

Got it. That's helpful context. Appreciate it. So sort of related question here, but at a higher level as you're looking into fiscal 22, it certainly seems like you guys are feeling pretty good about margins holding up relative to where we were in 2021. So just curious if there's any sort of inflationary pressures you're worried about and, you know, on the cost side of things, is there anything you're watching as sort of a swing factor on whether those margins will trend to the higher, lower end of your range?

Yeah, Connor, let me just give you a high-level color, and certainly Joe will add some more to what I say. In general, we feel good about where we've got margins forecasted based on our current customer demand and segments, the various end-market exposures we have. From an inflation perspective, there are two things you want to keep in mind, right? First and foremost, material cost is a fairly small part of our cost down. given our gross margins, given about the value we create. That's sort of one thing to remember. The second thing to remember is that our cost to our customers is a smaller part of their total cost act. And so what that means is that we have a differentiated position and are able to pass along price increases where that is necessary. And we've already done that in some businesses. Overall, we don't see this being a major factor for us in the coming year. Joe, you want to add any color to that?

That covers it. I mean, we are closely monitoring it from an inflation perspective, both on the raw material side as well as the labor side, and then it was the logistics side, I would tell you, that spiked in Q4 that impacted the margins slightly. I will also add we see NBS Next efficiencies helping offset some of this pressure, efficiencies in terms of labor and conversion costs at several of our pilot sites. And so that has also helped our performance, and we anticipate that to continue to contribute favorably as we go into 22. All right, appreciate it.

Turn it back here.

Our next question is from Andrew Scalia with Barenberg. Your line is open.

Morning, guys. If you look into your sales guidance for next year, if you back up NDC, the implied organic sales is more like mid-single digits. I was wondering, I know you gave a lot of color already, but I would think that some areas like medical and even electronics, you see a reacceleration, I think, mid to late year. And I just wonder how conservative you're being on that, you know, with that as a dynamic in the forecast.

Yeah, Andrew, let me make one, then maybe I'll let Naga say something else. But when you think about our sales guidance for the full year at the mid 0.8%, there is roughly about a 2% FX headwind that we're contemplating. And to your point, the acquisitions net of, don't forget, we have one quarter of the screw and barrel business. So the way that we're thinking about it is a negative 2% FX headwind. The net acquisition of divestiture is roughly favorable, 3%. And then it's 7% organic growth is what we have. Okay.

Is there a way? Sorry, go ahead. No, no, go ahead, Andrew. Well, I was just going to say, you know, with medical, I would think that that's being held up by recent variant activity again. So I would just think that that would only be a nice tailwind as the year progresses.

Yeah. You know, just historically, think about the medical business as high single digits or electronics mid-single digits. We are in the early cycle of, you know, maybe third wave there on electronics. So you are right. In electronics, we're going to see some pretty nice growth. That's what is reflected in our guidance. In medical, we are expecting to have some pretty good, you know, return to the high single digits. Biopharma doing well. So if you think about all of that, you know, these are going to be the big growth contributors. But look at the record year on our industrial business and consumer non-durable business in 2021. Our expectation is we carry that strength into the first quarter. The back half of the year, there is going to be some tapering on those businesses, which has double-digit organic growth in consumer non-durable and in industrial businesses. So our expectation is some normalization in the back half for those businesses. That's But you're right. There is strength in medical. There is strength in electronics. That's what we have reflected. And what we are excited about is as you go into the first quarter, we are carrying the momentum of our second half of 2021 into 2022. Okay.

Okay, that's helpful. Is there a way in that backlog that you can identify what percent of sales is specific to electronics and medical?

Yeah, I would tell you it's pretty heavy on the system side. And on the electronics, there are a lot of systems businesses that we sell. But I can't tell you the split between electronics and medical.

But we do have industrial systems that still need to get shipped out in the first quarter. Okay.

All right. Thank you, guys. Our next question is from Matt Somerville with DA Davidson. Your line is open.

Thanks. A couple questions. You commented sort of on the fact that we should not expect normal seasonality as it pertains to the first fiscal quarter of the year. But maybe, Naga and Joe, if you can comment on how we should be thinking about the quarterly earnings cadence beyond that. Should we expect kind of the typical kind of fiscal Q3, you know, being the high watermark for the year? What's the right way to be thinking about that, particularly as you see some tapering, as you're describing, or at least expect to see some tapering, as you're describing, in non-durables and general industrial?

Yeah, I think our comments around the normal seasonality, as you know, Q4 used to be the strongest seasonality. And here we had Q4, which contributed $25 million of revenue back into Q3. So Q4 wasn't the strongest this year. And therefore, coming off of Q4 being the strongest, we used to see a big drop into Q1. So now you're not seeing the big drop, and actually Q1 will be comparable. to Q4. And the way we think about then the remaining three quarters, I would tell you with the current order entry pattern and the customer behavior that we're seeing, I would think about those quarters relatively evenly split as you think about the remaining three quarters of 2022. So Q1 will still be relatively light compared to the other quarters, but not as dramatically light as it was in the past

coming off of a strong Q4. You know, Matt, one comment I would add to that is the ordering pattern of our customers are so different and expectation of shipments are so different. So, you know, that's why you see us sort of changing what was traditionally a normal ordering pattern and a seasonality to our revenues on a quarterly basis. That's the big difference. You know, the question really is, you know, when do you return back to your normalcy? It's a perfectly good question to ask us. I wish I knew the answer to that. I would say as our customer ordering patterns stabilize or, you know, some of this supply constraint questions that customers have in mind, when they ease up is when we get to that. We're right now at best middle of this transition, so... I think, you know, at least for this year, we don't see our typical seasonality.

Got it. And then as a follow-up, relative to what you would normally do from a pricing standpoint, is what you're contemplating for fiscal 22 more than you would normally seek to get? And if so, if you could maybe perhaps quantify that a little bit for us. And then... Also, just maybe a little bit of commentary on M&A actionability going forward as it pertains both to T&I and medical, recognizing you just completed a bulk on in the former. Thank you.

Yeah, sure. On pricing, you are right. You know, our expectations for pricing is going to be higher than our normal price increases that we have got. And the timing of them is also reflective of what we see in our businesses, right? So in 21, we didn't talk a lot about the price increases that we had already sort of acted on in 21 because they were not material enough or could not move the needle for the total company. But in general, our view around pricing is that we're in an inflationary period. We need to adjust pricing where we need to adjust pricing. You know, we're cognizant of the fact that we're the price leader in the marketplace. We're adding value. We'll get paid for it. So that's on pricing. Let me have Joe add a little bit more color on the sort of magnitude and such, and then I'll come back and answer your acquisition question.

Yeah. I guess, again, if you think historically, I would tell you we would realize approximately probably 1% on price relatively correlated to inflation. And so when you see the elevated inflation numbers that are being reported, that's how you should think about our response as it relates to pricing. But, again, I'll go back to Naga's original comment. When you think about the composition of our cost of goods sold, material costs, the purchase component is not the largest factor. The largest factor is on the labor side, and that's as we're generally a light assembly manufacturing operation. But you are correct. The historical way that we view price increases and the historical magnitude is no longer applicable in an environment that we're in right now.

I think, Matt, it's really important, right? If the inflation is 4% or whatever, 4% or 5%, Our material cost tag is lower, so the price increase we will realize would not be the same. Four percent would be different. Got it. On the acquisition question, we feel really good about our pipeline. We continue to have very Very good conversations, but what comes to market and when a seller is going to act on an opportunity, really we don't control, but we are actively pursuing our pipeline as we always do. But we will remain financially as well as strategically disciplined. And the areas we really like are test and inspection, medical, And, you know, there may be some adjacent markets to our core products that if we have an opportunity, we might act on them as well. So acquisition pipeline, healthy, good activity, but what we, you know, act on obviously depends on what comes to the marketplace. But you can expect us to remain disciplined.

Got it. Thank you, guys. Our next question is from Jeff Hammond with KeyBank. Your line is open.

Hey, good morning, everyone. Good morning, Jeff. Good morning. Apologize for any background noise here. I'm jumping on a flight. But just kind of back on the industrial comment around tapering into the back half, is there anything that's really informing that as you talk to your customers, or is that just – your normal lack of visibility that would, you know, kind of want you to put some caution around that?

Well, it is a couple of things, right? One, if you look at industrial capex activity as well as GDP activity over the cycle, you can start to expect that 23 is going to be a little bit lower than where we have been at, right? So there's going to be a natural stabilization that goes, and so we expect that to get reflected in our data. That is one. The second is the comps are going to be really difficult for you. So think about the IPS business. That grew 15% in the back half. And this is a business historically grew, you know, 2% to 3%. So as you think about year-on-year comps, the back half is going to get tough. And you are right. we don't have visibility to our industrial customers as much as we have in other places. So that's kind of where we're at. Hopefully that, you know, so it's three things that are going on that sort of informs our thought process.

Okay, and then just back on the, you know, the non-recurring charges and medical, can you just expand on that? you know, what you're doing there and kind of where you're shifting your focus. Thanks. Yeah.

You know, it is just a single R&D project that we were working on with one customer on a product category that was, let's just say, a little bit away from where we were and where we see the best opportunities today. Our best opportunities are in biopharma. Without going into specific details of the particular customer and such, this was an R&D project we were working on with an inventor on the outside. And given the kind of robust demand that we have and a very strategic discipline around where we want to grow this business, this is one that we needed to sort of stop doing and there was a write-off related to that asset.

Okay. Thanks so much, guys.

Thank you, Jeff. Our next question is from Chris Glynn with Oppenheimer. Your line is open.

Thank you. Good morning. So, you know, thanks for the update on uh ascend strategy i'm curious where you're you know seeing as you've been enacting this for a little while now where you're seeing share gain market space creation or enablement um you know not necessarily in a broad stroke level but maybe some finer points on that yeah that'd be great

Thanks, Chris. You know, one of the areas, and it's a good example to share with you that actually sort of uptales to the question that Jeff just asked us. You know, if you think about our biopharma business, you know, one of the things that as we, you know, as we deployed Ascend, as our teams use strategic discipline with NBS Next, and really begin to say, what is my market position in biopharma? And how big is it? What are my core competencies? How can I continue to grow this? Really, this just opened up a whole new opportunity for this team. You know, certainly the market environment helped them, but it allowed them to really focus on this biopharma part of the business and grow it. And so what we're doing is as we invest more in biopharma, you know, We continue to get new opportunities with existing customers as well as picking up new customers. And with existing customers, you know, where we were, let's say the number two or number three, we're moving up to number two or number one. So that would be a concrete example of how this is happening. And another example I would give you would be in our coding businesses. You know, in the past, we would take almost every project at an equal weight, but now our teams are able to say, if I have 15 projects or 10 projects in front of me, what is the best growth-oriented project and what is the most profitable project, and have the courage to be able to invest more in the most profitable and most growth-oriented project and maybe de-emphasize the ones that are not so profitable.

Great. Thanks for that. And, um, you know, it looks like the book to bill was, uh, maybe a little over 1.1 X. I'm curious of a couple dynamics. I understand the extended and lead time and behavioral aspect. Um, but curious of the organic book to build by segment, um, you know, approximating the impact of the acquisition. And then does guidance assume a reciprocal of book to bill at some point of the year where you, you know, just naturally flow into a negative book to bill given how backlogs formed currently, but maybe you might advise us not to read so much into it, you know, if a negative book to bill reciprocates.

You Yeah, I guess I would repeat, you know, some of Naga's comments. If you think about the strength in the electronics and the medical end market, those are predominantly that we see going out into 2022. Those are predominantly in the ATS segment. Whereas the industrial and consumer non-durable, where we see the growth rate stabilizing into the back half of 2022, that's predominantly in IPS. So when you think about the book-to-bill ratio and the movements there, as you were quoting, Chris, that's how it's going to correlate by segment.

Okay, thanks. I'll pick it up offline.

Again, as a reminder, please press star 1 to ask a question. Our next question is from Sari Boroditsky with Jefferies. Your line is open.

Thanks for fitting me in. So the earnings guidance of 8% to 18% is a pretty wide range. Could you just talk through the assumptions at the bottom and top end of the range? What do you need to see to hit the higher or lower end of your guidance?

You know, when we look out the range, to your point, Siri, is plus or minus, I would say, 5%, 4% in terms of earnings guidance. And I think it was mentioned early on the call. You know, COVID is still out there. COVID and the variants and what that does to the supply chain, what that does to the medical business, I think is a little bit uncertain. And so, you know, that... contributed, I think, to our guidance range, the uncertainty around that. And the second is the inflation combined with some of the supply chain challenges that we saw spike in Q4. Some of those supply chain challenges have started to mitigate here over the last, I would say, 30 to 45 days to a degree. But how that is handled going forward, I think, will also impact our range. But really, we were pretty specific, I think, in terms of our guidance for Q1, where we do have good visibility, where we are saying top line is 15% at the midpoint growth, consistent with what we delivered over the last two quarters combined. And at the midpoint, the earnings growth in Q1 is at 40%, 50% incremental margins in Q1, consistent with what we just delivered here in Q4. So we're trying to give I would say some clear guidance, one quarter out, which is where we have better visibility, and then leaving a little bit broader range for the back half.

Understood. And just a follow-up on the pricing question. Within your top-line guidance, you talked about organic growth of around 7%, the midpoint. How much of this is related to price-first volume? And then just on pricing, given the larger backlog, how should we think about pricing rolling through the P&L in 2022?

Yeah, so let me take those, I guess, in reverse order. You are correct. In some of our businesses, we had to go out with pricing actions earlier than what I'll call our fiscal year-end traditional practice, given some of the inflation pressures that we were seeing. Other businesses stuck with their year-end price increase. And so there will be a little bit of a timing issue, although not material. 55% to 57% gross margin range, but it will take some time for some of our pricing to take effect here as we roll into 2022. When you think about the organic growth on the full year of 7%, you know, we don't break that down specifically, but roughly when I look at the business and the timing and the price increases, you can probably think that that's roughly, you know, 2% to 3% pricing.

Great, that's helpful. Thanks for taking my questions.

Thank you. Our next question is from Walter Liptak with Seaport Research. Your line is open.

Hey, good morning, guys. Good morning, Walter. Hey, Walter. I wanted to ask about kind of a follow-on to the last one with regard to the range. The gross margin of 55% to 57%, To hit the high end of your EPS range, would that imply that you're at the higher end of your gross margin range as well? You know, I think the higher end EPS range, I think I would tell you, is more reliant on being at the high end of the revenue range. uh you know the margins throughout the year will fluctuate between that 55 and 57 uh as you know we delivered last two quarters uh q2 and q3 were average 57 roughly speaking so um it'll depend on product mix but i i think it's more contingent on the sales than where the margins drop out okay and and the sales it sounds like the if there is any kind of uh caution or whatever in the big range for 2022. It's around COVID and supply chain. So you're talking about not demand risk, but you're talking about just shipment timing. Can you get the shipments out in 2022? Is that fair? Well, I would also tell you that COVID impacts demand, particularly in our medical space. Okay. Okay, great. And I wanted just to review the – I think you made a comment that the last 12-week orders were up 25%. And I wonder if you could help us just get some visibility into that. Was that – what was the comp like? You know, it sounds like it was strong in electronics and medical equipment.

You know, maybe, you know, what around both of those APS segments? You know, is it semiconductor that's strong? Is it COVID-related, you know, medical that's strong?

Walter, I mean, you know, we generally don't break, you know, order entry by product categories, but my opening comments around where we are seeing strength in order entry is still the same, which is, You know, our electronic business order entry is pretty robust, pretty strong. If you think about our medical businesses, they continue to be pretty strong. And going into the first quarter, I would say the order entry for our industrial and consumer non-durable are also pretty solid, you know.

And from a time... Walter, I guess going back, I think it was Chris's question, a book to bill and what have you. It was really in Q2 that we started to see the ramp up last year. So from a year-over-year comp standpoint, from an order entry rate standpoint, that's when the year-over-year comps on growth rates start to become more challenging related to order entry. Okay, that makes sense. Okay, great. All right, thank you.

We have no further questions at this time. I'll turn the call back over to Naga for any closing remarks.

Thank you. Thank you for your time and attention on today's call. We're well positioned going into fiscal 2022. We remain focused on our long-term objective of delivering top-tier revenue growth with leading margins and returns as we deploy our 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.

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