Nordson Corporation

Ladies and gentlemen, thank you for joining us and welcome to Nordson Corporation's second quarter fiscal year 2026 conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Laura Mahoney. Laura, please go ahead.

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 Chief Executive Officer, and Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, May 21st, to report Nordson's fiscal 2026 second quarter 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 www.nordson.com forward slash investors. This conference call is being broadcast live on our investor website and will be available there for 30 days. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable gap metric 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 Nordson'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 materially differ. Moving to today's agenda on slide three, Naga will discuss second quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the three business segments. Dan will also discuss the balance sheet and cash flow. Naga will then share a high level commentary about our enterprise performance and provide an update on the fiscal 2026 third quarter and full year guidance. We will then be happy to take your questions. With that, I'll turn to slide four and turn the call over to Naga.

Good morning, everyone. Thank you for joining Norton's fiscal 2026 second quarter conference call. I'm very pleased to report a strong second quarter where all three segments contributed to our organic growth performance, surpassing the midpoint expectations of last quarter's sales and earnings guidance. We built upon the momentum of the first quarter with record sales of $741 million. This is an 8% increase over the prior year, which is inclusive of 7% overall organic growth. Order entry momentum continued throughout the quarter with accelerated activity in the last couple of months, driving up backlog 18% organically compared to the prior year. Solid execution and volume leverage drove record profit performance for the quarter, delivering EBITDA of $235 million which was a second quarter record and 32% of sales. Adjusted earnings per share of $2.86 were also a second quarter record. This was an increase of 18% compared to prior year. I would also like to highlight our free cash flow of $170 million. Our free cash flow conversion over 100% of net income continues to be a strength, enabling a healthy mix of shareholder returns and reinvestment in growth. We strategically deployed this cash to repurchase shares, return dividends to shareholders, and maintain our debt leverage while continuing to invest in the company. Also during the quarter, we acquired Capstan AG, a small but strategic precision agriculture company in North America. This bolt-on deal, which was valued at nine times adjusted EBITDA, enables Nordsten to grow our precision agricultural portfolio with mid-tier OEMs in the region. I'll talk more about the capstan deal and enterprise performance in a few moments, but first, I'll turn the call over to Dan to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning, everyone. On slide number five, you'll see second quarter fiscal 2026 sales were a second quarter record of $741 million, up 8% from the prior year second quarter sales of $683 million. The second quarter 2026 sales included an organic increase of 7%, driven by growth in all three of our segments, as well as a favorable currency translation impact of 3%. This result was slightly offset by the net impact of the medical contract manufacturing divestiture we completed in the fourth quarter of last year and the contribution of the small capstan acquisition that was completed during the quarter. Adjusted operating profit increased 11% year-over-year to $199 million, or 27% of sales, driven by increased SG&A leverage on the strong organic sales growth. EBITDA was up 8% year over year to $235 million, also a second quarter record. EBITDA margin as a percent of sales was 32% in line with the prior year. Incremental EBITDA contribution in the quarter was about 31%. While this is on the lower end of our typical sales conversion of mid to upper 30s, it's a 300 basis point improvement versus first quarter incrementals. and in line with our expectations to return to normal incremental performance as the year plays out. Looking at non-operating income and expenses, net interest expense during the quarter was $22 million, a decrease of $4 million versus the prior year, driven by lower year-over-year debt levels and a stable to declining rate environment. Other expenses on a GAAP basis increased $30 million year-over-year. There's a couple of drivers behind this that are important to understand and have been adjusted out of our non-GAAP earnings. The biggest driver was a one-time pension settlement transaction we completed during the quarter. We were able to annuitize approximately $113 million or just under a third of our remaining U.S. pension obligation at a very competitive discount of 7.5%. There was zero cash outlay required for this settlement However, the transaction resulted in a one-time $24 million pre-tax charge as part of the settlement. In addition to retiring the obligation, the settlement further improves our funded status for the remaining pension obligation and favorably impacts our ongoing pension cost. In addition to the settlement charge, other expense includes $10 million of non-cash mark-to-market charges for minority investments. You'll recall that in Q1, we actually marked these investments up by $22 million. So the Q2 adjustment just reflects the non-cash fluctuation in value during the quarter. Excluding these non-cash charges, other expense was actually slightly favorable year over year. Our tax expense on a U.S. GAAP basis was $24 million for an effective tax rate of 17%. inclusive of the impact of the non-cash losses I just mentioned and acquisition-related amortization and costs. On an adjusted basis, our effective tax rate was 18% in line with the prior quarter. We now expect our full-year tax rate to be in the range of 18% to 19% on an adjusted basis, which is slightly better than our previous annual guidance range for fiscal 2026. I should also mention that this improved outlook for tax rate is very much sustainable and reflective of our ongoing rate expectations. Gap net income in the quarter totaled $117 million, or $2.09 per share. Excluding acquisition-related amortization and costs and the non-cash losses, adjusted earnings per share totaled a second quarter record of $2.86 per share. six cents above the midpoint of our quarterly guidance, and an 18% increase from prior year adjusted earnings per share of $2.42. This improvement in year-over-year earnings reflects solid operating leverage from the organic sales growth, as well as improved capital leverage through strategic cash flow deployments. Now let's turn to slide six through eight to review the second quarter 2026 segment performance. Industrial precision solution sales were a second quarter record of $350 million, an increase of 10% compared to the prior year second quarter. Organic sales increased 5% compared to the prior year with a favorable currency impact of 4% and an acquisition impact of roughly 1%. Growth was driven by improving industrial coating and polymer processing systems demand, ongoing growth in our precision agricultural end markets, and stable demand in broader consumer and industrial end markets. As a result, EBITDA was 124 million in the quarter, or 35% of sales. This is up 9% over prior year, largely due to the higher sales volumes. Turning to slide seven, you'll see medical and fluid solution sales of 213 million, also a second quarter record, increased 5% compared to the prior year's second quarter. Organic sales increased 8% in the quarter, driven by contributions from both our engineered fluid solutions and our medical product lines. We're pleased to see solid growth in our medical product lines following a slower start to the year. divested sales from the medical contract manufacturing business had a negative impact of approximately 4% compared to the prior year. EBITDA for medical and fluid solutions was $79 million, or 37% of sales, which was an increase of 3% from the prior year EBITDA of $77 million. EBITDA margins during the quarter were slightly compressed versus the prior year, due to the impact of a near-term product startup headwind in selected interventional medical product lines. This should become an opportunity as the year progresses. Turning to slide 8, you'll see advanced technology solution sales were an all-time quarterly record of $178 million, a 10% increase compared to the prior year's second quarter. The 8% organic sales increase in the quarter was most notable in our electronics dispense product lines and reflects ongoing strength in semiconductor and market demand, which we're also seeing in orders across all of our ATS product lines. Second quarter EBITDA was a record $48 million and also a record EBITDA margin of 27% of sales, representing an increase of 22% compared to the prior year second quarter EBITDA of $40 million, or 25% of sales. The improvement in EBITDA margin compared to prior year reflects SG&A leverage on the high single-digit organic growth. Overall record margins reflect the sustainable, operational, and footprint changes we've made within the segment in prior years, guided by the NBS Next growth framework. Finally, turning to the balance sheet and cashflow on slide nine. At the end of the second quarter, we had cash on hand of 102 million and net debt was approximately 1.8 billion. Our leverage ratio of 1.9 times continues to improve from last year and is now actually below the low end of our long-term target range. This along with our strong cashflow generation provides us with significant firepower to strategically deploy capital, including the acquisition of strategic assets. Our free cash flow generation was $170 million during the quarter, resulting in a 119% conversion rate on net income, excluding the non-cash losses I mentioned a moment ago. This represents the fourth consecutive quarter above 100% conversion, despite the accelerated revenue growth we've delivered. And it's also worth noting here again that the pension annuitization we completed during the quarter on quite favorable terms retired about 30% of our U.S. obligation, further minimizing our long-term obligations and locking in the long-term funded status for the remaining plan obligation with no expected ongoing cash requirements. As noted on slide 10, Our capital allocation continues to be both balanced and value-seeking. During the quarter, we invested $10 million in capital projects to support current and future organic growth, paid $46 million in dividends to our shareholders, repurchased $43 million in shares on the open market, and reduced net debt by $93 million. We also made a strategic investment in our growing precision agriculture business by acquiring Capstan AG. Naga will get more color on that in a moment. So to summarize the quarter and really the first half of the year, we've achieved strong organic sales growth with all of our segments contributing nicely while maintaining our strong EBITDA margin performance. All three of our segments achieved record second quarter sales and our ATS segment achieved an all-time record quarterly performance. Our cash conversion remains strong, allowing us to strategically deploy capital to sustainably grow the franchise and return value to shareholders. Our teams once again delivered on their commitments for the quarter and worked to grow backlog to position us for success in the second half of the year. Our end market theses and momentum supports our growth and the Ascend strategy is positioning us well to deliver for our stakeholders. With that, let's turn to slide 11, and I'll turn the call back to Naga.

Thanks, Dan. It's been a very strong first half for Nordsten. We are delivering above-market organic growth through accelerating demand in key end markets, our differentiated technology, close to the customer business model and the execution of the NBS Next growth framework. Before I talk about our end markets, I would like to share more color on the small acquisition I mentioned earlier. Nordsten acquired Capstan AG, a precision agriculture technology leader in North America, headquartered in Topeka, Kansas, Capstan has a strong reputation built upon its innovative pulse width modulation systems. These specialized nozzle by nozzle controls drastically increase efficiency and reduce waste for row crop, orchard planters, and aerial sprayers. Paying nine times Adjusted EBITDA, this strategic acquisition gives Northland Precision Agriculture another leg for growth in North America, focused on mid-tier OEM customers. Capstan's entrepreneurial culture and customer-centric business model align closely with the growth objectives of our Precision Agricultural Division. Our existing precision agricultural business, which began with the ARAG acquisition, had a small presence in North America. We are already consolidating our facilities into Capstan's existing footprint in Topeka, Kansas, to be closer to the North American mid-tier customers and grow our expanded product offering in this end market. Acquisitions remain a critical component of our growth strategy. As Dan noted, we are active in the M&A market with a robust pipeline. We remain focused on opportunities that meet both our strategic and financial criteria. We have been very intentional in building a growth-biased portfolio of precision technologies, as you will see in slide 12. More than 50% of our portfolio is now in growth and markets, including semiconductor, electronics, and medical, with remaining exposures in more stable GDP plus and markets. This diversification gives me confidence in our expectations for the remainder of the year and beyond. Within electronics and semiconductor applications, our dispense and surface treatment product lines continue to drive growth while our test and inspection systems that ensure the quality of semiconductor packaging are also inflected. We also see this growth reflected in our engineered fluid solutions product lines, where growth is being driven by electronics applications. Growth in general and automotive electronics remains somewhat muted, but there are signs of growing capacity needs in these applications. After a modest first quarter, medical end markets are steadily returning to normalized growth. The long-term growth drivers remain unchanged, including aging population, chronic illnesses, and technology investments in minimally invasive procedures, biopharma, and the increasing use of diagnostics. Within consumer non-durable, investments in packaging and product assembly are sustaining. And industrial end markets also remain stable, particularly automotive and polymer processing applications are improving as the year progresses. We are well positioned to meet the demands of our customers in these end markets. Turning now to our outlook, starting on slide 13. We enter the third quarter with strong order entry and increased backlog, which is up 18% over the prior year. Order entry momentum was broad based in the quarter with all segments contributing. At current exchange rates, foreign exchange, which has been a contributor to the growth in the first half, will be essentially neutral in the second half year over year. These trends position the company to deliver third quarter fiscal 2026 sales in the range of $760 million to $790 million. Third quarter adjusted earnings are forecasted to be in the range of $2.95 to $3.15 per diluted share. Turning to slide 14, based on the momentum in our end markets, as evidenced by our backlog and order entry, we are increasing our full year guidance. Sales are now expected to be in the range of $2,930,000,000 to $3,000,000,000. $10 million and adjusted earnings to be in the range of $11.30 to $11.80 per diluted share. Our updated guidance balances the strong demand momentum with the appropriate prudence needed given the potential for a range of macroeconomic outcomes. We have a high level of confidence in the midpoint of our range, and it would take a meaningful slowdown in order activity driven by macro conditions to move us towards the low end. At the same time, if we sustain the current demand trends, particularly in electronics and markets, we believe we are well positioned to deliver the upper end of our guidance. We delivered a very strong first half of fiscal 2026, highlighted by record performance and ongoing momentum across our end markets. Our NBS Next growth framework, close to the customer business model, and differentiated precision technologies positions us well to continue compounding profitable growth. As always, I want to thank our customers and shareholders for your continued support. In particular, I want to thank Norton employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence Continue to position as well to serve our customers. With that, we will pause and take your questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Somerville with DA Davidson. Matt, your line is open. Please go ahead.

Thanks morning. Just a couple quick ones here on the medical side of things. Should we assume that growth going forward is now sustainably on track to consistently deliver the algorithm as you guys have historically advertised? And then could you give a little bit more detail on the interventional product headwind that you referenced there, Dan?

Yeah, good morning, Matt. Thanks for the question. So yeah, 8% growth in the quarter, we were quite happy with. I would say if you pull that apart, our medical product lines are continuing to track towards normalized growth. We saw strength in our fluid dispense products, our engineered fluid dispense products, which are also part of that segment as well during the quarter. So that's part of what's driving the growth. I would say that that's the area that we saw a little bit of upside. I would say medical is on track and still returning to normal growth rates of what we would call 6% to 8% as a target. So everything's on track. The 8% overall, I would say, is a pretty good precursor, but the mix within is still a little bit different than I'd say long-term expectations. And then your second question on the conversion, this is really, it's a near-term issue that we're working through with the material change in one of our medical product lines. It's actually a regulatory required material change, which drove some operational inefficiencies in the quarter. It's a short-term changeover issue that we are, you know, see clear line of sight towards working through, which is why I said that really becomes an opportunity as the year plays out. But a one time kind of changeover requirement based on some regulatory requirements with the customers.

Yeah. Just to add to that, Matt, what I would tell you is the medical business order entry and backlog build up. Yes. Allows us to have this confidence that we are returning to normalize growth in this segment.

understood thank you for the color and then maybe over to the semiconductor facing business can just kind of review how you're thinking about nordstrom's positioning there in views on cycle durability and maybe a little bit more granularity or quantification to the extent you can on how this cycle is reading through into orders and backlog thank you yeah

The ATS segment, if you look at our 18% backlog growth, is one of the strongest because of robust backlog growth in ATS. And if you remember and recall some of the conversation we had a number of years ago, during the downturn, one of the best things our teams did was to reposition the business in a couple of different areas. We diversified away from just our dispense businesses. Now we have testing inspection businesses that are delivering growth. In addition, we also had a real nice work that was done around diversification of customers going away from Reliance or one or two large customers. And third, we were able to optimally reposition our footprint so that we are in regions where our customers need us to be. So three things of work that we've done in this period of time that has allowed us to position the business. But on top of this, what you have is our close to the customer business model, allowing us to innovate on technologies that are needed for our customers as the new AI applications occur as AI infrastructure happens and semiconductors become more complex, more difficult to manufacture. So all these three things, you know, diversifying customers, operationally being where our customers need us to be, innovating on technologies and applications they need us to be, sort of has allowed us to be in this place that we are benefiting from this robust market growth you know where is where are we at on the cycle i would tell you we're in the early stages it is as always we know this is a difficult business to predict but based on what you can see in the marketplace based on what you can see with our customers i would definitely tell you we're in the early stages um in terms of number of applications If you think about this business, over 50% of this business is in semiconductor now. And so there are numerous applications that we are part of. Lots of new technologies. I think we have talked about with you around where we are headed in this cycle. There is more technology and innovation that is happening in this business that will allow our customers to really get after the AI compute needs that they have. And so a couple of things that you would probably be reading about is panel level packaging. It's very, very early stage, but we are participating in developing these technologies. If you think about optical fibers and increased content of optical fibers in AI infrastructure, that's another big area. So number of applications benefiting us because of our ability to co-develop technology with our customers right and and lastly what i will tell you is predominantly we are seeing the growth today in our electronic dispense business and our testing inspection businesses are beginning to inflect and that is more to come there

Your next question comes from the line of Jeff Hammond with KeyBank Capital Markets, Inc. Jeff, your line is open. Please go ahead.

Yeah. Hi. Good morning. Good morning, Jeff. Thanks for the explanation on the medical kind of material issue kind of impacting margins. Can you just talk about industrial specifically, you know, kind of, you know, decent growth kind of splatted down margins? Any anything in their price cost or mix that You know, and then how you see that plane, you know, playing out into the second half is, I think, last year, your margins, you know, ticked up nicely for that business. Yeah.

You know, the RPS business, we are really glad to see that we have returned to normalized growth. You know, we delivered 4% organic growth in this segment in the first half. That is a really strong performance for this business. You know, where we are focused on is to simply take this view that Our margins are best in class for the company as well as for this segment. And what is really important is for us to continue to focus on the market and be able to deliver growth. And that's what we're doing in this business. If you look at the pieces and parts of this business, I would tell you the packaging product application, adhesive dispensing is doing really well, sustaining growth where we expect delivering above market growth. If you think about our plastics and our industrial coating businesses, they are certainly improving. And our precision ag business is also growing nicely. In terms of margins, Dan, you want to comment about that?

Yeah, I think Naga mentioned it. I'll say this, Jeff. I mean, clearly, and this doesn't just apply to IPS. I mean, I would say clearly, we are operating in a bit of an inflationary environment right now. And when I say that, I would include tariffs in that. Tariffs in itself are not material, but I would say it's part of the broader inflationary impact we're seeing as we look at the price of components and resins and other inputs. And so All of our businesses are managing through that. We're managing through that with selective pricing where we need to, with offsetting cost actions where we need to. But I think that's why you're seeing a little bit on the lower side of incrementals and IPs. um but that's a short-term issue it's something that we'll work through and you know i think tanaga's point what we're really focused on in this environment is how do we maximize growth while maintaining our margin performance which is essentially what we did in q2 okay great um and then just can you talk through the moving pieces um to the guidance i guess it sounds like lower tax um maybe you know

Maybe you can give us a revenue assumption or, you know, how much is included from this acquisition. And then it seems maybe the backlog is more shippable, you know, in 4Q relative to maybe previous expectations, but maybe flesh that out.

Yeah, so I'll give you maybe a couple of pieces of flavor on that. I mean, I'll start on the sales front. You know, FX has been a tailwind for us in the first half of the year. At current rates, that becomes a neutral item in the second half of the year because the rate changes that we've seen kind of started in the second half of last year. So year over year, think of FX as neutral. The net impact of M&A that's both the divestiture and the new acquisition, which is a small acquisition, is a slight negative of roughly 1% in the back half of the year. And then the rest of the guidance is really around growth. And I think in the opening comments, I think Naga said it quite well. I mean, we have high confidence in our kind of midpoint outlook. We have seen, I would say, accelerated demand, really accelerating the last couple of months of the quarter, and I would say even carrying into the first weeks of the new quarter. And so if that continues, I think that's where we see the upper end playing out. It would take a meaningful pullback in order activity for us to be in the lower end of our guidance range. Again, just trying to give you a little bit of the flavor and the thinking in this fairly dynamic environment. We think it's the right way to think about the second half, but high confidence in kind of the midpoint of our sales outlook with opportunity if things continue to inflect.

I think additionally, what I would tell you, if you look at our backlog and where these components are coming from, all segments are contributing. And that is for us probably the most exciting part is that all of our businesses are contributing. And so the momentum across the company is strong. And that's why you see us increasing guidance.

And I think on the conversion, I was going to say, I think on the conversion side, Jeff, I mean, again, in the environment that we're in, you know, if I think of last year, I mean, we had incrementals in the 50 percent range in an inflationary environment. That's not realistic. Right. And so I think this is this is going to be a year where, you know, it's really about maintaining margins as we grow, as opposed to. expanding margins in an inflationary environment. And so I think that's the other flavor I would give you as you think about the second half.

Okay, appreciate it.

Your next question comes from the line of Mike Halloran with Baird. Mike, your line is open. Please go ahead.

Okay, thank you. Good morning, everyone. Good morning.

Just some clarifications then on what you just mentioned. One, is the assumption sequential normalcy from the trend you're seeing right now? In other words, are you just assuming trends stay normal? I mean, it feels like there's maybe a little flattening from 3Q to 4Q in the guide. Obviously, I get the confidence you guys are exhibiting here. Just want to make sure I understand that. And then also related to the last answer, just the backlog conversion, is that a pretty normal conversion timeline as we sit here? Any signs of backlog building farther out for capacity purposes, particularly on the ETS side? Any nuance on that?

Yeah, on the backlog piece, I appreciate the question, Mike. On the backlog piece, I would say no fundamental change. I mean, our Our backlog in general, the majority, I would say, turns certainly within six months. In some cases, certainly within the quarter. We do have some portion of our backlog that's starting to bleed into 2027, but I would say that's the minority. But no real fundamental change in overall backlog timing. And so, yeah, I think that's the simple answer to your question. I think as far as the expectation, you know, look, I think we have good visibility, certainly to the third quarter. Sixty percent of our business is, you know, consumables and single use kind of turnover. And near term, I think we have high confidence in that. I think we're still being prudent. Right. There's there's some dynamic things happening in the world right now. If you ask me, what do we worry about? Look, if some of the things going on in the macro environment start to create, let's say, raw material shortages or issues for our customers, that's what we worry about. If some of these things have more broader implications on the industries we're serving and there's some limited pullback, I would say that's what we're just being prudent about if I think about the fourth quarter.

And the reason you hear the confidence in what we're suggesting is that we're not seeing any of that correct in our demand patterns right now.

Yeah. No, that makes a lot of sense. And then the coatings and plastic side, starting to see some better trends. Maybe talk about what you think is driving that beyond just comparisons as well as the durability of that dynamic. Appreciate it.

Yeah, I would say actually what we're seeing there, really not a surprise. I mean, going back to last year, we said that certainly there was a big pullback in those markets. But we were confident that that had hit the trough in the fourth quarter. And I would say we're seeing, you know, normal gradual recovery in both of those markets through the first half and in line with what we expected. So certainly not what I would call a rebound, but but nice, you know, normal recovery.

Thank you. Appreciate it.

Yep.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas. Andrew, your line is open. Please go ahead.

Hey, good morning, everyone. Morning. Yeah, I just want to check your industrial precision. You guys sound confident and things are improving and market-wise and trend-wise. What about within that segment, and maybe just talking broadly, the mix of that aftermarket sales versus systems, are your customers signaling more confidence in moving forward with some bigger CapEx decision-making, or is that already underway and that's being reflected in backlog?

Yeah, I would say improved order entry, both in systems and parts, signaling what our customers feel in terms of a broader recovery. So if you look at all the different businesses, there is a momentum in the industrial businesses that has allowed us to post a 4% organic growth. I mean, this is at the high end of what these businesses have done. And if you look at our backlog building, we are seeing confidence in system orders.

Yeah, I think just to add one other piece of flavor to that, there's really been no, I'd say, fundamental change in our mix of systems versus parts for IPS. It's been pretty close around that 60-40. And if I look at Q2, actually parts are slightly higher as a percent, but again, not meaningful, a couple of percent. So no big system inflection, I think, is maybe the message there.

Yeah, okay. Okay. Yeah, I wanted to check, you know, the cash flow has been solid. I'm wondering, you know, you did this small deal, but you say in the slides, you got about $900 billion in capacity, still left. I know you got some debt pay down, but I wonder what the M&A environment looks like into year end for you, and that other companies seem to be signaling, you know, valuations are maybe ever so slightly normalizing. But if you could give us some insight into what you're seeing there, that'd be great.

Yeah. Our M&A activity continues to be robust. We have a pipeline that's pretty active. We continue to work it. But we're going to stay disciplined, right? We're going to stay disciplined against our strategic criteria as well as our financial returns criteria. What we don't talk about are things that we've been part of and didn't bring to fruition for many different reasons. So the activities are pretty strong. Our focus is the same. We're continuing to be focused around our medical business growth, test inspection, and any technology adds bolt-on ads to our strong existing portfolio of businesses right our industrial businesses our ats businesses wherever there is a opportunity to bolt on technology we will do that but big strategic acquisitions are focused on medical got it thanks naga thank you

If you would like to ask a question, please press star one to raise your hand. Your next question comes from a line of Walter Liptak with Seaport Research. Walter, your line is open. Please go ahead.

Hi, thanks. Morning. I want to ask one about the ATS order strength. I wonder if there's a way you could quantify it for us. a little bit more, you know, is it up single digits, you know, double digits? And I wonder if you could talk a little bit more about the broadening, I think, of the technology from electronics dispense to more T&I, you know, why is there sort of a lag from dispense to T&I?

So maybe I'll take the first part of that and then I'll hand it off to Naga and appreciate the question, Walt. So look, we don't give backlog and order level details at a segment level, but I think I'll maybe reiterate some of the earlier comments. So with backlog up 18%, that was broad based with all segments contributing to that. And I would actually say, and I think Naga mentioned this, I would say particular strength in our ATS segment contributing to that 18 percent. So I think you can you can easily draw a double digit increase to ATS from those statements. And if anything, I would say in line with or better than that, 18 percent overall.

So let's talk about some of the applications. You know, there is not really a lag between these different businesses. Right now, the strength is in our dispense businesses. You could correlate that there are more dispense businesses versus test and inspection, right? If you look at a single line, you're going to have more dispense units versus T&I units. But in terms of lag is... Those are just business dynamics. I wouldn't read any much more than that. We are seeing similar levels of growth in terms of demand from both these dispensers as well as test and inspection. My comments were more around if you compare to before, ATS today is a much broader set of applications, broader set of technologies. That's probably what I was trying to say. Yes, I did mention around that being a lag, but that's not related to any dynamics in the marketplace rather than it just happens to be such that, you know, there are cases last year we were we were growing our test and inspection faster than we were growing our dispense business. And this year, the last three quarters, our dispense businesses are far more robust than our test and inspection business. But when we look at our demand, look at our customer projects, look at all the things that we're working on, there is no difference really.

Okay, great. And then as sort of a follow-up to an earlier question about the backlogs and the cycle times, I think, you know, some of those six-month cycle times from backlog to shipment is probably longer in industrial but shorter in medical and advanced tech. And so I wonder if you could talk specifically about those differences and then in the advanced tech segment. You know, are those cycles, you know, what are the are they are they significantly shorter in advanced tech?

Yeah. And I hate to say this, but it really depends to some extent. And it really depends on the mix of the orders coming in. I mean, the longer cycle times tend to be tied to our larger, more complex systems. And again, if you look at the mix, even in medical, while it's all consumable products, there's a lot of times that we have customers that will place three-month POs. And so it's one PO that goes under the backlog that gets issued or released over three months. And so it's really, I hate to say it, but it depends. What I would say generally is, you know, consumables, smaller kind of, let's just call it our high volume, smaller systems tend to get delivered much quicker, even within the quarter. And it's really our larger systems that tend to be more the, you know, three to six or even beyond, somewhat dependent, not just on the system, but also on because it tends to be tied into a larger product or project that our customers are working on. And it's really about their timing.

Yeah. So, I mean, based on what Dan is telling you, right, it's exactly what you're talking about. Well, you know, our largest system businesses are more in IPS, right? less in ATS, right? So you are right. Our largest system backlog converting into shipments for in that six month period, it's more around that large system businesses, which are predominantly in IPS. If you think about ATS, you still have systems that ship within the quarter, right? But What is why Dan says it depends is our customers will give us the order in this quarter, but would tell us, hey, I want this in the fourth quarter. Right. So that we don't control, even though our lead times are pretty good. We have significantly improved our lead times from, you know, what used to be 16, 18 weeks to now less than seven, eight weeks. And we could even push things into four weeks if somebody wants it. So it's not really an issue of the company as much as what the customer wants as well, right? And MFS predominantly is consumables. And yes, the orders you get, you can ship them within the quarter, within the week, within the month, but it depends on what order you got. If you got these long dated blanket orders, then they don't. So we're sorry to give you an answer that is broad-based, but it is the circumstances. But in general, what you want to take away from this conversation, order momentum strong across all segments, all segments contributing, backlog up 18%. gives us a high level of confidence at the mid end of, you know, middle of midpoint of our sales guide.

And no fundamental change in the delivery requests. We're not we're not we're not taking in one year out orders and things of that nature. It's it's pretty much in line with what we would typically see.

OK, got it. All right. Thank you for that explanation.

Your next question comes from a line of Robert Jamison with Vertical Research Partners. Robert, your line is open. Please go ahead.

Hey, good morning. Thank you for taking my questions. Good morning. So just a quick one on IPS, just kind of higher level. When I think about, you know, the precise nature of your dispensing offer in IPS and inflationary input environment, you know, you're offering really positioned Luke as a, you know, a cost savings partner in a way. You know, do you think if we see persistently high like input costs, you know, could this act as like a medium term driver for consumables refresh demand for IPS customers that could coincide with the improvements that you're seeing in systems level demand? You know, is this kind of the right way to think about that? And how might this be or turn into like a medium-term kind of demand driver for you all?

Absolutely. Right. This is, you are absolutely right in that what we offer is, you know, material savings across the entire product line. Material savings, you know, of course, accuracy, precision, speed, things that matter, but this drive for efficiency, not only because of waste of materials, but it is also because it's not available. And hence, you are looking at somebody that is, and that goes along across the entire portfolio, right? It's not only the adhesives, it goes across the coatings businesses, it goes across our precision ag business as well, because we do believe this is a really strong value proposition that our teams are marketing out there with our customers because there is a real need for it. And And when you suddenly apply more or you're changing materials, that's another one, right? When you run out of certain materials, you're trying to change materials. Again, technical help, application help, things that the company is really good at, I think will help us.

That's really helpful. Thank you for that. And then just two quick ones, just on Should we think about the incremental revenue like addition? Like I saw there was like 2 million bucks or so and you owned it for maybe a month. Should we think about that as like a five to $6 million incremental revenue? Like as we put that into our models?

For the second half, yeah, that would be a good estimation. I mean, it's roughly a $13 million business is the approximate size.

okay okay perfect and then um just last on um you know where do you think we are in the uh the demand cycle for ets i mean obviously looking at capital spending environment semiconductor and where you play you know would you still categorize that we're like in the early innings or early stages of um of the demand cycle at this point yes perfect thank you okay

There are no further questions at this time. I will now hand the call over to Naga for closing remarks.

Thank you for your time and attention on today's call. Norton is well positioned as a diversified position technology company. Our close to the customer model, proprietary and niche technology, diversified geographic and end market exposures, High level of recurring revenue and strong balance sheet are among the many attributes that makes us a quality growth compounder. Have a great day. This concludes today's call. Thank you for attending.

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