Q3 2022 Nordson Corp Earnings Call
2021.
The fact that the team delivered above this result is a true testament to our differentiated position technology.
Customer centric model.
Infective deployment of the NBS next growth framework.
And the dedicated nordson employees, who are driving strong profitable growth.
I'll speak more about the business.
In a few moments, but first I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.
Thank you Naga and good morning to everyone.
On slide number five you will see third quarter of fiscal 2022 sales were a record $662 million, an increase of 2% compared to the prior year's third quarter sales of $647 million.
The increase was primarily related to 4% organic volume growth.
The MDC acquisition.
Offsetting by unfavorable currency impact of 5%.
On a constant currency basis, our sales increased 7%.
Pair to prior year third quarter.
Which was the previous quarterly sales record.
The organic growth was broad based across most end markets and geographies, except for Asia Pacific, which was impacted by the Shanghai, China Covid Lockdowns for the first month and a half of this fiscal third quarter as.
<unk>.
We are very thankful for the outstanding efforts of our China employees as their return in full force helped offset a significant portion of the lockdown impact and contributed to the record sales quarter.
Gross profit for the third quarter of fiscal 2022 totaled $366 million or 55% of sales a slight increase compared to the $365 million or 57% of sales in the prior year third quarter.
Excluding onetime restructuring costs.
Adjusted gross profit totaled $368 million or 56% of sales.
The team continues to actively manage the price cost dynamic and these inflationary periods. In addition to unfavorable currency impacts opt.
Operating profit totaled a $185 million in the quarter.
During the quarter, we recorded onetime restructuring costs associated with the facility consolidation and the <unk> division of the Ats segment.
And the closure of our Russian operations.
Adjusted operating profit excluding these nonrecurring items was $188 million in the quarter.
For 28% of sales compared to the strong prior year third quarter operating profit of $188 million.
Organic sales volume leverage contributed to the operating profit result, and was offset by unfavorable currency impact and inflationary pressures.
EBITDA for the third quarter was $213 million or 32% of sales, which is ahead of our long term target of 30%.
Looking at non operating expenses.
Other net expenses decreased $3 million, primarily driven by lower.
Non operating pension costs and foreign currency exchange gains.
Tax expense was $39 million for an effective tax rate of 21% in the quarter.
Which is in line with our prior year third quarter rate and the forecasted full year rate for 2022.
Net income in the quarter totaled $142 million or $2 45 per share.
Adjusted earnings per share, excluding severance and facility closure costs totaled $2 49 per share a 3% increase from the prior year.
This improvement is reflective of the year over year increase in sales and.
More importantly, the consistent application of the NBS next growth framework, which leads to steady profitable growth.
Now, let's turn to slide six and seven to review the third quarter 2020 to segment performance.
Industrial precision solutions sales of $341 million decreased 1% compared to the prior year third quarter, but grew 5% on a constant currency basis.
With the MDC acquisition, providing a 7% sales increase which was offset by an organic volume decrease of 1%.
The unfavorable currency impact on this segment was 7%.
The organic 1% decrease needs to be properly interpreted as <unk> third quarter 2021, with a very strong quarter, 10% above the quarterly average in fiscal 2021.
As it was inclusive of several large system orders, which customers pulled forward.
Also the Ics segment, China operations are headquartered in Shanghai.
And therefore this segment was disproportionately impacted by the Covid Lockdowns in May and June of this year.
The organic growth. Excluding these factors was driven by robust demand for packaging and product assembly product lines, and our food and beverage industry.
And industrial end markets in most geographies.
Operating profit for the quarter was $120 million or 35% of sales, which is a decrease of 3% compared to the prior year operating profit of $124 million.
Unfavorable currency negatively impacted operating profit despite comparable sales for the prior year record third quarter.
Moving now to advanced technology solutions.
Sales were $321 million, a 7% increase compared to the prior year third quarter and.
Sequentially the.
The second quarter 2022 quarterly revenue record for this segment.
The record quarterly sales included an increase in organic sales volume of 10%.
Offset by unfavorable currency impacts.
Growth was across all major product lines, but particularly strong in the electronics dispense and biopharma fluid component product lines.
All geographies contributed to this quarter's growth with particular strength in the international regions.
Third quarter fiscal 2022 results for Ats included two and a half million dollars.
Of nonrecurring facility closure expenses associated with the consolidation of manufacturing operations within the <unk> Division.
This consolidation will enable improved operating efficiency and customer service levels to support the growth of this division once complete.
Third quarter adjusted operating profit, excluding the consolidation expense was $89 million or 28% of sales an increase of 10% over the prior year operating profit of $81 million.
The profit growth was driven by sales volume leverage offset partially by currency and inflationary pressures.
This segment continues to deliver impressive sales growth at very attractive, 40% plus incremental operating profit margins.
Appointment of our NBS next growth framework.
10 used to be a key element and the success of this segment delivering profitable growth.
Finally, turning to the balance sheet and cash flow on slide eight.
Our third quarter balance sheet includes cash of $129 million and net debt was $675 million, resulting in a 0.9 times leverage ratio based on the trailing 12 months EBITDA.
We continue to have significant available borrowing capacity.
Pursue organic and inorganic growth opportunities such as the cyber optics acquisition announced on August eight.
Free cash flow in the quarter was $111 million.
Or a conversion rate on net income of 78%.
Strategic investments are being made in inventory to address portions of the current supply chain constraints and increased capacity to address the growing backlog.
Dividend payments were $29 million in the quarter and our board approved a 27% increase in the annual dividend.
Effective in the fourth quarter of fiscal 2022.
This marks the 59th consecutive year the company has increased its dividend.
The significant increase of 27% reflect the strength of our financial results, which are driven by our continued progress in executing <unk> strategy.
Combined with the desire to maintain targeted payout and yield ratios.
The annual dividend yield now will be slightly over 1% at current market prices.
Also with the ongoing market volatility, we again capitalize on the opportunistic repurchase of shares here.
Year to date, we have spent over $230 million on share repurchases.
Averaging a price of $219 per share.
For modeling purposes in fiscal 2020 to assume an estimated effective tax rate of 21%.
Capital expenditures of approximately $50 million.
I will now turn the call back to Naga.
Thank you Joe.
We are working through incredibly dynamic times, yet our teams continue to meet the needs of our customers. It is their dedication and focus on our customers that resulted in another record breaking quarter.
I want to pause and say thank you to.
To our employees.
You make these results possible.
We continued to manage through the challenges of the short term macro environment.
And we are making solid progress on our strategy.
Illustrated on slide nine we announced our decision to realign our business segments better focus on our best profitable growth opportunities.
Effective August 1st.
We organized into three financial reporting segments.
Industrial position solutions.
Led by Jeff Pembroke will focus on proprietary.
Dispensing and processing technology.
For adhesives coatings paints.
Finishes and other materials across diverse end markets.
Jeff joined Nordson in 2005, and has driven growth in multiple businesses across nordson.
He also was instrumental in the development of our medical platform.
The new medical and fluid solutions segment will include Nordson fluid management solutions.
Medical high Tech industrial and other diverse end markets.
This remains one of the company's growth engines, both organically and Iclusig currently.
This segment is being led by.
Even though Wes.
Stephen joined Nordson in 2016, as the leader for industrial coating solutions business.
In 2020, he was appointed the head of strategy and corporate development group.
He has actively advance our <unk> strategy.
Finally, our advanced Technology solutions segment will focus on test and inspection.
Precisely control dispensing and surface treatment for electronics applications.
<unk> Subramanian.
Is leading the segment.
<unk> joined Nordson in 2006 and has served in roles of increasing responsibility in corporate development business management and global market development.
She was most recently.
<unk> President of the electronics processing solutions Division, where he has successfully driving the execution of the NBS next growth framework.
Okay.
Our new reporting structure will give better visibility into.
Into our medical and electronics platforms, which have grown significantly through both organic and acquisitive opportunities.
I'm also pleased that this structure gives us the opportunity to recognize and promote from within nordson and advance our winning team strategy.
We will share historic financials, reflecting this new segmentation.
The.
Third quarter of fiscal 2022 10-Q filings.
Turning to slide 10 I.
I'm pleased to highlight the new acquisition agreement that we announced earlier in August .
Nordson has a very disciplined acquisition strategy.
We are focused on acquiring businesses with differentiated position technology that serve attractive high growth end market applications.
We have been building platforms in two end markets that meet the strategic criteria.
Medical and test and inspection.
In the test and inspection platform.
We have built a significant product offering.
Our electronic customers in <unk> and <unk>.
Inspection.
Using the NBS next growth framework.
Test and inspection division identified optical inspection has.
High growth application in this end market.
Further our deep understanding of the semiconductor customer and industry trends indicate that <unk> automated.
<unk> inspection product category is growing double digits.
Optical inspection, which takes a picture of the surplus level of an application.
Semiconductors are.
<unk> circuit boards is an attrition noninvasive inspection method.
Cyber optics, we just establish itself as a leading global developer and manufacturer of.
Our high precision <unk> optical sensing technology solutions provides.
<unk> provides a new growth platform for us with existing and new customers and the electronics end market.
Cyber optics utilizes a proprietary sensor technology called Mris.
That significantly reduces reflection to create higher quality <unk> images and divers electronics applications.
The innovative fiber optic sensors.
Combined with advanced software results in high quality images.
Market, leading speed precision and resolution.
The company also has introduced.
8% technology, we just say wireless diagnostic tool that provides real time data to ensure the calibration and process reliability.
April production systems.
Today this type of inspection requires machines to go offline.
So way percents offers in line.
<unk> inspection that will improve our customers' product quality and throughput efficiency.
This technology will allow of nordson.
To further expand into the front end of the semiconductor manufacturing process.
Launch and has limited presence today.
We are very excited to soon add cyber.
Cyber optics differentiated technology into nordson portfolio.
This acquisition meets the strategic and financial expectations, we outlined during our Investor day in March 2021.
We expect this deal to close.
In our first quarter of fiscal 2023.
We will invest in this business to extend the technology to meet emerging customer needs and scale, the global sales and service infrastructure to make their technology accessible to a broader range of electronics customers.
Now, let's turn to our updated fiscal 2020 to outlook on slide 11.
Order entry remained strong throughout the third quarter.
The favorable book to bill ratio, maintaining backlog at over $1 billion.
This growth in backlog is partially related to the ongoing extended shipment request dates for large customer orders and electronics industrial and medical end markets.
For the full year fiscal 2022.
We are confirming our previously provided revenue guidance of 8% to 9% growth in adjusted earnings growth in the range of 18% to 21% over fiscal 2021, despite the increased currency.
<unk> headwinds.
This is approximately <unk>.
20% earnings growth.
Following a record 2021 financial performance.
It is a testament.
To our dedicated employees and the solid execution of DSM strategy.
Our financial results and expectations for profitable growth is rooted in our differentiated precision technology customer centric model and diversified end markets.
Additionally, the ongoing implementation of NBS next is making sure that we have a crystal clear view.
Our best growth opportunities.
And we remain disproportionately invested in them during this dynamic environment.
As always I want to thank our customers shareholders and the nordson team for your continued support.
With that we will pause and take your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Allison <unk> from Wells Fargo. Your line is open.
Sure.
And your results certainly bucked that trend in your commentary about strength in end market is certainly there.
Any differences that youre seeing maybe some of your earlier cycle order entry slowing just any dynamics that youre seeing that maybe you're raising some advice in your head and I guess in line with that how do you view. This portfolio now that you've thought through cycles. It seems much significantly more defensible as we go forward here with particularly strength in that vertical and some of the tech.
But any thoughts there.
Allison we missed earlier part of the question if you don't mind could you.
And repeat it maybe I missed it.
Yeah, I would just say just any red flags that you are starting to see I know you talked to order entry being pretty strong still but just any sort of normalization are slowing or some cautiousness around some of your customers that are out there today.
Sure.
In general as we indicated.
Our results show it was a very broad based demand.
Environment that we're experiencing today and.
Yeah.
Points of strength as we indicated electronics medical.
We also saw some really good strength and solid order entry as well as.
Revenue profiles in our industrial businesses.
Consumer facing businesses in North America was particularly strong as well.
Yes.
As you think about orders our comps are beginning to get difficult.
Anything Thats, probably what you would see.
But in general very very solid in the electronics very solid and medical pretty good strength in industrial so.
And I would just.
So that.
In the quarter, our order entry from a strength standpoint was again a favorable book to bill. So that's the seventh consecutive quarter, where we've been adding to backlog. So despite the record sales order entry was north of our sales.
Got it and then the new segment structure, that's put out there and I just recall etfs kind of before that push into medical with extreme lately volatile how should we think of that volatility in Etfs today is that test and inspection balancing some of that volatility that you've historically seen there.
Yes.
If you think about an electronic business and we've talked about this now for some time here.
Our electronics dispense business as such has gotten more broader.
And more.
A more diverse and the applications as well as test and inspection is less volatile than competitive dispense and hence what youll find really is.
Okay.
Less cyclical than we.
Before but it is still at.
Facing business. It is still has some cyclicality might be amplitude of the cycles be muted.
<unk>.
It is our expectation.
Understood. Thank you.
Your next question comes from the line of Connor Lynagh. Your line is open.
Yes. Thank you.
Was wondering if if we could dive in on the fiber optics acquisition, a little bit more.
Could you maybe discuss the competitive positioning of the company sort of why you thought it would be an attractive target and then sort of second portion of this if you could just detail some of the cost synergies. It seems like that was a meaningful portion of the deal.
Yes.
If you think about fiber optics cyber optics.
A leading global designer developer.
Three the optical inspection and the reason we call that out as <unk> optical inspection is that they have some unique technology around.
Something called as Mris, which is really which suppresses the reflection of coming off of a shiny surfaces. So what you find really is they are really strong and this and that leads to.
Highly precise.
At greater speeds of three D images than their competitors. So they're competitive advantage really is on.
Speed precision and.
Resolution.
What we find is that.
They are about $100 million company.
Yeah.
Market space about $1 billion so.
We felt or we believe that there is a opportunity for here for us to continue to expand their wonderful technology into existing customers of nordson.
And use our global infrastructure to be able to.
Gained share in the marketplace and certainly continue to solve problems.
For our existing customers so.
From our perspective it is.
The three D inspection is a dull.
Double digits growing part of.
Test and inspection technology, so a much faster growth rate than our <unk>.
Existing test and inspection technologies, which are still growing nicely at high single digits, but <unk> optical inspection is growing at double digits. So so really like the growth rate is really like the technology really like their market position and hence.
The combination of cyber optics technology with Nordson <unk> market presence and commercial infrastructure believes that this is a really good addition to our portfolio.
And Joe do you want to take the.
Question on synergies.
Yes.
Yes, so when you think about the $6 million of cost synergies I would tell you.
Two main buckets, one is greater than 50% of those cost synergies are simply eliminating the public company cost as youre aware cyber optics as a public company and so there are some cost synergies there that are north of 50% of the total and the other one I would tell you is when you look at North <unk> global.
Sales infrastructure, there's opportunity there to leverage our physical infrastructure around the world.
To more efficiently support their existing sales force and start to leverage their presence in other geographies and thats. The remainder I would tell you of the 6 million dollar cost synergies.
Yes.
One more thing on fiber optics and it is an important piece of why we are why we have decided to go this route.
Is that the technology of cyber optics is exceptional in our mind and.
We intend to continue to invest in this technology to meet customer emerging customer need.
Our needs and so.
So yes, we have the synergies, but it's also equally important to remember that this is the reason we acquired.
Cyber optics is really to invest in the technology and <unk>.
Support the growth that they have experience, which is incredibly good and compared to their peers.
Makes sense. Thank you I was wondering just broadly speaking within this value chain are there any other areas that you see is particularly high growth, particularly compelling for further capital allocation.
There are a number of other opportunities out there that we continue to evaluate so the opportunity profile pipeline looks pretty good but.
Yeah.
In terms of this area.
Traditionally we have spent most of our time in the backend of the semiconductor manufacturing.
And and also we spend more.
More time in components as well as Pcbs.
<unk> brings us.
More exposure to the front end, where we have limited opportunities.
So.
The upfront to middle part of semiconductor manufacturing so is.
An area, where you know norton's capabilities aligned yet.
Presence of unlimited, so we do see opportunities there.
Alright, thanks, very much I'll turn it back.
Your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.
Thank you good morning.
Congrats on the deal.
Was curious on the longer cycle side of the business you mentioned.
Industrial markets, along with electronics and medical but.
In the industrial markets with the kind of long long lead time large orders and curious if you could kind of differentiate among your industrial end markets, where you're seeing those kind of long lead time larger orders land.
If you think about our industrial coatings business. It is just one of those businesses, where we have pretty.
We have customers placing orders.
Much into 2023, alright, and so really.
<unk> be fine and this is not only our industrial but they're also consumer facing for example, our container coating business.
<unk> is doing really well and the backlog is pretty strong as we look forward into 2020, we received some pretty good strength.
Similarly, what you.
On a broader basis.
This is a trend that is that has been talked about but continue to emerge which we've seen some strength in the U S is that as.
As our customers think about supply chain constraints.
And as they begin to reassure manufacturing to more regional places, we do see opportunities for our industrial businesses to continue to have.
The strength and opportunities to grow.
<unk>.
And.
Our newly acquired.
N D C technologies, which is which we call the desert emission control systems business within Nordson is also seeing some pretty good strength here just as a reminder, what we manufacture here our sensors are sensing technologies that go on automated lines of manufacturing.
So if you are.
We get into food and beverage industry.
Our centers.
Tech and ensure that the.
The chips for example has the right Christmas and.
Fewer.
Film cast line.
Measures the thickness of the film to make sure that high quality film this produce so.
Again, our sensor technologies aiding automation another secular trend that we are very excited that positions <unk> to continue to grow.
Great. Thanks, and just wanted to touch on.
Short cycle industrial space.
How youre seeing the continuity there, particularly on some of the consumables the OEM.
Content that yourself.
Yes.
Yes.
If you think about our OEM consumer facing businesses.
Especially in our adhesive business.
We have new applications that we're very excited about in the electric vehicle, we're starting to gain some traction there.
Critical battery manufacturing is not completely.
Solidified yet, but number of emerging applications that are very beneficial too.
<unk> Hot melt adhesive and other technology, so very excited about that.
On on consumer packaging interestingly enough in North America, our businesses continued to have pretty good strength in Europe as well, we seem to have good strength, but in Europe . It gets muted by the currency.
Instead, we are facing right now.
Thanks for all the color.
Yeah, if I could just add a little color in number terms I mean, if you look at our growth rate in the United States.
It was up organically, 5%, which is accelerating from our year to date growth rate in that business.
<unk>.
Gotcha.
Thanks, Jeff.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good morning, everyone.
Good morning, Jeff Good morning.
So just just back on the order front.
Any indications you're getting from customers that theyre going to start to kind of normalize the order patterns and kind of get away from this.
Less long dated focus or or is that continuing to play out and then just separately.
I think you said electronics still very strong, but we've gotten.
A lot of mixed messages on semi capex and just wondering.
How you kind of.
Looking looking behind the scenes to kind of understand any any cracks there yes.
Yes.
So.
Let me take the electronics question first and then.
So in terms of electronics.
Which are beginning to find is that based on what we see with our customers.
Sales model, which is direct sales models that we have direct interactions with our customers don't have distributors in between.
The order entry still looks pretty solid.
And still continues to be.
The robust for our teams both in the dispense side of the business as well as in test and inspection.
Thing to remember is something that has changed about electronics and digital businesses is that.
Now.
Electronics is just not limited to consumer electronics.
Electronics is much broader or bigger part are significantly bigger part about how people conduct business.
Think about the explosion in cloud think about you know.
Number of different technologies now have become.
A common part of doing business.
It would be at a zoom call of the team's got all of this has digital.
Infrastructure behind it that needs to continue to be supported so.
Our teams find that.
Our electronic businesses and the need for electronics and in this digital economy is much more broader than it ever has been.
And so.
That might be part of the explanation why we continued to see strength in electronics for a longer period than before.
That is one and the second is the complexity of these devices semiconductors and there is a lot of work going on to ensure throughput and quality of these devices and hence we see our test and inspection businesses benefit from this trend.
Not quite 100%, but pretty darn close to more in line examination and inspection than offline sampling right. So you see that benefit so from an electronic business from what we can see.
What we have visibility to do and we do have a lot of visibility because of our direct sale model, we feel really good about where the business is at today.
In terms of our customers and <unk>.
Order pattern changing.
We have not seen it normalize yet that people are coming back now in the past we used to have backlog for AG.
A quarter ahead, but now we have several quarters in front of US right and I think unless at least this is just my personal perspective as we resolve.
Supply chain issues and people feel more confident about our supply chain.
Not just northern supply chain.
Global supply chain.
This this is not going to change so till we have that it is going to be.
This.
Yeah.
This long dated orders is just people feeling I need to get my orders in line. So that my project, which is going to come online in a year from now doesn't get delayed.
So.
I wish I could give you a more clearer answer but that is that's where we're seeing we continue to see our customers keep the same pattern that we have seen in the last four.
Four to six quarters.
And that's that sort of reflected in this.
Doug rehab and.
And I have not seen it normalize yet.
No that's great color and then just maybe a preview on this segment change any light you can shed on like rough I don't know if the business is X cyber optics are going to be 50, 50 between medical and electronics or kind of size those and.
Should we expect a material difference in the margin profile or the or the growth profile of those businesses.
Yes.
Shortly after filing our 10-Q, we're going to issue a press release, which will give you all the historical information financially for the new segments going back quarterly 2019, 2020 one.
So.
There will be in that release.
Okay, and then just just a housekeeping.
Corporate expense was a little bit higher how should we think about that run rate into <unk>.
Yes, I would just take that and think about the state average.
That expense on a quarterly basis.
<unk> right.
That's how I would think about that.
Okay. Thanks, so much.
Thanks.
Your next question comes from the line of cerebral <unk> with Jefferies. Your line is open.
Thanks. Good morning, just building on the last question on the new reporting structure can you talk through how you are thinking about the independent long term growth outlooks for the medical and fluids business and then ETS and then how should we think about incremental margins on this.
Yes.
Yes, so kind of like we highlighted at our Investor day, when you think about the medical business in the long term growth rate. There if that was your question sorry.
That has I think a higher growth rate.
Given the mega trends of that market and the applications with which we serve and so thats slightly higher than our.
Ats business.
And the new segmentation, which is predominantly on the electronics side. So I would tell you, it's probably about 200 basis points higher in terms of growth rate in the medical.
And then as it relates to incremental margins as you're aware on our organic growth.
<unk> committed to 40% to 45% incremental margins on our organic growth.
And you see that as a little bit higher in the Ips segment over.
Over the recent quarters.
Past several quarters.
But going forward I would commit to the 40 to 45 million in all three of our segments.
Great. Thank you and then you mentioned the facility closure in the quarter I think in Etfs would you expect to see a margin benefit from this closure and could you quantify that for us.
Yes.
The margin benefit as we consolidate that facility I don't think there's going to be a material change in that that's predominantly to support the growth and supporting that growth at the incremental margins of 40 to $45. So I would tell you is kind of a capacity play as we consolidated into an expanded an existing.
<unk> facility and consolidate it from a separate facility.
Great if I could just squeeze one more in I think in your earnings guidance still has kind of a wide range for the fourth quarter could you just talk us through the assumptions at the bottom and top end of the range and you know what would you need to see to hit the higher level. Thank you.
You bet, yes, so when you think about our Q4 2002 'twenty two guidance.
First of all I would tell you maintaining the guidance range suggests an increase in the organic growth forecast given the fact that FX has a greater headwind than it was when we initially gave the guidance.
And so when you think about Q4, our guidance at the midpoint suggests about 10%, 10% sales growth and about a 20% earnings growth.
So considering the 5% FX headwind, that's about 15% constant currency growth rate in Q4.
Bob.
So sorry to answer your question on the lower side.
Knows where the exchange rates are going to move there was some volatility as you saw in Q3 and that has continued in Q4.
And then I would tell you theres just some overall.
Yeah.
I would say uncertainty in the marketplace, whether it's geopolitical if you look at the Covid lockdowns that we experienced in Q3.
And Shanghai and what if that will have any recurring impact in Q4, we don't know.
And so it was just the overall I would tell you volatility of the supply chain, which continues to be a challenge as well as currency, which kind of has us maintaining.
The lower end of the range. If you look at the upper portion of our guidance range.
This suggests that Q4 from a sales standpoint should be comparable to Q3 at a record level $662 million and then as you also look at the upper end of our guidance range from an earnings perspective. It suggests let's just say 23% growth.
However sequentially. It's the earnings is down from Q3 and I would tell you. There is two main factors that were taken a consideration. There one is Ips sales mix is expected to be less favorable in Q4.
The composition of the backlogs and items scheduled to ship. This is sequentially is a negative impact on our profitability. When you compare it to Q3, specifically and then secondly, the stronger U S dollar.
With the euro at near parity or below.
For the forecast for Q4 compared to where it was in Q3.
This again has a negative impact on earnings when you look sequentially compared to Q3. So those were some of the thoughts that went into our guidance.
Maintaining our guidance, which is really increasing our organic growth forecast.
Great I really appreciate the color thanks, guys.
Yeah.
Your next question comes from Mike Halloran with Baird. Your line is open.
Hey, good morning, everybody. This is Pat on for Mike.
Because.
Wanted to dig into the backlog a little bit.
Just wanted to clarify I believe you said backlog was up sequentially based on the commentary and then also mentioned.
<unk> going to see the extended shipment dates.
Previously they were booking several quarters out is that extending that shortening is at about the same.
And then also could you maybe discuss the composition of backlog, maybe how that's changed quarter over quarter.
Yes, I guess, specifically order entry exceeded our sales. So it was a very slight but it was an increase in our backlog and so it remains north of $1 billion.
I would tell you it's basically maintaining.
The timeline that we saw in Q2 in terms of getting in line order entry and backlog it's predominantly.
I would say disproportionately heavily weighted on the systems side.
And where the longer lead times are.
Some of our parts and consumables are more book and ship. It as you know and so there's not a heavy <unk>.
Backlog there, but when you look at some of our systems businesses, it's going out as Naga mentioned into 'twenty three.
And your question has it changed it has that dynamic hasnt changed from Q2 to Q3.
It remains the same but I would tell you.
Okay.
And then could you maybe discuss how that's changed your visibility going into F 2023, obviously.
Backlog is elevated versus prior years going into sorry calendar 2023.
Backlog is elevated going into next year relative to prior years does that give you a little bit more comfort in the.
The strength or the.
Excuse me the sales conversion in the front half of next year and does that give you a little bit more visibility on the front half.
Yeah, I would tell you for the systems business, yes, it does give us better visibility of.
We used to run with a $400 million backlog.
And now we're running with a backlog of $1 billion clearly on the heavy systems businesses. There is greater visibility I would also tell you in some of our medical businesses. There is better visibility than there used to be in the past.
And so that does I would tell you.
To help us in terms of our forecasting accuracy.
That being said there is a large portion of our business which remains.
With a shorter cycle time of book and ship and so.
It's not even across the board like I said earlier.
Okay.
Great. Thank you that's all helpful color I'll pass it on.
Thanks, Doug.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Chris Tinker with loop capital. Your line is open.
Hey, good morning, everyone. Thanks for taking my questions here.
I guess now you've given us some really great color on fiber optics, and then just some of the unique capabilities there.
Wafer level.
Tough inspection, it's a much more competitive space and some of the backend nice stuff in north has been doing historically I mean is it because of the unique capabilities that we moved into this or is there really an impetus to move further into the wafer level inspection you kind of get into that space in a much more meaningful way and then just how should we think about the Tam for TNI. Following this deal.
Yes.
If you just think about it.
The Tam for cyber optics.
It is about one 3 billion there are two things very unique about cyber optics <unk> inspection.
Nordson does not have right, we have a small optical business, but but really we buy.
Cyber optics.
Our sensor to make <unk> happen. So really we are already a customer favorite optics that we understand the capabilities so cyber optics.
Okay technology.
Yeah.
Wafer level inspection isn't great opportunity, but.
In some of the wafer level of opportunity for cyber optics really.
We sell the critical component, which is the MRO sensor to their customers, who will build the broader system.
So it kind of resembles some of our other businesses, but we sell that critical component to into a major machine that.
Cyber optics customers markets right. So that's an example of it are interesting in this business is that size of optics also sells Brady inspection systems in the backend. It does not just exclusively to the front end right.
Let me highlight front end is that because we already do backend in Midland We don't do the front end, that's really what I was trying so so it is not about that.
We want to move exclusively into front end or greater opportunities in front of it is just and what we do in the backend right. So thats sort of how I think about it the other really exciting technology that cyber optics brings to nordson is very different which is their wafer sensor technology, which is an online monitoring.
Of manufacturing systems in wafer production right and so those.
That is completely new for us and I think that again puts us in a place where it's a small device, but performs a very critical function.
A lot of that view, so two exciting technologies, we bring to the company continuing to expand our test and inspection.
Folio and all rooted in this secular trend of things, becoming smaller things, becoming more complex and hence test and inspection, becoming more in line more under percent.
Rather than sampling so a good secular trend for us and adding more capability.
And one more thing on after the inspection is that.
Optical inspection is viewed as something that doesn't.
Impact the component of disinfecting.
Do you think about our X ray inspection it impacts not the first time, but after the 10th time it would impact that component it is correct.
But optical inspection that does not happen so inherently optical inspection.
<unk> to grow as an inspection method and we wanted to make sure that we have.
Have a presence in that space.
Got it. Thank you that's very helpful color it sounds like you're really kind of picking your spots in that front end space. So thank you.
I guess I will follow up but again no we're not talking about fiscal 'twenty two.
Three yet, but just given the size of the backlog is there any lumpiness to keep in mind as we're kind of shaping and building out the out year here.
Yes, I would I would tell you if you look at our guidance for Q4, and what we just delivered in Q3.
Different than last year in the back half when you saw lumpiness.
In terms of our Q3 performance versus our Q4.
It's really starting to two I would say level out you also saw that in our strong Q1 compared to historically lighter Q1s.
You can go back several years, so from a from a lumpiness I would tell you it started to level out as opposed to increase.
Yes, there's one other point I'd like to make.
Little bit of follow up on <unk> question on our Q4 guidance and properly interpreting our Q3 results.
When you look at Q3 profitability by segment.
Where changes in inventory valuation related to switching from LIFO method to FIFO method and Obsoleting older product line. The net impact of the adjustment was immaterial to.
The consolidated Nordstrom results in the quarter, but when looking specifically at the segment profitability. In Q3 2022. These adjustments favorably impacted Ips and unfavorably impacted ats by about 100 basis points. So when thinking about our Q3 performance and forecast.
Going into Q4, I think that's important to understand despite the fact of immaterial to the consolidated nordson.
That's really helpful. Joe. Thank you so much for that.
Yeah.
Okay.
Your next question comes from the line of Matt Summerville with D. A Davidson your line is open.
Thanks, just two quick questions first can you comment on where nordson stands right now price versus versus cost and then maybe just.
Quick word on the M&A pipeline beyond fiber optics comment.
Kind of go forward action ability, what the funnel looks like multiple youre, saying thank you.
And maybe Doug I'll take the the price versus cost again was favorable.
In terms of we were successful in passing through the cost increase in terms of pricing.
But it was negative impact from a from a margin standpoint, because it's not like we're remaining cost increase plus 56% on top of it.
Favorable from a pass through standpoint.
Yes.
In terms of our pipeline.
Continues to be very active.
Continues to be pretty strong.
We have a very disciplined acquisition strategy very focused strategically around our medical businesses and our test and inspection businesses clearly easily find.
<unk>.
A core technology that is.
Jason do what we do we certainly will take a look at them.
But we remain focused on medical and test and inspection.
The pipeline itself is pretty good action ability.
It is very difficult to say.
Given given the kind of volatility.
It seems that.
It's difficult to predict so I will then comment much about the action ability other than we continue to cultivate our pipeline continued to and cyber optics was egregious example, right. We had known cyber optics for a number of years.
We just had a nice opportunity to.
Take that opportunity and converted to get to a place where we were able to have an agreement.
So.
Sure.
Action ability defense is the best way I could say it.
But we are very pleased with the strength of the pipeline and the activity we've got going on on valuation.
In some areas you may have at least public equities looked like they have moderated but.
We are playing in highly differentiated businesses highly differentiated end markets as well as technologies.
We expect to play market multiples.
But we're going to be highly disciplined on our financial return metrics and so.
Hopefully our last two.
Deals that we've announced in D C as well as.
Upticks as a good indicator of.
Entering markets, where they were.
But it is very strategic to us and has.
A great opportunity for us to grow the company, but at the same time very financially disciplined.
Okay.
Got it thank you guys.
There are no further questions at this time.
I turn the call back over to you.
Yeah.
Our continued performance reflects the strength of our differentiated position technology customer centric model and.
In diversified end markets again, I want to thank nordson <unk> employees for their perseverance and commitment which makes these results possible.
The continued deployment of NBS next in DSM strategy will ensure we remain well positioned in this dynamic environment.
Thank you for your time and attention on today's call have a great day.
This concludes today's conference call you may now disconnect.
Okay.