The Nordson Corporation held a conference call to report their third quarter fiscal year 2023 results. The call was led by Vice President of Investor Relations and Corporate Communications Lara Mahoney, President and CEO Sundaram Nagarajan, and Executive Vice President and CFO Joseph Kelley. During the call, the participants discussed the highlights of the quarter, sales and earnings performance, and the balance sheet and cash flow. The conference call was broadcast live on the company's website and a telephone replay will be available until August 29.

Nordson's third quarter earnings per share were at the high-end of their expected guidance, despite the ongoing weakness in their electronics and biopharma product lines. Their medical interventional solutions, polymer processing, and test and inspection business experienced double-digit and high-single-digit growth, respectively. Regionally, the company experienced mid-single-digit organic growth in both the Americas and Europe.

In the third quarter of fiscal 2023, sales were $649 million, a decrease of 2% compared to the prior year. This was due to an organic decrease of 5% and was partially offset by the CyberOptics acquisition. Gross profit for the third quarter was $360 million, and SG&A was $189 million, which was impacted by non-recurring items related to two separate $1 billion global acquisition targets. Operating profit, excluding these non-recurring items, was $181 million, 4% below the prior year adjusted operating profit.

The Industrial Precision Solutions segment experienced a 1% decrease in sales compared to the prior year third quarter due to softness in product assembly and nonwovens product lines in Asia, which was partially offset by growth in the Americas and Europe. EBITDA for the quarter was at $208 million, with a net income of $128 million and an effective tax rate of 21%. Adjusted earnings per share was 6% lower than the prior year at $2.35, primarily due to higher interest expense and lower operating profit.

EBITDA for the quarter was $122 million, a decrease of 3% compared to the prior year. Medical and Fluid Solutions sales decreased 4% due to destocking in single-use plastic components and fluid solutions. Advanced Technology Solutions sales decreased 3%, with the CyberOptics acquisition contributing 11% growth and organic sales volume down 13%. EBITDA for Medical and Fluid Solutions decreased $8 million compared to the prior year, but the margin improved 200 basis points compared to the second quarter of 2023.

During the third quarter of fiscal 2023, the company took structural cost reduction actions to address the decrease in demand for electronics dispense products, resulting in a $2 million non-recurring severance cost. Despite the double-digit organic sales volume decrease, the segment's quarterly profitability was only 100 basis points below 2022 levels. The company generated $181 million in free cash flow and had a net debt to EBITDA leverage ratio of 0.9 times. They also repaid $111 million of debt, paid $37 million in dividends, and repurchased 107,000 shares of company stock. The Board approved a 5% increase in the annual dividend for the fourth quarter of fiscal 2023.

Joe provided the audience with assumptions for the upcoming acquisition of ARAG, such as estimated revenue of $20 million to $30 million and EBITDA margins in the high-30% range. He also mentioned that the acquisition will initially be financed with a short-term loan and revolver borrowings and that a bond issuance in the public markets is expected later this year. Joe concluded by mentioning that the Nordson team is continuing to execute the Ascend strategy, which is evident in the strong profitability delivered in this quarter.

Nordson's medical fluid components division is expected to return to its historical mid to high single-digit growth rate in the first quarter of 2024, while the electronics processing solutions division is expected to benefit from customer investments in automation, memory, AI, and new product innovation in the second half of 2024. Despite sales weakness in the Asia Pacific region due to electronics exposure, Nordson is well-positioned to support customers in the event of supply chain diversification.

Nordson's goal is to reach $3 billion in revenue by 2025 and they are nearly 80% of the way there due to their acquisition of ARAG, a global market and innovation leader in precision spraying technology. ARAG meets Nordson's criteria for acquisitions and expands their technology expertise into the high-growth precision agriculture market. It is the largest single acquisition in Nordson's history and has potential for growth in existing and new markets. Nordson is excited about the acquisition and the long-term growth opportunities it presents.

Nordson is expecting a 0-2% growth in revenue for 2023, with fourth quarter sales increasing low to mid-single-digits over the prior year. The company is forecasting fourth quarter earnings in the range of $2.34 to $2.49 per share. This guidance includes approximately $20 million to $30 million of sales from the ARAG acquisition. The guidance is a result of Nordson's operational excellence and execution of the Ascend strategy.

In the fourth quarter, organic growth is expected to be negative 5%, and the ARAG acquisition is expected to contribute between $20 and $30 million. The range of revenue guidance is influenced by the timing of the acquisition close and large system shipments. IPS is expected to remain at or above its long-term growth rate, but electronics and biopharma are not expected to recover in the fourth quarter.

Joseph Kelley provides guidance on the purchase accounting for the ARAG deal, which will be given in full when Nordson's 2024 guide is released. He also explains that the EBITDA margins are in the high-30s and the interest expense is 5.5% for the total company. Additionally, he states that the amortization amount is based on historical trends for acquisitions of this nature.

The majority of Nordson's electronic business divisions' revenues come from Asia, with a significant portion coming from China. China's impact on Nordson's business is mainly due to the electronics division and is cyclical in nature, following the global customers to China.

Sundaram Nagarajan and Joe provide detail on the company's backlog, which is historically high due to orders from their system and medical interventional businesses. They also explain that customers are making investments in other regions than China, but there is no structural change in the supply chain. However, there is a cyclical decline in Asia Pac due to electronics.

Sundaram Nagarajan commented that the backlog worth of $1 billion has migrated over the past six to nine months and is now heavily weighted towards the large system businesses and medical IS, while the majority of the business has normalized to pre-pandemic levels. Matt Summerville asked if the electronics piece turning in the second half of fiscal '24 would coincide with continued strength in T&I and medical interventional, and if all four pieces of the business could result in organic growth towards the end of the year.

The speaker expects the electronic cycle to rebound in the middle of 2024, resulting in growth in both T&I and EPS. Medical has seen strong double-digit growth in the last couple of quarters due to backlog and elective surgery returning to normal, but this is expected to decrease to mid to high single-digits. Biopharma is believed to have bottomed out and settled at current levels.

In the first quarter, the growth rate of fluid components has been double-digit for two years, but the company is cautious about how quickly they will reach high-single-digit growth in biopharma. The electronics and EPS divisions are down 20%, while destocking in biopharma is down 30-40%. Medical interventional solutions are only down 10-15% during the pandemic. Medical fluid components are expected to flatten out or pick up a little bit, while interventional components are expected to grow at a high-single digit rate.

Sundaram Nagarajan explains that the company pursued two potential $1 billion M&A deals but ultimately chose ARAG due to its strategic and financial criteria. He also praises Nordson's team for their operational excellence, which was evident in their results despite the challenges they faced.

Sundaram Nagarajan discusses the competitive advantage of the Ascend strategy and how it is manifested in three different ways. He explains that in divisions where end-market conditions are challenged, the team takes an owner mindset and delivers decremental margins. In divisions with strong market opportunities, the team delivers strong incremental margins. Lastly, the company is looking at growth opportunities through acquisitions.

The team is pursuing recycling as a growth opportunity due to the demand for plastic reduction, and they have unique technology in their BKG business in Germany which is resulting in a backlog for next year. Joseph Kelley adds that the divestiture of the Xaloy business has upgraded the quality and differentiation of the product lines that remain in the polymer processing division. Sundaram Nagarajan then explains that the rule of thumb metric informing the 4Q guide is around 2.5 to 3% of purchase price and that the inventory levels in the channel should be balanced between stock and flow.

Sundaram Nagarajan has stated that the order entry for the electronics and fluid components biopharma businesses have bottomed out and that there have been no further declines. He also mentioned that as the quarter progressed, it became clear that the order entry was at the bottom.

Nordson's strong performance is attributed to its precision technology, customer-centric model, and diverse end-markets. The order entry has improved sequentially through the quarters and is steady. The length of the cycle and slowdown in the T&I business is similar to that of the dispense side, with a slight offset. Nordson employees are thanked for their commitment which has made these results possible.

The Ascend strategy will help the company achieve long-term growth and the call has now been concluded.

This summary was generated with AI and may contain some inaccuracies.