Nordson Corporation Stock

Hello, everyone. Thank you for joining us, and welcome to the Nordson Corporation Third Quarter Fiscal Year 2026 Conference Call. [Operator Instructions]

I will now hand the conference over to Matt Matejka of Nordson. Matt, please go ahead.

Thank you. Good morning. This is Matt Matejka, Senior Director of Investor Relations. 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, August 20, to report Nordson's fiscal 2026 third 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/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 GAAP metric in the press release issued yesterday.

Before we begin, please refer to Slide 2 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 3, Naga will discuss third quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the 3 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 full year guidance. We will then be happy to take your questions.

With that, I'll turn to Slide 4 and turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's Fiscal 2026 Third Quarter Conference Call.

Before we begin, I would like to welcome Matt Matejka to our call in his new role of Senior Director, Investor Relations. As we announced in a previous press release, Matt has assumed Investor Relations responsibilities from Lara Mahoney, who has taken on a new role within Nordson. Matt joined Nordson in 2023 and brings over 10 years of experience in financial leadership roles, most recently serving as Finance Director for our Industrial Coating Solutions division.

Moving on to the financial results. I am pleased to share that the momentum driving our strong first half continued throughout the third quarter. For the first 9 months of fiscal 2026, Nordson has grown revenue by 9% and adjusted earnings per share by 18% year-over-year with strong backlog, giving us confidence in the rest of the year.

As our growth end markets continue to inflect, we are winning due to our unique competitive advantages and the successful execution of our Ascend strategy. We are well positioned to continue compounding profitable growth.

During the third quarter, all 3 segments again contributed to our organic growth performance, surpassing the high end of our sales and earnings guidance. We achieved record sales of $818 million. This is a 10% increase over the prior year, which is inclusive of 12% overall organic growth.

Order entry momentum continued to accelerate, driving backlog up 35% compared to the prior year. Backlog growth was broad-based with all segments contributing, but particular strength coming from our Advanced Technology and Medical segments.

Solid execution and volume leverage drove record profit performance for the quarter, delivering EBITDA of $262 million, which was an all-time record and 32% of sales. Adjusted earnings per share of $3.25 was also an all-time record for the business. This was an increase of 19% compared to prior year. I would also like to highlight our free cash flow of $237 million. Our free cash flow conversion of well over 100% of net income continues to be a strength, enabling a healthy mix of shareholder returns and reinvestment in growth.

Our balance sheet continues to be in a strong position, giving us plenty of flexibility for future acquisitions that meet our strategic and financial criteria.

I'll talk more about enterprise performance in a few moments, but first, I'll turn the call over to Dan to provide detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning, everyone. On Slide #5, you'll see we achieved record level sales of $818 million in the third quarter, up 10% from prior year third quarter sales of $742 million. The third quarter 2026 sales included an organic increase of 12%, driven by growth in all 3 of our segments. Currency translation was effectively neutral for the period. Strong organic sales performance was slightly offset by the net impact of the medical contract manufacturing divestiture completed in the fourth quarter of last year and the small contribution from the Capstan acquisition that was completed during the second quarter of this year.

Adjusted operating profit increased 13% year-over-year to a record $226 million or 28% of sales driven by increased leverage on the strong organic sales growth across the segments. EBITDA was up 10% year-over-year to $262 million, also a new company record. EBITDA margin as a percent of sales was 32%, in line with the prior year.

Incremental EBITDA contribution in the quarter was just shy of 32%. We are quite pleased with these operating results, which reflect our focus on maximizing growth potential while protecting our best-in-class margins and effectively managing near-term inflationary pressures tied to the broader market and geopolitical factors. In addition, we continue to reinvest and innovate to maintain our strong value proposition for many years to come.

Looking at nonoperating income and expenses. Net interest expense during the quarter was $20 million, a decrease of over $5 million versus the prior year, which is really driven by 2 key factors. One, our strong cash generation through the first 9 months has allowed us to significantly delever our balance sheet.

In addition, our average borrowing cost has improved year-over-year due to lower market rates on our variable debt, including the benefits from the recently announced commercial paper program that was launched during the quarter.

Other expenses on a GAAP basis increased $14 million year-over-year with the primary driver being a $15 million noncash mark-to-market charge for minority investments. These noncash valuation adjustments are subject to market volatility. And on a year-to-date basis, the impact is actually negligible. Excluding this noncash charge, other expenses net decreased by a nominal $1 million year-over-year.

Our tax expense on a U.S. GAAP basis was $33 million for an effective tax rate of 17.8%, inclusive of the impact of the noncash loss I just mentioned and acquisition-related amortization and costs. On an adjusted basis, our effective tax rate was 18.3%, in line with the prior quarter run rate. For the full year, we expect our tax rate to be near 18%, which is also reflective of our ongoing rate expectations.

GAAP net income in the quarter totaled $153 million or $2.73 per share, excluding acquisition-related amortization costs and the noncash loss, adjusted earnings per share totaled a record $3.25 per share, $0.10 above the high end of our guidance range and a 19% increase from prior year adjusted earnings per share of $2.73.

To wrap up our consolidated summary. The improvement in year-over-year earnings and record Q3 results reflect strong sales growth across our portfolio, which I'll cover a bit more in a moment. It also reflects strong delivery execution driven through our Ascend strategy and NBS Next framework. Our differentiated products, market position and commercial and operational execution have allowed us to grow our adjusted earnings per share 18% year-over-year through the first 9 months of the year, with strong momentum heading into the fourth quarter.

Now let's turn to Slide 6 through 8 to review the third quarter 2026 segment performance. Industrial Precision Solutions sales were $367 million, an increase of 5% compared to the prior year third quarter. Organic sales increased 3% compared to the prior year with a favorable currency impact of 1% and an acquisition contribution of roughly 1%. Organic growth was driven by packaging and industrial coatings application demand and continued recovery in our plastics processing demand.

Broadly speaking, aftermarket demand remains stable across our IPS portfolio, while systems demand for broader industrial and agricultural markets remain stable, but with limited growth. EBITDA was $130 million in the quarter or 35% of sales, which is in line with the third quarter of last year as we continue to invest in innovation while mitigating selected near-term inflationary pressures.

Turning to Slide 7. You'll see Medical and Fluid Solutions sales of $231 million, a quarterly record. Total sales increased 5% compared to the third quarter of last year, while organic sales increased closer to 11% in the quarter, driven by contributions from both our engineered fluid solutions and medical product lines. Divested sales from the medical contract manufacturing business had a negative impact of approximately 6% compared to the prior year.

Medical component demand has normalized, and we're now seeing stable ongoing growth in many of our product lines, while we're also seeing broad-based demand for Fluid Solutions systems applications in medical and electronics markets.

EBITDA for Medical and Fluid Solutions was a record $88 million or 38% of sales, which is an increase of 6% from prior year EBITDA of $83 million. The segment delivered strong year-over-year incrementals during the quarter, and EBITDA margins improved about 100 basis points sequentially on the higher sales.

Turning to Slide 8. You'll see Advanced Technology Solutions sales were an all-time quarterly record of $220 million, a 28% increase compared to the prior year's third quarter. Organically, sales increased 31% with growth coming across both the electronics dispense and test and inspection product lines, reflecting the continued strength in semiconductor and broadening electronics end market demand.

Third quarter EBITDA was also an all-time quarterly record of $66 million, driving a record EBITDA margin of 30% of sales. EBITDA increased 58% compared to the prior year third quarter EBITDA of $42 million or 24% of sales. The improvement in EBITDA margin reflects the record sales volumes and strong operational leverage, driven by improvements we've made in our operations over the last several years.

Finally, turning to the balance sheet and cash flow on Slide 9. At the end of the third quarter, we had cash on hand of $113 million and net debt was approximately $1.6 billion. We've continued to delever with our leverage ratio decreasing further to 1.7x, which is made possible by our strong earnings and cash flow generation. This provides us with significant firepower to strategically deploy capital, including returning cash to shareholders, reinvesting for growth and acquiring strategic assets.

Our free cash flow generation during the quarter was $237 million, resulting in a 144% conversion rate on net income, excluding the noncash loss that I mentioned a moment ago. This is up from 113% through the first half of this year, and the third quarter represents the fifth consecutive quarter of delivering well over 100% conversion.

As noted on Slide 10, our capital allocation continues to be balanced and is driving value, fueled by our strong cash flow generation. Year-to-date, in addition to our acquisition of CapstanAG announced last quarter, we've invested $40 million in capital projects to support current and future organic growth opportunities. Through 9 months, we've also returned capital to shareholders with $137 million in dividends paid and $159 million of shares repurchased. We've been able to do all of this while reducing our net debt and reducing our leverage ratio, positioning us well to pursue strategic growth opportunities.

So to summarize and close, we delivered another quarter of fantastic record results. Each of our segments delivered record third quarter sales and strong organic growth. And in the case of MFS and ATS, all-time record quarterly sales. EBITDA margins remained strong and cash conversion is a continuing strength, reflecting solid earnings quality and disciplined working capital management. This provides us all the flexibility needed to strategically deploy capital to sustainably grow and return value to shareholders.

Our teams once again delivered on their commitments for the quarter and continued to grow our backlog, which puts us in a great position heading into the fourth quarter. As Naga will address next, our portfolio position and NBS Next framework support continued growth into the future, positioning us well to continue delivering 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 very strong fiscal 9 months for Nordson. As our end markets continue to inflect, the execution of our Ascend strategy positions us well to deliver for our customers.

As we look at Slide 11, I want to take a moment to remind our investors about Nordson's competitive advantages, which have positioned us to reliably compound profitable growth. From the very beginning, Nordson built a business model based on 3 key strategic themes: differentiated products, close to customer relationships, and diversified niche end markets.

Our founders started this company through the purchase of patented technology, understanding the importance of differentiation. Our legacy was then built through close customer relationships where we solve problems together in advanced technology road maps.

Over the past 70 years, Nordson's innovation has led to market leadership in precision technologies, speed and efficiency in diverse niche end markets. We have built upon these core strengths with the addition of the NBS Next growth framework, which is how we run the company. Our decentralized divisions use this framework to focus on the best market growth opportunities, top products and customers to deliver above-market organic growth. We have also been very intentional in building a growth biased portfolio of precision technologies with reduced cyclicality over time.

Some of you may recognize Slide 12 from our 2024 Investor Day. Approximately 60% of this portfolio generates recurring revenue including aftermarket parts, consumables and services. Importantly, more than 50% of our portfolio is now in growth end markets, including semiconductor, electronics and medical with the remaining exposures in more stable GDP plus end markets. Our portfolio positioning gives me confidence in our growth aspirations for the remainder of the year and beyond.

Turning now to our outlook on Slide 13. We entered the fourth quarter with backlog up 35% year-over-year. 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 $3.035 billion to $3.075 billion, and adjusted earnings to be in the range of $11.8 to $12 per diluted share, putting us on the high end of our previously communicated average growth algorithm.

Our updated guidance reflects sustained order strength and our ability to deliver results through NBS Next. We also assume FX rates hold at current levels, which implies a neutral impact on the fourth quarter.

As always, I want to thank our customers and shareholders for your continued support. In particular, I want to thank Nordson employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence continue to position us well to serve our customers.

With that, we will pause and take your questions.

[Operator Instructions] Your first question is from Mike Halloran from Baird.

So a couple of questions here. Could you just put the backlog in context for us? Obviously, quite strong backlog growth. Have you seen any elongation in lead times? What kind of visibility does it give you in the next year? And anything from a historical perspective that you think is worth bearing in mind here as we think about the magnitude of that gain?

Sure, Mike. This is Dan. I appreciate the question. A couple of things. Number one, I'll highlight again, as we mentioned, the backlog growth that we're seeing is broad-based. All 3 of our segments are showing higher backlog year-over-year. But I would say, in general, no real departure from what I would call normal order patterns. Again, just to recap some things that we've said in the past and are still true today, our backlog, generally speaking, turns over in about 6 months. The majority of our backlog ships within about 6 months.

So clearly, as of the end of the third quarter, we're taking orders into 2027 at this point, but no elongation in lead times. Our lead times have actually been reduced over the years. So if anything, I would say we're able to deliver faster than we have in the past. But no real change in order patterns, I would say, normal recurring order patterns. At this point, our backlog is normal turnover of roughly 6 months, 80% or so of our backlog is going to turn over with a few long lead time items with some of our larger systems, which is very typical.

Maybe I'll add a little bit color there, Mike, around lead time. In general, with our Ascend strategy and NBS Next over this period of time, if you think about our lead times, they've generally reduced. And routinely, we have the opportunity to gain share because we are able to have shorter lead time than the rest of the team in the marketplace.

Our on-time delivery has significantly improved across the company and in just about every division. We have gone over this period of time, and routinely, we will ship 80% to 95% in most of our businesses. So a good strength for us to be able to deliver when the customer wants it. I think that is probably critical because some of these lead times are also dictated by the customers' need in relationship with the other things that they're putting together in the line.

And then second question, just maybe give us some more context on what you're seeing in the ATS segment, specifically within the T&I and dispensing, maybe just break out the 2 dynamics you're seeing there. And any new ones you think is relevant versus what you're seeing in the market today?

Yes. Broad-based growth in the quarter with both our dispense business and T&I business. Clearly, the dispense business is typically ahead of the curve in terms of growth cycle, and that's what we saw. In the quarter, certainly, our T&I businesses continue to grow nicely. A good inflection point both for our X-ray and optical businesses. If you remember, these technologies are critical in ensuring semiconductor packaging.

We are also seeing growth reflected in our EFD business, which is part of our MFS segment. So feel good about order entry, pipeline activity, customer conversations for both dispense and test and inspection. A lot of this demand allows us to not only be quite confident about what we're going to deliver in Q4, but well into next year, right?

Your next question is from Jeff Hammond with KeyBanc Capital Markets Inc.

So maybe just to stay on whether it's backlog of orders or the guide. I mean, it seems like that the start beat in the quarter is ATS. So I'm just trying to understand, maybe you can unpack the $0.35 raise between the businesses? I mean it doesn't seem like maybe the other 2 segments are moving that much, which goes back to like your comment that you're seeing broad-based growth. I'm just trying to understand like this backlog and the order growth, like how differentiated the ATS is versus the other 2 segments?

Yes. I guess maybe just to give a little color on it. I would say, broadly speaking, IPS is as expected as we think about heading into the quarter and then how we finished in our outlook. I would say the upside that we're seeing, certainly in the third quarter, but even in our outlook for Q4 is certainly, ATS is a big driver, but I would say Medical is the other area that we're seeing acceleration. And maybe just to go back to our pre-Q3 commentary, we said, look, if order momentum sustained, I think we said we felt comfortable we'd probably be on the higher end of our guidance. I would say in both Medical and ATS order momentum, not only sustained but actually accelerated in some areas. And so I would say it's those 2 segments driving the increased outlook for the year. But again, I think on the IPS side, no surprise, I think just kind of steady state with IPS.

Right, Jeff, if you would sort of compare against long-term targets for these growth rates of these businesses is to put it in context. Clearly, ATS was significantly higher than our long term. And we are at the peak of the cycle, and we're starting to really have legs to this cycle even more than we were. So we're on the upside of the cycle. And hence, you see some very elevated growth rates. But IPS, for example, right, it's 50% of the company. We're at our long-term goal of growing 3% in the quarter. And for the first 9 months, again, growing over 3%, okay, that number is not big when compared to the 30-some percent in ATS, but 3% for this business is pretty darn good.

And if you think about MFS, that's even a better story, what our long-term expectations are 6, 7 kind of percentage growth rates. And in the quarter, they were 11%. And clearly, there is some benefit from the EFD business that has some electronic exposure. But even if you take that out, I would say medical businesses are trending towards where our long-term targets are, and we're really -- feel good about where we're headed into next quarter and the following year.

Okay. Great. And then just on IPS, I think for all year, like the margins, obviously very good, but down year-on-year, and I think you mentioned price cost dynamics. Just talk about the margin dynamic. And I think you mentioned kind of prioritizing growth and balancing that with margins. So just speak to IPS margins. And then just while we're on it, any thoughts on -- did you have any IEEPA refunds? Are those to come? Will you exclude those kind of things?

Yes. No, it's both great questions. So let me start with just Jeff, maybe reiterate margin expectations. I mean really no fundamental change in margin expectations. Our target incrementals are 35% to 40% that's consistent across all 3 of our segments. But I will say that, I mean, these are long-term targets, right? And so in any given year, we may do better or worse given different dynamics that are going on in the market.

I would say given the current market dynamics, our focus is really maximizing growth potential and maintaining margin performance, which is already very strong, certainly within the IPS business. And so I think if you look at our margins of 35% in the quarter, it's in line with where we've been. We're holding serve while maximizing our growth potential. And if we think in the current market dynamics, that's the right playbook for IPS. And so I think that's the simple way to think about it, no fundamental change in the margin profile, no fundamental change in our long-term targets, but there's plenty of room for margin enhancement in the future. We think the right playbook is to focus on growth and maintain our margin position today.

Your second question on tariffs, I guess, a couple of things just to comment on that. Maybe I'll remind everybody, tariffs and themselves have never -- have not had a material impact on Nordson. That said, I would tell you, of course, where we have potential, we are pursuing recoveries for selected tariffs, like everybody else. But in the context of, a, tariffs, not having a material impact overall and the fact that those recoveries only being a portion and offsetting, let's just say, any ongoing tariff impact. In the context of our overall results, tariffs and tariff recoveries are really not a significant item to talk about. I think that's the short answer.

That said, I would say we are seeing clearly through, let's call it, the direct and indirect impact of tariffs as well as other geopolitical events. We are seeing general inflationary pressures that we are managing and mitigating our way through while maximizing our growth potential. And that has -- it's not just tariffs, but I would say that has broader implications if you think about freight, if you think about selected commodities. So more of a general pressure that I would say tied to, but not directly related to tariffs.

But put all of it together, still the company delivering 32% EBITDA, each of the segments delivering best-in-class margins. So we're managing through all of these different pressure points, but continuing to stay focused on what is the best value creation opportunity for Nordson, which is really profitable growth. And that's what you're seeing play out in the first 9 months of the year as well as in the quarter.

Your next question is from Matt Summerville with D.A. Davidson.

Just on the MFS segment. Can you maybe just give a little bit more granularity on what you're seeing between the EFD business versus medical components versus interventional kind of just parse that out a bit around that 11% organic. And then specifically for that business, what's kind of implied in organic for the fourth quarter?

Yes. So we don't typically give segment level detail on our outlook. But let me just maybe address the first part of your question. I appreciate the question. I would say the 11% growth that we're seeing in the quarter is pretty broad-based. And certainly, as Naga commented, relative to EFD, one of the drivers is what I'll call electronics-based demand, and we're seeing nice growth and ongoing demand in our order outlook for that space. But we are seeing pretty broad-based growth and order demand in the medical component space as well. That would include the interventional space, that would include some of our medical specialty products, our fluid components products. And so as well as even within EFD, a significant portion of EFD's business is actually tied to medical investments.

So pretty broad-based. I wouldn't say it's across-the-board growth yet in medical, but in all spaces, it's clear to us based on actual performance in Q3, what's on our order board and our pipeline. We're walking our way right back to, I would say, our ongoing normal mid-single-digit plus growth in our medical components business. Some are already there, some on their way there is the way, I guess, I would say it.

And then maybe Naga, if you could just speak back to the ATS business, how you're thinking about cycle durability, how long this cycle extends, any early views you have on fiscal '27 growth in that business, just given you're obviously going to have some tougher compares versus this year, but I really want to understand kind of how this cycle maybe feels versus prior.

Yes. Clearly, based on what we see both in our businesses where we are at in terms of pipeline activity with customers, order entry, backlog buildup and revenue delivery, right? So if you think all 4 of those things together and if you think about in terms of our dispense business, our test and inspection business, our exposure in EFD to electronics, all of them indicating that we are -- we still have room in this cycle, right? As we are headed to delivering what is looking like a very strong probably an all-time record. As you know, in the quarter, we delivered an all-time record for this segment. We feel really good about where we are at and where we are going.

To address your question, which I'm glad you asked this. Look, we, this quarter, we delivered 30% organic growth in this segment, which is fantastic results. But as we head into next year, though, our expectation is we're going to build off of this peak, and we're going to build at a rate that is more in line with our longer-term mid single-digit number. But that is going to be of an all-time peak is sort of what you want to think about.

And everything we see in the business and what we follow for our customers, this demand looks pretty strong going into '27. And I'd give you 1 point of clarification in terms of -- just 1 proof point, I should say, for that comment, if you think about investments, chip manufacturing infrastructure investments in North America specifically, none of that has happened yet, right, or at least not in the context of orders for Nordson yet. That is to come. And so a lot of this demand that we are fulfilling today is a significant portion of it is in Asia. As North American chip infrastructure gets built out. I think that's an opportunity for Nordson, and we are yet to see that.

Your next question is from Christopher Glynn with Oppenheimer & Co. Inc.

Yes. And just wanted to ask about IPS. You talked about it being right in your ZIP code and expectation. Over the years, you have some step-out opportunities, cans, clothing, recycling comes to mind. Wondering if there are any emerging applications, market adoption opportunities for polymers, coatings or core adhesives that are popping up in the pipeline?

Yes. I mean, look, if you think about our IPS business, it really thrives on finding applications or pivoting to end market niches where the growth is. And so we continue to build out new applications. I wouldn't say anything that pops up. We are certainly watching the growth. If I would take you back and give you some examples around battery or solar, we are in pretty early stages of thinking about how IPS segment applications will play both in defense as well as, as you think about a number of data center build-out applications where you -- these are early stages.

So for us, it's really -- you have to be careful in that we have multiple single applications in many different end markets. And they don't particularly -- so for example, if we think about our [indiscernible] examples. That business is doing incredibly well this year. That is because they have multiple different end market applications that they're going after. But I wouldn't say we have something that we would highlight as we've highlighted in the past around fabric bonding or things like that.

Okay. And then sorry, Dan?

I was just going to say, the context I would give you on it is I think it's kind of what Naga's articulating. There's lots of opportunities. But these, I'll use some baseball analogies. These tend to be more like singles, not home runs. Lots of singles. It's not like there's a big home run out there.

But for the business to deliver a 3% growth, they have to do that, right? And so I think it is underestimating the potential of this business. When you have as significantly, what is going to be [ $1 billion ] kind of business that is growing at 3%. That is pretty strong for the company and not to be underestimated, the power of this business.

Yes, I agree, the stability in particular. And then the fourth quarter, I think, implies a pretty meaningful acceleration in sequential incrementals. I know you had that and then some last year, fourth quarter over third quarter. But we're kind of in a year of managing inflation, as you've described in tail. So yes, just curious kind of relative stability sequentially in the third quarter. It looks like the fourth quarter has a fairly meaningful ramp without a particularly pronounced sequential volume lift.

Yes. No, I appreciate the observation. And certainly, I would say that's tied to normal operational improvements and enhancements that we are continually working on. I think we have good line of sight to that. And I think that's also why when we look at our margins, we tend to look at it more as an average over time as opposed to on any given quarter. And so I think, certainly, I think there's a nice step-up in our profitability. Some of that is tied to mix in our outlook, but also tied to ongoing operational initiatives and the impact that, that has on us going forward.

And so that's a normal part of our NBS Next framework and our operational excellence focus. And I think on a year-over-year basis, as an example, the incrementals are a little more challenging. But largely, that's because the fourth quarter of last year was a bit of an outlier from a profitability standpoint. So I would say we're on track with our average annual growth algorithm or margin expectations and Q4 is reflective of that. .

Right? I mean the simple -- the way to think about Nordson going forward is, look, we want to maximize our best growth opportunities, deliver against our growth commitments that we have made with best-in-class margins, right? And I think that is how we believe we will create the best value for our shareholders. And we continue to stay focused on organic growth improvement, maximizing all the main market opportunities that has -- where we have a right to play in.

Okay. And last one for me, if I could sneak it in. To the lower end on the tax rate, this has been to trend a couple of years, so clearly doing excellent tax model. And you indicated stability into next year. Is there -- how would you describe the longer-term tax rate opportunity from here in the context of the progress the last few years?

Yes. As I said in my opening comments, 18% is kind of reflective of our ongoing rate expectation. We think that's a good spot to be in. And I think is reflective of our ongoing run rate. It's obviously something that we continue to look at and assess. But I would give you 18% as a good long-term expectation going forward. We think that's a good ZIP code to be in.

[Operator Instructions] Your next question is from Andrew Buscaglia from BNB Praibas.

This is Ed on for Andrew. Many of my questions were already asked, but I wanted to touch on M&A. You pointed out the 1.7x leverage and sales firing on most cylinders are going to be driving some strong free cash as well. So just wondering if you could provide some color on the M&A pipeline, what you're seeing and whether there may be some end markets which are more or less attractive from a valuation perspective or otherwise?

Yes. Look, I would continue to remind us, M&A is an important part of Nordson's growth algorithm. This is an area that we continue to spend time on. We have a healthy number of opportunities. We are always pursuing them with our strategic and financial criteria in mind.

Look, we have demonstrated that we would do various different sizes and types of deals. Most recently, we did a very small bolt-on acquisition with CapstanAG. The previous year we had Atrion. So we continue to stay focused on acquisitions. Because we have not announced anything significant, doesn't mean we're not working on it. Oftentimes, things are not appropriate, either from a strategic criteria perspective or there is not a financial return that we can do for the best way to deploy our cash.

Just a reminder, right, our strategic criteria, our attractive end market niches and applications, differentiated technologies, clearly adding to our growth focus portfolio is sort of 3 strategic criteria. On the financial returns, certainly, we want to have growth that is above market with Nordson like margins and returns that are sufficiently that exceeds our cost of capital.

The areas we're spending a lot of time in. We've talked about it in the past, just as a reminder, we're spending a ton of time around our medical, continuing to expand our medical platform and as with Capstone, you can see we will continue to add bolt-on assets to performing strong existing core franchises of the company. So we'll do both. We certainly look at test and inspection as well as the other area we're spending time on.

The only thing I'd add to that is, maybe I'll just take you back to our -- what we call our growth algorithm, which is, on average, over time, half our growth, organic, half our growth, inorganic. We still think that's the right long-term formula. And so certainly, as Naga said, we're continuing to actively work the M&A piece. But I think as you think about it broadly, I think that's still the right way to think over time, half our growth coming from inorganic as well as the other half from organic.

Well, we got to get stayed disciplined, and that's really what you're seeing from the company is staying disciplined with the right kind of assets that fits both strategic and financial criteria.

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

Thank you for your time and attention on today's call. Nordson is well positioned as a diversified precision 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 so much for attending. You may now disconnect.

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. [Operator Instructions]

I will now hand the conference over to Lara Mahoney. Lara, please go ahead.

Thank you. Good morning. This is Lara 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 21, to report Nordson's fiscal 2026 2nd 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/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 provided a reconciliation of these metrics to the most comparable GAAP metric in the press release issued yesterday.

Before we begin, please refer to Slide 2 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 3. 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 3 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 4 and turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's Fiscal 2026 Second Quarter Conference Call. I'm very pleased to report a strong second quarter, where all 3 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 CapstanAG, a small but strategic precision agriculture company in North America. This bolt-on deal, which was valued at 9x adjusted EBITDA, enables Nordson 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 #5, 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 3 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 nonoperating 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 onetime pension settlement transaction we completed during the quarter. We were able to annuitize approximately $113 million or just under 1/3 of our remaining U.S. pension obligation at a very competitive discount of 7.5%.

There was 0 cash outlay required for this settlement. However, the transaction resulted in a onetime $24 million pretax 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 costs.

In addition to the settlement charge, other expense includes $10 million of noncash 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 noncash fluctuation in value during the quarter. Excluding these noncash 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 noncash 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.

GAAP net income in the quarter totaled $117 million or $2.09 per share. Excluding acquisition-related amortization and costs and the noncash losses, adjusted earnings per share totaled a second quarter record of $2.86 per share, $0.06 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 reflect solid operating leverage from the organic sales growth as well as improved capital leverage through strategic cash flow deployment.

Now, let's turn to Slide 6 through 8 to review the second quarter 2026 segment performance. Industrial Precision Solutions 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 7. You'll see Medical and Fluid Solutions 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 start-up 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 Solutions sales were an all-time quarterly record of $178 million, a 10% increase compared to the prior year 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 end 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 cash flow on Slide 9. 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 1.9x 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 cash flow 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 noncash 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 CapstanAG. Naga will give 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 3 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 work to grow backlog to position us for success in the second half of the year. Our end market thesis 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 Nordson. 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. Nordson acquired CapstanAG, a precision agriculture technology leader in North America, headquartered in Topeka, Kansas. Capstan has a strong reputation built upon its innovative pulse with modulation systems. These specialized nozzle by nozzle controls drastically increase efficiency and reduce waste for row crop, orchard planters and aerial sprayers.

Paying 9x adjusted EBITDA, this strategic acquisition gives Nordson precision agriculture, another leg for growth in North America, focused on mid-tier OEM customers. Capstan's entrepreneurial culture and customer-centric business model aligned closely with the growth objectives of our precision agricultural division. Our existing precision agriculture business, which began with the REG 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 end markets, including semiconductor, electronics and medical with remaining exposures in more stable GDP-plus end 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 inflecting. 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 remained 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 nondurable, investments in packaging and product assembly are sustaining. And industrial end markets also remained 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 entered 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 billion to $3.010 billion 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 end 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 notes and employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence continue to position us well to serve our customers.

With that, we will pause and take your questions.

[Operator Instructions] Your first question comes from the line of Matt Summerville with D.A. Davidson.

Just a couple of 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?

Yes. Matt, thanks for the question. So yes, 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'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 is 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 regulatorily required material change, which drove some operational inefficiencies in the quarter. It's a short-term changeover issue that we are -- 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 onetime kind of changeover requirement based on some regulatory requirements with the customers.

Yes. Just to add to that, Matt, what I would tell you is the medical business order entry and backlog buildup allows us to have this confidence that we are returning to normalized growth in this segment.

Understood. And then maybe over to the semiconductor facing business. Can you just kind of review how you're thinking about Nordson's positioning therein, 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?

Yes. The ATS segment, if you look at our 18% backlog growth, is one of the strongest is 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.

One, we diversified away from just our dispense businesses. Now, we have test and 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 on 1 or 2 large customers. And third, we were able to optimally position -- reposition our footprint so that we are in regions where our customers need us to be. So 3 things of work that we have 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 3 things, diversifying customers, operationally being where our customers need us to be, innovating on technologies and applications that need us to be sort of has allowed us to be in this place that we are benefiting from this robust market growth.

Where is -- where are we at in 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.

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 and AI infrastructure, that's another big area. So number of applications benefiting us because of our ability to codevelop technology with our customers, right? And lastly, what I will tell you is predominantly, we are seeing the growth today in our electronic dispense business, and our customer inspection businesses are beginning to inflect, and there is more to come there.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets Inc.

Thanks for the explanation on the medical kind of material issue kind of impacting margins. Can you just talk about industrial specifically, kind of decent growth, kind of flat to down margins, anything in there, price cost or mix that -- and then how you see that playing out into the second half? I think last year, your margins ticked up nicely for that business?

Yes. The RPS business, we are really glad to see that we have returned to normalized growth. We delivered 4% organic growth in this segment in the first half. That is a really strong performance for this business. 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 coatings businesses, they are certainly improving. And our precision ag business is also growing nicely.

In terms of margins, Dan, do you want to comment about that?

Yes. 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. We don't talk -- 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, but that's a short-term issue. It's something that we'll work through. And I think to Naga'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. And then just can you talk through the moving pieces to the guidance, I guess, it sounds like lower tax, maybe you can give us a revenue assumption or how much is included from this acquisition? And then, it seems maybe the backlog is more shippable in 4Q relative to maybe previous expectations, but maybe flesh that out.

Yes. So I'll give you maybe a couple of pieces of flavor on that. I mean, I'll start. On the sales front, 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, I 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 to -- for us to be in the lower end of our guidance range. So 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 our -- 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, if I think of it last year, I mean, we had incrementals in the 50% range. In an inflationary environment, that's not realistic, right? And so I think this is going to be a year where 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.

Your next question comes from the line of Mike Halloran with Baird.

Some clarification 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. I 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 time line as we sit here? Any signs of backlog building further out for capacity purposes, particularly on the ETF side, any nuance on that?

Yes. On the backlog piece I appreciate the question, Mike. On the backlog piece, I would say no fundamental change. I mean, our backlog, in general, the majority, I would say, turned certainly within 6 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 yes, I think that's a simple answer to your question.

I think as far as the expectation, look, I think we have good visibility certainly to the third quarter. 60% of our business is 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 some dynamic things happening in the world right now. And 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, right? 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, so...

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

Yes. 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're confident that, that it hit the trough in the fourth quarter. And I would say we're seeing normal gradual recovery in both of those markets through the first half in line with what we expected. So certainly not what I would call a rebound, but nice normal recovery.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

Yes, I just wanted to check, industrial Precision is 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 aftermarket sales versus systems, are your customers signaling like more confidence in moving forward with some bigger CapEx decision-making? Or is that already underway and that's being reflected in backlog?

Yes. 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.

Yes. I think just to add a little bit just to add 1 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. But -- so no big system inflection, I think, is maybe the message there.

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

Yes. 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 and inspection and any technology adds -- bolt-on adds to our strong existing portfolio of businesses, right? Our industrial businesses, our ATS businesses, wherever there is an opportunity to bolt-on technology, we will do that, but big strategic acquisitions are focused on medical.

[Operator Instructions] Your next question comes from the line of Walter Liptak with Seaport Research.

I want to ask one about the ATS order strength. I wonder if there's a way you could quantify for us a little bit more. Is it up single digits, 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. 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 I 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, yes, I would say, particular strength in our ATS segment contributing to that 18%. So I think 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% overall.

So let's talk about some of the applications. There is not really a lag between these different businesses. Right now, the strength is in our dispensed businesses. You could correlate that there are more dispensed 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 lags, those are just business dynamics. There is -- I wouldn't read any much more than that. .

We are seeing similar levels of growth in both -- in terms of demand from both these dispense 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 -- 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 3 quarters, our dispense business is 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 some of those 6 months 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, are those -- what are the -- are they significantly shorter in advanced tech?

Yes. 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 3-month POs, right? And so it's 1 PO that goes into the backlog that gets issued or released over 3 months. And so it's really -- I hate to say it, but it depends. What I would say generally is 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 3 to 6 or even beyond, somewhat dependent not just on the system, but also 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.

Yes. So I mean, based on what Dan is telling you, right, it's exactly what you're talking about, well. Our largest system businesses are more in IPS, less in ATS, right? So you are right, our largest system backlog converting into shipments for -- in that 6-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 what used to be 16, 18 weeks to now less than 7, 8 weeks, and we can even push things into 4 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, right? So we're sorry to be -- 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 is strong across all segments. All segments contributing, backlog up 18% gives us a high level of confidence at the mid-end of -- middle of -- midpoint of our sales guidance.

And no fundamental change in the delivery request. We're not taking 1 year out orders and things of that nature. It's pretty much in line with what we would typically see.

Your next question comes from the line of Robert Jamieson with Vertical Research Partners.

So just a quick one on IPS, just kind of higher level. When I think about the precise nature of your dispensing offer and IPS and inflationary input environment, you're offering really positioned as a cost savings partner in a way. Do you think if we see persistently high like input costs -- 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? Just kind of rightly 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 material savings across the entire product line, material savings, 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 when you certainly 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. And then just 2 quick ones. Just on CapstanAG, should we think about the incremental revenue, like addition, like I saw there's like $2 million or so you and you owned it for maybe a month. Should we think about that as like a $5 million to $6 million incremental revenue, like as we put that into our models?

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

Annual. Okay. Perfect. And then just last on -- where do you think we are in the demand cycle for ETFs? I mean, obviously, looking at capital spending environment in semiconductor and where you play, would you still categorize that we're like in the early innings or early stages of the demand cycle at this point?

Yes.

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. Nordson is well positioned as a diversified precision technology company are closer 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. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Nordson Corporation First Quarter Fiscal Year 2026 Conference Call. [Operator Instructions]

I will now hand the call over to Lara Mahoney. Please go ahead.

Thank you. Good morning. This is Lara 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, February 19 to report Nordson's fiscal 2026 first quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to on today's call on our website at www.nordson.com/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 GAAP metric in the press release issued yesterday.

Before we begin, please refer to Slide 2 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 differ.

Moving to today's agenda on Slide 3, Naga will discuss first quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the 3 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 second quarter and full year guidance. We will then be happy to take your questions.

With that, I'll turn to Slide 4 and turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2026 first quarter conference call. We entered 2026 optimistic about end market demand trends and we achieved a record first quarter sales of $669 million. This is a 9% increase over the prior year and reflects 7% overall organic growth. Organic growth was broad-based across our segments with notable strength in our ATS segment, which grew over 20% compared to prior year due to momentum in the semiconductor end market.

Solid execution and volume leverage drove strong profit performance for the quarter increasing EBITDA by 8% and increasing adjusted earnings per share by 15% compared to prior year, both first quarter records.

I would also like to highlight our free cash flow of $123 million and consistent cash flow conversion over 100% of net income during the quarter. We strategically deployed this cash to repurchase shares, return dividends to shareholders and maintain our debt leverage while continuing to invest in the company. I'll speak more about the 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 #5, you'll see first quarter fiscal 2026 sales were a first quarter record of $669 million, up 9% from the prior year first quarter sales of $615 million. Total organic sales increased 7%, driven by robust demand in Asia across most of our end markets. And while all of our segments contributed to growth, we saw particular strength in our advanced technology product lines, responding to growing demand in the semiconductor space.

Favorable currency translation added an additional 4% to the top line in the quarter and was partially offset by the small divestiture that we completed in the fourth quarter of last year. Adjusted operating profit increased 10% year-over-year to $166 million, driven by increased SG&A leverage on the organic sales growth as well as benefits from the divestiture of our medical contract manufacturing business.

EBITDA was up 8% year-over-year at a first quarter record of $203 million. EBITDA margins as a percentage of sales were 30%, in line with the prior year as our sales growth was concentrated in Asia, where our gross margins are generally lower, particularly on system sales. As a result, we saw lower incrementals during the quarter which we would expect to normalize over time.

Looking at nonoperating income and expenses. Net interest expense during the quarter was $23 million, a decrease of $3 million versus the prior year, driven by lower year-over-year debt levels and a stable to declining rate environment.

Other income increased $19 million year-over-year, principally related to a noncash gain on a minority investment. To give a little color on this since this is a new this relates to a small but strategic technology investment that we've accumulated over a number of years. The company we invested with completed an initial public offering in December of 2025 on the Korean Stock Exchange. As a result of this offering, we're now required to mark this investment to market value each quarter.

The initial gain that we recognized was $22 million in the quarter before tax. We've excluded this noncash gain from adjusted earnings, and we'll continue to treat future adjustments to mark-to-market as such going forward. Excluding this noncash gain, year-over-year changes in other income and expense were driven by foreign currency contract fluctuations.

Our tax expense on a U.S. GAAP basis was $31 million for an effective tax rate of 19%, inclusive of the impact of the noncash gain that I just mentioned. Excluding this impact, our effective tax rate on an adjusted basis was 18%. This result is slightly below our annual guidance range for fiscal 2026 due to some discrete benefits that hit in the first quarter, primarily tied to stock compensation. We still project our full year tax rate to be at the lower end of our initial guidance range of 18.5% to 19.5%.

Net income in the quarter totaled $133 million or $2.38 per share. Excluding intangible amortization and the noncash gain, adjusted earnings per share totaled a first quarter record of $2.37 per share, $0.02 above the midpoint of our quarterly guidance and a 15% increase from prior year adjusted earnings per share of $2.06. This improvement in year-over-year earnings reflect solid operating leverage from the organic sales growth as well as benefits from the divested medical contract manufacturing business.

Now let's turn to Slides 6 through 8 to review the first quarter 2026 segment performance. Industrial Precision Solutions sales of $327 million increased 9% compared to the prior year first quarter. Organic sales increased 3% compared to the prior year with a favorable currency impact of 6%. Growth was broad-based across most product lines with particular strength in Asia Pacific markets. Notably, demand for polymer processing and automotive product lines have stabilized as we expected.

EBITDA was $110 million in the quarter or 34% of sales, down 2% over prior year, largely due to the geographic product mix of organic growth and the lower incremental leverage on foreign currency changes.

Turning to Slide 7. You'll see Medical and Fluid Solutions sales of $193 million were relatively flat compared to the prior year's first quarter. Organic sales increased 3% in the quarter, led by strength in our engineered fluid solutions product lines. Divested sales from the medical contract manufacturing business had a negative impact of approximately 4% compared to the prior year. The 3% growth was a slower start than we expected for the segment, but we remain confident in the mid-single-digit outlook through the year. It's worth noting that the winter storms at the end of January did impact some of our production as well as some of our medical supply chain on a temporary basis. We estimate to the tune of about a 1% impact on our sales in the quarter.

EBITDA for Medical and Fluid Solutions was $70 million or 36% of sales, which was an increase of 9% from the prior year EBITDA of $64 million. EBITDA margin improved, driven by the divestiture, organic sales volume and strong incremental performance.

Now turning to Slide 8. You'll see Advanced Technology Solutions sales were $149 million, a 23% increase compared to the prior year's first quarter. The 21% organic sales increase was driven by double-digit growth in electronics dispense product lines related to semiconductor applications as well as recovering demand for our x-ray systems.

First quarter EBITDA was $33 million or 22% of sales, an increase of 43% compared to the prior year first quarter EBITDA of $23 million or 19% of sales. The improvement in EBITDA margin compared to the prior year reflects stronger sales volume and volume leverage. The team did an outstanding job of maintaining SG&A during the quarter as a result of sustainable operational and footprint changes that they've made within their segment in prior years, guided by the NBS Next growth framework.

Finally, turning to the balance sheet and cash flow on Slide 9. At the end of the first quarter, we had cash on hand of $120 million and net debt was approximately $1.9 billion. Our leverage ratio of 2.1x remained consistent with year-end results and is in line with our long-term targets, allowing us to continue to strategically deploy capital and giving us plenty of firepower for acquisition of strategic assets.

Our free cash flow generation was $123 million during the quarter, resulting in a 105% conversion rate on net income, excluding the noncash gain. This represents the third consecutive quarter above 100% conversion despite the accelerated revenue growth we achieved.

As noted on Slide 10, during the quarter, we invested $18 million in capital projects to drive future organic growth. We paid $46 million in dividends to our shareholders, and repurchased $82 million in shares on the open market. We also modified and extended our existing $1.2 billion credit facility. As part of that transaction, we consolidated a term loan coming due in fiscal 2026 into the new facility to provide greater overall financial flexibility to pursue strategic opportunities with no change in our total outstanding debt. At quarter end, we have about $800 million available under the new facility.

So to summarize the quarter, we achieved high single-digit organic sales growth while maintaining our strong 30% EBITDA margins despite some geographic and product mix headwinds. Our cash conversion remains strong, allowing us to strategically deploy capital to sustainably grow the franchise and return value to shareholders. Our team delivered on their commitments for the quarter and worked to grow backlog to position us for success in the second quarter. While market conditions have improved for most of our businesses, we remain balanced and vigilant for more meaningful recovery in select end markets, which is reflected in our updated guidance for the full year that Naga will cover in a moment.

With that, let's turn to Slide 11, and I'll turn the call back to Naga.

Thanks, Dan. This strong first quarter performance has set the stage well for fiscal 2026. Now 3 months into the year, our end markets are playing out as we expected. Within IPS, investments in packaging and product assembly are sustaining. Precision agricultural investments continue to grow over prior year and automotive and polymer processing applications have stabilized.

Medical end markets are returning to more normalized growth, and we expect to see these benefits continue as the year progresses. Growth in engineered fluid solution product lines is being driven by electronics and industrial applications. Within advanced technology, our dispense and surface treatment product lines for semiconductor applications continue to drive growth, while our x-ray systems that ensure the quality of semiconductor packaging are starting to inflect. Growth in general and automotive electronics is more muted but there are early signs of growing capacity needs in these end markets. Because it is such an important growth driver, I want to take a moment on Slide 12, to remind our investors about why Nordson wins in the semiconductor space.

Semiconductor applications account for approximately 50% of revenue in the ATS segment and drove the overall double-digit organic growth in the first quarter. ATS core competency is in the advanced packaging process of semiconductor manufacturing. Our precision dispense applications, including our market-leading Vantage and Spectrum S2 electronics dispense systems, enable underfill and encapsulation applications that allow the stacking of increasingly small chips on printed circuit boards.

Our close to the customer model positions Nordson as a partner when customers start developing advanced manufacturing processes for semiconductor packages. Our technology enables these increasingly sophisticated manufacturing processes. Quality control of these costly and complex chips is also creating more opportunities for our test and inspection portfolio. Current investments are primarily in Asia Pacific, and we are well positioned across the semiconductor supply chain, both technologically and geographically as investments grow into other regions. Clearly, I am pleased with the momentum across our end markets and our ability to meet our customer needs.

Turning now to our outlook, starting on Slide 13. We entered the second quarter with continued order momentum and increased backlog, up approximately 4% over the prior year. Order entry momentum was broad-based in the quarter with strength in our ATS segment. These trends position the company to deliver second quarter fiscal 2026 sales in the range of $710 million to $740 million.

Second quarter adjusted earnings are forecasted to be in the range of $2.70 to $2.90 per diluted share. Based on strong start to the year, the second quarter outlook, and the current foreign exchange rate environment, we are increasing our full year guidance as noted on Slide 14.

Sales are now expected in the range of $2,860 million to $2,980 million, which is an increase of 4.5% at the midpoint. The top end of our range assumes continued momentum from electronics end markets as well as modest improvement in our industrial and automotive product lines. The bottom end of our guidance would assume some broader pullback in end market demand in the second half. While we certainly don't see signs of that today, we still believe it is prudent to plan for this potential scenario.

Adjusted earnings will be in the range of $11 to $11.60 per diluted share, which is an increase of 10% at the midpoint. As always, I want to thank our customers and shareholders for your continued support. In particular, I want to thank our Nordson employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence continue to position us well to serve our customers.

With that, we will pause and take your questions.

[Operator Instructions] Our first question comes from Jeff Hammond with KeyBanc.

So really, I just want to -- can we just unpack kind of the margin dynamics around this kind of systems, geographic mix? And -- and do you think that continues over the next few quarters? Do you see mix improving? Maybe what's showing up in the order book that would support cover mix change or staying the same? .

Yes, it's a good question, Jeff. I would say, number one, if I step back, we saw very strong incrementals in our medical business, I would say, normal incrementals in our ATS business, really the primary segment where we saw the mix challenges was in IPS. But I think more importantly, what we would say is there's been no fundamental change in the margin outlook for our business. We've always said 40% is kind of a normal ongoing incremental expectation for our businesses. There's been no change in our gross margin profile. It's really just a mix issue in the quarter. So we see things moving back to normal, certainly as the year plays out.

And maybe just add to it, if you think about our second quarter guide and our full year guide, both contemplates Nordson delivering strong best-in-class EBITDA margins like we have done in the past.

Okay. Can you just expand on kind of the slow start in medical ex, I think, the weather issues and just what you're seeing that gives you confidence that, that business starts to pick up as you move through the year? And if you can just give us kind of underlying incrementals in that business if you exclude kind of the divestiture impact?

So we'll take the incremental first, Dan go, and then I'll talk about the trends.

Sure. Yes. Yes. And as I said, incrementals were actually quite strong. I mean our incrementals all in are essentially off the chart. I think when you kind of strip out the impact of the CDMO divestiture, incrementals are still north -- well north of 50% in the quarter. So it's quite strong and reflective of a good strong outlook in that business.

From a growth standpoint, I mean, I'd say our 3%, while it's a slower start than we would have liked, part of that was weather-related. We mentioned about 1% impact. But we're, frankly, very comfortable with the mid-single-digit outlook kind of return to normal growth. We see strong underlying demand in the business in our backlog and our project activity with customers. So it's really just a slightly slower start and really not that much slower than we expected, not far off that mid-single digit if you adjust for the weather impact.

Maybe add additional color to it, Jeff, is that supply chains in the interventional businesses have stabilized. We see some pretty good movement in order entry momentum in our fluid component business. Our ongoing demand for the Atrion businesses look good. I would just remind you that the Atrion businesses are going to be lower than our interventional businesses. But all in all, if you take the current order entry and you be taking backlog and take the healthy pipeline of customer projects, we feel pretty good about delivering on the mid-single digits for MFS for the full year.

Our next question comes from Mike Halloran with Baird.

Can we start on the ATS piece and maybe just give some more context to the moving pieces in the larger buckets there. The dispense piece, it seems like it's tracking the right way, certain to see some signs on x-ray. Maybe broadly in P&I piece, what are you seeing? And just maybe put it all together, talk about the 3 pieces of the order trajectory and where you're the most confident?

Yes, sure. Overall, strong momentum on order entry as well as revenue shipments in the quarter for these businesses. Clearly, our dispense businesses were the strongest, and that is to be expected, right? If you think about our dispense businesses and their applications in these complex chip manufacturing processes driven by AI computing power needs of our customers. We see a tremendous amount of investment going on in this business, and that is reflective of the revenue performance as well as the order entry.

If you think about our T&I, you want to think about it in 2 pieces. One is our X-ray businesses and the other one is our what we call as AMI businesses. And so these are acoustic emission-based inspection techniques and optimal techniques. So if you think about the x-ray, we are beginning to see some pretty nice momentum in our X-ray business. Remember, last year, this business was a little bit down, we are beginning to see that business starting to inflect and feel really good about where we are.

Think about these complex chips. These complex chips are now both combined logic and memory on the same stack. And so these are very expensive chips, and yield rates are everything here. And so the test and inspection applications continue to expand for us in these manufacturing processes. And so we feel good about the long term, but also feel good about the near term where we're seeing these orders starting to inflect.

One thing that is -- we also have our AMI business, which is our acoustic emission business, There, we have coming off of 2 really strong years of growth. We still have pretty decent growth plan for them this year. But in general, we feel really good about ATS segment, and that is reflected in our second quarter outlook. If you get into the second half, you need to remember that this business started to inflect in the second half of last year, the comps get a little bit difficult, but yes, based on what we can see in terms of backlog and order entry momentum, we feel still good about this year, this business being north of its long-term targets of mid-single digits.

Great. That was super helpful. And maybe you can just have the exact same conversation around the IPS segment, given all the moving pieces there.

Yes, sure. If you think about the IPS business, what we feel -- the headline really is we returned to growth with IPS. We posted a 3% organic growth in the quarter, expect that we will do so in the rest of the year. That's sort of what we contemplate in our midpoint of the guide.

Investments in packaging and product assembly end markets are sustaining. We see -- we continue to see growth in our precision ag or ARAG business in Europe and South America, where we are market leaders, stable aftermarket demand. Remember, this is a business where we are aftermarkets are a significant part of their revenue, which is north of 55% or so. Polymer processing and automotive end markets, we expect a nominal recovery through the year. They're stabilized, but not meaningfully inflecting yet.

The only other thing I would add is as the growth that we are seeing -- I'm sorry, go ahead.

I said the exact same thing. I apologize and said, go ahead.

Well, the only other thing I was going to add, Mike, is that the growth that we are seeing back to our kind of prepared remarks is largely in Asia today or in Asia Pacific. Again, that's not just China, that's broad Asia Pacific. And so an opportunity, we're still not seeing much inflection in the European and North American market demands. I think certainly, there's some early signs, as Naga mentioned in his comments, but we're really not seeing that yet. And I think also being very cautious to call when that's going to happen.

Our next question comes from Matt Summerville with D.A. Davidson.

Just a quick follow-up. On the medical side of the business, can you just give a little bit more granularity as to the weather impact you saw in the quarter, which business line was impacted. And if you kind of normalize for that impact, what would the medical organic performance, medical-only organic performance have looked like in the quarter?

Yes. It was primarily in our interventional products and then also to some extent in our fluid components, particularly some of our some of our Atrion related businesses. We had several businesses that have operations on the East Coast as well as supply chains that are East Coast based. And the long and the short of it is we lost a few days of production because we had literally operations that were mandated to be shut down because of the weather impact.

And so we estimate about a 1% impact. It's -- think of it as 2 to 3 days of production, very temporary in nature. We're back up and obviously fully running, but did have an impact on our ability to deliver during the quarter, especially with it happening late in the quarter. So again, I think the simple math is 3% overall growth normalized, that would have been about 4% in the quarter without that late storm impact.

Got it. And maybe if you can just comment on what you're seeing from an M&A standpoint, multiples, potential deal sizes, actionability and where you see most activity across the company?

Just a reminder, in terms of our acquisitions, we continue to work our pipeline, pretty active pipeline, lots of different opportunities they will pursue. What you don't want to look at lack of announcements and relate that to lack of activity, right? Because we remain financially and strategically disciplined, the areas we are continuing to work on or continue to expand our medical component portfolio. We're working on test and inspection opportunities. And any core technology, any technology that it will add to our core offering in the industry. So that is sort of the 3 areas that we are looking at and working on.

Yes, the multiples look a little elevated in some cases, in some places, it look reasonable. I think for us, it is -- we are going to continue to be pretty disciplined around what we buy. And our criteria has remain the same. We're looking for businesses that would add to our growth portfolio, businesses that are differentiated, businesses that have strong technology place.

And from a financial perspective, we're looking for Nordson like gross margins and maybe EBITDA was in the 20 range with meaningful opportunity to expand margins and our appropriate return. So all our criteria, both strategic and financial remain the same. Healthy pipeline, continue to work on lack of announcement shouldn't be assumed for lack of activity or work on our part.

Our next question comes from Christopher Glynn with Oppenheimer.

Just wanted to -- you mentioned, I think, seeing some initial signs of the general electronics of ATS starting to show signs of life that pretty consistent with what we're hearing from kind of adjacent companies or exposures to yours. But I just wanted to spend a minute exploring that topic.

Yes. I guess maybe just to add a little bit of color. I would say we're not really seeing inflection in those businesses, I would say, stable demand at low growth levels. I think the early signs that I would say we're pointing to is, and you guys see the announcements as much as anybody else, you're starting to see some of the semiconductor -- I'll say the high-end semiconductor demand and investments seem to be trickling into the lower level electronics applications.

If you think of memory and general electronics requirements. We're starting to see announcements and discussions around capacity investments. We're not seeing those yet. But certainly, those are early signs that we may see inflection coming at some point in the future. Right now, what I would say we're seeing in those markets is stable demand at low growth rates. Yes.

Great. And then just want to explore also when emerging technologies and the semi application space started to hit you say in the case of co-packaged optics. Is that a meaningful opportunity? Is that down the line? Or are you seeing some early action derivative of that technology?

Are you talking about optical modules. Is that what you're talking about, Chris?

Yes, exactly.

Okay. Yes, that is an area of -- we have some interesting products there that helps our customers manufacture those optical modules. It's certainly an area that we are playing in, and it's an area where we are beginning to see orders directly related to that.

Okay. And last one for me. What was -- as I recall from back in the past, it's been a while, but FX can have a substantial impact on IPS margins, and they were certainly well below the steady state that you've delivered for a long time there. I know you talked about mix but ahead of call. I was certain it would be FX. So I just wanted to ask about that.

Yes. And we mentioned that as well. FX is certainly -- if you think of the incremental performance for IPS, that's certainly one of the items that impacts us and the simple math I would give you is because FX was about a 6% positive impact on IPS sales, we -- obviously, we don't get the same incrementals on FX movements. In fact, we would give you the math of use a 25% to 30% range for a normal incremental on FX, both on the upside and downside. And so with 6% growth coming from FX at a lower incremental, certainly, that's a contributor to the performance in the quarter.

Our next question comes from Robert Jamieson with Vertical Research Partners.

Just really wanted to follow up quickly on that FX incrementals. Should we be assuming the same sort of incremental drop through those 25% up or down across the other segments as well for FX?

It varies a little bit by segment. But yes, generally speaking, that's a good benchmark. And again, the only thing I would maybe caution you on is if the outlook for the year, that FX impact will lessen at current rates, as you saw FX rates improving throughout the year last year. So -- in Q1, we get a pretty big lift, but that will lessen as the year plays out at current rates. But yes, the drop-through should be pretty similar. It moves a few points one way or the other, but not significantly different by segment.

Great. And then I just want to talk about full year guidance. Really solid performance in 1Q. Nice [ Q3 ] guide. Just taking Naga's comments, and I think it's wise here to have a level of conservative and baked in, and hopefully, I'm reading those comments, right. But what I'd like to kind of understand is what end markets and areas would you expect to outperform your base case estimate to get us at or above the high end of your sales range?

Does it need to be an acceleration in like auto? I mean, I've been watching auto CapEx for 20-plus global auto OEMs. And even since December, we've seen auto CapEx revised higher by like 5% growth to '26 from flattish in December. So would it be kind of like a mix of that as more of an acceleration in some of the minimally invasive and specialty medical business, would that be like kind of like a fair assessment if we were to think everything works to align and get us towards the high end of your guidance range?

Rob, thank you for your comments. That exactly mirrors our thinking. What we're trying to be is balance and prudent in our thinking for the rest of the year. And in terms of the details of how we're thinking about each of these end markets, I'll have Dan talk to you about the high end and the low end.

Yes. And I'll start with, frankly, I think the easier one. Medical, we see, as we mentioned, good ongoing stable growth in the mid-single-digit range. Is there potential for upside there potentially. But we're not really -- I would say that's not a market that we expect to inflect further necessarily. If I think of what would drive the higher end, it would be exactly what you're talking about, some further inflection in general industrial and automotive demand.

And then the other key factor that I would say is if you look at our ATS performance, as we've highlighted a number of times, ATS deliveries being 70% systems tend to be lumpy. We're not factoring in a 20% run rate and growth in this business. We know that there will be some lumpiness quarter-to-quarter. But one potential upside is if we see continuing ongoing strength in demand that would be upside versus our kind of base case thinking. Yes.

Maybe let me just add one thing there, particularly on ATS. Some of the demand and the exact delivery depends on our customer, right? So we are part of somebody else's large manufacturing supply chain that they're bringing a process up to speed. So occasionally, there may be a pull ahead and sometimes pull back, postponing is the way to think about it. So think of our lumpiness also from a customer demand delivery requirement. .

Yes, it's a good way to think about it.

No, that makes perfect sense. And then just one last one. Just I don't see this being an issue for you all, but the DRAM pricing is -- have there been any impact? Or how much is that of like your billing materials? Is it pretty de minimis? And then, I guess, another question would be with just some of the capacity constraints there, could that be a potential opportunity for you all if -- like on the back-end processes if they need to increase capacity? Or am I not kind of on course there?

Robert, could you repeat your -- the early part of your question before the pricing, we missed something there. Just...

Oh, yes. Sorry. So I was just talking about DRAM pricing, and I was wondering just with like memory cost going up, do you have any significant exposure there that would be related to margin?

Yes. We don't have a significant amount of exposure, but we do have exposure in the memory space, in the traditional memory. And when there are capacity adds there, we will benefit, we will benefit.

Our next question comes from Andrew Buscaglia with BNP Paribas.

Just wanted to check on. Within ATS, I know you said about half of your sales tied to semis, but we're seeing that test inspection piece maybe start to recover with X-ray. Can you just talk a little bit about how I know that you're testing the inspection stuff is quite niche. So I'm wondering what a cycle looks like for that side of your business? And is this X-ray piece sort of a precursor for a lift in that chunkier ATS business?

Yes. If you think about our X-ray business, this is one -- is a little slower to recover when compared to our dispense business and when compared to our acoustic [ commission ], and so if you think about year-on-year, our -- x-ray has some automotive exposure as well. The semi side of x-ray is doing really well, and the auto is flattish is the way to think about it. Does that help the question that you asked?

Yes.

Sorry, as automotive comes back, we will continue to see x-ray do well. .

Okay. Got it. Okay. In MFS, you run into some pretty tough margin comps in the back half of the year. Can you just remind us I guess, is that something when you -- when we come to lap that, you expect to expand off of that high base? I mean they are pretty impressive margins you're kind of running into? And maybe what would that be? What would lift that demand, if you don't -- or margin demand is not really accelerating?

Yes. No, it's a good question. And I mean maybe I'll even go back to our fourth quarter. We printed a very strong margin in the fourth quarter. And I think we made comments during that call that, that was a high point and not necessarily an ongoing run rate. And so we think margins in the MFS segment are very much sustainable in a 37%-ish range. And we may have some select quarter-over-quarter comp issues like the first quarter where we had a really strong performance, but we think maintaining that margin performance and continuing to generate reasonable incrementals as we grow is very much attainable in the medical business.

Yes, it's worth pointing out, maybe just to reiterate, the divestiture that we completed in the fourth quarter is kind of a, call it, a onetime adjustment that impacts our ongoing margins. And so you're certainly seeing that in the year-over-year margin comparisons in Q1, and you'll see that through the year and so we hit Q4.

And I think the most important part, we, as a company, are focused on, and this message sort of reiterates across all of our businesses. In -- given Nordson's high gross margins, high best-in-class EBITDA margins, it is super important for our businesses to stay focused on growth at reasonable incrementals.

So as you think about us, be it MFS, yes, the margins are pretty strong. But day in and day out, what our teams in the divisions are focused on is to drive organic growth, innovate, deliver products at the time the customer is asking us, have the best quality there is, meet our customers' needs in the market where they need us to be just being agile. That's sort of how we are thinking about it. And I would say the margin is just a byproduct of all of the work, right? So that -- if you want to think about us, we think about above-market growth and reasonable incrementals. That's where we're focused on. That's what you would see us deliver.

Our next question comes from Chris Dankert with Loop Capital.

Just looking at the ATS segment, I guess, I'm fully appreciating that a lot of that business is just lumpier by nature. But was any of that growth a pull forward around Lunar New Year? Or is that just kind of how the orders just happened to fall [indiscernible].

Yes. No, nothing that we would say is tied to the Lunar New Year. In fact, to be honest, we've kind of looked at this and the Lunar New Year, it has a pretty de minimis impact, and we've kind of proven that out looking at history. So it's really tied to, as Naga said earlier, customer demand requirements when they want the machines on their floor for installation into their broader lines. And what you're seeing is reflective of, I would say, normal customer demand and requirements.

We do hear that our customers are investing for the demand, right? And so this increased demand for AI chip capacity is playing out. And it's playing out in the packaging area right now. And that's why you see our dispense business benefit, you start to see our X-ray business start to inflect. So this is based on what people are asking. And the lumpiness comes from our customers, both the investment pattern as well as installation requirements, so.

Yes, it certainly encouraging to see the strong start to the year and the good shipments in 1Q here. So you have on that. I guess as my follow-up, any comments on kind of the machine builder activity in core Europe and kind of what that demand has been within the IPS segment?

They seem to be pretty stable, and our packaging business has had a pretty good quarter. Expect to continue to have a pretty good quarter. If you think about the non-wovens business, we're coming off of 2 years of incredible capacity adds, a lot of capacity adds for nonwovens came in the last year from a lot of our mid-tier OEMs based in Asia, building out in Africa, Middle East, India.

So global middle income growth still a big secular growth driver for this business, albeit reasonable low single-digit growth, stable aftermarket demand all the things that makes this business great still intact, still continuing to do well.

Congrats on a nice start to '26 here.

Our next question comes from Walter Liptak with Seaport Research.

Let me try one on the ATS segment. And if I'm recalling this right, in past positive cycles around consumer electronics for dispensing, the visibility was pretty short, like the customers would place orders and then you'd have to cycle through and ship very quickly already. And it sounds like with this kind of data center build-out for advanced chips that lumpiness is still there. Do you -- can you help us understand is there any differences between prior kind of consumer electronics-led cycles versus this one? Do you get any more visibility into the capacity that might be going in? And those order lead times, if you can just comment.

The order lead times are not very different, but the size or the growth differences are -- they are smaller rather than significantly huge chunks and then nothing. So I would say it has dampened -- the amplitude of the cycle is dampened as maybe one way to think about it. But the order lead times are no different, but we have built in some new advantages here in the last couple of years.

If you remember, this business went through a relocation of capacity to be in geographies where we are closer to our customer and where the customer needs it to be. So that has helped us to be able to respond to this lead time.

The other is our NBS Next application within our factories certainly has improved our own on-time delivery capability. We are consistently in the low 90s starting to march towards a 95% on-time delivery based on customer requirements. So this type of delivery capability that the teams have built over the last couple of years and having capacity where our customer needs us to be is a game changer for this business.

I'll just add, by the way, I mean your comment is spot on. If you think of our backlog, and this is why we think looking at our backlog quarter-to-quarter or year-over-year is a good indicator. We're turning our backlog pretty quickly. As you think about our backlog, yes, we have some selected areas with longer lead times, but the majority of our backlog turns in the quarter. And so our starting backlog is really an indicator of current demand for Q2.

To your point, we also have -- we maintain robust pipelines. We know what we're talking to our customers about on new projects. I think the piece that's harder to pin down sometimes just because of customer requirements as when those turn into orders and delivery, which is dependent on when the customers need them for their factory floor.

Okay. Great. And then you called out the wise Nordson advanced electronics winning. I wonder is there a win rate? Like it sounds like you might be gaining market share here with some of the quick delivery. Is there a way of quantifying it was a win rate?

Well, we don't share that on the outside. I would definitely tell you our work around growth drivers in each of our businesses, including ATS, around focus on innovation, focus on delivery, having the best in quality and finally, meeting where our customers need us to be in the market. Our 4 core growth drivers that each of our businesses are working on.

And what you're seeing in ATS, certainly, there is a market momentum. But to be able to leverage the full potential of the market opportunity, clearly, our teams are doing a fantastic job, and I think we're getting rewarded for that in the market.

[Operator Instructions] Our next question comes from Brad Hewitt with Wolfe Research.

So IPS revenue was much better than typical sequential seasonality, of course, you call about the strength in Asia Pacific. But just curious if you could elaborate a little bit more on what drove that strength in Asia. How much of that was a function of an easy comp? And then how do you think about growth by region for the year in IPS?

Yes. As I shared earlier in one of the answers, I would tell you, it is a broad-based demand that we are certainly seeing in IPS. IPS returns to growth, return to growth in the quarter, expect to have a good growth for the rest of the year. Clearly, you can see growth in packaging, product assembly, our Precision Ag business is also growing nicely.

Polymer Solution has stabilized, so there is some of that negative going away, right? If you think about polymers and automotive, where last year, we were dealing with still demand going down. That has stabilized. So from that perspective, the comps are better there. So it's a combination of our businesses that were negative last year are stabilized. They're not inflected yet. But our businesses that are having good growth demand in packaging product assembly and precision ag are contributing to the growth in this segment.

I think that's maybe a good way to think about it, Brad, is what you're seeing in our first quarter growth of 3% is really the underlying growth that we've been seeing in this segment if not for the drag that we saw in the automotive and polymer space last year.

Okay. That's helpful. And then maybe switching over to the ATS side, given AI demand continues to accelerate in recent months, does that give you confidence that perhaps your electronics business as a whole can outperform the mid-single-digit long-term outlook you discussed at the Investor Day?

I think it's really important to remain balanced on this business. We have seen the cycle of this business. And that's the space we play in, and we fully appreciate it, and we capitalize and fully participate in the market when the market is up. So yes, in years when there is going to be a significant investment like now, we are going to see higher than the mid-single digit. But then through the cycle, we're going to be in places where this business will go down. And that's something you have experienced. You've seen us -- so you want to think through the cycle mid-single digit in the up cycle, certainly higher, right? And so that's what we're experiencing now, and that's what we're planning for, and that's embedded in our guide.

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

Thank you for your time and attention on today's call. We have several upcoming investor events over the next month, where our team would be happy to meet with you, including the Loop Industrial Conference on March 10 in New York, the Bank of America Conference on March 17 in London and at the Apex Trade Show in Anaheim, California on March 18, featuring our electronics product lines.

Nordson is well positioned as a diversified precision technology company, are 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 make us a quality compounder. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for joining us, and welcome to the Nordson Corporation Fourth Quarter and Fiscal Year 2025 Conference Call. [Operator Instructions]

I will now hand the conference over to Lara Mahoney. Please go ahead.

Thank you. Good morning. This is Lara 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, December 11, 2025, to report Nordson's fiscal year 2025 fourth quarter and full year results.

You can find both our press release as well as our webcast slide presentation that we will refer to on today's call on our website at nordson.com/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 GAAP metric in the press release issued yesterday.

Before we begin, please refer to Slide 2 of our presentation, where we will 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 differ.

Moving to today's agenda on Slide 3. Naga will discuss fourth quarter and full year highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the 3 business segments. Dan also will talk about the year-end balance sheet and cash flow. Naga will conclude with high-level commentary about our enterprise performance, including an update on the Ascend Strategy as well as our fiscal 2026 full year and first quarter guidance. We will then be happy to take your questions.

With that, I'll turn to Slide 4 and hand the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2025 fourth quarter and full year conference call.

I am pleased to share our solid fourth quarter results. Sales were up 1% over prior year, inclusive of the divestiture of our medical contract manufacturing business that closed on September 2. Adjusted earnings per share grew 9% over the prior year, reaching the high end of our fourth quarter guidance. Notably, we achieved record EBITDA of $256 million, expanding EBITDA margin to 34% in the quarter.

We also generated record cash flow of $194 million in the quarter, which is a conversion rate to the net income of 128%. This enabled us to continue repurchasing shares, paying dividends and further reducing debt. This is a strong operational result, and I want to thank the Nordson team for their ongoing commitment to delivering value to our customers and shareholders.

As I turn to fiscal 2025 financial highlights on Slide 5, I want to reflect on the progress we have made since launching the Ascend Strategy 5 years ago. In addition to Nordson's legacy strengths of leadership positions in diversified niche end markets, high recurring parts revenues, a direct-to-customer model, and differentiated products built on deep knowledge of our customers' demanding applications, the Ascend Strategy has added new capabilities, including the NBS Next growth framework and a division-led structure, which have empowered our teams to respond rapidly to changing market conditions. And certainly, we have navigated effectively through significant macroeconomic changes over the last 5 years.

2025 was no exception. And Nordson delivered strong results in line with our initial guidance. We achieved record sales of $2.8 billion, up 4% from last year. Despite the macro disruptions, we delivered record adjusted earnings per share of $10.24, exceeding the midpoint of our initial full year guidance. We maintained our average gross margins of 55% in an evolving tariff environment, demonstrating the value and differentiation we provide to our customers.

Throughout fiscal 2025, we also continued to strengthen our portfolio. The integration of Atrion Medical has been a success and it contributed nicely to sales and EPS growth in the first year. We also strengthened our medical portfolio through the divestiture of our contract manufacturing business, driving immediate improvement in our margins and increased focus on our remaining differentiated medical businesses. All of these actions delivered EBITDA of $900 million, achieving our 2025 Ascend Strategy goal.

I would also like to highlight our full year free cash flow conversion of 136% of net income. Our strong cash generation enabled us to repurchase about $300 million in shares, increased dividends for the 62nd consecutive year and reduced our net debt, ending the year at a 2.1x leverage ratio, near the low end of our targeted range.

I'll speak more to the enterprise performance in a few moments, but first, I'll turn the call over to Dan to provide more detailed perspective on our financial results for the fourth quarter and fiscal year 2025.

Thank you, Naga, and good morning to everyone. I'll start on Slide 6, which summarizes our overall results for the fourth quarter.

Fourth quarter 2025 sales were $752 million, up 1% compared to the prior year's fourth quarter sales of $744 million. Organic sales decreased 1% compared to the fourth quarter of 2024, with the growth in our Medical segment being offset by softness in selected Industrial and Advanced Technology systems product lines during the quarter.

Currency translation had a positive impact of 2% during the quarter, and we saw a small positive from a combination of both the Atrion acquisition, which anniversaried in late August, and the divestiture of the medical contract manufacturing business, which we completed in early September.

Adjusted operating profit increased 6% year-over-year to $218 million, reflecting both strong gross margin performance and improved SG&A leverage during the quarter. EBITDA was also up 6% year-over-year at $256 million and reached 34% of sales. This represents a 160 basis point improvement over the prior year fourth quarter. Adjusted operating profit and EBITDA margins benefited from solid operational performance, improved portfolio mix as a result of the divestiture of our medical contract manufacturing business, and the restructuring actions that we announced earlier in the year, which have now been substantially completed.

It's worth highlighting that this is our third consecutive quarter of improving EBITDA margin amid the dynamic trade environment. This is a testament to our ability to execute and deliver operationally in dynamic times while also creating value through strategic M&A activity.

If we look now at nonoperating income and expense during the quarter, interest expense improved $4 million year-over-year, driven by reduced leverage and a stable to declining rate environment. This benefit was essentially offset by an increase in other nonoperating expenses during the quarter. Tax expense was $31 million in the fourth quarter, for an effective tax rate of 17.1%. This brings our full year tax rate to 18.9%, which is slightly better than our original guidance range for fiscal 2025.

All of this resulted in GAAP net income that totaled $152 million or $2.69 per diluted share. Excluding nonrecurring acquisition and restructuring-related expenses, as well as charges associated with the exit of the medical contract manufacturing business, adjusted earnings per share totaled $3.03 per share, a 9% increase over the prior year and $0.08 above the midpoint of our quarterly guidance, reflecting our strong operational performance during the period. Not only was this a strong year-over-year improvement in earnings, but on a dollar basis, it also represents a quarterly record for the company.

Now let's turn to slides 7 through 9 to review our fourth quarter segment performance.

Industrial Precision Solutions sales of $362 million decreased 2% compared to the prior year fourth quarter. Organically, IPS was down just under 4% in the quarter, with currency providing a favorable impact of about 2%. Although it was another quarter of improvement sequentially, year-over-year declines in our polymer processing product lines and some smaller reductions in our industrial coating systems outpaced solid growth in precision agriculture and packaging product lines. For both polymer processing and industrial coating systems, we see continued signs of stabilization and improvement in our backlog and order rates. So these areas should no longer be a drag on results heading into the first quarter of fiscal 2026.

EBITDA for the quarter was $137 million or 38% of sales, reflecting consistent and strong operational performance on slightly lower sales volumes during the quarter.

Turning to Slide 8, you'll see Medical and Fluid Solutions sales of $220 million increased 10% compared to the prior year's fourth quarter. Organic sales volume was up nicely at 7%, driven by broad-based demand across all of our product lines. I think it's fair to say that the destocking that was impacting our interventional product lines is now fully behind us, and we see good, stable demand in our order books heading into the new year.

The final acquisition impact from Atrion, net of the sales reduction from divesting our medical contract manufacturing business, added a net 2% to sales during the quarter. After a successful year 1 integration, it's also worth noting that Atrion is now contributing nicely to organic growth that we achieved during the quarter. Finally, currency had a modest favorable impact on the overall sales versus the prior year.

EBITDA for the quarter was $88 million or 40% of sales, which is an increase of 21% compared to the prior year EBITDA of $72 million or 36% of sales. This was a fantastic result with EBITDA margins up 380 basis points versus the prior year. While a big part of the margin improvement in the quarter is driven by the divestiture of our contract manufacturing business, our teams also continue to execute quite well and are now fully benefiting from the normalization in demand.

Turning to Slide 9, you'll see Advanced Technology Solutions sales of $171 million decreased 4% compared to the prior year's fourth quarter. This change included a decrease in organic sales volume of roughly 5%, with a small positive currency benefit. The year-over-year organic sales decline was driven by weakness in X-ray systems demand. We continue to see strong growth in electronic dispense product lines and stable demand for optical, acoustic and other product lines, but these were overshadowed by near-term weakness in X-ray systems during the quarter.

As a reminder, our ATS revenue tends to be a bit lumpy quarter-to-quarter based on systems delivery. That said, we continue to see strong underlying momentum in our ATS end markets despite the lower year-over-year result in the fourth quarter.

Fourth quarter EBITDA was $43 million or 25% of sales, a decrease of 10% from the prior year fourth quarter EBITDA of $48 million or 27% of sales. The decrease in EBITDA margin was reflective of lower sales volume and some unfavorable product mix during the quarter, with stable underlying product line performance.

Now turning to Slide 10, I'd like to make a few comments on our full year results. As Naga mentioned, fiscal 2025 full year sales were a record $2.8 billion and an increase of 4% year-on-year. Our acquisition and divestiture activity added a net 6% to sales for the year while organic sales were down roughly 3% and currency was a modest benefit.

Looking back at the full year sales results, organic sales were really weighed down by 3 specific areas: polymer processing systems, our automotive-related systems and selected X-ray inspection applications. In all cases, the core fundamentals of these businesses remain strong, and as we exit the year, we see good stability in our backlog and order rates, meaning we've seen the trough.

EBITDA for the full year increased 6% to a record $900 million or 32% of sales. This reflects a full year incremental EBITDA margin of 49% and marks the fifth consecutive year that the Ascend Strategy has delivered strong EBITDA growth. This results in GAAP diluted earnings per share of $8.51 for the year and adjusted diluted earnings per share of $10.24, both up 5% from the prior year and representing a new record for adjusted diluted earnings per share. In a year that's been full of surprises, we're quite proud of these results, and we like where we're positioned heading into fiscal 2026.

Finally, turning to the balance sheet and cash flow on Slide 11. At the end of the fourth quarter, we had cash on hand of $108 million and net debt was approximately $1.9 billion, resulting in a leverage ratio of 2.1x, a significant reduction from where we started the year. While we did benefit from roughly $30 million in net proceeds from the contract manufacturing sale, our free cash flow really enabled this debt reduction. And our free cash flow generation remains quite strong, an annual record of $661 million, and a cash conversion rate of 136% on net income. This strong cash conversion was primarily driven by targeted improvements in working capital, which is an area that we remain focused on.

As a result of our strong free cash flow during the year, we were able to repurchase approximately $300 million in shares, reduced our net debt by about $224 million and pay $179 million in dividends, while continuing to invest approximately $60 million in capital projects to drive organic growth. This positions us quite well heading into 2026 for continued returns to shareholders with plenty of firepower to continue to add attractive assets to the portfolio.

In summary, we had another strong operational quarter and we finished the year strong, exceeding our original profit commitment for the year despite a very dynamic macro environment. We closed fiscal 2025 with a strong balance sheet while returning value to shareholders due to record free cash flow generation. And we took action to optimize our medical portfolio, positioning us for continued profitable growth.

As we enter fiscal 2026, with our key market headwinds behind us, we're well positioned to capitalize on profitable growth opportunities and we're confident in our ability to convert these opportunities to bottom line results and value.

With that, we'll now turn to Slide 12, and I'll return the call to Naga.

Thank you, Dan. In October 2024, we announced our 2025 to 2029 performance targets. In 2029, when we look back on our financial performance for that period, we expect to deliver an average annual growth of 6% to 8% in revenue, balanced between organic and acquisitive growth. And 10% to 12% in adjusted EPS growth. In 2025, we managed effectively through some dynamic macroeconomic conditions and made progress towards our goals.

Turning to Slide 13, I'd like to talk about what we are seeing in our end markets as we enter fiscal 2026. Starting with our Industrial Precision Solutions segment, we continue to see sustaining investments in packaging and product assembly end markets. Precision agriculture demand is sustainable in Europe and South America given the strengthening demand for increasing yields and quality in these regional markets. Demand in auto and polymer processing end markets has stabilized.

Through it all, aftermarket parts remain a stable part of the IPS revenue portfolio, contributing to growth and delivering attractive margins. Overall, we expect the IPS segment to return to more normal growth rates of low single digits.

In Medical, customer destocking is behind us and our core business is returning to mid-single-digit organic growth. The demand drivers fueling the end market, such as the aging of the population and shift towards non-invasive surgeries, remain consistent and our medical team has a healthy pipeline of customer projects.

In ATS, our semiconductor applications are well positioned to benefit from investments in the semiconductor cycle. We remind our investors of semiconductor applications account for approximately 50% of ATS revenue. While timing of orders remain lumpy, our team is winning share based on our ability to deliver innovative new products in short lead times. This is possible because we have holistically applied NBS Next.

In addition to being located close to the customer, our products deliver leading productivity and quality in complex advanced packaging applications of semiconductors used for AI, cloud computing and more. The remaining exposures within ATS are automotive and general electronics, where the demand is stable, but dampening the higher semi growth rates. Encouraged by our end market demand trends and being prepared to operate in a range of macroeconomic environments, we are entering 2026 optimistic to deliver solid growth.

Now turning to the financial outlook on Slide 14. [indiscernible] fiscal 2026 with approximately $600 million in backlog, up 5% from the prior year end, excluding backlog associated with the divested business. Based on the combination of order entry, backlog, current foreign exchange rates and anticipated end market expectations, we anticipate delivering full year sales in the range of 1% to 6% above fiscal 2025 sales. This sales guidance assumes 1% benefit from foreign exchange rates, which will be offset by the divested medical contract manufacturing business. Importantly, this implies a midpoint of 3.5%, demonstrating solid progress towards our long-term organic growth annual target.

Full year 2026 adjusted earnings are forecasted to be in the range of 6% to 12% growth per diluted share, with a midpoint of 9% adjusted earnings growth, is also progressing well toward our annual adjusted EPS growth algorithm.

For modeling purposes, in fiscal 2026, assume an estimated effective tax rate of 18.5% to 19.5%, capital expenditures of approximately $55 million to $65 million, and interest expense of approximately $85 million to $95 million.

Based on seasonality, we expect our fiscal first quarter to start modestly growing nicely over prior year. As you will see on Slide 15, first quarter fiscal 2026 sales are forecasted in the range of $630 million to $670 million and adjusted earnings in the range of $2.25 to $2.45 per diluted share.

The Nordson team consistently delivers operational excellence and strong cash flow due to our unique competitive advantages. Coupling with our expectations for end market growth, we are looking forward to a solid fiscal 2026. As a growth compounder, we will continue to reinvest in the business while returning cash to our shareholders. Again, I want to thank our employees, customers and shareholders for your continued support.

We will now open the phone lines for questions.

[Operator Instructions] Your first question comes from the line of Mike Halloran from Baird.

So first question is on the ATS segment, specifically the semi side. In the past, the higher growth areas have been driving the strength in that piece. Are you seeing any broadening out across semiconductor applications yet? Or is it still concentrated in some of the areas, data center, wherever, AI, where you've seen strength traditionally? In other words, have you seen that broaden out to some of the more traditional electronic applications, auto, wherever else you want to talk to?

Yes. I would say the strength continues and remains in the semiconductor space for the AI applications, cloud computing and such. But automotive is certainly starting to stabilize for us. And general electronics has been pretty decent through all of it, just lower growth, Mike, when compared to the semiconductor growth rates. Just for color, 50% of the revenues come from the semiconductor space, about 15% or so in the automotive, and the rest is in electronics, so.

Okay. And then on the margin side of things, maybe just some help on trajectory into this year. Very robust margins, particularly MFS, this quarter. Is this the right zone to think about sequentially as we work through the year next year? Or are there any one-offs? In other words, are these the right margin levels to build off of -- are these the representative margins to build off of adjusting for revenue levels as we work through '26?

Yes, it's a good question, Mike. I would say, as I look at IPS and ATS, I think certainly the right jump-off point and in line with historical performance. On the Medical side, we had a really strong quarter. I don't know that 40% plus is the right way to think about it. I think we're very comfortable maintaining the upper 30s in our Medical business. They had a really strong performance this quarter. Certainly, I wouldn't expect a lot of degradation. But there were some strong benefits associated with the portfolio changes that we made, as well as some operational tailwinds that we had.

And so I think the upper 30s in the Medical is certainly sustainable. 40% is a bit of a notable achievement this quarter.

One thing I would add, Mike, is that think of a 100 basis point improvement for the segment margins with the action of the divestiture, is maybe a way to think about it.

Your next question comes from the line of Jeff Hammond with KeyBanc.

Jeff, we can't hear you if you're there. I think we might have a technical difficulty. Jeff is not coming through.

Can you hear me?

We can.

Sorry about that. This is Mitch Moore on for Jeff. Just within IPS, it seems like polymer processing weakness has been masking some of the more stable growth in other parts of that business. Just as we look to 2026, what are you expecting from the polymer processing versus kind of the rest of the business? If you could talk about order intake there and how much that's contributing to backlog and expectations for the year.

Yes. For polymer processing, what I would tell you is what we have seen in order entry and backlog buildup, we're at the [ bottom ], and our expectation is, going into the year, that things improve from where we are, certainly not getting any more difficult than being a drag on IPS.

That's helpful. And then just on 1Q and ATS, it looks like there's some pretty healthy growth implied in 1Q. Just if you could help us walk through how much of that is comps, how much of that is underlying markets getting better or timing of shipments. Just if you could us -- help me walk through that.

Yes. No, happy to add some color. I would say, from a demand standpoint, we see good underlying stable demand, and growth, as Naga mentioned, particularly in the semi space but also a good stable ongoing growth in the electronics, automotive and general electronics space. As you think about first quarter, as you'll recall, we did have a slow start to the year in ATS last year. And so there are some favorable comps year-over-year, and that's driving part of the performance in Q1. As we sit here today, entering the year, we're in a much stronger position from a backlog standpoint from where we started the year last year. So we're off to a good start, I would say, certainly for the first quarter. Some of that is the prior year comp. But really, it's really driven by ongoing demand and a stronger backlog entering the year, is really the big driver.

Your next question comes from the line of Matt Summerville with D.A. Davidson.

So can you put a little bit of a finer point on what you're seeing with respect to X-ray inspection, in the sense that I would imagine if a lot of the semi-driven growth is being steered by AI, cloud, kind of the more technologically rich chip architectures, I would think the pull-through and almost more of a real-time pull-through on X-ray would be more pronounced maybe than what you're seeing. So can you kind of talk about why the 2 pieces of the business may be decoupled, whether you think that's sort of temporary? Just kind of walk me through that again, specifically focused on X-ray. And then I have a follow-up.

Sure. On the X-ray side, think about X-ray, it has great exposure to our semiconductor, but it also has a pretty solid exposure to automotive. So some of these differences you're seeing in X-ray when compared to ATS, you also can attribute to some of the automotive exposures we have in that business.

We certainly like the trends that we are seeing in the business right now. We've got a number of new products that are launching. And so we are pretty excited about going into this year. I think X-ray begins to contribute to ATS's growth.

The one other point that I would make for you on X-ray is that if you think about these composite structures that people are building, where you have both logic as well as memory on that, there are parts of that structure cannot be inspected with X-ray, right? There are parts that need to be inspected with X-ray and there are parts that cannot be. And for Nordson's position, we have both those technologies. So you typically use acoustic for memory and you use more X-ray for logic chips, right?

So if you think about those 2, we certainly benefit from them. But there is a transition in technology that is happening in testing as we speak. And we have some new technologies that we are testing right now, which certainly will have an impact, but probably not in '26, probably in '27.

So overall, the X-ray business is in a good spot. Certainly did not contribute last year. Some of that is automotive exposure. But we feel like our X-ray business is in a good spot going into this year and will contribute to growth in the ATS segment.

And then just as a follow-up, with Atrion seemingly in a good spot, maybe just talk in a little bit more detail about M&A actionability from here on out, at 2.1x net leverage, and whether or not at 250-ish, wherever your stock is going to trade today, are you still a buyer in the open market?

Yes. I'll wait for that -- I'll pass that part of that question to Dan. But first, let me take the M&A piece of it, right? Just as a reminder, Matt, you know this about us, our goal with M&A remains the same as what we shared during our Investor Day, which is really adding highly differentiated businesses that are additive to the growth of the portfolio, right? That's -- while remaining strategically and financially disciplined. So that is the strategy. Nothing really has changed. We have a pretty healthy pipeline. We continue to be in part of processes. Obviously, in some cases, we are not successful because we choose to exit the process or, in some cases, we just -- the project ideas did not meet our financial criteria or strategic criteria, right?

So we continue to have a robust pipeline. We continue to work the pipeline. You did not see any actionability in '25 primarily because we didn't have projects that met both those things. And clearly, stock price was very favorable for us to be supportive of our stock by buying back share.

So then, let me have you address the last part of Matt's question.

Yes. And just to add maybe some color on the capital allocation thinking, our goal and, frankly, one of the strengths of the company with our strong cash flow is the ability to be balanced. And so you're going to continue to see us not just do one or the other, but continue to do both meaning returning cash to shareholders and continuing to identify and bring in high-quality assets to the portfolio.

So let's say, I like your thinking, let's say that we're in a $250 range today, we think there's still upside to our stock. We've just authorized late last year an increase in our authorization that gives us coverage in the near term. And I would say we're going to continue to be balanced in deploying the strong cash that we generate, both continuing to work our acquisition pipeline and balancing that with shareholder returns.

[Operator Instructions] Your next question comes from the line of Andrew Buscaglia from BNP.

So maybe a high-level question on your guidance to start out. Dan, you kind of mentioned these tougher markets seem to have [ troughed ], so that's an interesting comment. Yet the low end of your guidance really doesn't assume much growth this year. And it seems unreasonable if some of these tougher markets, you're past the worst. So what's giving you the hesitation to guide at the low end such a low range? And can you walk through maybe where you see some risk and you don't want to stick your neck out just yet?

Yes. No, it's a good question, Andrew. And again, I would say put the guidance in perspective, it's a range of potential outcomes, right? And we think it's important as a company to plan for both the upside and the downside. I think at this point in time, obviously, with our first quarter guide, we're going to have -- we're expecting to have a strong start to the year. We think it's prudent to plan for kind of our midpoint guidance. And on the downside, I would say that contemplates something happens this year.

Now certainly, sitting here today, I would tell you, we don't see a lot of indicators of any downside, but we still think it's prudent to plan for any potential outcome. And as the year plays out, we'll continue to update our guidance based on what we're seeing. But sitting here today, we feel very good. But we think it's still important to make sure that we're -- as we've learned, if nothing else, this year, a lot can happen in a year, and being prepared for any potential outcome in the marketplace is important. That said, where we sit today, we feel quite good. We're going to have a strong start to the first quarter, which is implied in our guidance. And we'll see how the rest of the year plays out.

Yes.

Does that make sense?

Yes, that's fair. Yes. And maybe focusing on your IPS market for a second. There's some enthusiasm amongst investors around improving industrial production, PMI factors this year, especially if we don't have another tariff situation. But I would think that -- can you talk about your IPS segment as it pertains to that? I mean it's weak and it's been tracking that -- somewhat tracking that comment for a weak kind of industrial factors, but also you have that [ ARAG ] weakness that's masking it and exacerbating it. So yes, can you talk about how you perceive that business in terms of sensitivity to the industrial economy and your outlook there?

Yes. So if you think about -- maybe just for a brief moment talk about 2025 and then talk about 2026. If you think about 2025, the IPS segment was weighed down, the performance that is published in the print, is weighed down by plastic processing and automotive, right? That's -- and that kind of takes -- took away most of the progress that the team has been delivering in our core IPS businesses. And precision ag grew double digit in the year, right? So that is 2025.

As we look into 2026, we continue to see investments in packaging and product assembly, our [ hot melted diesel ] businesses. We feel very good about the order entry and the backlog in our precision ag businesses. Now remember, precision ag for us is a European business. It's not a North American business. We are a market leader in Europe and in South America. So we see -- we feel good about that.

And if you think about our aftermarket parts, which is upwards of 55%, 56% of this business revenue comes from aftermarket parts. So we feel really good about stable demand there, right? And then polymer processing has troughed, automotive has troughed. And so any nominal recovery there is all upside to this business. So as we sit here today, this business getting back to GDP plus kind of growth is what we are planning for.

Your next question comes from the line of Chris Glynn with Oppenheimer.

Chris, if you're there, we can't hear you.

Okay. I was showing unmuted and then it prompted me to unmute again and again. Can you hear me?

We can.

We can.

Okay. Great. Just want to drill back down into a little bit at the lower end. It sounded like what that contemplates is more the hypothetical versus anything you're seeing. But I wanted to understand how the dynamic of lumpiness of electronic processing systems orders might play into it. Does the idea of lumpiness get negated on a 12-year basis and fiscal '26 should fully participate in what you've often characterized as the beginning of a multiyear run for ATS?

So I think that's the right way to think about it. I mean, A, your initial comment, look, we're planning for a range of scenarios, and certainly part of that range is a downside scenario, right? But sitting here today, I would say that's more of a hypothetical. I think that's a good way to think about it.

With regards to ATS, that's kind of exactly how we think about it. And I'll maybe point to 2025 as an example. We had a couple of quarters of 15% growth. That's not necessarily a run rate on a 12-month basis. If you look at our full year, we grew our ATS segment about 4%. And so looking at -- we expect good mid-single-digit growth over, I think, to your point, maybe a 12-month period is a good way to think about it. That said, you're going to see some peaks and valleys, right, over that period based on delivery timing. Does that make sense?

Yes. Makes sense. And then just a last one on polymer processing. Obviously, you had an excellent fiscal '24 and pretty steep downturn in fiscal '25. You've said that is categorically behind you. Are there rumblings customer activity in polymer processing? And is that a factor that could push you nicely to the upside of the guidance range? I think last quarter on the call, it was referenced a couple of times about customer discussions in polymer processing having turned decidedly.

Yes. Look, I think the best way to think about it is we have hit the bottom. When we look at activity in the marketplace, on the system side of the business, we still seem to be in a good place, order entry is starting to look good, starting to look at backlog building. But there is also a [ dice ] business in there, which is not growing at the same clip as our systems business there. So it's one of those cases where we believe that we have bottomed out. Even in the [ dice ] business, it is bottom, it is not going any further down. The recovery seems to be different in these 2 businesses. So now we're getting a little bit more detail, more detail than we normally talk about, Chris, but we're providing this just to help you understand.

So the best way to think about polymer processing is, where are the trough? We're expecting some nominal growth, is what we are expecting in our guide. Should there have something bigger and better than what we have planned, then that definitely puts us on the upside for that segment.

And I would just add to that, similar comments with regards to our automotive businesses. Automotive, we're not -- we see that that's troughed, it's stabilized, we're expecting nominal growth. But we're not expecting any big recovery in our automotive markets.

Sorry, Chris. This is why we give a range, particularly this early in the year, so.

Great. Thanks for the color. Happy holidays.

Your next question comes from the line of Brad Hewitt with Wolfe Research.

So you mentioned backlog is up 5% year-over-year, but could you quantify how backlog trended sequentially? And then any additional comments on the sequential backlog trends by business would be helpful.

Yes. So backlog is up 5% versus where we started last year. Backlog is down sequentially, but that's actually normal, Brad, because Q1 is always seasonally our lowest quarter given holiday and other schedules. And so that kind of sequential reduction in backlog is a normal trend, is the way that I would think about it. What's more important is I think the comparison year-over-year starting point standpoint. I think that's the right way to think about it.

Okay. Great. And then as we think about seasonality throughout the year, in terms of the revenue and EBITDA split, is it fair to assume roughly normal seasonality for 2026? And then in terms of organic growth, do you think that should be similar in first half versus second half?

Yes. I would say we're planning for a normal year from a seasonality standpoint. Typically, what you see is Q1 is always our lowest start given the timing of the year, the holidays, as well as kind of the year-end timing of shipments and customer activity. And then you see that sequentially improve throughout the year. I would say we would expect a normal kind of seasonal trend, at least sitting here today, across our business.

I mean there is some Chinese New Year that moves from quarter-to-quarter, but there is a nominal impact. This year, Chinese New Year will be in the second quarter, so.

Your next question comes from the line of Walter Liptak with Seaport Research.

Congratulations on the 5 years of NBS Next. And so I wanted to ask, as you look back, what do you think went best for you guys? And what was the toughest? And if I'm recalling, there was a little bit more of like a growth focus on your NBS Next. How do you feel about that now? And what should we be thinking about over the next 5 years?

Yes. No, thank you, Walt. If you think about NBS Next, and if I were just to sort of go back to where we started, where we started was the company's greatest opportunity was growth. And so really we structured NBS Next around how do we deliver on that great growth opportunity for Nordson. And it all started with strategic discipline. So if you think about how the company thinks about strategic discipline across all of our divisions that is well patted down, this is how our teams think about how do I resource a new growth opportunity? How do I build a new product line? How do I innovate around a new product opportunity? How do I operationally be positioned for that growth?

So I'm really happy where we are as a company in terms of using segmentation in our strategic discipline. So strategic discipline really is segmentation. And so using segmentation, our teams identify the best growth. We're able -- we have now -- beginning to holistically implement.

I would say in terms of leadership level performance, this is sort of the process metrics we use within the company to say where we are at in the effectiveness. I would tell you we are halfway there, is probably the best way to think about it. So we still have plenty of room left in terms of continuing to deliver growth with this framework.

If you take the 5 years -- take the first 2 years as the years when we built this framework, deployed it, trained, getting really good at it, and the next 3 years is really starting to deliver results. If you think about EBITDA margins, we went from 27% to 30% in that first period. And then if you think about the next period where we're beginning to deliver growth results, the expansion from 30% to 32%, right?

So what you really see is the company using the framework to drive growth. Where we are today and where we have the greatest opportunity is, over this period of time, the company's operational excellence have gotten really great, innovation has gotten stronger, and commercial excellence is sort of where we are spending most of our time today. And so I'm super excited the team is really working incredibly hard in sort of how we play in the markets we have chosen to play in. And so all of the work in the next couple of years is around commercial excellence, connecting the dots between segmentation, innovation, operational excellence and commercial excellence.

Okay. Great. And on the profitability side, as you pointed out, the profits were good. Are we -- what inning are we at now do you think with that operational EBITDA part of NBS Next?

Yes. So I guess what I would say, I'll go back to Naga's comments, growth is our best opportunity as a company. And I think I would say that's where the margin enhancement comes from going forward, is continuing to effectively grow the organization and basically throwing off normal incrementals that will lead to natural margin accretion over time. That's our primary focus and I think our best opportunity. That doesn't mean that there aren't things that we can -- yes, you can always improve your operations, you can always get better. But I would say our best opportunity is continuing to grow the organization and growing it more aggressively and allowing that to be basically your margin accretion.

One thing I would add to that is just over the long term, Walt, don't hold us to some short periods of time here, if you think about an average 35% incremental for the company, blended between acquisitions and organic growth, a 35% incremental implies, over the longer term, our margins start to converge on that number, right? And we're running at 32% today. But that is primarily through growth. And I think that is the key, hopefully, you take away, is we are solely focused on growth, which is a big part of who we are. But growth in a very profitable way. As you have seen the team demonstrate year in, year out, operationally, pretty darn good incrementals. So if you sort of take that incrementals and sort of project out to the longer term, that's what you would end up. Hopefully, that helps you. .

It does.

Your next question comes from the line of Robert Jamieson with Vertical Research Partners.

Congrats on the quarter. And all the color has been very helpful this morning. Just wanted to touch on full year EPS guidance. And with the midpoint at 9% growth, your long-term target range of like 10% to 12%, what bridges you from the midpoint to achieving the upper end of that target range? Would you expect that to be primarily operational execution, maybe some help from share repurchases? Or are there potential upside scenarios in your end markets? And where do you think that might come from if we did see that -- the top end of the range being achieved?

Yes. Well, relative to 2026, I mean, certainly, that 9% is a midpoint and also based on a midpoint growth. So stronger growth and our base business would be certainly one item to bridge that. The other thing I would point out is the 10% to 12% growth was a combination of organic and inorganic. And we're not factoring in any acquisitions this year. That doesn't mean that we're not working on -- actively working on opportunities, and that would be additive to the organization as well. So I think a combination of those 2, continuing to grow our base business with our NBS Next formula, that will deliver upside. 3.5%, I think it was a good midpoint aiming target, and that's what we kind of factored into our long-term thinking. Delivering better than that in certain years will deliver higher earnings growth as well as continuing to add attractive assets to the portfolio.

Great. And then just nice free cash flow conversion in the last couple of quarters. Can you talk a little bit about the working capital improvements and sustainability there? Have there been structural improvements there that would be able to -- for you all to sustain conversion above your long-term average rate?

Yes. No, it's been -- our teams have done some nice initial work. It's been really a targeted focus area for us, simply because we see it as an opportunity to continue to enhance our working capital utilization. I would tell you, not only is it sustainable, we think there's more opportunity ahead of us. And so we are certainly focused on that. And I would expect us to continue to generate strong cash flow performance going forward.

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

Thank you for your time and attention on today's call. We're making great progress on the Ascend Strategy, and we are positioned well to deliver solid growth in fiscal 2026. We wish you a happy holiday season.

This concludes today's call. Thank you for attending. You may now disconnect.