Nordson - Earnings Call - Q4 2020
December 16, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Nordson Corporation Fourth Quarter and Fiscal Year twenty twenty Conference Call. At this time, all participant lines are on mute. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to speaker today, Laura Mahoney.
Please go ahead.
Speaker 1
Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Navarajan, our president and CEO, and Joseph Kelly, executive vice president and CFO. We welcome you to our conference call today, Wednesday, 12/16/2020 to report Nordson's fiscal year twenty twenty fourth quarter and full year results.
You can find both our press release as well as our new webcast slide presentation that we will refer to during 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 fourteen days. There will be a telephone replay of the conference call available until 12/30/2020. During this conference call, references to non GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric has been provided in the press release issued yesterday.
Before we begin, please refer to slide two of our presentation where we note that certain statements regarding our future performance that are made during this call may be forward looking based upon 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 three, Naza will discuss fourth quarter and full year highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the two business segments. Joe also will talk about the year end balance sheet and cash flow.
Naza will conclude with high level commentary about our enterprise performance as well as our fiscal twenty twenty one first quarter guidance. We will then be happy to take your questions. With that, I'll turn to slide four and hand the call over to Naga.
Speaker 2
Good morning, everyone. Thank you for joining Nordson's fiscal twenty twenty fourth quarter and full year conference call. In this unprecedented fiscal year, we did not just weather a challenging macro environment. We advanced our long term strategy and achieved solid financial results. First, I wanna thank our notes and employees for their flexibility, resilience, and commitment as we navigated fiscal twenty twenty.
From the beginning of this pandemic, our leadership team has worked together to protect the health and safety of our employees and respond to the needs of our customers. Representatives from our global team came together to share best practices and lessons learned as COVID nineteen spanned the globe. We implemented new protocols of social distancing and face coverage as well as regular cleaning and temperature checks, all of which continues to this day. By protecting our employees, we were able to offer uninterrupted service to our customers, many of whom were deemed to support critical infrastructure. Nordson products serve a very diverse set of end markets, including medical, electronics, consumer non durables, and general industrial.
This diversity helped us drive the relative stability of our results. They've also stayed invested in our direct sales, application, and service model and committed to the innovation in our physician technologies. For the full year, sales decreased only 3% compared to prior year, which is commendable in this environment. Simultaneously, we made meaningful progress on our long term objectives. We built and started to deploy the next generation of notes and business system, which we are calling NBS Next, our growth framework.
Using critical insights generated by NBS Next segmentation tools, our divisional leaders are prioritizing investments in our best growth opportunities and simplifying non value added tasks in operations to deliver best in class product quality and delivery. Use of this data driven growth framework led us to take actions that could strategically position our portfolio for sustainable long term profitable growth. In September, we announced the technology acquisition of Vivomass, which designs, develops, and fabricates high end image sensors that would further differentiate our X-ray inspection product offering. Earlier this year, we acquired Flortech, a precision plastic exclusion manufacturer in medical device industry. Flortech brings highly differentiated PTFE medical tubing expertise, which is complementary to our current value added component offering for minimally invasive therapies such as heart valve replacement.
Scaling up our highly differentiated test and inspection and medical product lines will continue to be a priority of our capital deployment strategy. We also took actions to simplify our portfolio in less differentiated areas. On December 3, we announced the divestiture of our screws and barrels product line from our polymer process and systems division to Altair Investments. While this business is a respected leader in the plastic industry, it does not meet Morrison's long term profitable growth objectives. We believe we'll be better positioned with Altair.
By divesting this business, we will focus our resources on growing more differentiated, profitable product lines that would deliver on our long term growth objectives. We believe our remaining PPS division has the right degree of differentiation and related technical competitive advantages to deliver North and Light growth and returns. I'll speak more about the business in few moments. But first, I'll turn the call over to Joe to provide more detailed perspective on our financial results for the quarter.
Speaker 3
Thank you, Naga, and good morning to everyone. As Laura mentioned, we have provided slides to complement the narrative during today's earnings call. On Slide five, you see fourth quarter twenty twenty sales were $559,000,000 a decrease of 5% compared to the prior year's fourth quarter sales of $585,000,000 The decrease was primarily related to organic volume, offset by favorable currency and benefits from the Flortech and VivaMOS acquisitions. Test and Inspection product lines were solid again this quarter, and we continue to see growth in our product lines serving medical end markets. Sales declines in the quarter were largely driven by weakness in the industrial and automotive end markets.
Gross profit totaled $297,000,000 or 53% of sales in the quarter compared to $319,000,000 or 54 percent of sales in the prior year. The 100 basis point decrease in gross margins primarily relates to the $1,300,000 in amortization of acquired inventory step up from the fiscal twenty twenty acquisitions. Looking sequentially, gross margins improved 100 basis points as the manufacturing inefficiencies related to our response to the COVID-nineteen pandemic and unfavorable product sales mix experienced in the 2020 were primarily temporary in nature. Operating profit was $37,000,000 in the quarter. This included an $87,000,000 noncash impairment charge related to classifying the Screw and Barrel product line within the IPS segment as assets held for sale.
This classification aligns with the company's strategic decision to divest this product line to improve the ongoing earnings and overall profitable growth profile of the business. Excluding this item, plus cost reduction actions and the amortization of acquired inventory step up, adjusted operating profit totaled $130,000,000 or 23% of sales. EBITDA for the fourth quarter was $15,059,000,000 dollars or 29% of sales, which is 5% below the prior year EBITDA of $168,000,000 Looking at non operating expense, net interest expense decreased $4,000,000 or 37% from the prior year levels associated with lower effective borrowing rate. Other net expense increased $2,000,000 driven primarily by a $1,000,000 increase in pension cost. Tax expense in the quarter totaled $8,000,000 or an effective tax rate of 30% in the quarter.
Excluding the tax impact on nonrecurring items and the $2,000,000 discrete tax benefit associated primarily with stock option exercises, the fourth quarter and full year normalized tax rate is approximately 21%. Net income in the quarter totaled $18,000,000 or $0.31 per share. Adjusted net income and earnings were $93,000,000 or $1.59 per share. This represents an 11% decrease from the prior year adjusted earnings, reflective primarily of a 5% year over year decrease in sales. Turning to Slide six.
I'll now share a few comments on our full year results. Sales for the full year 2020 were $2,100,000,000 a decrease of three percent compared to the prior year. This change in sales included a decrease in organic volumes of 4%, offset by growth related to acquisitions. The full year impact of currency translation differences was not significant. Excluding the noncash impairment charge, cost reduction initiatives, acquired inventory step up amortization and the discrete tax benefits, adjusted operating profit was $454,000,000 and diluted earnings per share were $5.48 a 7% decrease from the prior year adjusted earnings of $5.87 EBITDA for the full year was $567,000,000 or 27% of sales, which is in line with our prior year EBITDA margin percent of sales.
Now let's turn to Slide seven and eight to review the fourth quarter twenty twenty segment performance. Industrial Precision Solutions sales of $3.00 $8,000,000 decreased 8% compared to the prior year fourth quarter. This decline was driven in part by weaker demand in industrial and automotive end markets where we had record sales in the prior year fourth quarter. Currency was favorable 2% primarily driven by the strengthening of the euro offset by an organic volume decrease of 10%. Adjusted operating profit for the quarter was $92,000,000 or 30% of sales, which excludes the $87,000,000 noncash impairment charge and $4,000,000 in structural cost reduction actions.
Despite the decrease in sales volume, cost control measures and sales mix improvements enabled the segment to deliver the same 30% operating margin as the prior year fourth quarter. Structural cost reductions taken in the fourth quarter were primarily related to early retirement incentives offered to employees in the Industrial Coatings Systems division. These actions will generate 3,000,000 to $4,000,000 in annualized savings starting in fiscal twenty twenty one. Advanced Technology Solutions sales of $250,000,000 increased approximately 1% compared to the prior year fourth quarter. This change included a decrease in organic sales volume of 3%, an increase of approximately two percent related to acquisitions and a 1% increase related to currency.
Continued sales volume growth in Test and Inspection product lines serving electronics end markets and steady demand in medical product lines were offset by weakness in fluid dispense product lines serving industrial and automotive end markets. Reported operating profit for the segment was $51,000,000 Excluding onetime charges associated with the amortization of acquired inventory step up, adjusted operating profit was $52,000,000 or 21% of sales. Decrease of 100 basis points in operating margin in the fourth quarter and the full year was driven by unfavorable product sales mix within the segment. Finally, turning to the balance sheet and cash flow on Page nine. We ended the quarter with a strong balance sheet and plenty of available borrowing capacity.
Cash totaled $2.00 $8,000,000 and net debt was $898,000,000 ending the quarter with a 1.6x leverage ratio based on the trailing twelve months EBITDA. Free cash flow in the quarter was $178,000,000 This brings the full year 2020 free cash flow total to $452,000,000 a conversion rate on adjusted net income of 141% as working capital liquidation and lower cash taxes paid contributed favorably to free cash flow 20. For modeling purposes, in fiscal twenty twenty one, assume an estimated effective tax rate of 21% and capital expenditures of $50,000,000 to 55,000,000 In summary, our top line has held up well considering the unique challenges of fiscal twenty twenty. The team has taken constructive actions to manage cost while also aligning our resources and product portfolio with the best profitable growth opportunities. We continue to maintain a strong balance sheet with sufficient liquidity to allow us to stay focused on long term strategic initiatives to drive profitable organic and inorganic growth.
I will now turn the call back to Naga.
Speaker 2
Thank you, Joe. Let's turn to slide 10. We're well positioned going into fiscal twenty twenty one. We have been operating safely and efficiently in this pandemic environment. We also have found creative ways to connect with our customers, whether it is virtual training and tech support or safely distance on-site product implementations.
For example, our adhesive team recently participated in the annual pack expo, which is the largest North American packaging trade show. They rose to the challenge of this virtual event showcasing our recent innovation through virtual demonstrations and videos. No matter the environment, Nutsun employees remain focused on innovation and delivering on the needs of our customers. I'm also pleased with the engagement of the team in adopting our MDS next growth framework. This is truly about making a strong Nordson even stronger.
Fundamental to this framework is to select and invest in the best profitable growth opportunities. This data driven customer and product segmentation approach, which we refer to as strategic discipline, identifies where we create the greatest value for our customers. It is the new capability that our team is learning. Using a data driven segmentation approach in a consistent and disciplined way, division leaders across Nordson have been working to define their strategic business priorities. This framework empowers our division leaders to take action on the data and focus on the areas where we win.
Our decision to divest the screws and barrels product line was based on critical insight gained from this data driven segmentation approach. Realigning our portfolio is another step forward in positioning Nordson for long term profitable growth. This divestiture will improve earnings on a go forward basis. It also gives our PPS leaders more time and energy to focus their resources on their differentiated and profitable product lines. This action exemplify the power of NBS Next.
Identify our business' core, simplify the areas that distract you from focusing and growing with your core strengths. The consistent deployment of a data driven growth framework will complement Nordson's great strengths of innovation, customer passion, and culture and values. We'll continue to strengthen our newer capability by unleashing an entrepreneurial mindset at the division level while also building deep and diverse winning teams. We're very excited to announce that we will be hosting a virtual investor day on 03/30/2021. At this event, we will share more details about our long term strategy, our differentiated product portfolio, and our growth objectives.
We will be sharing more information about the details of this event in January, but please save the date on your calendars for the morning of March 30. Now for the outlook on slide 11. As I previously mentioned, we are well positioned entering 2021. During the challenging year of 2020, we remained invested in what makes Nordstrom strong, the direct sales model and our innovative physician technology portfolio. Additionally, we were successful in advancing several aspects of our long term growth strategy.
As we begin fiscal twenty twenty one, backlog has increased approximately 5% compared to the same period a year ago, and the trailing twelve week order entry is 5% above prior year levels. That said, it remains a dynamic environment, and our business conditions are changing frequently as the world responds to the challenges of resurging COVID nineteen virus. Given these factors, we're not providing annual guidance at this time. However, we have a good line of sight to the fiscal twenty twenty one first quarter. Based on current order entry trends, backlog amounts, and the correlation to sales timing, we expect the 2021 sales growth to be approximately two to 3% with adjusted earnings growth in the range of 15 to 20% as compared to fiscal twenty twenty first quarter.
As always, I wanna thank our customers, employees, and shareholders for your continued support. With that, we will pause and take your questions.
Speaker 0
Thank you. At this time, we will be conducting a question and answer session. Your first question comes from the line of Allison Poliniak with Wells Fargo. Allison, your line is open.
Speaker 4
Great, thanks. Good morning, guys. Within the 5% order rate for this past couple of weeks, is there a noted vertical that's driving that? Or is it fairly broad based here?
Speaker 2
Yeah. Allison, good morning. Thank you. Thank you for your question. Let's just maybe talk in terms of specific end markets.
That's probably the better way to answer that question. So if you think about our consumer non durable business, what you're really finding is, you know, this is a recession, resilient end market for us, food and beverage packaging. Adhesives have been trending slightly up, and so our expectations are, you know, this is a better growth than what we have seen in some time. In the medical business, know, order rates remain stable. It still remains a dynamic You know, remember that our parts of our medical business that is, certainly.
Impacted by, elective surgeries or selective surgeries, but we also have fluid component parts of our business that has been serving biopharma end markets and so and disposable single use plastics as well. So that part of it is doing really well. So overall medical is stable, still continuing to grow. In electronics, I would tell you that testing inspection business is really doing extremely well there, you know, driven by advanced components in semiconductors, camera modules. You know, in the quarter, we experienced double digit growth.
I would my expectations would be, you know, slightly lesser than that, but certainly high single digits is sort of where this is trending. Our industrial business, I would tell you, is, you know, challenged, but things are starting to look up. You know, we expect some recovery in the first quarter. Our OEM businesses are moderating, and automotive is a small part of the company. So it's it's not one single vertical, but differing rates of growth and trends that are trending up based on end market.
Speaker 4
Got it. That's helpful. And then just in touching on the divestiture, know your comment about it not necessarily being quarter Nordson longer term. Is there somewhat of an impact, a mix impact that you guys are thinking about when looking at these businesses as well in terms of the long term profitability of the company or is that sort of just an aside at this point?
Speaker 2
Joe, you want to take this one?
Speaker 3
Yes. So when you think about the divestiture, as Naga mentioned in his script, this divestiture, which we hope to conclude, I would say, at the end of Q1 or early Q2, it will improve the ongoing earnings of Nordson and specifically, I guess, to your question, the IPS segment and will also improve, therefore, the profitability profile. I would tell you, no different than Naya mentioned in his script, most important, I think impactful, is the prioritization and the allocation of resources to those more attractive growth opportunities. That's what really came through the MBS next portfolio analysis driving that focus in terms of a growth framework going forward.
Speaker 4
Great. Thanks so much.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Matt Summerville with D.
Speaker 5
A couple of questions. Maybe just to follow-up on the last point. This internal review process that led to this divestiture announcement, have you fully concluded that at this point? And should we expect any additional portfolio shaping actions here in the more immediate term?
Speaker 2
Yeah. I Matt, thank you for your question. On MBS Next, you know, portfolio analysis is a core part of n b s next, which is really what we call strategic discipline. It is based on product segmentation and customer segmentation. It is an ongoing process.
So, you know, based on what we looked at today with our PPS business, our decision was this part of the business doesn't really fit the kind of long term differentiation as well as the growth potential that we are looking to have in a business. So that's sort of what it is. But there are parts of our EPS business in this analysis. You know, we we figured out that it has some pretty strong differentiation characteristics, some technical advantages, which we believe will allow us to continue to grow this business with a notes and like profitability. So, you know, for the rest of the businesses, this is an ongoing process, and it's not so much about what you're not going to do.
It is as much as what you're going to do more of. Right? So as you think about our businesses, each of our divisions are going through portfolio analysis, and they figure out what are the best growth opportunities. Where do we create the greatest value? How do we win?
And focus disproportionately our resources and investments in that part of the company. So it's an ongoing process, and and hopefully that gives you some color.
Speaker 5
Yes, thank you. And then as a follow-up, when you look at kind of your implied organic guidance for the first quarter, probably flat to maybe down slightly because you'll have some FX tailwind and then some acquisition tailwind. Can you maybe talk about square that up a little bit with respect to your trailing order entry being up mid single digits? And you mentioned some things maybe around the correlation with timing, etcetera. Can you maybe expand on that a little bit, Nak?
Speaker 0
Yes. I guess let me expand on some of the numbers. Maybe, Naga, you can
Speaker 3
expand on the trends that you're seeing in the orders. But you are correct. I mean, if you look at our Q1 guidance as it relates to the revenue, we assume there FX rate similar to what we had experienced in Q4. And so therefore, when you look at the Q1 guidance, the FX and acquisition will be favorable to about the same degree they were in our Q4 performance, which to your point implies organic growth relatively flat on a year over year basis. Now, I'll point out that organic growth of relatively flat is a significant improvement from the seven percent decrease that we saw organically in Q4 and the 4% organic decrease in the full year 2020.
Also, would add, if you look at what the revenue forecast implies for Q1 twenty twenty one, not only is it up 2% to 3% over 2020 Q1, but it's also up over Q1 twenty nineteen. Said differently, from a run rate standpoint, we're starting out the year north of 2019 levels. And then one other comment I would make is your observation. The 5% on the order entry and the 5% on the backlog, That 5% is calculated on a constant dollar basis. That's really what's driving our optimism and our attitudes and our positive outlook as we enter Q1 twenty twenty one.
Now, that being said, you clearly see there is a difference between timing and lead times in terms of shipments and order entry and backlog. And so that all has to be taken into consideration when we give the Q1 guidance. But when we look at that log in that order entry trend that that's what provides us that optimism heading into 02/2021. Hopefully that Matt, what I would add to that is really, that timing really depends on various different businesses. Right?
So it's there are certain business is like a medical business is pretty much not a backlog kind of business.
Speaker 2
It's more a book and ship kind of business. But if you contrast that with an ICS business, that is more, backlog oriented. You get the order, then you have a large system that you have to put together. And then, our our aftermarket parts revenues are pretty much book and ship. And in our adhesive business is somewhere in between.
It is more standard products that you're, you know, customizing or configuring to to sell. So, depending on a business, depending on where it is, you know, there is a correlation of timing that we talk about.
Speaker 5
Thank you, guys.
Speaker 0
Your next question comes from the line of Jeff Hammond with KeyBanc. Jeff, your line is open.
Speaker 6
Maybe just give us a five gs update. We're seeing new phones get rolled out with five g. Just, you know, what are you seeing in terms of a a CapEx cycle and on the mobile side as well as as well as five g infrastructure?
Speaker 2
Yeah. Let me let me talk about that broadly, Jeff. What we are seeing in in the business is five g related, but more broadly, digital acceleration is really driving the electronic supply chain within our businesses. And most prominently where we are seeing this kind of activity in digital acceleration is in the semiconductor side of the business. So in the semiconductor business, we're seeing some incredible, really nice demand patterns that are emerging for our test and inspection business, and that is really what you're seeing the strength of.
In terms of five g, you know, some of the semicon, are related to five g, but not entirely. Right? This is really mostly because of a contact free economy that is beginning to emerge. Virtual conferences, virtual investor discussions, you know, how you order your Christmas gifts, you know, how you order your grocery. All of this is really an example of how this contact free economy and digital acceleration that is really driving the growth of semiconductors.
So you wanna think about our electronic business not so much with the mobile revolution, how we thought about our business then, you know, had been the last decade where mobile revolution was really the biggest growth driver for us. But going forward, you wanna think about our electronic business more in terms of digital acceleration. So that will mean two to three times GDP kind of growth over the long cycle. And on infrastructure, it is still slow. You know, you know, we're we're continuing to get orders.
We're continuing to work on those things, but it is not at the same rate as one you would expect. You know? So five g in our mind is still an emerging opportunity.
Speaker 6
Okay. And then medical, you you characterize as stable. And, you know, I guess I think its business is historically kind of a high single digit, you know, low double digit grower. And, you know, maybe maybe I'm just assuming stable means a little bit of growth. But I'm just trying to understand the how you think the growth rate shapes up for Medical and kind of these puts and takes around elective surgeries maybe coming back as we get vaccine distribution versus kinda comps from, you know, PPE equipment, etcetera.
Speaker 2
Yeah. So I I think that's a great question, Jeff. In terms of our medical business, there are really two parts to the medical business that sort of allow us to have flat to low single digits. But you gotta remember the context. Context really is our med device customers are down 10, 15%.
So that's the context. And so why are we doing better than in that context? It's really because we have a fluid component business, which is really, serving the biopharma end markets as well as, you know, fluid components for, COVID type therapies. Right? So so what you're finding what you're finding is our fluid component business is doing incredibly well, which is muting some of the declines we're seeing in our interventional component business, which is directly correlated to the selective surgeries and elective surgeries.
So big picture, if you think about our elective selective surgery kind of related component business, is is down a little bit, you know, down a bit. In the long term, all of all of the drivers, aging population, single use component, outsourcing of med device components, All of those are intact as things normalize. We will return to mid to high single digit kind of growth for this business, and that's our expectation. And right now in this transition, if you think about elective surgeries, you know, in July, they were down about seventy five percent. They were, you know, they were seventy five percent of pre COVID levels elective surgeries were.
And our expectation was they were gonna improve, but they've not. So as, you know, as these elective surgeries improve, what you're going to find is that we will benefit from it, and and we will we will return to our, you know, mid single digits, high single digits kind of growth in the medical business. So let me stop there. You know, if you have any follow-up, I mean, we'll be happy to.
Speaker 6
No. That's great. Just maybe last one. You know, I understand the uncertainty. Just give us a sense of, what you need to see or I don't know if it's just a couple more quarters before you kind of flip to a more full year kind of outlook.
Speaker 2
Joe, you want to take that?
Speaker 3
Yes. Our hope is that, you know, our visibility will improve, or I should say our confidence as it relates to the, you know, volatile time that we're in with the pandemic, here in Q1 and Q2. And so our hope is that by the time we have our Investor Day that Niagara referenced, we will resume annual guidance at that time.
Speaker 6
Okay. Thanks so much, everyone.
Speaker 3
Thank you.
Speaker 0
Your next question comes from the line of Andrew Vescaglia with Berenberg. Andrew, your line is open.
Speaker 7
Hey, guys. I wanted to ask on digging a little deeper in that electronics component within ATS.
Speaker 8
So, you know, there's lot of last year, there's a lot
Speaker 7
of optimism brewing into 2020. And, obviously, you know, there's a lot of things you gotta navigate. You're you're dealing with trade and then the pandemic. So I guess into into this year, I guess,
Speaker 0
how do you how do
Speaker 7
you how do you view things in a in a relative basis versus historical cycles for that segment? And so as the year progresses, I guess, what are some of the times, you know, we should be on, you know, pull it out forward, see how that how that business shapes up?
Speaker 2
Yeah. Andrew, thank you. The electronic business, you know, what has happened with our electronic business is something that we've been talking about for a while. You know, if you think about historical, go back, you know, a decade ago, over the last decade, Nordson benefited by this incredible mobile revolution where you went from 30,000,000 phones to about one and a half billion phones worldwide. It was an incredible time of change, incredible amount of things changing in the mobile technology.
Notes and Play contributed incredible technology and value to our customers, benefited from it, and that's what we saw. As you think about the next decade, and that's sort of what we are in right now, that mobile revolution is a once in a lifetime kinda event. And what you're going to see is a much more normal kinda growth. Still pretty strong growth, two to three times GDP. And so the way we plan and think about our businesses, we think about two to three times growth across the electronic supply side.
Not just mobile, but really in our view as we work with our customers and what we see in our businesses, what we find the greater drivers are digital exploration, which we've talked about. Right? A contact free economy, virtual conferences, virtual way of doing business, virtual way of buying grocery, virtual way of ordering Christmas gifts. Many different ways you think about it. This virtual economy, this contact free economy is continuing to grow, which is leading to digital acceleration on infrastructure in in capabilities.
Certainly, all of this adds to supply, you know, improvement and order trends that are across the supply chain. And Nordstrom has done a really nice job over the last decade to diversify from just one particular product category to multiple, you know, semiconductors, components, end products, PCB. So we're diversified across electronic supply chain, and so we'll benefit from that. And, you know, we diversified into test and inspection. And so what you really see is this digital acceleration, all of this leading to complex devices, complex components leading to a 100 inspection, inline inspection in some cases, all leading to our test inspection business doing really well.
So our expectation is two to three times, and it is a different kind of growth when compared to what you experienced in the last decade.
Speaker 7
Yeah. Okay. You know, with this MBS next, you know, using data to kinda understand your business a bit better. You know, you you obviously found a divestment in there, but what about you know, is this influencing any change potentially on the acquisition side as to maybe another adjacent, you know, subsegment that you'd like to be in, or is the focus gonna remain on test inspection medical?
Speaker 2
So as as you think about it, right, we didn't talk about this when we which when we clarified our focus is going to be on test inspection and medical. But really, that is what was behind. Or, you know, maybe, you know, at that time did not, publicly talk about NBS next because we were still in the process of building it. But really, what drove our focus to focus on pest inspection and medical is really a concerted view inside the company on how the portfolio was and where was the greatest growth opportunities, what was the most differentiated parts of the company, which had the greatest growth potential, is sort of what had led us to this focus around Test and Inspection and Medical. You know, we have opportunities to scale up both these businesses and have a meaningful impact on growth of the company.
Should we ever get in a place where we run out of ideas in scaling up these two businesses? You know, we we have a innovation team within the company that is always looking for new market spaces that have characteristics that are very similar to Nordson. You know, do we like the company? Do we like the market? What is the growth potential?
What is the level of differentiation? So, you know, you know, should we ever run out of ideas, you know, we don't rule out the opportunity to expand into a newer space should that need to happen.
Speaker 7
Okay. Thanks, Nadia.
Speaker 2
Thank you, Andrew. Appreciate the question.
Speaker 0
Your next question comes from the line of Saree Boroditsky with Jefferies. Saree, your line is open.
Speaker 9
Thank you, and good morning.
Speaker 2
Good morning, Saree.
Speaker 9
As part of the MBS next portfolio analysis, was there any businesses or product lines that you found were being underfunded that you wanna focus on growing organically going forward?
Speaker 2
I I think that's a great question. You know, that is one of the things that we are really laser focused on is this decision also you you know, there are two ways to think about this. One, it's a consistent disciplined way of looking at opportunities in the company. But more importantly, that analysis and that decision making now happens at our division level. You know, at the company level, it is great to understand where you wanna be.
But it is even more powerful when you look at the businesses and you look at subsegments within the business where the greatest opportunities are. And as our division leaders have set their strategic growth priorities, what we are finding is that our leaders are making those decisions. You know, the company has done a really nice job of staying invested in customer passion and staying invested in innovation. So I wouldn't say there's a complete, you know, switch, but but are we discovering opportunities? Yes.
And and I think I am more excited about the fact that now these decisions are made much closer to the customer, much closer to action and knowledge. And I think that's probably the the shift that we are making.
Speaker 9
Thank you. And then lastly, as we think about the backdrop for industrial spending next year, what are you hearing from customers as far as appetite for capital spending?
Speaker 2
As as we talked a little bit about our industrial business, you know, it remains challenged, but we're starting to you know, from from the middle of the year to now, sequentially, the orders have continued to improve and continue to grow. And we see some of that in our industrial businesses. So as we think about it, it remains a dynamic environment, but our expectations are that it is trending up and, you know, we expect some recovery in the first quarter.
Speaker 9
Great. Thanks so much for answering
Speaker 3
So, would just add your comment on the MBS next. If you look at our SG and A, we did take several actions during the back half, particularly of 2020 to lower our structural cost. That said, those actions were very strategic, focused on business as identified and areas identified through the MBS Next framework. At the same time, it also allowed us areas where we wanted to invest, invest, as Naga mentioned. So if you look at our product development costs on the full year and in the quarter, it was actually flat for the full year, up in the quarter.
There are areas where we continue to invest and there are areas where we are taking strategic, I would say, structural cost reduction actions.
Speaker 9
Thank you.
Speaker 0
Your next question comes from the line of Mike Halloran with Baird. Mike, your line is open.
Speaker 8
So
Speaker 10
some thoughts on the margin profile as you work through fiscal 'twenty one. Maybe just help us some puts and takes. How are thinking about incremental margins? What some new structural cost improvement initiatives can provide as
Speaker 2
a
Speaker 10
tailwind, mix, any other puts and takes we need to think about? Obviously, the divestitures coming up that'll help with the mix. But beyond that, how should we think about some of the key buckets in the fiscal twenty one?
Speaker 2
Okay. Mike, I I think in general, let me give you a broad broad broadly how we think about this, and then Joe can walk you through the presentation, all of that. Right? So in general, the expectation for us is that as our revenues grow, you know, our expectation on incremental should be north of 45%. That's sort of how we're thinking about it in the business.
So that allows us, you know, with a current 54% growth, this inability to invest back in the business to continue to grow. So with that, why don't I get Joe to talk to you about the details of the various puts and takes?
Speaker 3
Yeah. So when you think about the incremental margins, I mean, guidance here in Q1, I think, know, our high incremental margin sequentially, I should say on a year over year basis, because that is where you're seeing the benefits of some of those structural cost reduction actions in the Q1 numbers. But I would go back to Q4 and I'd just point out, I mean, quite pleased with the ITS, 30% OP as a percent of sales. That was nice, nice sequential incremental margins there when you look at it compared to Q3. And so it just did highlight that that particular business, modest growth, really drop some nice incremental margins north of 50%.
That 30% goes back to the Q4 twenty nineteen level. Also even if you look at Q2, Q3 back in 2019, when that business is north of $300,000,000 doing 29, 30% margins is something it can do. So it's nice to see that bounce back from the Q3, which was a little bit depressed. Some of those items we viewed as temporary. It was nice to see that they were temporary in nature.
Speaker 10
And then on the capital deployment side, on the externally, obviously internal is the priority, but what's the acquisition side look like? How are you thinking about buybacks, anything like that, and what the prioritization looks like internally as well as what the opportunity set and how realistic would it be to move the needle on the acquisition side?
Speaker 3
Yes. From a priority standpoint, as you mentioned, organic generally generates the best return at the lowest risk. And so we continue to organically invest in the business. That being said, it's relatively capital light and doesn't demand a lot of cash flow from operations, which are quite strong. And so we're a committed dividend payer, as you know, and dividend increaser.
We would like to do share buybacks to offset dilution. But beyond that, we're really focused on the acquisition side. And it's been a challenging 2020 the M and A market. That being said, quite pleased that we were able to make progress with the Flortech, with VivaMOS, and then they announced divestiture as well. I will tell you, no different than the factories are learning how to operate and produce products safely in this environment.
The M and A community is also figuring out how to do deals in this environment. And so the market for M and A, I would tell you, our activity level is improving. Remain active. We are very strategically focused based on the MBS next framework that Naga has reviewed with you and where our growth opportunities are. So we are actively, I would say Mike, actively working to deploy capital through the acquisitions.
The pipeline is growing, is how I would characterize it.
Speaker 8
Appreciate the time and the color. Thank you. Your
Speaker 0
next question comes from the line of Christopher Glynn with Oppenheimer. Christopher, your line is open.
Speaker 8
Thanks. Good morning. Good morning. I had a question about the just want to kind of go for a high level revisit of the the T and I momentum and review of the compounding dynamics you have there. I'm I'm really curious about, you know, what what you're driving in terms of succession pattern of new capabilities versus, you know, adoption of the iterations, the technology iterations you've over the past year plus?
And, you know, how those two factors converge towards this ideal of a 100%
Speaker 2
online, testing capabilities. Yeah. And and I think it's a great, great question, Chris, and it's an area that we are doing a lot of work in, and it is an area that has a lot of promise for the company. Just sort of if you step back a bit, if you think about our pest and inspection business today, it is, know, it has two major so maybe three major product technologies. First is X-ray inspection.
Second one is acoustic imaging. Third one is mechanical testing where we do some wire bond testing. We do optical inspection as well, but it is a smaller part of the company. So major product lines really be our X-ray imaging, think about acoustic imaging, and then think about mechanical testing. We fundamentally believe that the acoustic imaging and x-ray imaging are going to continue to grow for us as these devices get more complex.
A couple of applications. So if you if you take a little bit one more step deeper into the product application. So if you think about a complex semiconductor package that is being manufactured. You know, in the past, they were sampled and,
Speaker 7
you know,
Speaker 2
you ensure that the manufacturing process was stable and the product quality was really good. But as these devices get a lot more complex, now you're really interested in because these devices now have greater functionality, the the risk of failure and the potential impact on the customer's experience is so high that these semiconductor packages are now getting inspected on the present. So that's sort of the need. In terms of what is it our customers are looking for, the customers are really looking for not only whether the bonds were made, but they're more looking for, you know, all the things that they need. Is it in there?
Is it in the right size? So now all of a sudden, three d metrology with X-ray inspection becomes a lot more greater and real and online rather than what was a good feature to have. So as it translates to the company, you know, what it really means is do we have the resolution, which we've always been really good at? Do we have the speed? And do we have the lowest signal, noise level?
Right? So those three things really now matter. As you think about the new acquisition we made, it was a technology acquisition with CMOS sensor, image sensor, and it provides all those three. Provides a unique combination of higher speed, higher resolution, and lower noise. And so, you know, so as we build out our inspection capability, you're gonna find us add technologies that allow us to help our customers inspect things more in real time and at a faster rate, higher resolution, lower lower noise level.
And we're gonna add capability that allows us to do more three d metrology than we have done in the past. So that's another one that's coming about. And I would say the third is today our business is very focused around electronics. We do and we're beginning early stages of diversifying that exposure into adjacent end markets. And this VivoMiles acquisition allows us to now think about, you know, is it possible for us to become a component supplier?
It allows us to sell our, image sensors and allows us to sell our tubes into end markets to other OEMs in end markets that we don't have a right to play in. But we have a right to be a component supplier because we have the best resolution in the market. We have the best lowest noise level in the market. We have higher speed. So so it's an exciting time in the test inspection business.
It's an area where, you know, we will continue to invest in. One that we did not talk about is, you know, some early days here is this defect classification is is another big thing. Right? You know, I I talked to you about image speed, low noise, but it also defect classification is important because that allows our customers again to identify whether it's a good chip package or a bad chip package. So a lot of details there, but hopefully that gives you how we're thinking about this business, where it is headed.
It clearly has some good opportunities for organic growth and, you know, opportunities for us to acquire. Again, we'll be really thoughtful as always around what we acquire, how we acquire. You know, we're gonna be disciplined around acquiring things that makes Nordson stronger. You know, we're not gonna acquire for growth's sake. We're not gonna acquire undifferentiated commoditized products in custom inspection.
We're gonna be very focused around what makes Nordson strong, is precision technologies, customer intimacy, you know, really customer critical applications, and how we add value and create value. And so that's where we're gonna be focused on.
Speaker 8
That's great detail and great bang bang for the buck on the question. Thanks. Just a little housekeeping to close-up. D and A and bias on working capital, through the cash flow statement fiscal twenty twenty one. Any comment there, Joe?
Speaker 3
Yes. So quite pleased with our progress on working capital liquidation there in 2020, particularly the strength in Q4. We improved, I would say, our efficiency around the AR side. And so when you look at the cash flow statement, you'll see it was on the AR. And it's not just the following 3% or 5% less than we did in Q4, I should say.
It was really improving the DSI. As we implement MBS next and see that rollout, I think going forward, there's an opportunity on the inventory side. So really anxious as we go into 2021 just to continue the focus on the cash flow and do feel that there's some opportunities from an inventory efficiency side there.
Speaker 8
Thanks. Do have a D and A figure for fiscal twenty one?
Speaker 3
D and A, I don't have
Speaker 0
a figure yet. It's going
Speaker 3
to depend on, you know, the timing of this XLOA, or I should say the screw and barrel divestiture. Okay. Thanks. Yeah.
Speaker 0
Your final question comes from the line of Chris Dankert with Longbow Research. Chris, your line is open.
Speaker 11
Hey. Good morning. Thanks for fitting me in here.
Speaker 5
Ran over this quickly, but I
Speaker 11
just want to make sure I'm understanding the dynamics. When we're looking at the ATS business specifically, as you characterize medical stable, Test and Inspection up double digits, high singles, that really does kind of give the sense that dispense was extremely weak in the quarter, kind despite some of the other strength going on in PCBs and semis. Am I thinking about that right? And I guess just what was the key driver of the weakness in the quarter then on that core dispense business in Advanced Technology?
Speaker 2
Yeah. I you know, I think it's a good question, Chris. Our dispense business, as you think about it, you know, benefited in the last decade from this mobile revolution. You know, this incredible investment on mobile revolution. What we are so, you know, we we are benefiting from some projects that are related to semiconductor in that business.
Certainly benefiting from some projects in some newer features, but not to the same extent as we benefited in the past. So you had a comp issue there for that business that, you know, we're working our way through. In general, our expectation for that business is as these competitions get worked out, what you're going to find is it's gonna be a nice two to 3% grower. It's not going to be the same kind of grower that it was, but, you know, the company was very thoughtful in diversifying into testing inspection. And so testing inspection all of a sudden is a really nice growth engine for us in the semiconductor side, and and we'll benefit from it.
And hopefully that gives you, you know, how we're thinking about it internally.
Speaker 11
That's that's fair. That's fair. Thanks, Naga. And then, I guess, just lastly for me, when we look back at at the other half of the business, Adhesive Dispensing, I guess, the Coatings business versus Hot Melt, my assumption is that Coatings is down pretty substantially and really driving the weakness in the fourth quarter here and Hot Melt was much more stable. Is that correct?
And just thoughts going forward.
Speaker 2
Yes. Yes. I think but you want to remember, coatings business was one of those businesses that had an order substantial amount of orders slipped from 2019 to 2019. So if you think about fourth quarter by itself, yes, the coatings business had a significant headwind. But if you look at it from second half perspective for the coatings business, it was about mid teens.
Still still pretty high and, you know, was essentially one of the things. So so there's a comp issue, and there is an industrial exposure issue. And and you're right about it being in a much better place. Joe, you wanna add some color to it?
Speaker 3
Yeah. I would just add one thing. You know, the your two questions there. The fluid dispense within ATS, and and then the ICS business within IPS. Sorry.
You know, sequentially, we're we're we're seeing, you know, some nice improvements there. Those are the businesses that have the heavier industrial exposure. And so when you talk about Nadia's comments, as we went through the back half of '20, You know, we saw that steady improvement in order rate. While it's down year over year, from a trend standpoint, those businesses are seeing some improvement sequentially.
Speaker 11
Got it. That's all very helpful color. Thanks so much guys and best of luck into 2021 here.
Speaker 2
Thank you, Chris.
Speaker 0
This concludes our question and answer session. I will now turn the call back over to Naga for closing remarks.
Speaker 2
All right. Thank you for your time and attention on today's call. We're well positioned going into fiscal twenty twenty one. We remain focused on our long term objective of making a strong Nordson even stronger as we deploy MBS next growth framework to prioritize organic and acquisitive growth opportunities while also unleashing an owner mindset within our customer focused divisions. We wish you a happy holiday season.
Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.