Nordson Corporation (NDSN) Q3 2021 Earnings Call Transcript

Nordson Corporation (NASDAQ: NDSN) Q3 2021 earnings call dated Aug. 31, 2021

Corporate Participants:

Lara Mahoney — Vice President, Investor Relations & Corporate Communications

Sundaram Nagarajan — President and Chief Executive Officer

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Analysts:

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Connor Lynagh — Morgan Stanley & Co. LLC — Analyst

Jeffrey D. Hammond — KeyBanc Capital Markets, Inc. — Analyst

Michael Halloran — Baird Equity Research — Analyst

Christopher Glynn — Oppenheimer & Company — Analyst

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

Walter Liptak — Seaport Global Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nordson Corporation Third Quarter Fiscal Year 2021 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Lara Mahoney, Vice President of Investor Relations. Please go ahead, ma’am.

Lara Mahoney — Vice President, Investor Relations & Corporate Communications

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 CEO; and Joseph Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, August 31, 2021 to report Nordson’s fiscal 2021 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/investor. This conference call is being broadcast live on our Investor website and will be available there for 14 days.

There will be a telephone replay of the conference call available until Tuesday, September 7. During this call, references to non-GAAP financial metrics will be made. A reconciliation of these metrics to the most comparable GAAP metric was provided 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 the third quarter 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 will also discuss the cash flow and balance sheet. Naga will conclude with high-level commentary about our enterprise performance as well as our updated fiscal 2021 full year 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.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, everyone. Thank you for joining Nordson’s fiscal 2021 third quarter conference call. First and foremost, I want to congratulate the Nordson team on another record quarter. During this quarter, we continue to benefit from the execution of our NBS Next growth framework in combination with robust end market demand. Investments in industrial capex and the strengthening medical and electronics end markets drove record results in the quarter.

I’m also pleased with the resilience of our colleagues. In this dynamic macro environment, that continues to be plagued by supply chain, labor and COVID concerns, our division leaders are deploying NBS Next to focus resources on the greatest growth opportunities in their respective businesses. I’ll speak more about the business, including the recent announcement of the NDC Technologies acquisition in a few moments.

But first, I’ll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter. Joe?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Thank you, Naga, and good morning to everyone. On slide number 5, you’ll see third quarter 2021 sales were $647 million, an increase of 20% over prior year’s third quarter sales of $538 million. This is a new quarterly record for the company, $57 million above the prior quarterly record. The increase was primarily related to: 20% organic volume growth and favorable currency, offset by net — negative impact from acquisitions and divestitures. The benefits from the Fluortek and vivaMOS acquisitions were more than offset by the headwind from the divestiture of the Screw and Barrel product line. When excluding the divested product line in the prior year for comparability purposes, sales growth would have been 24% in the current year third quarter.

The organic sales increase was driven by continued demand across all divisions and end markets, including a seasonal increase in quarterly shipments into the electronics end markets. From a geographic perspective, growth was once again strong in all regions except Japan, which continues to manage pandemic-related impacts. Gross profit totaled $365 million or 56% of sales in the quarter, compared to $281 million or 52% of sales in the prior year. This 430 basis point increase in gross margin was driven by volume leverage, benefits from structural cost reduction measures taken in fiscal 2020, and improved sales mix particularly resulting from the divested Screw and Barrel product line at the beginning of fiscal second quarter.

Also record in the quarter were operating profit of $188 million or 29% of sales, a 57% increase from the prior year adjusted operating profit of $120 million and EBITDA of $215 million or 33% of sales. This result was 45% higher than the prior year EBITDA of $148 million. Our broad-based organic growth, plus the favorable sales mix benefits, including the divestiture has led to attractive incremental EBITDA margins of greater than 60% in the quarter. The application of the NBS Next growth framework at our divisions is helping us to focus and realize profitable growth in areas of greatest opportunity. Looking now at non-operating expense, net interest expense decreased $1 million or 18% from the prior year associated with reduced debt levels.

Other net expense decreased $7 million driven primarily by smaller currency translation losses and a non-cash pension settlement charge of $3 million in the third quarter of 2020 associated with the retirement of the prior CEO that did not repeat. Tax expense totaled $38 million or an effective tax rate of 21% in the quarter. Net income in the quarter increased 71% year-over-year to a $142 million or $2.42 per share, yet another quarterly company record. This significant growth is reflective of volume leverage driven by the 20% increase in sales as well as benefits from cost control measures and improved sales mix and manufacturing efficiencies.

Now, let’s turn to slide 6 and 7 to review the third quarter 2021 segment performance. Industrial Precision Solutions sales of $345 million increased 20% compared to the prior year third quarter. The organic volume increase of 22% was driven by the same growth in hot melt adhesive dispensing and industrial coating product lines. System sales in the quarter were particularly strong, up 37% across the broad set of end markets and geographies. The divested Screws and Barrels product line more than offset the currency gains on a year-over-year sales growth.

Operating profit in the segment was $124 million or 36% of sales, compared to $78 million of adjusted operating profit in the prior-year period. This 60% profit growth was driven by sales volume leverage associated with the organic growth, favorable sales mix, and improved manufacturing efficiencies. The NBS Next growth framework is driving strong sales growth at very attractive incremental operating profit margins. Excluding the impact of the divestiture, incremental operating profit margins were 55% in the quarter. Moving now to Advanced Technology Solutions. Sales of $301 million increased approximately 21% compared to the prior year third quarter.

This change included an organic increase of 18% as well as the increases of 2% related to currency and 1% related to acquisitions. The increase in organic sales volumes was driven by strong double-digit growth in all product lines particularly those serving electronics end markets and fluid management product lines serving medical and industrial end markets. Third quarter 2021 operating profit for this segment was $81 million or 27% of sales. This increase of 51% over prior year adjusted operating profit margin of $53 million was driven by sales volume leverage, favorable sales mix, and the realization of benefits from cost controls measures taken in fiscal 2020.

Similar to the IPS segment, the implementation of NBS Next throughout the divisions of ATS is driving strong sales growth at attractive incremental operating margins of greater than 50%. Finally, turning to cash flow and balance sheet on slide 8; free cash flow in the quarter was strong at $118 million, which was 45% above the prior year free cash flow. Cash conversion on net income was 83% in the quarter, which was below normal levels due primarily to investments in working capital to support growth and a $30 million pension contribution. The year-to-date free cash flow conversion rate remains north of 100%.

Dividend payments were $23 million in the quarter and the company’s board approved a 31% increase in the annual dividend effective in the fourth quarter of fiscal 2021. This marks the 58th consecutive year the company has increased its dividend. The significant increase of 31% reflects the strength of our financial results, which is driven by our continued progress in executing the Ascend strategy, combined with the desire to maintain targeted payout and yield ratios.

The annual dividend yield remains just under 1% at current market prices. Our third quarter balance sheet includes cash of $174 million and net debt was $647 million, ending the quarter with a 0.9 times leverage ratio based on trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities, similar to the NDC acquisition announced last week.

I’ll now turn the call back to Naga.

Sundaram Nagarajan — President and Chief Executive Officer

Thank you, Joe. Let’s turn to slide 9. Again, thank you to the Nordson team for delivering this outstanding performance. We are making progress on our Ascend strategy to achieve top tier revenue growth with leading margins and returns. During the quarter, Joe and I continue to visit our divisions to review their progress with NBS Next deployment. It is exciting to see how NBS Next is being applied to make data-driven decisions to meet the increased demand of our customers. For example, in our Nordson MEDICAL Interventional Solutions facility in Salem, New Hampshire, the team has used NBS Next to understand complexity and standardize their product offering.

This has allowed them to disproportionately focus resources for their best customers and products. We are purposeful in where we focus our energy to ensure we take advantage of the greatest opportunities for profitable growth even during the recovery. NBS Next is at the core of our Ascend strategy, which is designed to deliver $3 billion in revenue and 30% EBITDA. This target will be achieved through a combination of organic growth within each segment as well as the acceleration of acquisitions. Clearly, the record-setting second quarter followed by the record-setting third quarter demonstrates that we are off to a strong organic start toward achieving our long-term goals.

We’re also making progress on our acquisition objectives. On August 23, we signed the definitive agreement to acquire NDC Technologies, a leading global provider of precision measurement solutions for in-line process control. This acquisition expands our test and inspection platform into new markets and adjacent technologies. With Nordson-like gross margins, it is clear that NDC has a differentiated product portfolio that is leveraged through a customer-centric business model. This portfolio includes in line measurements sensors, gauges, and analyzers using near-infrared, laser, X-ray, optical, and nucleonic technologies as well as proprietary algorithms and software.

For example, its near-infrared technologies can simultaneously measure moisture, oil, and surface brownness of a potato chip or it can estimate the porosity level in the film used to separate the anode and cathode in an electric vehicle battery. Its laser and ultrasonic capabilities are used to measure wall thickness, ovality, and diameter of industrial cables or medical tubing. As customers focus on automation and process control, NDC supports their success through these critical quality control technologies. We also look forward to leveraging NDC’s software and algorithm expertise to advance Nordson’s capabilities in manufacturing process intelligence development.

I’m very pleased with the strategic fit of this business, which aligns with the acquisition portion of the Ascend strategy presented at our Investor Day earlier this year. We look forward to welcoming the NDC team to Nordson, upon our NBS Next growth framework and investing in NDC’s greatest opportunities for profitable growth. We expect the deal to close within our fiscal first quarter of 2022. Now, let’s turn to an updated fiscal 2021 outlook on slide 10. As we enter the fiscal fourth quarter, backlog is approximately $700 million and 70% above the prior year. Customer order patterns have clearly changed in terms of both volume and extended shipment request dates in this dynamic environment.

Based on the continued strength in our order entry and elevated backlog, we are increasing our full year revenue and earnings guidance. For full year fiscal 2021, we expect sales growth to be approximately 11% to 12% over fiscal year 2020. Excluding the 3% headwind from the revenue of the divested Screws and Barrels product line in the prior year, our forecasted full year sales growth would be approximately 14% to 15%. Our forecasted sales growth combined with the benefits from the strategic actions taken around efficiency and cost is forecasted to deliver earnings in the range of $7.75 to $7.95 per diluted share.

The midpoint of this guidance reflects 43% earnings growth compared to prior year and a 34% increase over 2019 earnings. Given the strong system sales in the third quarter 2021 plus the seasonality in electronics, it is important that investors look at the second half of 2021 when reviewing our full-year guidance. At the midpoint, the guidance suggests second half sales growth of 14% and earnings growth of 47%. Additionally, the guidance implies that we expect to enter 2022 with a robust backlog, approximately 70% greater than the backlog entering fiscal 2021. Our current financial results signify more than the benefits of the recovery.

Nordson wins because of the foundation of our precision technology focus, customer-centric model, and diversified end markets. We are well-positioned to benefit from this increase in demand as our products remain a critical solution to our customers through the cycle ahead. Additionally, our leadership team is advancing the implementation of the Ascend strategy, which is establishing a growth framework, entrepreneurial organization and a deep diverse team to drive sustainable profitable growth. As always, I want to thank our customers, shareholders and the Nordson team for your continued support.

With that, we’ll pause and take your questions.

Questions and Answers:

Operator

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

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Thanks. A couple of questions. Typically, how much of your backlog would converge in the current quarter? I guess, excuse me, I’m trying to get a sense in terms of how elongated maybe some of these orders have become.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. So, Matt, this Joe. Let me just take that. Typically, I would tell you entering backlog we have less than 100% of quarterly sales entering any given quarter. And so it’ll trend, I don’t know, let’s just say in the 80% range of the quarterly — upcoming quarterly sales. And we clearly see that changing as the customer requested delivery date is out further and further. So, customers are just placing orders further in advance. And so if you look at our quarterly sales going forward and our implied guidance, it would suggest that the midpoint is about $600 million and our backlog entering the year is about — entering the quarter is about $700 million. So, it has elongated, it depends on the systems businesses versus parts and it’s different for each business. But some of them are going out into Q2 of 2022.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Great, that’s helpful. And then have you guys encountered any actual shipment delays to customers? And in your mind, are things getting better/worse, stabilizing as we think about supply chain challenges, freight issues, etc.

Sundaram Nagarajan — President and Chief Executive Officer

Matt, this is Naga. Let me take that one. Yes, we are experiencing some, but not significant, freight especially, our international shipments sometimes seems to get pushed out. But what we have experienced in the third quarter really is customers pulling orders forward and what is impressive is to see the team, even in a very difficult environment, be able to manage and ship it out when the customers requested it.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

And again, Naga, just to put a finer point on my question, do you get the sense of things, in this regard, are getting more challenging? Has the situation stabilized? Are things starting to loosen up and get better yet? Thank you.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. Matt, I would say, it is a dynamic environment. It is not getting any worse, but it’s not getting any better either. But I will tell you that the Nordson team is fully participating in this recovery under some challenging environments, but doing an excellent job, so.

Matt J. Summerville — D.A. Davidson & Co. — Analyst

Excellent. Thank you, guys.

Operator

Your next question comes from the line of Allison Poliniak with Wells Fargo.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Hi. Good morning.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Naga, just want to explore the order trends a little bit more for you guys. I guess, when you talk to your customers — is it more on the IPS or is Advanced Technology? And is it really just a reflection of some of those — I think with Matt talking with the supply team challenges, that people are trying to get those orders in a little earlier to guarantee delivery? Just any thoughts, is this sort of a temporary situation or do you think this is sort of your customer patterns or order patterns are starting to shift a little bit permanently?

Sundaram Nagarajan — President and Chief Executive Officer

I would say what you’re seeing is broad-based strong order patterns across end markets, across regions. And are there some cases where people are trying to get in front of the line or ahead of the line proactively? Yes. But quite frankly, if you think about the kind of end markets we play in and look at all the secular drivers for them, I’d tell you we are very pleased with the momentum that we are seeing, for example, in our medical business. If you think about our fluid component business, with biopharma — just not vaccine, but biopharma in general, we see some pretty strong order rates that is — embedded in it is really the secular growth drivers around biopharma really going well for us.

And if you think about interventional solutions in the medical side, what you’ll find there is our aging population, single-use components, all of those drivers still intact. Selective surgeries or some might have unfortunately have started calling it as elective surgeries have come back. But that remains a little bit fluid, but we feel really good about the recovery we’re seeing in our medical businesses. On our electronic businesses, we are at the beginning of a really nice growth cycle here. You hear about chip shortages, and you can — all of us read the headlines on the big investments that major semiconductor manufacturers are making and Nordson is participating nicely in it.

We’ve got a couple of new products that are entering the market both on test and inspection and our dispense business. So, industrial capex is pretty robust. Might you say that might moderate over time? I would say yes. That might do that. On the packaging side, on the consumer non-durables, I mean, really very strong move towards eating at home rather than out at a restaurant. Might that continue? We’re seeing a lot of activity in packaged goods, packaged beverages. Our teams like to call them from keg to can, and you have more people using cans. So we see a lot of container businesses that are going well for us. Hopefully, that gives you enough color, Allison.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

No, that’s really helpful. And then I just want to touch on operating execution. Incredibly strong in the past two quarters here. Relative to your expectations of setting some of these operational plans [Indecipherable], is this — is the execution maybe better than maybe you would have anticipated kind of walking into this up cycle? Any color on how that is relative to what your view was in terms of what the organization could do?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. No. I am incredibly proud of the execution of the team. This is not ordinary times or environment that we are operating in. But we are using NBS Next and — in our businesses to meet this incredible demand. And it plays out in many different ways in multiple businesses across the company. NBS Next fundamentally is all about making choices to drive growth. And what you begin to see is, for example, in some of our businesses understanding what are your greatest growth opportunities and disproportionately investing in them is one way it shows up in this great execution.

You’ll see our team standardizing product offering, reducing complexity, streamlining and dedicating products to the most important products in the business, prioritizing our best growth opportunities, our best customers. So lots of different ways be it quality, be it manufacturing capacity, be it conversion costs, be it selecting the right end markets to choose to play. And also treating very differently unattractive opportunities in the business is really how this is playing out. I am really happy about the progress we are making. And I wouldn’t say I’m surprised, but I am excited about the fact that the teams are doing one heck of a job really converting orders to shipments, shipments to profitable growth for all of us.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Great. Thanks so much. I’ll pass it on.

Operator

Your next question comes from the line of Connor Lynagh with Morgan Stanley.

Connor Lynagh — Morgan Stanley & Co. LLC — Analyst

Yeah. Thanks. I thought maybe we could touch on the NDC acquisition. And basically I’m just wondering if you could sort of illuminate, obviously, you guys are very focused on growth. How has the growth profile of this business looked over the past few years? Where do you see the opportunities? Is it — this business enhancing your growth in your existing portfolio, your portfolio of existing growth in this business. How do you think about that?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. In this business, historically, they have underperformed in terms of growth versus where they should really be growing, because we play in the same end markets as these businesses. So, we fundamentally see an application of NBS Next in this to understand what are the best growth opportunities for them and invest disproportionately in those to drive growth. This would most likely be, I would say, mid single digits is sort of our growth expectation for this business and we feel really good about it. Their performance in the year is looking really good. Certainly, we don’t talk about specific product lines and how they perform, but we feel really good about it.

But what I will tell you about this business that we really like. It is strategically similar to a lot of Nordson businesses. It’s got a customer-centric business model. I would — direct sales model, global sales and service support, large installed base, a lot of similarities to some of our consumer non-durable businesses. It has a very strong suite of differentiated products. And you see that in Nordson like gross margins. So, we’re looking forward to welcoming this team, using NBS Next, understanding the growth initiatives. And really for us it is a pretty, pretty strong place to be. We do clearly see a path for the margins to expand north of 20% EBITDA.

Connor Lynagh — Morgan Stanley & Co. LLC — Analyst

Got it. A helpful context. I’m wondering if you could just characterize the broader M&A landscape out there? Is this — was this a diamond in the rough? Was this one of many good options you saw out there? Just an update on, sort of, the opportunity set and valuations would be great.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. M&A, we clearly remain focused, as everybody would tell you, M&A landscape has improved, banker activity suddenly have expanded and accelerated this year when compared to last year. We remain focused though, we are very focused around continuing to scale up our medical business, as we see a lot of opportunities there, we’ll continue to stay focused there. Test and inspection, as NDC will illustrate for you, is an area we continue to diversify, get into new markets, get into new technologies. Our test and inspection, Connor, today is very electronic centered. With NDC, you can begin to see us move beyond electronics and that’s really what you would see.

So, we see opportunities there. And finally, we have an internal team that continues to explore opportunities on precision technologies that are very adjacent to what we do today. Just as a reminder, we are laser focused on strategic criteria to play an attractive end-market that have real good growth profile to them, precision technology suite of products and have a customer-centric business model. On the financial side, clearly we are looking for assets that can add to our organic growth ambitions.

We, with Nordson-like gross margins, that’s really critical for us. For us, gross margin equals differentiation is the way to think about it, that’s how we think about it within the company. And on EBITDA, our expectation as we said in our Investor Day is approximately 20%. Would we do deals below that? Yes. And would we do deals above that? But we are looking for clear margin expansion opportunities. And all of these results in a fairly decent ROIC greater than our cost of capital over three to five years.

Connor Lynagh — Morgan Stanley & Co. LLC — Analyst

Got it. Thank you very much for the color. I’ll turn it back.

Sundaram Nagarajan — President and Chief Executive Officer

Sure.

Operator

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

Jeffrey D. Hammond — KeyBanc Capital Markets, Inc. — Analyst

Hey, good morning, everyone.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Jeff.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Good morning, Jeff.

Jeffrey D. Hammond — KeyBanc Capital Markets, Inc. — Analyst

So, just back on margins, I think there was an earlier question on that, but just — I think the expectation was 3Q would step down from 2Q and we’ve gone the other way. And I think 4Q guide suggests a step down. What’s — I guess, what’s surprising you the most or maybe where’s the caution in the guide on the margin? Is it largely mix or do we start to see some of the inflationary pressures come through, maybe just a little color there.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. Maybe if I could. On the gross margin in Q2 we did 57%. And when you think about our gross margin, we used to operate in the range, I would say, between 53% and 55%. Given the divestiture of the screw and barrel product line, that has systematically I would tell you moved our gross margin and at margin profile up probably 175 basis points. And so, now, I think the new normal from a gross margin standpoint fortune is in the range of 55% to 57% and you see that was sustainable in Q2 and in Q3.

Then you think about the sequential Q3 to Q4 and you look at our guidance, and more specifically I guess if you look at the second half 2021, Jeff, forecast and performance, you need to understand that approximately $25 million worth of system orders were pulled forward from our scheduled Q4 shipment into Q3 based on customer request. This was primarily in the industrial end market and primarily in IPS. Therefore, the guidance range implies Q4 performance would actually be comparable to Q3 if you adjust both quarters for the $25 million sales pull forward. Again this was — pull forward was request of the customer.

And as Naga mentioned, proud of our team’s — despite some of the supply chain issues — ability to meet the customer’s requests and demand and pull that forward. It is also noteworthy, I guess, if you exclude that $25 million from Q3, it would still have been a record-breaking quarter, $30 million north of the prior quarterly record. The sequential swing, we tried to point this out to investors by talking to the second half performance that the 14% growth in revenue and 47% growth in earnings at the midpoint. I would tell you, the other noteworthy point when you look Q3 to Q4 and you look at the year-over-year growth rates is the 4% tailwind that we had in Q3, that starts to moderate when you look at the year-over-year growth rate in Q4 to about 1%. And again, that’s just given the movement in exchange rates last year Q3 to Q4.

Jeffrey D. Hammond — KeyBanc Capital Markets, Inc. — Analyst

Okay. That’s all very helpful. Thanks, Joe. Just back on medical, I think, Naga you called out biopharma as particularly strong in your comments. I just — I wanted to dig in more on the kind of the elective surgery pace of recovery. And is that trending in line or better than you had expected?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. Jeff, thank you. On elective surgeries, in the third quarter we did really well and it was trending nicely. Now with Delta variant — might you expect that to tick back down. That is possible. But I fully expect that what had happened last year as we talked last — all of last year, as — our surgeries, I’d like — our teams would describe a more selective, not elective, right? If you need to get a heart valve replacement, you have to get a heart valve replacement. It’s just a matter of time. So, you could get it postponed, but you couldn’t get it canceled, right? I guess if something really bad happens, then that could happen. But that’s not what you’re hoping for. So, what we do see and what we experienced in the third quarter is a nice recovery.

You can — we saw that business really get back to high-single digits in the quarter and that was really nice to see. Going into fourth quarter, we’re trying to be cautious here. We don’t see it go all the way back down like last year. I do think it will be little bit lower, but we fully expect medical to recover completely because all of the growth factors that we played towards around aging population, all of this is going to be intact for us. And it is a great business that would — that is already returning to normal. Would there be bumps in the road, yes. Absolutely. Given the data — Delta variant would there be bumps in the road? Yes, absolutely, given the Delta variant, you could have a few bumps in the road. But hopefully that gives you answers to your question.

Jeffrey D. Hammond — KeyBanc Capital Markets, Inc. — Analyst

No, that’s very helpful. Thanks.

Operator

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

Michael Halloran — Baird Equity Research — Analyst

Hey. Good morning, everyone.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Mike.

Michael Halloran — Baird Equity Research — Analyst

Hey. Just a quick clarification on that last question Jeff asked. So, is it fair to say that you haven’t seen the full recovery in the medical piece yet? Trajectory is good, could get some volatility that happens over the next couple of quarters, depending on how the broader Delta variant goes and other factors. But on a trailing basis, you don’t think that you’ve gotten that full recovery yet, is that fair?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. Fair.

Michael Halloran — Baird Equity Research — Analyst

Okay. Okay. And so then two questions. First, when you look at the order patterns and how those have elongated and shifted, have you seen any change in the seasonality that you’re expecting on the actual conversion of those orders? In other words, as the demand carries through, are you still thinking that on an all-in basis, the seasonality is about the same or do you think the seasonality has shifted some?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. I would tell you, the seasonality is evolving. When you think about our end-market exposure in our particular applications, I don’t — we’ve studied the numbers on the quarter, I don’t know what is the normal seasonality any more. I mean, if you take for example our customers’ behavior on the industrial side, pulling in shipments into Q3 when typically Q4 was our strongest quarter and look at our implied guidance that suggests that Q4 is going to be down through Q3 because of that. So, I don’t know that given our electronic exposure has changed in terms of applications with the semiconductor cycle, our medical business, the biopharma has been strong, as the elective surgeries come back and the international side starts to return to growth. Our normal seasonality is, I would say, really challenged to make that statement any more.

Michael Halloran — Baird Equity Research — Analyst

So the answer to this one seems like, no. But when you look at the orders that you’re getting in, what’s the risk that there’s been some double ordering or that there’s cancellability in that order book versus just this is just a different cadence and the underlying demand — underlying order cadence so that your client can reserve spots over the next couple of quarters?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. I would tell you we track order cancellation very closely and we do not see an uptick in that whatsoever. So, I think we monitored that risk. But to-date that risk is very low.

Sundaram Nagarajan — President and Chief Executive Officer

You know, one thing.

Michael Halloran — Baird Equity Research — Analyst

Thanks, Joe. No, go ahead.

Sundaram Nagarajan — President and Chief Executive Officer

Sorry, Mike. Go ahead, finish up and then I’ll.

Michael Halloran — Baird Equity Research — Analyst

No. No. No. I was going to say thank you, but I didn’t know there was something else, so please, Naga, go ahead.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. I think what I would add is, just look at the unprecedented investments that are going on in industrial capex, that is one, that I would really point to as one of the big drivers in what you’ve seen in our IPS business. What you also see in our electronics, the ATS business, is this real strong semi investments and a particularly strong consumer electronic demand for what is turning out to be a digital economy. So, the macro drivers are pretty strong that we feel really good about what we are seeing in terms of demand for some of our precision technologies.

Michael Halloran — Baird Equity Research — Analyst

So, is the implication there then Naga that, yes, the order book has been very good and you like the fact that you’re getting more visibility. But it seems like you’re also implying that the front log of opportunity still remains pretty robust?

Sundaram Nagarajan — President and Chief Executive Officer

Yes. Yes. Good.

Michael Halloran — Baird Equity Research — Analyst

Thank you. [Indecipherable] Good. Appreciate it.

Operator

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

Christopher Glynn — Oppenheimer & Company — Analyst

Thank you. Good morning.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Chris.

Christopher Glynn — Oppenheimer & Company — Analyst

Just wondering Naga, if you had any anything to call out in terms of notable changes in the competitive backdrop consistent with the — or coincident with the pandemic if anyone has kind of fallen off or gotten flat footed. Clearly, it seems like you’ve picked up some momentum that you’ve generated. But just wondering about the kind of broader question as well.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. We generally don’t — we have some really strong competitors, but you know the businesses, as of course, you have followed us for a long period of time. Our consumer nondurable businesses, we really are very — we have a significant position with being a global competitor, right? So, a lot of our businesses, what you see us being is this global competitor that can be relied upon through good times and bad times and can be relied upon for global support for customers’ applications and service and sales, right?

And so, what we have seen come through in this environment is that value proposition getting strengthened even further as others will have some hiccups here or there or not able to make commitments, Nordson team is there supporting our customers and really in a lot of ways strengthens our value proposition and reaffirms for the customer why you want to work with Nordson not only because you’re going to get the precision technologies, you’re going to get reliable support that is going to be global in nature. And then that’s — if anything, it just reaffirms our strong value proposition.

Christopher Glynn — Oppenheimer & Company — Analyst

Thank you. And then the backlog up 70%, should we think about that as both segments kind of participating in parallel more or less?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. We don’t give backlog guidance on a segment specific basis, but you can interpret our performance year-to-date has been quite broad based. I mean, you see both segments growing approximately 20% organically in the quarter and broad based in terms of geography and end markets and division. So — but we’re not going to start giving backlog in segments specifically.

Christopher Glynn — Oppenheimer & Company — Analyst

Yeah. That wasn’t what I asked. Appreciate the answer. Last one for me. I’m curious about the industrial trends in particular. Has that been accelerating sequentially during and through past the quarter? In particular, are there any types of applications that you’re seeing really break out in industrial?

Sundaram Nagarajan — President and Chief Executive Officer

Our industrial business, strong investments, a couple of areas I would point out for you. We have applied NBS Next in all of our businesses to really understand what are the best growth opportunities, where should we want to focus on and how do we treat some positions that are inherently unattractive. And so, the net result of all of this is, we find some real strong growth in container for example. So, we talked about beverage cans and Nordson has a very strong position and a very attractive precision technology suite that supplies people who make beverage cans. And you coat the inside of a beverage can.

And that’s an example of what you see in this whole consumer shift, in how they eat and consume beverages and food. So, really we are benefiting there. We’re also beginning to see in our powder business this broad base industrial activity that is leading to investments on paint lines and things like that. So, we’re doing well there. Our packaging on the industrial, adhesive, hot melt adhesive is doing extremely well as well. So, hopefully, that gives you a couple of different points of — some of this is certainly broad based but we are pretty pleased with how the team is fully participating in the recovery that was going on.

Christopher Glynn — Oppenheimer & Company — Analyst

Great. Thanks for the color.

Operator

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

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

Good morning, guys.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Andrew.

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

I want to talk a little bit about mix in the quarter. So, obviously, NBS Next is helping and in Industrial Precision, you’re seeing the divestiture is helping both. Is there — are you seeing any interesting trends that are helping mix from that standpoint? And then, same within ATS, I would think that actually with electronics and test and inspection improving maybe you’d see maybe a less favorable mix, but what’s going on in there?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. So within the segments, I think particularly let’s just take one segment at a time. ATS, you do see some favorable mix. And I really think it’s not to your point at the division level but almost within the division. So if you think about NBS Next it’s being implemented at the division level. So even the relatively low margin businesses or the divisions within that are seeing nice improvement in their profitability and their gross margin, which is driving the favorable mix within the divisions. So, it’s funny at ATS, within the — at the division level, the mix is actually unfavorable, but it was favorable within each of the divisions such that the end result was favorable for the segment.

And so, I think that’s evident that NBS Next being applied at the — within the division where you’re looking at specific applications. I mean, Naga mentioned within ICS some of the liquid coating opportunities is clearly a favorable mix expansion. Within IPS, you see a very similar story. And particularly, I mean, you had strong growth in the systems over the parts within IPS. But yet the margins improved beyond that of the mixed benefit that we got from the divestiture to screw a barrel business which if you look at the IPS business that divestiture alone is probably worth 350 basis points of margin expansion. But they’re expanding beyond that due to the favorable mix I would tell you within the divisions.

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

Okay. Interesting.

Sundaram Nagarajan — President and Chief Executive Officer

Another point, noteworthy I guess which is also helping is we’ve had some nice success both in IPS and in ATS with our new product launches The ProBlue Flex and the Vantage continue to gain traction and I would tell you that that is helping us from a top line perspective, as well as the mix standpoint.

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

Okay, that’s helpful. And then another one on — in that, with the NDC acquisition, it seems like a great company. I guess, I was a little bit surprised given, like, the specialty nature of this business and it seems like a pretty good deal. That EBITDA margins, they look like they’re around 16.5% to 17%. Is this a situation where this company has a lot of very high gross margin profile? But maybe EBITDA margins, do you see an opportunity to expand? And I know you gave out over 20% target, is that a near-term target or is it a longer-term to more get that margin in line or above corporate average?

Sundaram Nagarajan — President and Chief Executive Officer

The — let me first start and then Joe, if you could add a little bit more color, that’d be good. The reason we acquired NDC Technologies is because it fits right with our test and inspection business. And particularly that particular company we really like is because if you look at it gross margins, they have Nordson-like gross margins. They have a customer-centric business model that is like Nordson. So, it’s this case of strong gross margins, indicating a strong differentiated product portfolio, but EBITDA margins are slightly lower than our target. Joe, if you want to just add a little bit more color on what we are thinking near-term?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. So, you are correct, the margins coming in are about 17% — 16% to 17% EBITDA margins and we see opportunities under our ownership and the execution of NBS Next to get margin expansion over the next, I would say, a couple of years, similar to what you see on the core Nordson similar to what you see on the core of Nordson business as we roll out NBS Next. Yeah. But the main reason — the main opportunity for here is to use NBS Next to identify the best growth opportunities to invest in them disproportionately and really grow the company and margin expansion will follow. So, with the 55% growth, it has favorable incremental margin. So, it’s the growth that drives the margin expansion.

Andrew E. Buscaglia — Berenberg Capital Markets LLC — Analyst

Okay. Got it. Thanks, guys.

Operator

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

Walter Liptak — Seaport Global Securities — Analyst

Hi. Thanks. Good morning, everybody.

Sundaram Nagarajan — President and Chief Executive Officer

Good morning, Walt.

Walter Liptak — Seaport Global Securities — Analyst

Great quarter. Hey, I’d like to go back to that 25 million of IPS systems that got pulled forward. I guess it’s impressive with the supply chain that you were able to get that into the quarter. But I guess my question is about the fourth quarter, I think you said Joe that the system — IPS systems would be down sequentially. Is that right? And then what does that do to the operating leverage? What does that do to the margins if you’ve got more mix of aftermarket parts and IPS in the fourth quarter?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

So, just my comment, it was holistically, there was about 25 million sold from Q4 into Q3. predominantly systems and predominantly, I would say, IPS. And so, to Naga’s point and your point, it was impressive, our team being able to meet that customer request — those customer requests. But from a margin standpoint, you build these systems over time. It shouldn’t have huge — our incrementals are what they are, and we’re still going to deliver growth in Q4 if you take the midpoint of our guidance And the sequential comment really whilst it’s just Q3 to Q4 for Nordson, when you level out and adjust that $25 million and take it out of Q3 into Q4, but in Q4 on adjusted basis we would be relatively flat. And so, it’s just that swing in the system which is driving the sequential drop.

Walter Liptak — Seaport Global Securities — Analyst

Okay. And how are you thinking about the fourth quarter margins? Are you saying that there’s going to be less leverage because the volume growth won’t be as high or is there a pickup in margin because there’ll be more aftermarket because I typically think of systems as having a little bit lower margin, maybe that’s incorrect.

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. It’s changing a little bit but not to the degree I think it was historically. And so, I would tell you we’re thinking about margins for Q4 at the gross margin line to be comparable with our new run rate that we saw in Q2 of 57%, 56.5% here in Q3. So, we feel confident to operate in the 55% to 57% gross margin range at the level of call it $600 million to $650 million in sales.

Walter Liptak — Seaport Global Securities — Analyst

Okay, great. Okay. Thanks. And then I wondered even — you guys talked about this last quarter a little bit, but it sounds like the supply chain there’s a little bit of challenges. But I wonder on pricing, are you seeing some inflationary pricing that you’re passing along to customers? How are you doing that or is it on a project-by-project basis or have you taken out prices?

Joseph P. Kelley — Executive Vice President and Chief Financial Officer

Yeah. It’s really project by project. It’s really project-by-project. I would tell you division-by-division. We are experiencing, as Naga touched on, some supply chain challenges, some logistics challenges, but we are laser focused on managing the gross margins of this business. And we’re also, I would tell you, looking out over the long term as it relates to our customer relationships and our position, I think that bodes well for us. When we entered this pandemic, in terms of strengthening what’s core at Nordson is that intimate customer direct sales model. And as we work through these challenging times, remaining focused on the gross margin and capturing the value we provide, but also protecting the long-term relationship with our customer. So, that’s how we — I would tell you look at that pricing.

Walter Liptak — Seaport Global Securities — Analyst

That’s great.

Sundaram Nagarajan — President and Chief Executive Officer

Well, the one thing I would add to it is, given our gross margins, the material cost in our business is fairly small when compared to other companies. We had a value added assembler of components not — we don’t have big process component to our business. So, to the extent that we need to increase prices in certain areas, we have done that. We will continue to do that. But in general, this is not a huge significant material issue for us.

Walter Liptak — Seaport Global Securities — Analyst

Yes. Agreed. There’s no doubt about that. Okay. And then, maybe last for me is, Naga, you mentioned that you and Joe have been out traveling and visiting the facilities.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah.

Walter Liptak — Seaport Global Securities — Analyst

And I wonder if you’ve — if you finished that process, how are you feeling now about, like the Delta variant, will you continue to visit operations? And do think the Delta variant is going to have any impact going into the end of the year?

Sundaram Nagarajan — President and Chief Executive Officer

Yeah. From our travel perspective, we continue to remain safe. But we can’t continue to just stay in the bunkers, right? So, Joe and I are being very cautious in how we travel, where we travel, but we’re going to continue to travel in a very limited basis. If this thing didn’t exist, would we be in more businesses than we were — with we are today, absolutely, yes. But — so, trying to find the right balance in terms of being safe as well as being in the businesses with our team, which is really where all of the action is going on.

Walter Liptak — Seaport Global Securities — Analyst

Okay, great. And are you — your salespeople, I imagine, are getting out to and visiting with customers.

Sundaram Nagarajan — President and Chief Executive Officer

Yeah.

Walter Liptak — Seaport Global Securities — Analyst

Do you expect that a lot continue through the end of the year?

Sundaram Nagarajan — President and Chief Executive Officer

Yes. It is by request of the customers and it is in the region, we’re not — we do have some thoughts around trying to balance safety, as well as trying to help our customers meet their business needs. So, it is still decided by senior leaders in the company who travels where we travel. We have started going to some shows on a very limited basis. So, a dynamic environment. Team is doing an excellent job of taking prudent measures to be safe, yet make sure we’re taking care of customers.

Walter Liptak — Seaport Global Securities — Analyst

Okay, great. Okay. Thank you.

Operator

At this time, there are no further questions. I would now like to turn the floor back to management for any additional or closing remarks.

Sundaram Nagarajan — President and Chief Executive Officer

Thank you. I want to reiterate that Nordson is well-positioned to benefit from the accelerating recovery and are precision technologies remain a critical solution to our customers through the cycle. Additionally, our leadership team is advancing the implementation of the Ascend strategy, which is establishing a growth framework, entrepreneurial organization, and a deep and diverse team to drive sustainable, profitable growth. Thank you for your time and attention today. Have a great day.

Operator

[Operator Closing Remarks]