Nordson Corp Q3 FY2023 Earnings Call

Hello and welcome to the Nordson Corporation's Third Quarter Fiscal Year 2023 Conference Call. All lines have been muted to minimize background noise. Following the speakers' comments, we will open the floor for a question-and-answer session. I will now hand the conference over to Lara Mahoney. Please proceed.

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 22 to report Nordson's fiscal 2023 third quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday, August 29, 2023. During this conference 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 third quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our enterprise performance. He will conclude with an update on the fiscal 2023 full-year and fourth quarter guidance. We will then be happy to take your questions. With that, I'll turn to Slide 4 and hand the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2023 third quarter conference call. While sales were at the low end of our expected guidance range for the quarter, I would like to recognize the dedicated Nordson team who has actively controlled costs in divisions where it was necessary and leveraged the NBS Next growth framework to deliver strong growth in divisions where the market demand was strong. This resulted in adjusted earnings per share of $2.35, which was at the high end of our third quarter EPS guidance. Going into the third quarter, we expected to be pressured by the ongoing weakness in our electronics and biopharma product lines. We understand the macro factors impacting these end markets, and we have line of sight to returning to growth. This quarter's electronics end-market softness is particularly visible when looking at our results in Asia Pacific, which declined 20%. This reflects decreased demand from semiconductor customers in our ATS segment and electronics assembly customers in our MFS segment. These markets are cyclical, and we anticipate them turning in the middle of 2024. The diversification of our business offset some of this pressure. From a product perspective, we continue to experience double-digit organic growth in medical interventional solutions and polymer processing product lines, as well as high-single-digit growth in the test and inspection business. Regionally, we experienced mid-single-digit organic growth in both Americas and Europe, as our customers in both these regions are rebalancing their supply chains to be closer to the markets they serve. I'll speak more about the enterprise and our exciting new acquisition of ARAG in a few moments, but first, I'll turn the call over to Joe to provide a detailed perspective on our financial results of the quarter.

Thank you, Naga, and good morning to everyone. On Slide number 5, you'll see third quarter fiscal 2023 sales were $649 million, a decrease of 2% compared to the prior year's third quarter sales of $662 million. This was driven by an organic decrease of 5%, partially offset by the favorable benefit of the CyberOptics acquisition. During the quarter, sales were negatively impacted by the end-market pressures that Naga referenced. Gross profit for the third quarter of fiscal 2023 totaled $360 million. Excluding severance costs, gross profit totaled $362 million or 56% of sales, which is comparable to the prior year third quarter. SG&A in the third quarter was elevated to $189 million above the $181 million we have been averaging for the last six quarters. Third quarter SG&A was impacted by notable non-recurring items that I'd like to highlight. Our teams advanced two separate $1 billion global acquisition targets through the comprehensive due diligence process all the way to the final stages. As a result of these two significant and strategic projects, we incurred $7 million in non-recurring costs from third-party service providers. We ultimately chose to move forward only with ARAG, which included an additional $1 million for the fairness opinion. In total, we incurred $8 million in non-recurring costs for acquisition-related activity in the third quarter. Operating profit, excluding these non-recurring items, was $181 million in the quarter or 28% of sales, 4% below the prior year adjusted operating profit of $188 million. Despite the lower sales volume, we held on to decremental margins on adjusted operating profit of 56%, reflective of our cost controls and improved pricing, which can be attributed to our team's dedication to the NBS Next framework. As we execute the Ascend strategy and scale through strategic acquisitions, EBITDA remains the key profitability metric. EBITDA for the third quarter was $208 million or 32% of sales, which is above our long-term profitability target; however, it was $5 million or 2% below the prior year EBITDA of $213 million. The decrease was primarily driven by lower sales volume in the quarter. Looking at non-operating expenses, interest expense increased $6 million associated with higher borrowings and increased interest rates. Other net expense decreased $2 million related to a combination of changes in pension and deferred compensation plans, as well as foreign exchange gains and losses. Tax expense was $34 million for an effective tax rate of 21% in the quarter, which is in line with the prior year third quarter rate and the forecasted full-year rate for 2023. Net income in the quarter totaled $128 million or $2.22 per share. Adjusted earnings per share excluding non-recurring acquisition and severance costs totaled $2.35 per share, a 6% decrease from the prior year adjusted earnings. The decrease was primarily driven by higher interest expense and lower operating profit. Now let's turn to Slide 6 through 8 to review the third quarter 2023 segment performance. Industrial Precision Solutions sales of $338 million decreased 1% compared to the prior year third quarter, driven by softness in our product assembly and nonwovens product lines in Asia. This was partially offset by continued strength in polymer processing product lines and growth in the Americas and Europe. Year-to-date, the IPS segments has delivered 3% organic sales growth following two consecutive years of double-digit growth. EBITDA for the quarter was $122 million or 36% of sales, which is a decrease of 3% compared to the prior year EBITDA of $126 million. The biggest driver of the decrease is lower sales volume and unfavorable sales mix due to the higher sales volume and polymer processing product lines. EBITDA in the current quarter has improved compared to the prior two quarters of the current year, and year-to-date is $4 million higher than the prior year. On Slide 7, you'll see Medical and Fluid Solutions sales of $171 million decreased 4% compared to the prior year's third quarter. The decrease was driven by continued softness in the medical fluid components division related to destocking in single-use plastic components for biopharma applications and fluid solutions product lines specifically for electronics assembly primarily in Asia Pacific. This pressure was partially offset by double-digit growth in our medical interventional solutions product lines. Third quarter EBITDA was $68 million or 40% of sales, which is a decrease of $8 million compared to the prior year EBITDA of $76 million. EBITDA continued to be impacted by meaningful sales mix changes within medical product lines. It is noteworthy that the segment EBITDA margin sequentially improved 200 basis points over the second quarter of 2023 and back to the profitability levels this segment delivered in 2021 and 2022. Turning to Slide 8, you'll see Advanced Technology Solutions sales were $140 million, a 3% decrease compared to the prior year third quarter. During the quarter, the CyberOptics acquisition contributed 11% growth. Organic sales volume was down 13%. The organic decrease was driven by electronics dispense product line, serving the semiconductor end markets, predominantly in Asia Pacific, slightly offset by continued growth in test and inspection products. The cyclical downturn of demand in the semiconductor market will anniversary in the second quarter of fiscal 2024, which aligns with the historic downcycles lasting approximately four to five quarters. Structural cost reduction actions were taken during the third quarter of fiscal 2023 to address the volume decrease in electronics dispense products. For example, they've chosen to outsource their fabrication shop to focus on more value-added precision dispense technology, resulting in a $2 million of non-recurring severance cost. Third quarter EBITDA was $33 million or 24% of sales, which was an improvement compared to the prior year third quarter EBITDA of $30 million. The improvement in EBITDA during the quarter was driven by favorable sales mix and continued realization of cost savings actions. Despite the double-digit organic sales volume decrease, this segment is delivering quarterly profitability only 100 basis points below 2022 levels. Finally, turning to the balance sheet and cash flow on Slide 9. We had a very strong cash flow quarter, generating $181 million in free cash flow, bringing our year-to-date cash conversion rate on net income to 126%. Cash ended the quarter at $143 million, and net debt was $695 million, resulting in a 0.9 times leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities such as our upcoming acquisition of ARAG. We expect to close the ARAG acquisition by the end of August and exit the year with a net debt to EBITDA leverage ratio of approximately 2 times. During the third quarter, we repaid $111 million of debt, paid $37 million in dividends and spent $23 million on repurchasing approximately 107,000 shares of company stock at an average price of $217 per share. Our Board approved a 5% increase in our annual dividend, effective in the fourth quarter of fiscal 2023. This marks the 60th consecutive year the company has increased its dividend, an impressive accomplishment only enabled by maintaining a truly differentiated precision technology portfolio and serving diverse end markets. For modeling purposes, in fiscal 2023, assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $35 million to $40 million, as several of our investment timelines have pushed out. With our upcoming acquisition of ARAG, I want to provide you with some assumptions for modeling purposes. For revenue, assume approximately $20 million to $30 million in fiscal '23. EBITDA margins are expected in the high-30% range. We expect ARAG to be slightly dilutive to GAAP EPS in Q4 2023 due to increased amortization of acquisition-related intangibles and interest expense associated with the acquisition. Excluding acquisition costs and related intangible amortization, EPS should be neutral for the fourth quarter. Due to the expeditious nature of the close, the acquisition will initially be financed with a short-term loan and revolver borrowings. We anticipate following up with a bond issuance in the public markets later this year, and we are currently working through the ratings process. Based on current market conditions, assume a weighted average interest rate of approximately 5.5% for total Nordson debt in 2024. We will now turn to Slide 10, and I'll turn the call back to Naga.

Thanks, Joe. Our team continues to execute the Ascend strategy, which is clear in the strong profitability delivered in this quarter. While we are managing the short-term sales weakness related to the biopharma end-market and electronic cycle, we're getting closer to anniversarying that pressure in fiscal 2024. Related to the biopharma product lines in our medical fluid components division, we believe we have seen the bottom of the customers' unique supply chain destocking trend and will anniversary this pressure in the first quarter of fiscal 2024. Following this period, we cautiously expect the medical fluid components business to return to its historical mid to high single-digit growth rate over time. Moving onto electronics end markets. I visited our Electronics Processing Solutions leadership team in Carlsbad, California earlier this month. Our team's expectation is that electronics CapEx spend cycle will begin to turn in the second half of the calendar 2024. We expect to benefit from customer investments in automation, memory, AI and electronics new product innovation. In the meantime, this division is successfully managing costs, while staying invested in profitable growth opportunities identified through the NBS Next growth framework. In fact, the EPS division exceeded its targeted decremental margins during this low-volume period. We also continued to be pleased with the growth of our test and inspection division, which mutes the volatility of the electronic cycle. Geographically, we are closely monitoring the pressure in Asia Pacific region, specifically in China. The regional sales weakness was largely related to the electronics exposure, though there was weakness in demand across all three segments, some of which was due to the timing of large system orders. Nordson has a well-established footprint in China with long-tenured and knowledgeable employees. We will remain close to our customers and support them appropriately. Simultaneously, Nordson's business model positions us well to support customers if they decide to diversify their supply chain to other regions of Asia or into the Americas and Europe. Our customer intimate business model ensures we are prepared to fully participate as global supply chains rebalance. Finally, I'd like to share an update on the Ascend strategy. Acquisitions are a very important part of our goal to achieve $3 billion in revenue by 2025. Of the $500 million acquired revenue target we set at our 2021 Investor Day, we are now nearly 80% of the way there. In June, we announced the acquisition of ARAG, a global market and innovation leader in precision spraying technology. Precision dispense technology is core to Nordson. Over nearly 70 years, we have expanded that expertise beyond our beginnings in industrial applications into dispense for packaging, product assembly, non-wovens, electronics, medical and more. Through it all, we adhered to disciplined strategic acquisition criteria, differentiated technology generated Nordson-like gross margins, high-growth end-market applications, and the customer-centric business model. The acquisition of ARAG meets all of these criteria and expands our technology expertise into the high-growth end-market of precision agriculture, and is the largest single acquisition in our history. Today, ARAG is the market leader in precision agriculture technology in Europe and South America. ARAG fluid components are sold to implement manufacturers, who in turn sell to the tractor manufacturers or OEMs. ARAG closely works with all of the customers within these channels to ensure its innovation pipeline supports the customers' goals of improving crop yields and minimizing the use of expensive fertilizers and chemicals. It is also important to note that over 40% of ARAG's revenue is recurring aftermarket sales sold through distributors. We were attracted to the continued growth opportunity in ARAG's existing geographic markets. The opportunity to invest and grow ARAG's technology in North America presents an attractive proposition beyond the existing core market growth, upon which we valued the company. I'm very excited about the ARAG acquisition and the long-term profitable growth opportunities in our business. We have a winning team, who is focused on the customer and managing through unique market headwinds, while delivering solid profitability and cash flow. Turning to the outlook for the remainder of the year on Slide 12, we are narrowing our previously provided 2023 revenue guidance to 0% to 2% growth over record fiscal 2022 and narrowing our adjusted earnings guidance to $8.90 to $9.05. Looking specifically at the quarterly sales and earnings split on Slide 13, we expect fourth quarter sales to be the strongest of the year, increasing low to mid-single-digits over the prior year fourth quarter at the midpoint. This guidance includes approximately $20 million to $30 million of sales from the ARAG acquisition that we expect to close in late August. Fourth quarter earnings are forecasted in the range of $2.34 to $2.49 per share. Embedded in our forecast is strong profitability and cash conversion performance, which is a result of Nordson's operational excellence, a clear competitive advantage created through the execution of the Ascend strategy by winning teams with an owner mindset. As always, I want to thank our customers, shareholders, and the Nordson team for your continued support. With that, we will pause and take your questions.

Thank you. One moment for your first question. Your first question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Hey. Good morning, everyone.

Good morning, Jeff.

Good morning, Jeff.

So, just really want to unpack the guidance change. I mean, I hear kind of Asia Pac and electronics kind of weaker and then the ARAG impact. So maybe just unpack kind of what drives the lower-end. And it seemed like the revenue was lighter in 3Q, but 4Q seems kind of in line, but maybe just a little more help on the moving pieces. Thanks.

Sure. Let me start by saying that at the midpoint of our guidance, we expect about 3.5% growth. For Q4, the acquisition should add around 6%, foreign exchange will have a positive impact of about 2.5%, and on the organic side, there's a decline of 5%, which aligns with our Q3 results. Regarding the revenue range, the timing of the ARAG acquisition will play a role, particularly in the first two months after closing, which we estimate could contribute between $20 million to $30 million. This introduces some volatility and can widen the revenue guidance range. Additionally, we anticipate large system shipments, and since Q4 last year was our strongest quarter, we're forecasting a similar outcome this year. However, significant system deliveries can sometimes be delayed, adding to the range of our revenue expectations. Naga, would you like to add anything from an end-market perspective?

From an end-market perspective, we are optimistic about our position in the IPS segment when compared to our long-term expectations and recent performance. We anticipate maintaining this system at or above our long-term growth rate. Regarding electronics and biopharma, we do not foresee a recovery in the fourth quarter at current levels. We expect to see a turnaround in electronics around the middle of 2024, while biopharma is expected to see improvements in the first quarter of 2024. However, we will approach the recovery in biopharma cautiously, as we are uncertain about the timeline for returning to high single-digit growth rates. Nonetheless, the long-term trends in biopharma remain intact, and we are confident in returning to those growth levels eventually. Our medical IS business is anticipated to continue growing at double-digit rates in the fourth quarter. Additionally, our polymer processing businesses are performing exceptionally well and are expected to maintain that momentum in the upcoming quarter. We also have several system businesses with strong backlogs that we expect will perform well.

Okay. I have some housekeeping questions regarding the ARAG deal. I believe you mentioned high-30s EBITDA margins. I'm curious if you have completed the purchase accounting and what the depreciation and amortization component is that would lead to an ongoing operating margin for that business in at least the first year. Additionally, could you clarify whether the 5.5% interest expense is weighted for the entire company or specific to the ARAG deal? If it pertains to ARAG, how should we consider the interest costs related to funding that acquisition? Thanks.

Yeah. So let me take a stab at that, Jeff. First of all, on the purchase accounting, we'll hold off and I'll give some clear guidance on that when we do our full-year 2024. And so, right now, the guide with the amortization just is really looking at historical trends for acquisitions of this nature and a percentage of the purchase price, but we will firm that up when we issue the 2024 guide for Nordson, which will include purchase accounting assumptions on ARAG. On the interest expense, given the current market conditions, depending on where the bonds will price later this year, our estimate currently is that total Nordson interest expense will be roughly 5% to 5.5% based on current market conditions. And that's for our weighted basket of debt.

What would that have been before the bond offering or before ARAG?

If you look from a year-to-date standpoint, we're slightly below 5% in terms of our weighted average interest cost.

Okay. Appreciate it. I'll get back in queue.

Thanks, Jeff.

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

Hi. Good morning.

Good morning.

Good morning.

I want to revisit your comments on China. Is there any indication that, while there are cyclical factors at play, you also see some potentially structural elements? Are you beginning to notice any industry shift away from that region, considering you mentioned potential offsets in other areas? I'm curious about what insights you have regarding the cyclical versus structural dynamics there at this time.

If we consider China, a significant portion of our electronic businesses, over 75% of their revenues come from Asia, with a large part being from China. The impact from China is primarily related to electronics, and we expect this to follow cyclical trends. Our exposure to China mainly involves large international customers, though we also serve some mid-tier Chinese clients. Currently, most global customers are rebalancing their supply chains, but we haven't observed major shifts away from China. Customers in regions like North America, Europe, and other parts of Asia are indeed building additional or new capacity outside of China. This is reflected in our regional performance, where we see growth in the Americas and Europe but a decline in Asia Pacific, largely driven by China. Japan is performing well, though it represents a smaller part of our business. The decline we are experiencing is mostly cyclical and connected to electronics. We are also seeing some variability from large systems that could fluctuate quarterly. Overall, while there are ongoing investments in other locations, we do not perceive any fundamental structural changes at this time.

It does. That was helpful, thanks. And then, backlog is still relatively strong. There's been a lot of supply chain rebalancing this year. Do you feel like a lot of that's out of the backlog at this point and it's really just sort of backlog growth as we look forward or projects being pushed out? Just any color on that backlog number would be great.

Sure, I can provide some insight on that. Our backlog is at historically high levels, primarily driven by a couple of system businesses and our medical interventional sector that generates long-term orders contributing to this backlog. We believe that approximately 60% to 70% of our business has returned to pre-pandemic backlog levels. This indicates that supply chain issues are normalizing in most of our businesses, while the elevated targets are mainly linked to our large system sectors, such as polymer processing and ICS, along with our medical IS business, which receives blanket orders from customers. Joe, do you have anything else to add?

I would just be repeating what you said. If you consider our backlog of $1 billion, it was previously balanced across all divisions. However, over the last six to nine months, it has shifted and is now predominantly weighted towards the large systems businesses and medical IS, while the remaining part, which constitutes the majority of our business, has returned to historical levels.

Great. Thank you.

Your next question comes from the line of Matt Summerville of DA Davidson. Your line is open.

Thank you. I have a couple of questions. If we look at fiscal '24 from a high level, with the electronics segment seemingly improving in the second half, will that align with the ongoing strength in T&I, or is there likely to be a trade-off? I have a similar question regarding the medical side of the business. As biopharma starts to regain momentum, will the medical interventional segment start to decline or decelerate? Ultimately, I'm trying to determine if we can expect a cohesive organic growth across all four business segments, which could lead to positive outcomes for Nordson as we move toward the end of next year.

Let me provide some insights about the end markets and our expectations. First, we are not providing guidance for 2024 yet. Regarding the electronics sector, I expect a rebound in our electronic cycle around the middle of 2024, with anticipated growth in both T&I and EPS. T&I will reflect the amplitude of the cycles, which is smaller compared to EPS due to the nature of our business and customer applications. Historically, ATS has been subdued, but as it recovers, EPS is expected to bounce back significantly like in the past, and T&I will also benefit from this recovery. On the biopharma and medical side, the medical sector has experienced strong double-digit growth recently, primarily driven by the recovery from backlog and the normalization of elective surgeries, resulting in increased demand for medical interventions. Looking ahead to 2024 and beyond, we expect medical growth to stabilize at its historical mid to high single-digit growth rate. For biopharma, we believe it has reached its bottom and is settling at current levels. By the end of the first quarter, we will see the anniversary of two years of double-digit growth in fluid components. However, I caution that the timeline for returning to high-single-digit growth in biopharma is uncertain. We are confident in reaching that growth, but we are cautious about the speed of the ramp-up. I hope this clarifies both topics for you. Joe, do you have anything else to add regarding the numbers?

I would just say, Matt, the electronics segment, specifically the EPS division, is down around 20%. When considering the T&I segment, with its varied end markets and applications, despite experiencing some fluctuations, it has been growing over the past few years. I do not foresee a situation where it would decline by 20%, which would counterbalance some recovery in EPS. Similarly, regarding our medical sector, the destocking within biopharma is quite unusual, with declines of 30% to 40%. In contrast, the medical interventional solutions are currently growing at a strong double-digit rate, but during the pandemic, that segment only experienced a decline of about 10% to 15%. Therefore, it doesn't exhibit the same level of fluctuations that we are observing in this current downturn. I don't expect it to negate the recovery anticipated for 2024.

I think...

Got it.

And just in addition to that, I would say, is medical fluid components flattens out, maybe picks up a little bit. And our interventional component grows high-single digits is sort of how I would...

Got it. That's helpful. As a follow-up, could you discuss the two concurrent $1 billion M&A processes you were running over the past few months? What led you to pause or abandon one of the deals, and what factors made ARAG more favorable than the other candidate?

Yeah. If you look at both the deals, we were excited strategically for both those opportunities. They fit right smack dab in the middle of where we want it to be, highly-differentiated precision technologies, very attractive growth rates in end markets we really like in places we really understand and do well and have a customer-centric business model. So strategically, both of them were exactly where we want it to be and we pursued both of them equally, yeah. And so, what really when we came down to final due diligence, we exercised financial discipline, we've always talked about, look, we first go through the strategic criteria and if we like it, we go to the next step and then when it's financially making sense for the company, has a return we'd like, then we do it. So what I'm telling you is that, on ARAG, we hit both of them. In the other deal, in the final analysis, we couldn't get there and we were financially disciplined and so we walked away from it.

Thanks, Naga.

Go ahead, Naga.

One thing I want to add regarding the end markets is that while we faced challenges, there were also upsides, and I want to take a moment to reflect on this quarter. The Nordson team demonstrated operational excellence which was evident in our results. Despite some difficulties on the topline, the team's performance significantly impacted the bottom line. This is a clear example of operational excellence, but more importantly, it highlights the progress we've made with the Ascend strategy and the competitive advantages we are developing. Our Ascend strategy is about fostering strong, winning teams with a proactive ownership mindset that execute the NBS Next growth framework. This competitive advantage manifests in three key areas. First, in divisions grappling with tough market conditions, the team adopts an owner mindset, taking necessary cost actions to maintain a decremental margin of around 55%. Second, we have divisions that are capitalizing on robust market opportunities, providing outstanding customer service and achieving strong incremental margins. Lastly, the company is actively exploring growth opportunities through acquisitions. These themes underscore what we aim to achieve, and I believe they are reflected in our quarterly results.

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

Thanks. Good morning, Naga and Joe, Lara. I was curious about the polymer markets, if there are any sort of interesting structural dynamics, what you're seeing in terms of a typical timing around a recap cycle or market penetration momentum? Just curious for a higher-level view of that market.

What we're seeing is this is a set of businesses that we've gone through some pretty good work around setting the business up for taking advantage of the growth opportunities. Really the biggest growth opportunity that is out there that this team is pursuing really is the recycling. And what we find is given this whole issue around plastic usage reduction, I don't know whether I go as far as to say plastic ban, but in certain parts of the world, those words get thrown around, but we do find incredible demand for recycling. And we have some unique technology in our BKG business in Germany that allows us to serve that particular market. And I would highlight that as a pretty strong secular trend that is going on. And that business has some pretty strong backlog going into next year, significant part of next year.

Chris, I would add when you think about that polymer processing; you go back in time and remember the divestiture of the Xaloy business. The divestiture of that product line, I would tell you, resulted in upgrading the quality and the degree of differentiation of the product lines that remained in that polymer processing division. And so, I think that's what you see also falling through some of these numbers.

Makes sense. Thanks. And just going back to Jeff's question on the D&A for ARAG, you referenced kind of rule of thumb metric informing the 4Q guide in terms of percentage of sales D&A. Just curious if that rule of thumb sort of correlates around 2.5%, 3% of purchase price, since you kind of put it in generic terms and also on ARAG, just the 40% through distribution, I know it's viewed as recurring, but stocking comes into question, particularly on the heels of a couple years of global supply chain volatility. So just curious how you view the inventory levels, the channel kind of balances and equanimity across that stock and flow sort of business.

Yeah. The answer to your question is, yes, that typical 2.5% of purchase price is our starting point in terms of the annual amortization.

So maybe help me. So you want to take the D&A question first, and then I can maybe make a comment around the inventory piece.

In terms of inventory, it's important to note that our recurring revenue comes from parts, not significant systems or large units that sit on distributor shelves and take longer to sell. These are small sprayers and similar components. We still don’t have ownership of the business and limited detailed information about their inventory status. However, I believe this will not pose a significant issue for us in that area.

Great. Thanks for the extra color.

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

Good morning, everyone. This is for Mike. Could you elaborate on the order entry comment? It seems that orders were down sequentially, and you mentioned challenges in China in the Asia Pacific region. Additionally, some businesses appear to be stagnating. Can you discuss the factors that influenced this situation? It sounded like the commentary leaned more toward the negative side. If you could also provide some insights on order entry through August, that would be appreciated.

All right. Let me start with where we're at in terms of the businesses, which is our electronics business and our fluid components biopharma business, both of those order entry have bottomed out is the best way to put it. So where they are currently performing, they have come to a place where we feel good about that it is not any further declines. We've seen as the quarter progressed, we could start to see that this is at the bottom. In terms of our businesses that are performing incredibly well and contributed to the growth, medical interventional business and our polymer solution business, on the other end of the spectrum have done well and the order entry remains pretty robust. And then you have a group of businesses sort of in the middle, some a little bit high, some a little bit low. In all of those cases, what we truly find is the order entry has sequentially improved. They have improved through the quarters, and that's kind of where we would say. The order entry has not significantly picked up or significantly declined. And that's really how we come to say that it is about steady.

Got it. That's super helpful. And then following up on the question differentiating between T&I and the dispense side within the electronics business. Naga, you mentioned that the amplitude of the cycles is different between T&I. But can you maybe talk about the length? I know, for instance, we kind of refer to a typical four to five quarter slowdown in dispense. When the paper comes for the T&I business, is it typical to think of the length of the cycle and slowdown in similar terms, or should we be thinking about them differently as well?

No. From what we understand and based on our experience, it’s about the same. There could be a slight offset, but nothing significant. We don't believe so.

Understood. All right. Thank you. I'll pass it on.

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

Our strong operating performance reflects the strength of our differentiated precision technology, customer-centric model and diversified end-markets. Again, I want to thank Nordson employees for their commitment, which makes these results possible. The continued deployment of the Ascend strategy will position us well for long-term growth. Thank you for your time and attention on today's call. Have a great day.

This concludes today's conference call. You may now disconnect.