Nordson Corp (NDSN) Q3 2026 Earnings Call Transcript

Hello everyone. Thank you for joining us and welcome to the Nordson Corporation third quarter fiscal year 2026 conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Matt Matejka of Nordson. Matt, please go ahead.

Thank you. Good morning. This is Matt Matejka, Senior Director of Investor Relations. I'm here with Sundaram Nagarajan, our President and Chief Executive Officer, and Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, August 20th, to report Nordson's fiscal 2026 third quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com forward slash investors. This conference call is being broadcast live on our investor website and will be available there for 30 days. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable GAAP metric in the press release issued yesterday. Before we begin, please refer to slide 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 Norton's current expectations. These statements may involve a number of risks, uncertainties, and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to materially differ. Moving to today's agenda on slide three, Naga will discuss third quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the three business segments. Dan will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our enterprise performance and provide an update on the fiscal 2026 full year guidance. We will then be happy to take your questions. With that, I'll turn to slide four and turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2026 third quarter conference call. Before we begin, I would like to welcome Matt Matejka to our call in his new role of Senior Director, Investor Relations. As we announced in a previous press release, Matt has assumed Investor Relations responsibilities from Lara Mahoney, who has taken on a new role within Nordson. Matt joined Nordson in 2023 and brings over 10 years of experience in financial leadership roles, most recently serving as Finance Director for our Industrial Coding Solutions Division. Moving on to the financial results, I am pleased to share that the momentum driving our strong first half continued throughout the third quarter. For the first nine months of fiscal Until 2026, Nordson has grown revenue by 9% and adjusted earnings per share by 18% year over year, with strong backlog giving us confidence in the rest of the year. As our growth and markets continue to inflect, we are winning due to our unique competitive advantages, and the successful execution of our Ascend strategy. We are well positioned to continue compounding profitable growth. During the third quarter, all three segments again contributed to our organic growth performance, surpassing the high end of our sales and earnings guidance. We achieved record sales of $818 million. This is a 10% increase over the prior year, which is inclusive of 12% overall organic growth. Order entry momentum continued to accelerate, driving backlog up 35% compared to the prior year. Backlog growth was broad-based with all segments contributing, but particular strength coming from our advanced technology and medical segments. Solid execution and volume leverage drove record profit performance for the quarter delivering EBITDA of 262 million which was an all-time record and 32 percent of sales adjusted earnings per share of three dollars and 25 cents was also an all-time record for the business. This was an increase of 19% compared to prior year. I would also like to highlight our free cash flow of 237 million. Our free cash flow conversion of well over 100% of net income continues to be a strength, enabling a healthy mix of shareholder returns and reinvestment in growth. Our balance sheet continues to be in a strong position, giving us plenty of flexibility for future acquisitions that meet our strategic and financial criteria. I'll talk more about enterprise performance in a few moments, but first I'll turn the call over to Dan to provide detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning, everyone. On slide number five, you'll see we achieved record level sales of $818 million in the third quarter, up 10% from prior year third quarter sales of $742 million. The third quarter 2026 sales included an organic increase of 12%, driven by growth in all three of our segments. Currency translation was effectively neutral for the period. Strong organic sales performance was slightly offset by the net impact of the medical contract manufacturing divestiture completed in the fourth quarter of last year and the small contribution from the capstan acquisition that was completed during the second quarter of this year. Adjusted operating profit increased 13% year-over-year to a record $226 million, or 28% of sales, driven by increased leverage on the strong organic sales growth across the segments. EBITDA was up 10% year-over-year to $262 million, also a new company record. EBITDA margin as a percent of sales was 32% in line with the prior year. Incremental EBITDA contribution in the quarter was just shy of 32%. We're quite pleased with these operating results, which reflect our focus on maximizing growth potential while protecting our best-in-class margins and effectively managing near-term inflationary pressures tied to the broader market and geopolitical factors. In addition, we continue to reinvest and innovate to maintain our strong value proposition for many years to come. Looking at non-operating income and expenses, net interest expense during the quarter was $20 million, a decrease of over $5 million versus the prior year, which is really driven by two key factors. One, our strong cash generation through the first nine months has allowed us to significantly delever our balance sheet. In addition, our average borrowing cost has improved year-over-year due to lower market rates on our variable debt, including the benefits from the recently announced commercial paper program that was launched during the quarter. Other expenses on a GAAP basis increased $14 million year-over-year with the primary driver being a $15 million non-cash mark-to-market charge for minority investments. These non-cash valuation adjustments are subject to market volatility, and on a year-to-date basis, the impact is actually negligible. Excluding this non-cash charge, other expenses net decreased by a nominal $1 million year-over-year. Our tax expense on a U.S. GAAP basis was $33 million for an effective tax rate of 17.8%, inclusive of the impact of the non-cash loss I just mentioned and acquisition-related amortization and costs. On an adjusted basis, our effective tax rate was 18.3%. In line with the prior quarter run rate, for the full year, we expect our tax rate to be near 18%, which is also reflective of our ongoing rate expectations. Gap net income in the quarter totaled $153 million, or $2.73 per share, excluding acquisition-related amortization and costs, and the non-cash loss, adjusted earnings per share totaled a record $3.25 per share, $0.10 above the high end of our guidance range, and a 19% increase from prior year adjusted earnings per share of $2.73. To wrap up our consolidated summary, the improvement in year-over-year earnings and record Q3 results reflect strong sales growth across our portfolio, which I'll cover a bit more in a moment. It also reflects strong delivery execution driven through our Ascend strategy and NBS Next framework. Our differentiated products, market position, and commercial and operational execution have allowed us to grow our adjusted earnings per share 18% year-over-year through the first nine months of the year with strong momentum heading into the fourth quarter. Now let's turn to slides six through eight to review the third quarter 2026 segment performance. Industrial precision solution sales were $367 million, an increase of 5% compared to the prior year third quarter. Organic sales increased 3% compared to the prior year, with a favorable currency impact of 1% and an acquisition contribution of roughly 1%. Organic growth was driven by packaging and industrial coating's application demand and continued recovery in our plastics processing demand. Broadly speaking, aftermarket demand remains stable across our IPS portfolio while systems demand for broader industrial and agricultural markets remain stable but with limited growth. EBITDA was $130 million in the quarter, or 35% of sales, which is in line with the third quarter of last year as we continue to invest in innovation while mitigating selected near-term inflationary pressures. Turning to slide 7, you'll see medical and fluid solution sales of $231 million, a quarterly record. Total sales increased 5% compared to the third quarter of last year, while organic sales increased closer to 11% in the quarter, driven by contributions from both our engineered fluid solutions and medical product lines. Divested sales from the medical contract manufacturing business had a negative impact of approximately 6% compared to the prior year. Medical component demand has normalized, and we're now seeing stable ongoing growth in many of our product lines, while we're also seeing broad-based demand for fluid solution systems applications in medical and electronics markets. EBITDA for medical and fluid solutions was a record $88 million or 38% of sales, which is an increase of 6% from prior year EBITDA of $83 million. The segment delivered strong year-over-year incrementals during the quarter and EBITDA margins improved about 100 basis points sequentially on the higher sales. Turning to slide eight, you'll see advanced technology solution sales were an all-time quarterly record of $220 million, a 28% increase compared to the prior year's third quarter. Organically, sales increased 31%, with growth coming across both the electronics dispense and test and inspection product lines, reflecting the continued strength in semiconductor and broadening electronics and market demand. Third quarter EBITDA was also an all-time quarterly record of $66 million, driving a record EBITDA margin of 30% of sales. EBITDA increased 58% compared to the prior year third quarter EBITDA of $42 million or 24% of sales. The improvement in EBITDA margin reflects the record sales volumes and strong operational leverage driven by improvements we've made in our operations over the last several years. Finally, turning to the balance sheet and cash flow on slide nine. At the end of the third quarter, we had cash on hand of $113 million, and net debt was approximately $1.6 billion. We've continued to delever, with our leverage ratio decreasing further to 1.7 times, which is made possible by our strong earnings and cash flow generation. This provides us with significant firepower to strategically deploy capital, including returning cash to shareholders, reinvesting for growth, and acquiring strategic assets. Our free cash flow generation during the quarter was $237 million, resulting in a 144% conversion rate on net income, excluding the non-cash loss that I mentioned a moment ago. This is up from 113% through the first half of this year, and the third quarter represents the fifth consecutive quarter of delivering well over 100% conversion. As noted on slide 10, our capital allocation continues to be balanced and is driving value, fueled by our strong cash flow generation. year to date in addition to our acquisition of capstan ag announced last quarter we've invested 40 million dollars in capital projects to support current and future organic growth opportunities through nine months we've also returned capital to shareholders with 137 million dollars in dividends paid and 159 million dollars of shares repurchased we've been able to do all of this while reducing our net debt and reducing our leverage ratio, positioning us well to pursue strategic growth opportunities. So to summarize and close, we delivered another quarter of fantastic record results. Each of our segments delivered record third quarter sales and strong organic growth, and in the case of MFS and ATS, all-time record quarterly sales. EBITDA margins remain strong and cash conversion is a continuing strength reflecting solid earnings quality and disciplined working capital management. This provides us all the flexibility needed to strategically deploy capital to sustainably grow and return value to shareholders. Our teams once again delivered on their commitments for the quarter and continued to grow our backlog which puts us in a great position heading into the fourth quarter. As Naga will address next, our portfolio position and NBS Next framework support continued growth into the future, positioning us well to continue delivering for our stakeholders. With that, let's turn to slide 11, and I'll turn the call back to Naga.

Thanks, Dan. And it's been a very strong fiscal nine months for Nordson. As our end markets continue to inflect, the execution of our Ascent strategy positions as well to deliver for our customers. As we look at slide 11, I want to take a moment to remind our investors about Nordson's competitive advantages, which have positioned us to reliably compound profitable growth. From the very beginning, Knudsen built a business model based on three key strategic themes, differentiated products, close to customer relationships, and diversified niche and markets. Our founders started this company through the purchase of patented technology, understanding the importance of differentiation. Our legacy was then built through close customer relationships where we solve problems together and advance technology roadmaps. Over the past 70 years, Nodsen's innovation has led to market leadership in precision technologies, speed, and efficiency in diverse niche and markets. We have built upon these core strengths with the addition of the NBS Next growth framework, which is how we run the company. Our decentralized divisions use this framework to focus on the best market growth opportunities, top products and customers to deliver above market organic growth. We have also been very intentional in building a growth-biased portfolio of precision technologies with reduced cyclicality over time. Some of you may recognize slide 12 from our 2024 Investor Day. approximately 60 percent of this portfolio generates recurring revenue including aftermarket parts consumables and services importantly more than 50 percent of our portfolio is now in growth and markets including semiconductor electronics and medical with the remaining exposures in more stable GDP plus end markets. Our portfolio positioning gives me confidence in our growth aspirations for the remainder of the year and beyond. Turning now to our outlook on slide 13. We entered the fourth quarter with backlog up 35% year over year. Based on the momentum in our end markets, as evidenced by our backlog and order entry, we are increasing our full year guidance. Sales are now expected to be in the range of $3 billion and $35 million to $3 billion and $75 million, and adjusted earnings to be in the range of $11.80 to $12 per diluted share, putting us on the high end of our previously communicated average growth average. algorithm. Our updated guidance reflects sustained order strength and our ability to deliver results through NBS Next. We also assume FX rates hold at current levels, which implies a neutral impact on the fourth quarter. As always, I want to thank our customers and shareholders for your continued support. In particular, I want to thank Norton employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence continue to position us well to serve our customers. With that, we will pause and take your questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the q a roster your first question is from mike halloran from baird your line is now open please go ahead um so a couple questions here could you could you just put the backlog in context for us um you know obviously quite strong backlog growth you have you seen any elongation in lead times?

What kind of visibility does it give you in the next year? And anything from a historical perspective that you think is worth bearing in mind here as we think about the magnitude of that gain?

Sure. Morning, Mike. This is Dan. I appreciate the question. A couple of things. Number one, I'll highlight again, as we mentioned, the backlog growth that we're seeing is broad-based. all three of our segments are showing higher backlog year over year but I would say in general no real departure from what I would call normal order patterns you know again just to recap some things that we've said in the past and are still true today our backlog generally speaking turns over in about six months the majority of our backlog ships within about six months so so clearly you know as at the end of the third quarter we're taking orders into 2027 at this point but no elongation and lead times our lead times have actually been reduced over the years so if anything i would say we're able to deliver faster than we have in the past but no real change in order patterns i would say normal recurring order patterns uh at this point you know our backlog is normal normal turnover of roughly six months you know 80 or so of our backlog is going to turn over with a few long lead time items with some of our larger systems which is very typical yeah maybe add a little bit color there mike around lead time in general with with our ascend strategy and nbs next over this period of time if you think about our lead times they're generally reduced and routinely we have the opportunity to gain share because we are able

to have shorter lead time than the rest of the team in the marketplace um you know our uh on-time delivery has significantly improved across the company in just about every division uh we've gone you know over this period of time routinely we we will ship 80 to 95 percent in most of our businesses so so a good strength for us to be able to deliver when the customer wants it i think that is probably critical because some of these lead times are also dictated by the customer's need in in relationship with the other things that they're putting together in a line

no thanks for that and then um second question just maybe give some more context on what you're seeing in the ATS segment, specifically within the T&I and dispensing? Maybe just break out the two dynamics you're seeing there. And any nuance you think is relevant versus what you're seeing in the market today?

Yeah. You know, broad-based growth in the quarter with both our dispense business and T&I business. Clearly, the dispense business is typically ahead of the curve in terms of growth cycle, and that's what we saw. In the quarter, suddenly our T&I businesses continue to grow nicely. A good inflection point both for our x-ray and optical businesses. If you remember, these technologies are critical in ensuring semiconductor packaging. We are also seeing growth reflected in our EFD business, which is part of our MFS segment. So, you know, feel good about order entry, pipeline activity, customer conversations for both dispense and test and inspection. A lot of this demand allows us to not only be quite confident about what we're going to deliver in Q4, but well into next year. Thank you. Appreciate it, Naga. Thanks, Dan.

Yeah, thank you. Your next question is from Jeff Hammond with KeyBank Capital Markets Incorporated. Your line is now open. Please go ahead.

Hey, good morning, everyone. Good morning, Jeff. So maybe just to stay on, you know, whether it's backlog or orders or the guide. I mean, it seems like that the stark beat in the quarter is ATS. So I'm just trying to understand, you know, maybe you can unpack the 35 cent raise between the businesses. I mean, it doesn't seem like maybe the other two segments are moving that much, which goes back to like your comment that, you know, you're seeing broad based growth. I'm just trying to understand, like, this backlog and the order growth, like, how differentiated the ATS is versus, you know, the other two segments.

Yeah, I guess maybe just to give a little color on it. Yeah, I would say, broadly speaking, you know, IPS is as expected, you know, as we think about, you know, heading into the quarter and then how we finished in our outlook. I would say, you know, the upside that we're seeing certainly in the third quarter, but even in our outlook for Q4 is certainly ATS is a big driver, but I would say medical is the other area that we're seeing, you know, acceleration. And maybe just to go back to our pre-Q3 commentary, you know, we said, look, if order momentum sustained, I think we said we, you know, felt comfortable, we'd probably be on the higher end of our guidance. I would say in both medical and ATS order momentum, not only 16, but actually accelerated in some areas. And so I would say it's, you know, those two segments driving the increased outlook for the year. But again, I think on the IPS side, no surprise, I think just kind of steady state with IPS.

Right. You know, Jeff, if you would sort of compare against long-term targets for these growth rates of these businesses is to put it in context. Clearly, ATS was significantly higher than our long-term, and we are at the peak of the cycle, and we're starting to really have legs to this cycle even more than where. So we're on the upside of the cycle, and hence you see some very elevated growth rates. But IPS, for example, it's 50% of the company we're at our long-term goal of growing 3% in the quarter. And for the first nine months, again, growing over 3%. Okay, that number is not big when compared to the 37% in ATS, but 3% for this business is pretty darn good. And if you think about MFS, that's even a better story where our long-term expectations are, you know, six, seven kind of percentage growth rates. And in the quarter, they were 11%. And clearly there is some benefit from the EFD business that has some electronic exposure.

But even if you take that out, I would say medical businesses are trending towards where our long-term targets are and we're, you know, really, you know, feel good about where we're headed into next quarter and the following year okay great and then um just on ips you know i think you know for all all year like the margins you know obviously very good but you know down year on year and i think you mentioned you know price cost dynamics just talk about you know the margin dynamic and i think you mentioned kind of you know prioritizing growth and and balancing that with you know with margin So just speak to IPS margins, and then just while we're on it, any thoughts on, you know, did you have any IEPA refunds? Are those to come? You know, will you exclude those kind of thing?

Yeah, no, it's both great questions. So let me start with just, Jeff, maybe reiterate margin expectations. I mean, really no fundamental change in margin expectations. You know, our target incrementals are 35% to 40% that's consistent across all three of our segments. But I will say that, I mean, these are long-term targets, right? And so in any given year, we may do better or worse, given different dynamics that are going on in the market. I would say, you know, given the current market dynamics, our focus is really maximizing growth potential and maintaining margin performance, which is already very strong. certainly within the IPS business. And so I think if you look at our margins of, you know, 35% in the quarter, it's in line with where we've been. We're holding serve while maximizing our growth potential. And if we think in the current market dynamics, that's the right playbook for IPS. And so I think that's the simple way to think about it. No fundamental change in the margin profile, no fundamental change in our long-term targets. But, you know, there's plenty of room for margin enhancement in the future. We think the right playbook is to focus on growth and maintain our margin position today. Your second question on tariffs, I guess a couple of things just to comment on that. Maybe I'll remind everybody, tariffs and themselves have not had a material impact on Nordson. That said, I would tell you, of course, where we have potential, we are pursuing recoveries for selected tariffs like everybody else. But in the context of a tariffs not having a material impact overall, and the fact of those recoveries only being a portion and, you know, offsetting, let's just say any ongoing tariff impact. In the context of our overall results, tariffs and tariff recoveries are really not a significant item to talk about. i think that's the short answer um that said you know i would say we are seeing clearly through let's call it the direct and indirect impact of tariffs as well as other geopolitical events we we are seeing you know general inflationary pressures that we are managing and mitigating our way through while maximizing our growth potential um and that you know has it's not just tariffs but i would say that has broader implications if you think about freight If you think about selected commodities, some more of a general pressure that I would say tied to, but not directly related to tariffs.

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

Okay, great. Thanks.

Your next question is from Matt Somerville with DEA Davidson. Your line is now open. Please go ahead.

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

Yeah, so we don't typically give segment level detail on our outlook, but let me just maybe address the first part of your question. I appreciate the question. I would say, you know, the 11% growth that we're seeing in the quarter is pretty broad based. and certainly, as Naga commented, relative to EFD, one of the drivers is what I'll call electronics-based demand, and we're seeing nice growth and ongoing demand in our order outlook for that space, but we are seeing pretty broad-based growth and order demand in the medical component space as well. That would include the interventional space. That would include some of our medical specialty products our fluid components products and so as well as even within EFD we you know a significant portion of EFD's business is actually tied to medical investments so pretty broad based I wouldn't say it's across the board growth yet in medical but in all spaces I we you know it's clear to us based on actual performance in Q3 what's on our order board and our pipeline, we're walking our way right back to, I would say, our ongoing normal mid-single-digit plus growth in our medical components business. Some already there, some on their way there, is the way I guess I could say it.

That color. And then maybe, Naga, if you could just speak back to the ATS business, how you're thinking about cycle durability, how long this cycle extends, any early views you have on fiscal 27 growth in that business just given you're obviously going to have some tougher compares versus this year but really want to understand kind of how this cycle maybe feels versus prior yeah you know clearly based on what we see both in our businesses where we are at in terms of pipeline activity with customers, order entry, backlog buildup, and revenue delivery, right?

So if you think all four of those things together, and if you think about in terms of our dispense business, our test inspection business, our exposure and EFT to electronics, all of them indicating that we are, we still have room in this cycle, right? As we are headed to delivering what is looking like a very strong, probably an all-time record, as you know, in the quarter we delivered an all-time record for this segment, we feel really good about where we are at and where we are going. To address your question, which is I'm glad you asked this, look, this quarter we delivered 30% organic growth in this segment, which is fantastic results. But as we head into next year, though, our expectation is we're going to build off of this peak and we're going to build at a rate that is more in line with our longer term, you know, mid single digit number. But that is going to be of an all-time peak is sort of what you want to think about. And everything we see in the business and what we follow for our customers, this demand looks pretty strong going into 27. And, you know, I'll give you one point of clarification in terms of, you know, just one proof point, I should say. For that comment, if you think about investments, chip manufacturing infrastructure investments in North America specifically, none of that has happened yet, right? Or at least not in the context of orders for Norton yet. That is to come. And so a lot of this demand that we are fulfilling today is a significant portion of it is in Asia. You know, as North American ship infrastructure gets built out, I think that's an opportunity for Norton and we are yet to see that.

Appreciate the college. Thank you. Your next question is from Christopher Glynn with Oppenheimer & Co. Incorporated. Your line is now open. Please go ahead.

Yeah, thanks. Good morning, everyone. And just wanted to ask about IPS. You know, you've talked about it being right in your zip code and expectation. Over the years, you had to have some, you know, step out opportunities, cans, clothing, recycling come to mind. I'm wondering if there are any emerging applications, market adoption opportunities for polymers, coatings, or core adhesives that are popping up in the pipeline.

Yeah, I mean, look, you know, if you think about our IPS business, it really thrives on finding applications or pivoting to end market niches where the growth is. And so, you know, we continue to build out new applications. I wouldn't say anything that pops up. You know, we're certainly watching the growth. You know, if I were to take you back and give you some examples around battery or solar, you know, we are in pretty early stages of thinking about how how ips segment applications will play both in defense as well as you know as you think about a number of data center build out applications where you you know these are early stages so for us you know it's really you have to be careful in that we have multiple single applications in many different end markets. And they don't particularly, you know, so for example, we think about our powder coating examples, you know, that business is doing incredibly well this year. That is because they have multiple different end market applications that they're going But I wouldn't say we have something that we would highlight as, you know, we've highlighted in the past around um fabric bonding or things like that okay great opportunity and then um oh uh sorry dan i was just going to say yeah the context i would give you on it is i think that's kind of what naga's you know articulating there's there's lots of opportunities but you know these tend i'll use some baseball analogies these tend to be more like singles not home runs lots of singles not it's not like there's a big home run out there but but for the business to deliver a three percent growth they have to do that right and so i i think i think it is underestimating the potential of this business you know when you have as significantly you know what is going to be a you know billion billion four kind of business that is growing at three percent that is pretty strong for the company and and you know not to be underestimated the power of this business yep agreed the stability in particular um and then the fourth quarter i think implies a pretty meaningful acceleration and sequential incrementals i know uh you know you had that and then some last year fourth quarter over third quarter but we're you know kind of in a year of

um you know managing inflation as you've described in tail uh so um yeah just just curious uh you know kind of relative stability sequentially in the third quarter it looks like the fourth quarter has a you know fairly meaningful ramp without a you know particularly pronounced sequential volume lift.

Yeah, no, I appreciate the observation. And certainly, I would say that's tied to normal operational improvements and enhancements that we are continually working on. I think we have good line of sight to that. And I think that's also why when we look at our margins, we tend to look at it more as an average over time as opposed to on any given quarter. And so I think certainly, I think there's a nice step up in our profitability. Some of that is tied to, you know, mix in our outlook, but also tied to, you know, ongoing operational initiatives and the impact that that has on us going forward. And so that's, you know, a normal part of our NBS Next framework and our operational excellence focus. And I think on a year-over-year basis, you know, as an example, the incrementals are a little more challenging, but largely that's because the fourth quarter of last year was a bit of a, you know, outlier from a profitability standpoint. So I would say we're on track with our average, you know, annual growth algorithm or margin expectations and Q4 is reflective of that.

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

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

Yeah, as I said in my opening comments, you know, 18% is kind of reflective of our ongoing rate expectation. We think that's a good spot to be in and I think is, you know, reflective of our ongoing run rate. You know, it's obviously something that we continue to look at and assess, but I would give you 18% as a good long-term expectation going forward. We think that's a good zip code to be in. Thank you.

Yep. As a reminder, if you would like to ask a question for the Q&A session, please press star one to raise your hand. Your next question is from Andrew Buscalia from BNB Paribas. Your line is now open. Please go ahead.

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

Thanks. Yeah, look, I would, you know, continue to remind us M&A is an important part of Nordsen's growth algorithm. This is an area that we continue to spend time on. We have a healthy number of opportunities. We are always pursuing them with our strategic and financial criteria in mind. You know, look, we have demonstrated that we would do various different sizes and types of deals. You know, most recently, we did a very small bolt-on acquisition with Capstan AG. You know, the previous year, we had Atrion. So, you know, we continue to stay focused on acquisitions because we have not announced anything significant doesn't mean we're not working on it. But oftentimes, you know, things are not appropriate either from a strategic criteria perspective or there is not a financial return that we can do for, you know, the best way to deploy our cash. Just a reminder, right, our strategic criteria are attractive end market niches and applications, differentiated technologies, you know, clearly adding to our growth focus portfolio is sort of three strategic criteria. Yeah. On the financial returns, you know, certainly we want to have growth that is above market with notes and like margins and, you know, returns that are sufficiently that exceeds our cost of capital. The areas we're spending a lot of times here, we've talked about it in the past, just as a reminder, you know, we're spending a ton of time around our medical, continuing to expand our medical platform. And as with Capstan, you can see, you know, we will continue to add bolt-on assets to performing strong existing core franchises of the company. So we'll do both. You know, we certainly look at testing inspection as well as the other area we are, we're spending time on.

The only thing I'd add to that is maybe I'll just take you back to our, you know what we call our growth algorithm which is you know on average over time half our growth organic half our growth inorganic we still think that's the right long-term formula and so you know certainly as naga said we're continuing to actively work the m a piece but i i think you know as you think about it broadly i think that's still the right way to think over time you know half our growth coming from inorganic as well the other half from organic But we've got to stay disciplined.

And that's really what you're seeing from the company is staying disciplined with the right kind of assets that fits both strategic and financial criteria.

Yeah, that's great caller. That's it for me. Thanks for taking my question guys.

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

Thank you for your time and attention on today's call. Norton is well positioned as a diversified precision technology company. Our close to the customer model, proprietary and niche technology, diversified geographic and end market exposures, high level of recurring revenue, and strong balance sheet are among the many attributes that makes us a quality growth compounder. Have a great day.

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