Earnings Call Transcript - NDSN Q1 2026

Operator, Operator

Hello, everyone. Thank you for joining us, and welcome to the Nordson Corporation First Quarter Fiscal Year 2026 Conference Call. I will now hand the call over to Lara Mahoney. Please go ahead.

Lara Mahoney, Vice President of Investor Relations and 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 Chief Executive Officer; and Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, February 19, to report Nordson's fiscal 2026 first quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to on today's call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 30 days. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable GAAP metric in the press release issued yesterday. Before we begin, please refer to Slide 2 of our presentation, where we note that certain statements regarding our future performance that are made during this call may be forward-looking based upon Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ. Moving to today's agenda on Slide 3. Naga will discuss first quarter highlights. He will then turn the call over to Dan to review sales and earnings performance for the total company and the 3 business segments. Dan will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our enterprise performance and provide an update on the fiscal 2026 second quarter and full year guidance. We will then be happy to take your questions. With that, I'll turn to Slide 4 and turn the call over to Naga.

Sundaram Nagarajan, President and Chief Executive Officer

Good morning, everyone. Thank you for joining Nordson's Fiscal 2026 First Quarter Conference Call. We entered 2026 optimistic about end market demand trends, and we achieved a record first quarter sales of $669 million. This is a 9% increase over the prior year and reflects 7% overall organic growth. Organic growth was broad-based across our segments with notable strength in our ATS segment, which grew over 20% compared to prior year due to momentum in the semiconductor end market. Solid execution and volume leverage drove strong profit performance for the quarter, increasing EBITDA by 8% and increasing adjusted earnings per share by 15% compared to prior year, both first quarter records. I would also like to highlight our free cash flow of $123 million and consistent cash flow conversion over 100% of net income during the quarter. We strategically deployed this cash to repurchase shares, return dividends to shareholders and maintain our debt leverage while continuing to invest in the company. I'll speak more about the enterprise performance in a few moments. But first, I'll turn the call over to Dan to provide a detailed perspective on our financial results for the quarter.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Thank you, Naga, and good morning, everyone. On Slide #5, you'll see first quarter fiscal 2026 sales were a first quarter record of $669 million, up 9% from the prior year first quarter sales of $615 million. Total organic sales increased 7%, driven by robust demand in Asia across most of our end markets. And while all of our segments contributed to growth, we saw particular strength in our advanced technology product lines, responding to growing demand in the semiconductor space. Favorable currency translation added an additional 4% to the top line in the quarter and was partially offset by the small divestiture that we completed in the fourth quarter of last year. Adjusted operating profit increased 10% year-over-year to $166 million, driven by increased SG&A leverage on the organic sales growth as well as benefits from the divestiture of our medical contract manufacturing business. EBITDA was up 8% year-over-year at a first quarter record of $203 million. EBITDA margins as a percentage of sales were 30%, in line with the prior year as our sales growth was concentrated in Asia, where our gross margins are generally lower, particularly on system sales. As a result, we saw lower incrementals during the quarter, which we would expect to normalize over time. Looking at non-operating income and expenses. Net interest expense during the quarter was $23 million, a decrease of $3 million versus the prior year, driven by lower year-over-year debt levels and a stable to declining rate environment. Other income increased $19 million year-over-year, principally related to a non-cash gain on a minority investment. To give a little color on this since this is a new item, this relates to a small, but strategic technology investment that we've accumulated over a number of years. The company we invested with completed an initial public offering in December of 2025 on the Korean Stock Exchange. As a result of this offering, we're now required to mark this investment to market value each quarter. The initial gain that we recognized was $22 million in the quarter before tax. We've excluded this non-cash gain from adjusted earnings, and we'll continue to treat future adjustments to mark-to-market as such going forward. Excluding this non-cash gain, year-over-year changes in other income and expense were driven by foreign currency contract fluctuations. Our tax expense on a U.S. GAAP basis was $31 million for an effective tax rate of 19%, inclusive of the impact of the non-cash gain that I just mentioned. Excluding this impact, our effective tax rate on an adjusted basis was 18%. This result is slightly below our annual guidance range for fiscal 2026 due to some discrete benefits that hit in the first quarter, primarily tied to stock compensation. We still project our full year tax rate to be at the lower end of our initial guidance range of 18.5% to 19.5%. Net income in the quarter totaled $133 million or $2.38 per share. Excluding intangible amortization and the noncash gain, adjusted earnings per share totaled a first quarter record of $2.37 per share, $0.02 above the midpoint of our quarterly guidance and a 15% increase from prior year adjusted earnings per share of $2.06. This improvement in year-over-year earnings reflects solid operating leverage from the organic sales growth as well as benefits from the divested medical contract manufacturing business. Now let's turn to Slides 6 through 8 to review the first quarter 2026 segment performance. Industrial Precision Solutions sales of $327 million increased 9% compared to the prior year first quarter. Organic sales increased 3% compared to the prior year with a favorable currency impact of 6%. Growth was broad-based across most product lines with particular strength in Asia Pacific markets. Notably, demand for polymer processing and automotive product lines have stabilized as we expected. EBITDA was $110 million in the quarter or 34% of sales, down 2% over prior year, largely due to the geographic product mix of organic growth and the lower incremental leverage on foreign currency changes. Turning to Slide 7, you'll see Medical and Fluid Solutions sales of $193 million were relatively flat compared to the prior year's first quarter. Organic sales increased 3% in the quarter, led by strength in our engineered fluid solutions product lines. Divested sales from the medical contract manufacturing business had a negative impact of approximately 4% compared to the prior year. The 3% growth was a slower start than we expected for the segment, but we remain confident in the mid-single-digit outlook through the year. It's worth noting that the winter storms at the end of January did impact some of our production as well as some of our medical supply chain on a temporary basis. We estimate to the tune of about a 1% impact on our sales in the quarter. EBITDA for Medical and Fluid Solutions was $70 million or 36% of sales, which was an increase of 9% from the prior year EBITDA of $64 million. EBITDA margin improved driven by the divestiture, organic sales volume and strong incremental performance. Now turning to Slide 8. You'll see Advanced Technology Solutions sales were $149 million, a 23% increase compared to the prior year's first quarter. The 21% organic sales increase was driven by double-digit growth in electronics dispense product lines related to semiconductor applications as well as recovering demand for our X-ray systems. First quarter EBITDA was $33 million or 22% of sales, an increase of 43% compared to the prior year first quarter EBITDA of $23 million. The improvement in EBITDA margin compared to the prior year reflects stronger sales volume and volume leverage. The team did an outstanding job of maintaining SG&A during the quarter as a result of sustainable operational and footprint changes that they made within their segment in prior years, guided by the NBS Next growth framework. Finally, turning to the balance sheet and cash flow on Slide 9. At the end of the first quarter, we had cash on hand of $120 million and net debt was approximately $1.9 billion. Our leverage ratio of 2.1x remained consistent with year-end results and is in line with our long-term targets, allowing us to continue to strategically deploy capital and giving us plenty of firepower for acquisition of strategic assets. Our free cash flow generation was $123 million during the quarter, resulting in a 105% conversion rate on net income, excluding the non-cash gain. This represents the third consecutive quarter above 100% conversion despite the accelerated revenue growth we achieved. As noted on Slide 10, during the quarter, we invested $18 million in capital projects to drive future organic growth. We paid $46 million in dividends to our shareholders and repurchased $82 million in shares on the open market. We also modified and extended our existing $1.2 billion credit facility. As part of that transaction, we consolidated a term loan coming due in fiscal 2026 into the new facility to provide greater overall financial flexibility to pursue strategic opportunities with no change in our total outstanding debt. At quarter end, we have about $800 million available under the new facility. So to summarize the quarter, we achieved high single-digit organic sales growth while maintaining our strong 30% EBITDA margins despite some geographic and product mix headwinds. Our cash conversion remains strong, allowing us to strategically deploy capital to sustainably grow the franchise and return value to shareholders. Our team delivered on their commitments for the quarter and worked to grow backlog to position us for success in the second quarter. While market conditions have improved for most of our businesses, we remain balanced and vigilant for more meaningful recovery in select end markets, which is reflected in our updated guidance for the full year that Naga will cover in a moment.

Sundaram Nagarajan, President and Chief Executive Officer

Thanks, Dan. This strong first quarter performance has set the stage well for fiscal 2026. Now 3 months into the year, our end markets are playing out as we expected. Within IPS, investments in packaging and product assembly are sustaining. Precision agriculture investments continue to grow over prior year and automotive and polymer processing applications have stabilized. Medical end markets are returning to more normalized growth, and we expect to see these benefits continue as the year progresses. Growth in engineered fluid solution product lines is being driven by electronics and industrial applications. Within advanced technology, our dispense and surface treatment product lines for semiconductor application continue to drive growth, while our X-ray systems that ensure the quality of semiconductor packaging are starting to inflect. Growth in general and automotive electronics is more muted, but there are early signs of growing capacity needs in these end markets. Because it is such an important growth driver, I want to take a moment on Slide 12 to remind our investors about why Nordson wins in the semiconductor space. Semiconductor applications account for approximately 50% of revenue in the ATS segment and drove the overall double-digit organic growth in the first quarter. ATS core competency is in the advanced packaging process of semiconductor manufacturing. Our precision dispense applications, including our market-leading Vantage and Spectrum S2 electronics dispense systems enable underfill and encapsulation applications that allow the stacking of increasingly small chips on printed circuit boards. Our close to the customer model positions Nordson as a partner when customers start developing advanced manufacturing processes for semiconductor packages. Our technology enables these increasingly sophisticated manufacturing processes. Quality control of these costly and complex chips is also creating more opportunities for our test and inspection portfolio. Current investments are primarily in Asia Pacific, and we are well positioned across the semiconductor supply chain, both technologically and geographically as investments grow into other regions. Clearly, I am pleased with the momentum across our end markets and our ability to meet our customer needs. Turning now to our outlook, starting on Slide 13. We entered the second quarter with continued order momentum and increased backlog, up approximately 4% over the prior year. Order entry momentum was broad-based in the quarter with strength in our ATS segment. These trends position the company to deliver second quarter fiscal 2026 sales in the range of $710 million to $740 million. Second quarter adjusted earnings are forecasted to be in the range of $2.70 to $2.90 per diluted share. Based on strong start to the year, the second quarter outlook and the current foreign exchange rate environment, we are increasing our full year guidance as noted on Slide 14. Sales are now expected in the range of $2.860 billion to $2.980 billion, which is an increase of 4.5% at the midpoint. The top end of our range assumes continued momentum from electronics end markets as well as modest improvement in our industrial and automotive product lines. The bottom end of our guidance would assume some broader pullback in end market demand in the second half. While we certainly don't see signs of that today, we still believe it is prudent to plan for this potential scenario. Adjusted earnings will be in the range of $11 to $11.60 per diluted share, which is an increase of 10% at the midpoint. As always, I want to thank our customers and shareholders for your continued support. In particular, I want to thank our Nordson employees who are passionate about meeting the needs of our customers. Our focus on innovation and operational excellence continue to position us well to serve our customers. With that, we will pause and take your questions.

Operator, Operator

Our first question comes from Jeff Hammond with KeyBanc.

Jeffrey Hammond, Analyst

Can we discuss the margin dynamics related to the geographic mix of these systems? Do you think this trend will continue over the next few quarters? Do you see any improvements in the mix? What indicators in the order book suggest a change in the mix or that it will remain the same?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Sundaram Nagarajan, President and Chief Executive Officer

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

Jeffrey Hammond, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, the incrementals were actually quite strong. Overall, our incrementals are essentially off the chart. If we exclude the impact of the CDMO divestiture, our incrementals are still well above 50% for the quarter. This is quite strong and reflects a positive outlook for that business. From a growth perspective, I would say our 3% growth rate is a slower start than we would have liked, partly due to weather-related issues, which we estimate had about a 1% impact. However, we are very comfortable with the outlook of returning to mid-single-digit growth. We observe strong underlying demand in the business, as evidenced by our backlog and project activity with our customers. So, it's just a slightly slower start, but it's really not that much slower than we expected, especially if you adjust for the weather impact.

Sundaram Nagarajan, President and Chief Executive Officer

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

Operator, Operator

Our next question comes from Mike Halloran with Baird.

Michael Halloran, Analyst

Can we start on the ATS piece and maybe just give some more context to the moving pieces in the larger buckets there. The dispense piece, it seems like it's tracking the right way, starting to see some signs on X-ray. Maybe broadly on the T&I piece, what are you seeing? And just maybe put it all together, talk about the 3 pieces, the order trajectory and where you're the most confident?

Sundaram Nagarajan, President and Chief Executive Officer

Overall, we saw strong momentum in order entries and revenue shipments this quarter for our businesses. Our dispense operations were the strongest, which was expected given their applications in complex chip manufacturing processes driven by AI computing demands. There is significant investment happening in this area, which is reflected in our revenue and order entries. For our test and inspection segment, we can break it down into two parts: our X-ray businesses and our acoustic emission inspection, which we refer to as AMI businesses. We're starting to see positive momentum in our X-ray business, which was down last year but is now showing signs of recovery. Complex chips, which combine logic and memory, are expensive and critical for yield rates, so the demand for test and inspection applications in these manufacturing processes is expanding. We are optimistic about the long-term growth as well as the near-term orders we’re seeing. Regarding our AMI business, we are coming off a couple of years of strong growth and still expect decent growth this year. Overall, we are confident in our ATS segment, which is reflected in our second quarter outlook. As we move into the second half of the year, we need to remember that this business began gaining traction last year, so the comparisons will be more challenging. However, due to our backlog and order entry momentum, we still feel positive about this year, expecting this business to exceed its long-term targets of mid-single digits growth.

Michael Halloran, Analyst

And maybe you can just have the exact same conversation around the IPS segment, given all the moving pieces there?

Sundaram Nagarajan, President and Chief Executive Officer

Yes, certainly. Regarding the IPS business, we are pleased to announce that we have returned to growth, achieving 3% organic growth in the quarter, and we anticipate continuing this trend for the remainder of the year. This aligns with our guidance midpoint. Investments in packaging and product assembly markets are holding strong. We are also witnessing growth in our Precision Ag or ARAG business in Europe and South America, where we hold a leading market position. There is stable demand in the aftermarket segment, which constitutes over 55% of our revenue. We expect a modest recovery in the polymer processing and automotive markets throughout the year. They have stabilized but are not yet showing significant improvement.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Michael Halloran, Analyst

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Operator, Operator

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

Matt Summerville, Analyst

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. The weather primarily affected our interventional products and, to some extent, our fluid components, especially in our Atrion-related businesses. Several of our operations and supply chains on the East Coast were impacted. As a result, we lost a few days of production due to mandated shutdowns. We estimate this had about a 1% impact, translating to approximately 2 to 3 days of production disruption. We are now fully operational, but it did affect our delivery capabilities during the quarter, particularly since it occurred late in the quarter. So, overall, we experienced 3% growth; normalized, that would have been around 4% for the quarter without the late storm impact.

Matt Summerville, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

We are actively working on our acquisition pipeline and continue to explore various opportunities. It is important to not interpret the lack of announcements as a sign of inactivity. We are maintaining financial and strategic discipline. Our focus areas include expanding our medical component portfolio, exploring test and inspection opportunities, and enhancing our core industrial technology offerings. While some market multiples appear elevated, we find reasonable options as well. We will remain disciplined in our acquisitions, targeting businesses that contribute to our growth, have differentiation, and possess strong technology. From a financial perspective, we seek Nordson-like gross margins and EBITDA in the 20% range with significant margin expansion potential and an appropriate return. Our strategic and financial criteria have not changed, and we have a healthy pipeline to continue working on. The lack of announcements should not be viewed as a lack of ongoing activity on our part.

Operator, Operator

Our next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn, Analyst

I wanted to mention that I'm seeing some initial signs of the general electronics of ATS starting to show some positive movement, which aligns with what we're hearing from companies that are somewhat related to yours. However, I would like to take a moment to further discuss this topic.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, to add some detail, I would say we're not really seeing any significant changes in those businesses. Demand remains stable but at low growth levels. The early indications suggest that high-end semiconductor demand and investments are beginning to flow into lower-level electronics applications. In terms of memory and general electronics needs, we are starting to see announcements and discussions about capacity investments. Although we haven't observed those yet, these are early signs that we might see some changes in the future. Currently, the situation in those markets reflects stable demand with low growth rates.

Christopher Glynn, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

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

Christopher Glynn, Analyst

Yes, exactly.

Sundaram Nagarajan, President and Chief Executive Officer

We have some interesting products that assist our customers in manufacturing optical modules. This is a segment we are involved in, and we are starting to see orders specifically related to it.

Christopher Glynn, Analyst

What was the impact of foreign exchange on ATS and IPS margins? They seemed to be below the steady state levels you have historically delivered. I know you mentioned mix, but I was expecting it to be more about foreign exchange, so I wanted to inquire about that.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. We also noted that foreign exchange (FX) had a notable impact on our incremental performance for IPS. Specifically, FX contributed approximately 6% to IPS sales. However, we don't see the same level of incrementals from FX fluctuations. Generally, we would expect a 25% to 30% range for typical incrementals from FX, both positively and negatively. Therefore, with 6% growth attributed to FX at a lower incremental rate, it certainly played a role in the performance this quarter.

Operator, Operator

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

Robert Jamieson, Analyst

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Robert Jamieson, Analyst

I would like to discuss the full year guidance. We had a strong performance in the first quarter and a positive outlook for the second quarter. Taking Naga's comments into account, I think it's prudent to maintain a degree of conservatism. I would like to understand which end markets and areas you expect to exceed your baseline estimates to reach the upper end of your sales projections. Would it require an acceleration in the automotive sector? I've been observing capital expenditures in over 20 global automotive OEMs, and since December, we've noted a 5% increase in automotive capital expenditures growth for 2026, compared to being flat in December. Would a combination of that, along with increased momentum in the minimally invasive and specialty medical sectors, be a reasonable assessment if all factors aligned to help us achieve the upper end of your guidance range?

Sundaram Nagarajan, President and Chief Executive Officer

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes, I'll begin with what I believe is the simpler part. In the medical sector, we observe consistent growth in the mid-single-digit range. Is there room for improvement? Possibly, but it's not a market we anticipate will show significant change. The factors that could drive higher growth would be an increase in general industrial and automotive demand. Additionally, regarding our ATS performance, as we've pointed out several times, ATS deliveries, which are 70% systems, tend to fluctuate. We're not expecting a 20% growth run rate in this business. We recognize there will be variability from quarter to quarter. However, one possible upside would be if demand remains consistently strong, which would exceed our current expectations.

Sundaram Nagarajan, President and Chief Executive Officer

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

Robert Jamieson, Analyst

No, that makes perfect sense. Just one last question. I don't see this being an issue for you, but regarding DRAM pricing, have there been any impacts? How much does it contribute to your bill of materials? Is it quite minimal? Also, with the capacity constraints, could that present an opportunity for you if they need to increase capacity on the back-end processes? Am I thinking along the right lines?

Sundaram Nagarajan, President and Chief Executive Officer

Robert, could you repeat the early part of your question before the pricing? We missed something there. We just...

Robert Jamieson, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

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

Operator, Operator

Our next question comes from Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia, Analyst

I wanted to ask about the ATS segment. You mentioned that around half of your sales are related to semiconductors. We're noticing a potential recovery in the test and inspection area, particularly with X-ray. Can you elaborate on the cycle for that segment of your business? Also, is the improvement in the X-ray area an indicator of a potential increase in that part of your ATS business?

Sundaram Nagarajan, President and Chief Executive Officer

Yes. If you think about our X-ray business, this is one is a little slower to recover when compared to our dispense business and when compared to our Acoustic Emission. And so if you think about year-on-year, our X-ray has some automotive exposure as well. The semi side of X-ray is doing really well and the auto is flattish is the way to think about it. Does that help the question that you asked? Andrew, maybe we can elaborate just a bit. As automotive comes back, we will continue to see X-ray do well.

Andrew Buscaglia, Analyst

On the MFS, you will encounter some tough margin comparisons in the latter half of the year. Can you clarify if you expect to see expansion from such a high base when we reach that point? The margins you're facing are quite impressive. What factors might drive demand or lift margins if demand isn't accelerating?

Daniel Hopgood, Executive Vice President and Chief Financial Officer

Yes. No, it's a good question. And I mean, maybe I'll even go back to our fourth quarter. We printed a very strong margin in the fourth quarter. And I think we made comments during that call that, that was a high point and not necessarily an ongoing run rate. And so we think margins in the MFS segment are very much sustainable in the 37%-ish range. And we may have some selective quarter-over-quarter comp issues like the fourth quarter where we had a really strong performance. But we think maintaining that margin performance and continuing to generate reasonable incrementals as we grow is very much attainable in the medical business. It's worth pointing out, maybe just to reiterate, the divestiture that we completed in the fourth quarter is kind of a, call it, a one-time adjustment that impacts our ongoing margins. And so you're certainly seeing that in the year-over-year margin comparisons in Q1, and you'll see that through the year until we hit Q4.

Sundaram Nagarajan, President and Chief Executive Officer

I believe the key focus for our company, which is reflected across all our businesses, is growth at reasonable incrementals. Given Nordson's high gross and best-in-class EBITDA margins, it's crucial for our teams to concentrate on driving organic growth, innovating, and delivering products when our customers need them, while maintaining the highest quality and being agile. The margin is simply a result of our efforts. To summarize, we are committed to achieving above-market growth at reasonable incrementals, and that's what you can expect from us.

Operator, Operator

Our next question comes from Chris Dankert with Loop Capital.

Christopher Dankert, Analyst

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

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Sundaram Nagarajan, President and Chief Executive Officer

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

Christopher Dankert, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

They seem to be pretty stable and our packaging business has had a pretty good quarter, expect to continue to have a pretty good quarter. If you think about the nonwovens business, we're coming off of 2 years of incredible capacity adds. A lot of capacity adds for nonwovens came in the last year from a lot of our mid-tier OEMs based in Asia, building out in Africa, Middle East, India, so global middle income growth, still a big secular growth driver for this business, albeit reasonable low single-digit growth, stable aftermarket demand, all the things that makes this business great, still intact, still continuing to do well.

Christopher Dankert, Analyst

Congrats on the nice start to '26 year.

Operator, Operator

Let me ask about the ATS segment. If I remember correctly, in past positive cycles around consumer electronics for dispensing, the visibility was quite limited. Customers would place orders, and then shipping would need to happen very quickly. It seems that the lumpiness is still present with the current data center build-out for advanced chips. Can you help us understand if there are any differences between this cycle and previous consumer electronics-led cycles? Do you have any more visibility into the capacity being added and the order lead times?

Sundaram Nagarajan, President and Chief Executive Officer

The order lead times remain similar. However, the size and growth differences are smaller instead of being significantly large or non-existent. This suggests a dampening effect; the cycle's amplitude is less pronounced. Despite this, our order lead times have not changed. Over the past couple of years, we have implemented new advantages by relocating capacity closer to our customers in areas where they need us. This relocation has enabled us to respond more effectively to lead times. Furthermore, our next application within our factories has greatly enhanced our on-time delivery capabilities, consistently achieving low 90s and approaching 95% on-time delivery based on customer requirements. This capability, developed by our teams over recent years, coupled with having capacity where our customers need it most, has been transformative for our business.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

I'll just add that your comment is accurate. If you consider our backlog, it's clear why we believe that looking at it quarter-to-quarter or year-over-year is a good indicator. We're able to turn our backlog around quite quickly. While we do have some specific areas with longer lead times, most of our backlog is processed within the quarter. Therefore, our starting backlog serves as a good indication of current demand for Q2. Additionally, we maintain strong pipelines and are aware of our discussions with customers regarding new projects. However, it can be challenging to determine exactly when these discussions will translate into orders and deliveries, as that depends on the customers' needs for their production schedules.

Operator, Operator

Our next question comes from Brad Hewitt with Wolfe Research.

Bradley Hewitt, Analyst

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

Sundaram Nagarajan, President and Chief Executive Officer

Yes. As I shared earlier in one of the answers, I would tell you, it is a broad-based demand that we are certainly seeing in IPS. IPS returns to growth, returned to growth in the quarter, expect to have a good growth for the rest of the year. Clearly, you can see growth in packaging, product assembly. Our Precision Ag business is also growing nicely. Polymer Solutions has stabilized. So there is some of that negative going away, right? If you think about polymers and automotive, where last year, we were dealing with still demand going down. That has stabilized. So from that perspective, the comps are better there. So it's a combination of our businesses that were negative last year are stabilized. They've not inflected yet. But our businesses that are having good growth demand in packaging, product assembly and precision ag are contributing to the growth in this segment.

Daniel Hopgood, Executive Vice President and Chief Financial Officer

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

Operator, Operator

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

Sundaram Nagarajan, President and Chief Executive Officer

Thank you for your time and attention on today's call. We have several upcoming investor events over the next month where our team would be happy to meet with you, including the Loop Industrial Conference on March 10 in New York, the Bank of America Conference on March 17 in London and at the APEX trade show in Anaheim, California on March 18, featuring our electronics product lines. Nordson is well positioned as a diversified precision technology company, 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 make us a quality compounder. Have a great day.

Operator, Operator

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