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Nordson Corporation (NASDAQ:NDSN)

F3Q 2011 Earnings Conference Call

August 19, 2011 8:30 AM ET

Executives

Michael F. Hilton - President and CEO

Gregory A. Thaxton - VP and CFO

James R. Jaye - Director, Communications & IR

Analysts

Jason Ursaner - CJS Securities.

Charlie Brady - BMO Capital Markets.

Mark Douglass - Longbow Research.

Matt Summerville - KeyBanc.

Walter Liptak - Barrington Research.

Liam Burke - Janney Capital.

Scott Blumenthal - Emerald Advisors.

Operator

Good day ladies and gentlemen and welcome to the Nordson Corporation Webcast for Third Quarter Fiscal Year 2011 Earnings. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions). As a reminder, this conference call is being recorded.

I would now like to turn your conference over to the host for today, Mr. Jim Jaye, Director of Investor Relations. Sir, please go ahead.

James Jaye

Thank you, Ben and good morning to everyone listening. This is Jim Jaye, Director of Communications and Investor Relations. I'm here with Mike Hilton, President and Chief Executive Officer; and Greg Thaxton, Vice President and Chief Financial Officer.

We would like to welcome you to our conference call today Friday, August 19, 2011 on Nordson's third quarter fiscal year 2011 results. Our conference call is being broadcast live on our webpage at www.nordson.com/investors and will be available for 14 days. There will be a telephone replay of our conference call available until midnight August 26 by calling 1-855-859-2056. You will need to reference ID number 89752139.

Our attorneys have requested we open this call with a cautionary statement under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

During this conference call, forward-looking statements may be made regarding our future performance based on 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. After our prepared remarks, we will have a question-and-answer session.

I would now like to turn the call over to Mike Hilton for an overview of our third quarter fiscal year 2011 results and Nordson's future outlook. Mike?

Michael Hilton

Thank you, Jim. Good morning everyone and thank you for listening to Nordson's third quarter 2011 conference call. This quarter we delivered the strongest third quarter in our history, with all segments generating solid growth and increased operating margins. Our update this morning will describe several of the highlights from our performance and we will also provide some perspective relative to our outlook for the fourth quarter of fiscal year 2011.

Let me begin by offering some comments on the third quarter. First, I want to congratulate and thank our global team for continuing to perform at an extremely high level. They delivered solid improvement over the strong levels of a year ago in sales, operating margin, operating profit, net income and earnings per share.

We continue to generate these results by delivering real value to our customers in the form of innovative technology, applications expertise and direct worldwide service. At the same time, we are maintaining our disciplined approach to spending and we are continuing to expand our operational efficiencies through a variety of continuous improvement initiatives.

Looking at a few of our numbers more specifically, sales grew by 12% in the third quarter compared to the same quarter a year ago as customers continued to respond to our value proposition. I'm especially pleased that we generated the solid growth despite a backdrop of sluggish global recovery impacted by the disaster in Japan, increased macroeconomic and political uncertainty in comparison against a very strong period of growth a year ago.

In addition to the solid top line, profitability reached the highest third quarter levels in our history. Excluding one-time items in both years, operating profits grew by 21% and operating margin reached 26% and EPS grew by 25%. We also continued to execute on our acquisition strategy during the quarter. As previously announced, the Verbruggen acquisition adds to our Adhesive Dispensing segment by providing us with an entry into growing flexible packaging markets worldwide and the Value Plastics acquisition, which we expect to close within the quarter, the fourth quarter, is a high performing growth business currently focused in an attractive niche market space in the medical area, but with opportunities to expand in industrial space as well.

In terms of our outlook, our 12-week order rates as compared to the prior year are solid and remain positive in all segments and geographies. So they are also reflective of the current macroeconomic environment. Overall, our guidance points to a record full year for Nordson in both sales and profitability.

I will offer additional comments relative to our outlook later in the webcast. Before that, let me turn the call over to Greg Thaxton, our Chief Financial Officer, who’ll provide a more detailed commentary on our third quarter financial results as well as some comments on our guidance for the fourth quarter of 2011. Greg?

Gregory Thaxton

Thank you, Mike and good morning to everyone. As Mike noted, this is the strongest third quarter in Nordson’s history. Let me start by talking about our sales performance, where in total sales were up 12% over the prior year’s third quarter. This growth is comprised of 5% improvement in volume with positive currency translation making up the balance of the increase and growth occurred in all three operating segments and in every region with the exception of Japan.

In the Adhesive Dispensing segment, sales improved by 13% over the prior year’s third quarter. Sales were strongest in emerging regions and in consumer non-durable end markets such as packaging and nonwovens.

The Advanced Technology segment also improved over the prior year, delivering an 8% sales increase, with particular strength in our dispensing and surface treatment product lines.

The Industrial Coating Systems segment continued to capture returning demand in consumer durable markets resulting in sales increase of 17% over last year's third quarter. Double-digit growth occurred in a majority of this segment's geographies and product lines.

As the quarter evolved, we did experience a decline in order rates as concerns regarding the global economic backdrop reemerged and our customers' buying patterns turned more cautious. Given the relatively short lead-time nature of our business, this did have an impact on our quarterly revenue. Also, all segments were impacted by the events in Japan where recovery from the disaster remained slow for the majority of the quarter. Within this particular region, we have seen a return in demand over the last several weeks in all segments.

Moving down the income statement, gross margin in the quarter was 60.2%, in line with our guidance and up 80 basis points from the prior year's third quarter.

As we look at operating performance in the quarter, reported operating profit increased by 16% over the prior year's third quarter to $79 million and operating margin improve to 25%, exceeding the strong level of a year ago.

We have included a schedule in our press release to reconcile between GAAP earnings per share and normalized earnings per share to exclude certain one-time items and excluding these one-time items in both years, operating profit improved by 21%, operating margin reached 26% and we have an operating profit leverage ratio of almost 1.8 times our sales growth.

Operating margin improved in all segments compared to last year's third quarter with Adhesive Dispensing and Advanced Technology continuing to perform at very high levels and I am particularly pleased with the continued progress within Industrial Coatings where operating margin expanded to nearly 18% in the quarter, an improvement of more than 5 percentage points over the prior year’s third quarter. For Nordson overall, this is the ninth consecutive quarter we have improved our quarterly operating margin over the previous year.

Continuing down the income statement, net income and diluted earnings per share both exceeded the levels of a year ago. Net income for the quarter was $57 million for a return on sales of 18% and third quarter diluted earnings per share are $0.82.

Earnings in the quarter included a gain of $0.04 per share related to a one-time tax benefit and a charge of $0.03 per share related to the withdrawal from an international multi-employer benefit plan. Excluding one-time items in both years, third quarter diluted earnings per share improved 25% on a year-over-year basis.

The current quarter's EBITDA was $85 million and third quarter free cash flow before dividend was a strong $65 million or 114% of the quarter's net income, representing a very strong cash conversion in the quarter.

Our continued confidence in our ability to general strong cash flow led to our recent dividend announcement where we increased our quarterly dividend by 19%. With this increase, Nordson has increased its annual dividend for 48 consecutive years, ranking us 15th among an elite group of publicly traded companies with the longest running record of consecutive dividend increases.

Looking at our performance through nine months, sales are up 20% over the prior year and excluding one-time items in both years, operating profit and earnings per share are up 48% and 55%, respectively. Also, over this nine-month period as compared to the prior year, EBITDA has increased by 41% and free cash flow before dividends has increased over 180%. Our balance sheet remained strong with debt to trailing 12-month EBITDA of well under one and sufficient capacity for additional strategic investments.

Before moving to our fourth quarter outlook, I'll provide some comments on recent order trends. We have provided our most recent order data, both on a segment and geographic basis with our press release. These orders are for the 12-week period ending August 14 as compared to the same 12 weeks of the prior year on a currency neutral basis.

Total Company orders were up 6% compared to the same 12-week period in the prior year. On a total Company level, acquisitions added approximately 1% to this growth. This overall growth rate is solid, broad-based growth, but also reflective of the slowing order trends that I referred to given the current macroeconomic environment. These order rates are also in comparison to a strong period of recovery a year ago.

On a geographic basis, orders were up in every geography over the same period last year with order rates growing fastest in Asia Pacific, Japan and the Americas. Orders rates in the U.S. and Europe reflect recent macroeconomic softening.

Looking at orders on a segment basis, Adhesive Dispensing orders were up 4% from the prior year, with growth driven by non-durable end markets. Advanced Technology orders over the latest 12 weeks are up 9% from the prior year, led by activity within our automated and semi-automated dispensing platforms.

Within the Industrial Coating segment, the latest 12-week orders were up 8% as compared to the prior year as investment in durable end market served by these products continues to recover.

Moving o to our outlook for sales in the fourth quarter, we're expecting sales to be in the range of $315 million to $327 million. As compared to the prior year’s fourth quarter, the sales outlook represents an increase in sales volume of between 5% to 9%, inclusive of 2% related acquisitions with an additional 4% currency translation benefit based on the current exchange rate environment. This represents a total sales increase of 9% to 13% as compared to the fourth quarter a year ago. We expect gross margin of around 59% in the quarter, reflecting a higher mix of systems versus parts as compared to the third quarter.

Total Selling and Administrative costs are expected to be up about 1% from the third quarter, including anticipated charges of approximately $2 million associated with restructuring costs and we’re forecasting a 30% effective tax rate for the quarter.

Earnings per share for the fourth quarter are estimated to be $0.77 per share to $0.84 per share inclusive of the $0.02 per share restructuring charge. Excluding one-time items in both years, the midpoint of this fourth quarter guidance represents an increase of 10% over the prior year fourth quarter earnings per share.

On a full year basis, even the low end of our sales and diluted EPS guidance will result in Nordson full year record for sales, operating profit, net income, and diluted earnings per share.

In summary, Nordson delivered record third quarter and nine-month year-to-date performance by generating solid growth even against strong comparisons and an uncertain macroeconomic environment by maintaining our strong focus on operating efficiency and continuous improvement initiatives. Our guidance points to a solid fourth quarter that will result in record full year performance.

Michael Hilton

Thanks, Greg. Before moving on to your questions, I would like to provide some additional comments on our recent order trends and outlook. As Greg described, our recent order trends remained solid, although they have moderated more recently given the level of macroeconomic uncertainty that persists in today's environment.

As we look at our latest annualized 12-week run rate, which is approximately $1.2 billion, this is down modestly from the $1.3 billion level we reported in our last conference call, but consistent with the seasonal trends that we see in the nature of our Advanced Technology business and Europe's holiday season.

We continue to believe that our presence in emerging markets, technology leadership positions and expanding application and new market opportunities will enable us to deliver long-term growth.

Specific drivers in each segment bode well for our long-term success. In Adhesives, we continue to be market leaders in consumer non-durable markets such as packaging and nonwovens that present solid and long-term growth opportunities in the rapidly expanding middle-class populations of emerging regions. General product assembly applications provide numerous application opportunities for us to grow as well.

In Advanced Technology, we are well-positioned to capitalize on the continuing demand for smartphones, tablets, and other electronic devices and accessories. We will continue to supplement our core electronics positions with new markets and applications in areas like medical devices.

Growth opportunities also exist in our Industrial Coating segment as we continue to expand our tiered product offering to more effectively meet the different needs of manufacturers in varying regions and we capture the demand of these emerging markets.

From an operating perspective, we expect to deliver very strong performance on a full year basis that exceeds the record performance of 2010. Yet there are opportunities for further improvement and we remained focused on our continuous improvement initiatives to leverage and deliver this opportunity. We’ll continue to surpass the competition with a compelling set of advantages that include innovative technology, application expertise, direct sales and service, our global footprint, our operational excellence model and financial resources for continued investment and, of course a team that executes better than anyone else. We’ll continue to focus on what we can control, mindful that we are not immune to the global macroeconomic factors.

With regard to the acquisition of Value Plastics, we’re still waiting for regulatory approval and we expect to close the transaction in our fiscal fourth quarter. Although terms of the contract prohibit me from discussing financial information about the Company, I will say that we are excited about the prospects the Company brings to Nordson and the opportunity to add such a high performing operation to the Nordson portfolio. Once the transaction closes, we do plan to schedule a teleconference to discuss the more specifics about Value Plastics and the value Nordson will bring to the acquisition.

In closing, I would like to thank our team again for delivering very solid results in the third quarter and for the first nine months of this year. I’m confident they will continue to perform at a high level in the fourth quarter and beyond.

At this time, we will take your questions. Thank you.

Question-And-Answer-Session

Operator

(Operator instructions) and our first question comes from the line of Jason Ursaner from CJS Securities. Your line is now open. Please go ahead sir.

Jason Ursaner - CJS Securities

Good morning. Mike, you’ve been anticipating a compression in year-on-year volume growth for some time, this moderation towards long-term sustainable trends, so just two questions related to that. One is, as you look at order flow and talk with customers, what gives you confidence that it is actually a moderation and not signs of a broader slowdown? And then secondly, given that you’re lapping the heart of the cyclical recovery, particularly in the U.S., how should we think about sustainable growth by segment and have the rates you’ve outlined in the past changed at all?

Michael Hilton

Okay Jason, maybe I’ll actually tackle that second question first because we've just spent some time going through our strategic plan update and from an overall organic growth perspective, as we look at each of the businesses that we operate in and the niches that we see as good opportunities for organic expansion, what we talked about last year in our Investor Conference sort of that mid-to-high single digits organic growth, we feel confident on that in the long run and perhaps see some upside from an organic standpoint based on some of the additional adjacent niches that we see as opportunity.

So we feel good about the long-term prospects across all of our segments. With respect to the short term, we have been talking about throughout the year, particularly in our technology business and in our Adhesives business getting closer to more of that long-term growth trajectory while still seeing some recovery opportunities in our Coatings business. I’d say we’re approaching that sort of longer term sustainable growth. As Greg and I both mentioned though, we have seen in the tail end of this quarter some slowing in two key geographies, the U.S. and Europe and while we tend to outperform those geographies given the niches that we have in the specific customer market opportunities we have, we did see at the tail end of the quarter some slowing there.

As it relates to our order rates, what we see, couple of comments, one, the backlog is pretty strong. Some of that is from a few orders that got pushed into this quarter from last quarter, but they’re going to be delivered in the early part of the quarter, but some of that is really slowdown that we’ve seen a little bit in the U.S. and Europe. I’d say our bid activity remains strong and we’ve continued to see orders come in. I’d say our customers are a little bit more cautious in the strong term just given the uncertainties out there.

Jason Ursaner - CJS Securities

Okay and then you mentioned Value Plastics expecting to close in this quarter. Do you have a rough date for when we could expect this or maybe a percentage of the full quarter we could assume the acquisition is contributing in fourth quarter?

Michael Hilton

I will wait right now to hear, to get through the review of the Justice department regarding the HSR filing. So we would hope that in the next week or so we’ll hear something on that and then close fairly quickly after that. So our hope is in the next couple of weeks that that would close.

Jason Ursaner - CJS Securities

And if I take the midpoint of the Q4 earnings forecast guiding to adjusted EPS for the full year of around $3.20. So I know you can’t discuss financials of the Value Plastics deal, but based on yesterday’s close, your own stock would be trading less than 13 times this year’s earnings, and I’d argue you are a pretty high quality company. So without discussing the financials, how do you see this business generating superior returns relative to your own stock, even if it's a very high quality business?

Michael Hilton

I think a couple of things. You’ve got it right. It is very high quality business. It has many of the attributes of our EFD business. It's in an area where we think there will be good growth both in the underlying demographics, but also with the potential to expand in some of the adjacencies as well as to expand in the industrial space. So we see some important opportunities to grow even faster than the Value Plastics team has been able to grow to date and we see the quality of the business being very, very high.

Jason Ursaner - CJS Securities

Okay. Thanks a lot for taking my questions.

Operator

Thank you, sir. Our next question comes from the line of Charlie Brady from BMO Capital Markets. Your line is now open. Please go ahead.

Charlie Brady - BMO Capital Markets

Thanks. Good morning guys. Hey, with respect to Adhesive Dispensing in the quarter, can you give us a sense of what the parts mix was for that and maybe the parts mix overall for the Company in the quarter?

Michael Hilton

Yeah, so generally speaking the parts mix has been declining from the beginning of the year as sort of system orders pick up, but overall I think in the quarter we might have been 42%, 43%, Greg?

Gregory Thaxton

Yeah, we declined by about 100 basis points from the second quarter. So, we're at about 42% in the third quarter.

Charlie Brady - BMO Capital Markets

For the Company as a whole?

Gregory Thaxton

That's total company.

Michael Hilton

Yeah and I say all businesses have seen that same trend, maybe a little bit more so in the Adhesive side.

Charlie Brady - BMO Capital Markets

Okay. In your fourth quarter guidance, the 2% from acquisitions, does that include Value Plastics?

Gregory Thaxton

No, it does not.

Charlie Brady - BMO Capital Markets

Okay. On the share repurchase, can you remind us how much is left on the 2 million share authorization?

Gregory Thaxton

Yeah, if we looked at what we've purchased to date, there is a little over one million shares remaining under that authorization.

Charlie Brady - BMO Capital Markets

Okay. One more and I'll get back in the queue here. You mentioned on the order growth, 1% came out of acquisitions. Was it a greater impact than that on the Adhesive Dispending orders for the 12 weeks?

Gregory Thaxton

No, that would be more impacting Advanced Technology.

Charlie Brady - BMO Capital Markets

Sorry. So was it greater than 1% for that segment?

Gregory Thaxton

The impact on that segment yeah, it was about 2 percentage points.

Charlie Brady - BMO Capital Markets

Okay, thanks.

Operator

Thank you. And our next question comes from the line of Mark Douglass from Longbow Research. Please go ahead sir. Your line is open.

Mark Douglass - Longbow Research

Morning, gentlemen. Can you discuss in Advance Tech, what are you hearing from your tier 1, 2 semi cap equipment customers? I mean, do they believe that the cycle has turned down and dropping or do they mostly see it as a pause in spending for a couple of quarter and then kind of gets back on the horse a little later?

Michael Hilton

Yeah, I think to answer that question just to make a couple of comments, there are a bunch of different areas within the electronic space that we support in our Advance Technology business. So the strongest have continued to be the folks involved with the smartphone, tablet kind of activities where orders remain strong and continue to look strong for the foreseeable future. I’d say in the sort of general packaging area that plays over a bit into the test and inspection area as well, things have softened a bit and I think expectations are for things to be slower growth back to more normal growth, but maybe with a quarter or so pause and we’ve seen that kind of flow through our orders.

So we’ve seen more of the larger automated system orders that are supporting kind of the mobile activity and some slowdown in some of the sort of smaller semi-automatic types of orders relative to what we would have expected and in our package, test and inspection area we have seen things are a little softer than we would have expected although last year we had a very strong sort of LED opportunity in that space that we really aren’t seeing this year in the kind of third and fourth quarter from the last year.

So I’d say, in the general packaging area what are customers are saying is more of probably a pause and anticipating if you look at their forecast, next year to be a more normal or slower or perhaps even a slower growth year. But in the things that tend to drive big parts of our business, the mobile devices, the smartphone piece, the tablets, that continues to remain robust.

Mark Douglass - Longbow Research

Is it fair to say in the smartphone and tablets that your ultimate customer base, you’re more heavy levered to those who are obviously taking share versus those who are losing significant amounts of share?

Michael Hilton

We are doing well with the leaders in that business and their supply chain.

Mark Douglass - Longbow Research

Okay, thanks and then last question. The Europe orders were slowing more significantly than others. I'm sure some of that is somewhat comps, but is most of that weakness in Adhesives? Are you seeing a pullback there, may be in more food and bev or nonwovens or both?

Michael Hilton

I would say in general we’ve seen a slowdown across the elements of the sort of broad elements of the Adhesive business. I’d say we still encouragingly, we still see bid activity, say in the product assembly piece of that business being robust. But yeah, we have seen a slowdown across sort of most elements of that business. I think reflective of the general economy and what’s going on there right now. But encouragingly in the sort of systems or orders part of that would tend to be product assembly and some coating applications and so forth; bid activity is up and orders are coming in. So it's a reflective of the general slowdown but with some bright spots.

Mark Douglass - Longbow Research

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Matt Summerville from KeyBanc. Your line is now open. Please go ahead.

Matt Summerville - KeyBanc Capital Markets

Morning. A couple of questions. First, I want to talk about orders a little bit more here. You mentioned the exit rate on the most recent 12-week period coming in below that 6%. I guess, could we get a little more granularity on how that looked I guess by segment? Are you seeing negative order trends in any of your segments now or any of your geographies relative to the prior year period and if you look at how orders came in throughout the quarter, is there a time period that you can point to and say like this was the inflection point?

Michael Hilton

So just a couple of comments. The orders are, just to be clear, the orders are delayed of 12 weeks. So that will be up through this week, beginning well actually at the end of last week would be the orders just to clarify that. I’d say in the last three or four weeks, we have probably in the last three or four weeks, we’ve seen some softening and more of that really been in the U.S. and Europe as we said. I’d say we see some different things across geographies.

In general, the segments have all slowed down a bit from order perspective. Now, if you look at what we typically see on an annual pattern on our orders, we tend to see particularly in the technology space that those would start to soften on a seasonal basis as you go through the latter part of third quarter and into the end of the fourth quarter as people have bought most of what they want to buy for the holiday production season. So we're seeing, I'd say same seasonal patterns that we’ve seen in a couple of areas in the U.S. and in Europe we're seeing little bit of softening. And remember, this is up against a very, very strong level of orders last year in the fourth quarter as well.

I'd say the one area that has been negative that we started to see a little bit turnaround from an order perspective was Japan. Though we've seen orders start to come back in Japan, what I would say is that's not making up what the impact was of the tsunami, but getting back to more normal cyclical kind of order rates we would expect in Japan and we would actually expect the kind of the makeup with the rebuild there for construction activities probably into next year.

Matt Summerville - KeyBanc Capital Markets

The other thing I guess Mike, with regards to just the geographic color on orders, a good chunk of that Adhesive business that's in Europe is believed to be exported to some of the emerging markets. So I guess, is there any read-through here to some of the emerging markets you serve like China? Are you seeing on a sequential basis the pace slowdown meaningfully there in any of your businesses?

Michael Hilton

Now, what I would say, certainly in the emerging market aspects of that and really on the re-export on the OEM side, that still looks quite strong for the emerging market. So no, we're not seeing a slowdown there. What we're hearing from our customers, let’s say in Europe is while they've got funded projects and are replacing orders, they are being more cautious with buying parts. They’re being more cautious with committing to the next system and that’s really reflected itself I think in the last month of the quarter sort of information that we’ve provided to you. And As far as emerging markets go, now we see that is very strong still and no signs that (inaudible).

Matt Summerville - KeyBanc Capital Markets

As you think about kind of the overall scenarios that can play out from a macro perspective looking out over the next several quarters, if Nordson were to see a more substantial downturn, I think you mentioned in the press release you feel like you are well equipped to deal with it and certainly last time around you guys did a good job in taking cost out and more importantly as we see with the kind of operating leverage you’ve been generating, you’ve kept it out. I guess if we have sort of a double-dip scenario, do you feel like there is enough? I guess sort of what’s in the playbook in that regard, Mike, given all that was accomplished through this last downturn? Do you kind of see where I am coming from?

Michael Hilton

Yeah, I think I understand your point. I mean first of all, yeah just to kind of restate that, we have been able to move our margin performance up 600 or 700 basis points. So I think that’s part of what you’re referring to and we’ve done that through structural improvements and that has created the good performance that we see this year and the volume leverage that we’ve gotten. And so I think that absolutely is something that we’re going to continue to support. I think also if you think about the nature of the downturn, pretty dramatic, financially led, liquidity impacted and if we were to have a slowdown, I think those things wouldn’t be similar.

So I think we would see perhaps more of a normal slowdown, which I don’t think will have the same level of impact. That said, I think as you’ll recall, one of the things that I did coming in here was create a role that reports to me to drive continuous improvement across our business and there are a number of initiatives that we’re working on as we speak, some of which have led to some short-term impact. Restructuring costs have come into the fourth quarter that were related to optimizing our supply chain. We have work on segmentation and pricing. We have work on our new product development. There are a number of other areas from that continuous improvement activity that will translate and be part of, we put out there as an ongoing structural margin improvement going forward.

So we are working on those and those will help offset I think the impact of the downturn. That said, we’ve seen and moving from the second quarter to the third quarter that we’ve done a nice job of creating leverage from a line perspective and so when volume goes down, we do have some impact and you saw some of that translate through to gross margin and the operating margin in the quarter. We’ve been very judicious this year in terms of adding costs back and being very careful only to do that in areas that made sense like selling and servicing activity at our production levels where we needed to and in our technology investment and we’ll continue to have that discipline (inaudible).

Matt Summerville - KeyBanc Capital Markets

Last question just so I make sure I understand kind of the moving parts from the second quarter fiscal '11 to the third quarter fiscal '11, Nordson’s revenue declined by about $6 million. If you ex out the noise from the one-time items, your operating profit declined $11 million to $12 million, that’s obviously pretty substantial negative leverage I guess. Can you give us a sense how much of that is mix? How much of that is volume? Is this parts versus systems dynamic really having a more profound impact now than maybe it was a quarter or two ago?

Michael Hilton

Yes, you’re right. There are a number of moving parts there. So certainly a portion of that was related to volume leverage, but we did have significant mix across segments in terms of growth in our Coatings business which is a lower margin business, but as you see a very good business now from the levels of improvement, but we certainly had mix across the segment. We had mix between parts and systems occurring there and we have the volume leverage, so you kind of have sort of equal parts of each of those as a rough guideline in terms of what you saw there. So I think as you go to the fourth quarter we’re going to continue to see as Greg mentioned, the systems parts piece have an impact and then within the segment themselves we have multiple product lines and some of those are at different profitability levels, generally a function of what the scope is of the offering that we provide and it will have some impact there as well which is why we guided to the level we have. I guess one comment I would like to make is, across this, the quality of the business in each of the individual segments has not deteriorated at all and what you’re really seeing is mix of things from volume (inaudible).

Matt Summerville - KeyBanc Capital Markets

Thanks a lot, Mike.

Operator

Thank you. Our next question comes from the line of Walter Liptak from Barrington Research. Your line is now open. Please go ahead.

Walter Liptak - Barrington Research

Thanks. Good morning. Want to ask about the corporate expenses this quarter, the $12 million. Is that inclusive of the Japan pension fund of $3 million?

Gregory Thaxton

Walt, this is Greg. Yeah, that's where we’ve booked the $3 million. That's also where we book expenses associated with corporate development activities, as you probably know from an accounting perspective; you now expense those as incurred. So that's where we recorded those charges and some of our continuous improvement efforts as Mike talked about are booked there as well.

Walter Liptak - Barrington Research

Okay, the continuous improvement that will hit in the fourth quarter? That's where you'd have the charge for that, right?

Gregory Thaxton

No. We've had some efforts ongoing that Mike talked about, for example customer segmentation and so those costs have already been incurred. What I'm highlighting is, is if you looked at quarter three, backed out the Japan pension, it's trended a little bit higher than the previous two quarters and it’s associated with some corporate development expenses in some of these continuous improvements.

Michael Hilton

Just as to be clear, on the continuous improvement we've had some help in certain areas from the outside, Walt, to look at segmentation and pricing in particular for example.

Walter Liptak - Barrington Research

Okay. Can we quantify the corporate development expense in the quarter?

Gregory Thaxton

I guess what I'd say, Walt, is if you looked at the previous quarters one and quarter two, you might have been in the $7 million, $7.5 million range. I think kind of normalizing our spend there, we might look at a similar range in quarter four, somewhere in that $7.5 million range.

Walter Liptak - Barrington Research

Okay. Excluding any…

Gregory Thaxton

Excluding any…

Walter Liptak - Barrington Research

–any restructuring related charge or more corporate development?

Gregory Thaxton

Right.

Walter Liptak - Barrington Research

Okay and I think we're, the challenge that we’re going to have is, you can't look at anything on Yahoo Finance or in the paper without recession and I think what everyone is trying to get at is in your organic order rate, could you go negative next year? I mean, should we expect, and I know you don't give annual guidance yet or you don’t give annual guidance, but in that organic growth that you have over the long term, are you including revenue going negative or organic growth going negative for a period and then recoveries? How should we look at the next 12 months?

Michael Hilton

Yeah, I think when we looked at our overall sort of guidance to that sort of high single-digit organic growth, we were thinking about our global economy that was growing at 4%, 4% plus on average. I think if you look at globally, I think prior to the last I’d say three or four months, I think most economists were probably looking at 4.5% for next year. I think most have reduced the global growth by maybe not quite a point, maybe three quarters of a point. More dramatic impact from a global, from an economic standpoint in terms of the reductions that you are seeing by the economists in the U.S. and Europe, probably more a full point kind of reduction from that sort of 3.5%, 3% to 3.5% to down to 2% to 2.5%.

I think most people still expect growth next year in the developed markets making that not more modest and most people have not significantly reduced the emerging market growth despite the efforts out there to try and make sure that inflation is under control and so forth. So if your economic scenario is a slower, global growth market by a percentage of point, we probably wouldn’t expect to see things go negative, but we’re not economists. We don’t know how this is going to play out. So I think of the general economy most people think it will grow but grow slower. I’d say what we were encouraged by as we went through our strategy work is there are a number of unique niches that we participate in or continue to or could participate in that tend to have some different dynamics.

So, if you look at the sort of tablets, smartphones, so that’s what’s most interesting. There is MEMs device applications that look interesting in that business, the medical spaces that we’re trying to get into, elements of the packaging space that I think are all of interest and I think the second thing that helps us is because we are a technology leader and we continue to invest in technology and we have a broad infrastructure out there in terms of the customers that we serve, we do have the opportunity and we are very focused on introducing new technology to help our customers very cost effectively recapitalize to improve their own performance say in the U.S. and Europe.

And so we are actively working on that. One of the things that we’ve been investing in this year is continuing to upgrade our technology platform. So we think we’ll do better than the general economy, but your view of the economy is as good as ours. At this point there is so much noise out there, it’s hard to understand where to place your bet from a realistic perspective.

Walter Liptak - Barrington Research

Okay, good. Alright, thanks for that color and then just one last one, and I know we can wait for a couple of weeks until the Value Plastics deals closes, but can you maybe talk generally about how you view or maybe review for us how you look at acquisitions? Are they typically accretive immediately or it’s in the first year? Are you willing to have a year of dilution from a deal before the accretion starts?

Michael Hilton

Yeah, so I think just a general comment on acquisitions. Our first screen is really from a strategic standpoint, does it fit areas that we think are good areas to invest in and are consistent with the kind of business model that we operate in, fit with the core skill sets that we have? That’s kind of the first screen and then the things that get through that and we look at individual deals, we are looking to earn several points above our cost of capital on those deals.

What I’ve said before is if it was dilutive in the first year that's probably okay. If it's dilutive in the second year, it's probably not a good deal and so you think about us putting some discipline around doing that and we typically are looking for high quality properties that we can add to and grow as opposed to things that we can go fix up. So we’re looking for leaders in the areas and niches that we think are interesting and Value Plastics fits into that category.

Walter Liptak - Barrington Research

Okay, great. Alright, thank you.

Operator

Thank you (operator instructions). Our next question comes from the line of Liam Burke from Janney Capital. Your line is now open. Please go ahead sir.

Liam Burke - Janney Capital

Thank you. Good morning, Mike, good morning, Greg. Mike, you touched on your continuous improvement initiatives and you sort of highlighted some of the activities that have been going on. Could you give us more or less a sense of timing of how those processes work through and when we would see that reflected in the operations or the financial operations?

Michael Hilton

Yeah. So Liam, there are sort of two levels of effort there. There is a level of effort that is really kind of taking us beyond lean at the operations level that you’ll see little bits of improvement on an ongoing basis and then there is some more substantial projects that might have sort of a multi-year effect. So in certain areas where we’re optimizing our supply chain, it takes some time to consolidate facilities where we’re doing that or in the case of our technology business, where we’re actually expanding our capability in China to better serve and match our supply and demand standpoint. It takes some time to build out.

So those could play out over the next several years. So when we talked about at our Investor Day a multi-year plan that was with those sort of bigger projects in mind driving at least a couple of points of improvement in margin with our overall flow and I think we’re on track with that. But it's going to play out over the next couple of years. It’s not going to play out over the next month, but we'll see. It will come in increments because some of the things are coming in phases and stages as opposed to big bangs.

Liam Burke - Janney Capital

Great, thank you. And Greg, you have allocations of cash for acquisitions, you raised the dividend 19%. Where are buybacks in the general mix or priority of capital allocation?

Gregory Thaxton

Yeah. Liam, as you know we’ve got (inaudible) categories as we look at prioritizing the use of cash and I think buybacks historically have been an element of that. We look first to offset the dilution affect and then attempt to be opportunistic where we think we can be and we've been more aggressive as you know in this year and so it is an important part of our strategy.

Michael Hilton

Okay, let me just add a couple of other comments, Liam. If you back historically for long period of time, about a third of our cash went into sort of organic support for growth of business. So a third went into sort of dividends and buybacks and a third went into sort of M&A. A lot of that that went into supporting through the organic growth is building out our global infrastructure which is largely in place. Not 100%, as I just mentioned, we're doing some things in technology. So going forward, the need for cash to support that kind of organic growth will be more modest and the other two categories will get a higher emphasis in our view of where we want to invest the cash that we generate and I think you’re kind of lost in sort of what’s going on in the current macroeconomic environment is the strength of our cash generation in our base business and the continued strong quarter and we have this quarter on cash generation that we expect in the future.

Liam Burke - Janney Capital

Great. Thank you.

Operator

Thank you and our next question comes from the line of Scott Blumenthal from Emerald Advisors. Your line is now open. Please go ahead.

Scott Blumenthal - Emerald Advisors

Good morning everybody. Mike, can you maybe characterize or put some numbers around how much you felt the situation in Japan with the tsunami affected sales and earnings?

Michael Hilton

Yeah. Certainly, if you look at our sales in Japan this quarter I think they were (inaudible). They were down…

Gregory Thaxton

Yeah, they were down in volume about 11%.

Michael Hilton

Yeah. Volume they were down 11%, so not insignificant. As I said earlier, the encouraging news is we are starting to see sort of orders come back to a more normalized level. But we saw a little bit of impact in Q2, not very much. We saw a more dramatic impact here in Q3 and we do expect actually this will be a net positive, but likely a net positive in the next year.

Scott Blumenthal - Emerald Advisors

Okay. So with regard then to Q4, which you’ve already guided for, you do expect your business in Asia to be sequentially better than Q3 and possibly at the level of Q2?

Michael Hilton

That’s a broad comment. What I would say is in general we would expect Asia to remain strong. We do have kind of a more seasonal pattern I would say typically in our technology business where our first quarter is kind of the softest and our second and third quarters tend to be the strongest, and the fourth quarter tends to be a little bit softer just because people have got in place what they need sort of for the holiday season. So we would expect that typical pattern. Overall, the fourth quarter tends to be historically for the Company, kind of our overall best quarter from a revenue perspective, but when you look at it, two, three and four historically are not very different.

Gregory Thaxton

Scott, this is Greg. I’d add with regards to those two regions, specifically Japan and Asia Pacific, the latest 12-week orders in those two geographies were up 10% and 11% respectively.

Michael Hilton

And that’s also pretty strong comparison year-on-year.

Scott Blumenthal - Emerald Advisors

Okay, thank you. That’s really helpful. Greg, can you maybe characterize the size of the technology business in Asia and Japan as compared to your Adhesive Dispensing business? We understand companywide that Advanced Technology is, what, two-thirds of the size of Adhesive Dispensing, maybe 60%. Does that hold through in Asia and Japan?

Gregory Thaxton

Yeah, Scott, we for various reasons don’t tend to go down at the geography level, but I’d say in terms of Advanced Technology in particular, much of the activity, much of the manufacturing activity occurs in Asia Pacific. So from a waiting perspective, it’s a higher percentage of the overall segment revenue in Asia Pacific than the other segment. So it’s disproportionately Asia Pacific.

Scott Blumenthal - Emerald Advisors

Okay and thank you for that and could you, Mike, could you let me know if it would be correct to characterize holiday production patterns that might trend towards a higher parts mix in the current quarter, parts and service as opposed to systems?

Michael Hilton

I'm not quite sure I heard the first part of the question. Did you say holiday?

Scott Blumenthal - Emerald Advisors

Yeah, I guess right now many companies are producing for the holidays and that would lead us to believe that there would be higher parts and service mix in Q4 than systems and would that be a correct characterization?

Michael Hilton

No, that's not typically what we see. So certainly in our, two comments, in certain parts of our business like our Coatings business we would typically see strong systems sales in the fourth quarter. In our Technology business, we would see that typically softening a little bit. In our Adhesives business, we would typically see solid systems business in the fourth quarter. What we said coming out of the recovery is that we had a higher mix of parts to systems as you might expect, because the first thing that happened is operating rates went up that generates parts business for us and then people started making capital investments. So at the beginning of the year we were running about 45%. That's high relative to a normal typical activity which would be closer to the 40%, 41% and so what we’re saying is by the end of the year we see ourselves transitioning back to more of that typical mix of systems and parts and getting down to that low 40%. So no, we typically wouldn’t see a holiday mix shift there that you thought you mentioned.

Scott Blumenthal - Emerald Advisors

Okay, terrific. Thanks for taking my questions.

James Jaye

And I think in the interest of time we probably are going to have to move on to Mike to wrap up questions, to wrap up comments right now. So Mike I'll leave it to you for a few closing comments here.

Michael Hilton

Okay. Thanks Jim. First of all, there was a number of questions here about the sort of overall business and what's going on in the economy and so forth. I want to reiterate that the business quality that we’re seeing and the orders were bringing in and executing on are no different than what we’ve seen throughout the year. So it remained very strong and most of what you see in terms of our guidance around margins and so forth is really a function of shift in mix between the various elements that we've talked about. So I think about where we're at and I look at Nordson.

I think the first thing I’d like you to take away is we’re a Company that continues to deliver. Absolutely in this quarter, we saw some softening in the U.S. and Europe and the underlying markets, but we still put up some very good numbers and when you look at this quarter and particularly the nine months here to-date, what you see is that we’re bringing innovation and value to our customers. They are valuing that, they are paying for that and we're delivering in terms of bringing orders in and getting profit to the bottom line. Second, as we look at our outlook for the fourth quarter, we see a very solid fourth quarter.

If we comment at the guidance that we’re talking about, we're going to be at record levels from overall revenue standpoint very, very high levels of performance not only for the quarter but for the year in an environment that's a little bit softer. So that points to the focus we have on key niches, the focus we have on key customers and the robustness of our model and so we feel encouraged about the outlook for the fourth quarter in the environment that we’re operating in and lastly, we don’t do this without having the best team out there, the best team in front of our customers, the best team developing our new products, the best team out there manufacturing what we have to deliver and distributing to our customers.

So we feel very good about a team that brings innovation and value to our customers and is not complacent. It’s not looking to stand still but always looking to continue to improve in everything that we build. So I want to thank them for their performance to date and what I expect will be a continued good performance into the fourth quarter and thank you for participating in our call today.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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