Nordson Corp (NDSN) 2009 Q1 法說會逐字稿

Good morning. My name is Rebecca and I will be your conference Operator today. At this time, I would like to welcome everyone to the Nordson Corporation first quarter fiscal year 2009 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions)

Thank you. Mr. Jay, you may begin your conference.

Good morning. This is Jim Jaye, Director of Communications and Investor Relations, with Ed Campbell, Chairman, 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, February 20th, 2009 on Nordson's first quarter fiscal 2009 results. Our conference call is being broadcast live on our web page at www.Nordson.com, and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Friday, February 27, by calling 1-800-642-1687. You will need to reference ID number 84392409.

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 remarks, we will have a brief question and answer session.

With that, I would now like to turn the call over the Ed Campbell for an overview of our first quarter fiscal 2009 results and Nordson's future outlook. Ed?

Thank you, Jim, and good morning to all of you on the call. And thank you for attending Nordson's conference call, discussing our 2009 first quarter results. My comments this morning will provide highlights of the performance in the first quarter, as well as provide some perspective relative to our outlook for the second quarter.

Regarding first quarter results, sales were $187 million, down 24% from the prior year. Sales volume was down 19% and unfavorable currency effects reduced sales by 5%. The quarter's revenue performance was obviously impacted by the global economic slowdown and perhaps more importantly the near collapse of the financial sector, which occurred shortly before the start of our first quarter and still exists today in the form of very tight and extensive credit. The resulting absence of liquidity on a global basis has caused companies to abruptly stop spending.

I would also make the point that the time period covered by our first quarter overlapped several holidays during which many, many companies reacted to this economic environment by extending holiday shutdowns beyond the normal week shutdowns we've seen in other years. This would include Chinese New Year, which was the last week in January and impacts much of Asia.

With regard to segment revenue performance in the quarter Adhesive Dispensing volume was down 11% compared to the prior year first quarter, and Advanced Technology and industrial Coating and Automotive Volume were both down 27%, again, as compared to the first quarter of 2008.

As a general comment, the portions of our business that are associated with consumer nondurable and after-market demand performed comparatively better during the quarter. Also, two of our product lines within Adhesives associated with longer leadtime system orders experienced strong performance in the quarter relative to the prior year. Where we do see softness in each of the segments is in our large dollar systems businesses, which was highlighted in our last conference call as we talked about order trends heading into the quarter. Those areas of our business within Industrial Coatings and Automotive segment associated with consumer durable end markets have continued to be soft and the Advanced Technology segment is being impacted by the slowdown in spending across most of the end markets served, including semiconductor and consumer electronics.

Geographic revenue data has been included with the earnings release and I'll share a few comments about this information. US volume in the quarter, down 23%, is largely driven by softness in the large dollar system product lines in each of our three segments. This would include product assembly, which is in our Adhesives segment, as well as the powder and automotive product lines within the Industrial Coating and Automotive segment. Again, most end markets in Advanced Technology are soft on a global basis, impacting revenue in all geographies.

Regarding Asia-Pacific, where volume is down 29%, this performance is largely impacted by weakness in Advanced Technology markets, as much of the demand for these end markets is produced in this geography. First quarter adhesives volume in Asia-Pacific was up as compared to the prior year.

Operating profit, as reported, is 7% of, sales and this includes $8 million of restructuring charges associated with our spending reduction program announced in September. Excluding the one-time restructuring charge, operating margin would be 11% in the quarter. I will also add parenthetically that the gain on a real estate sale of $5 million is below the line in operating income and does not inflate this operating margin of 11% with the one-time item. In a period with reduction in sales of 24%, this performance demonstrates our organization's ability to respond to external challenges with appropriate actions to reduce spending.

In addition to the spending reduction actions discussed at our last conference call, which included head count reductions announced in September 2008, as well as a freeze on compensation, this quarter's performance also benefits from our tight management of travel, overtime compensation, marketing expenditures and other discretionary spending. However, the quarter did not reflect a full quarter savings, as most of the head count reductions were completed in the second half of the quarter.

On a segment basis, the Adhesive segment has once again delivered very strong margins in the quarter of 25%, up from 23% last year. In addition to the benefit of our focus on spending management, this segment's margin was also helped by a higher mix of standard systems and aftermarket parts that carry higher gross margins. Both the Advanced Technology and Industrial Coating and Automotive margins were impacted by sales volume declines that more than offset the reduction in spending generated in these segments. I would also like to add that the majority of the head count reduction actions within Advanced Technology were not implemented until early in the second quarter.

Net income for the quarter was $11 million, or 6% of sales, and fully diluted earnings per share was $0.33 in the quarter. And again, this quarter's results included two nonrecurring items, restructuring charges of $8 million and a gain on the sale of real estate of $5 million. Excluding these two items, adjusted earnings per share would be $0.39 for the quarter and the return on sales would be 7%.

Cash measures in the quarter were very strong, where, in addition to net income and depreciation and amortization of $8 million, sources of cash included working capital of $10 million and a reduction of property, plant and equipment and other long-term assets, net of capital expenditures, $2 million. Dividends were $6 million in the quarter resulting in adjusted free cash flow of $25 million in the quarter. The current quarter's EBITDA was $28 million and our debt leverage as measured as debt to total capital ended the quarter at 33%. Net of cash, this ratio would be 31%.

In summary, I'm pleased with the way our organization has responded to these unprecedented global forces. We have maintained reasonable profitability in a quarter that is typically our weakest quarter, and this particular first quarter overlays a very difficult period that included frozen credit markets, a global occurrence of plant shutdowns around holiday periods, and a general pause in capital spending, as customers assessed the impact of the abrupt global economic slowdown. In addition, we have generated excellent cash flow in the quarter, allowing us to maintain a very strong balance sheet, which is critical in these uncertain times.

I would now like to turn to some brief comments about our outlook for the second quarter of 2009, but before I do, I would like to add some perspective on the outlook we'll share. The US and global economies continue to operate against a set of challenges more difficult than any of us have faced in our lifetime. And yet, as difficult as these times are and in every scenario that we believe is reasonable, Nordson remains profitable with positive cash flows during 2009.

Looking at order trends, we've provided recent demand data as measured by orders, both on a segment and geographic basis with our press release. We're confident that these orders are not reflective of a change in our competitive position, rather these order trends highlight that we are still in an environment where our customers operate with a cash preservation focus. I would also like to highlight again that the time period covered by this 12-week period ending February 15 includes a period of many extended holiday plant shutdowns globally.

A recent positive indicator is the credit markets seem to be thawing somewhat since the beginning of the calendar year, both in terms of pricing and demand. In addition, our order trends over the last few weeks appear to have leveled off. However, it is premature for us to imply that we've seen the bottom, and I don't think that's the case with the global economy. Regarding the orders for the last 12 weeks ending February 15, measured in constant currency, our orders overall were down 31% from the same 12-week period in the prior year. Within Adhesives, orders were down 19% from the prior year, primarily due to a reduction in those product lines associated with larger dollar systems such as product assembly nonwovens. Within this segment, orders for spare parts have held up fairly well and are up year-over-year in certain geographies.

Regarding Advanced Technology, 12-week order rates, which are down 43% from their prior year, we are seeing most softness, again, within the large dollar system businesses that is most pronounced in Asia-Pacific. Again, as in other segments, orders associated with the consumable product lines within this segment have fared better than the systems product lines. Within Industrial Coating and Automotive, the latest 12-week orders are down 47%, as this segment continues to be challenged by the weakness in consumer durable end markets, where our customers' buying behavior reflects a pause in spending.

With this view in order trends, we have recently implemented additional spending reduction efforts associated with the reduction in head count. Our second quarter results will therefore include a charge of approximately $5.5 million, and we expect a savings associated with this recent action of approximately $8 million in the current year that will more than offset the investment. The annualized effect of these latest actions is a savings of $13 million. You will recall that we announced a spending reduction program back in 2008 that was primarily associated with head count in the Adhesives and Industrial Coating and Automotive segments. This most recent action is primarily associated with Advanced Technology and combined with our 2008 head count action, will result in savings of $28 million in 2009 and over $40 million on an annual basis. These actions are largely complete.

Over and above these savings, we have reduced discretionary spending that will yield an additional $30 million or so this year. These include manufacturing overhead savings to offset under-absorption, a worldwide freeze on wage increases, and lower operating costs associated with planned facility consolidations. We have also put in place very tight controls on capital expenditures.

As we look at the second quarter, we currently project that volume will improve by about 3% sequentially from the first quarter. This sequential growth will be offset by recent appreciation of the dollar against most major currencies resulting in flat revenue comparisons to the first quarter. This outlook equates to a decline from last year's second quarter volume of between 27% to 31%. Currency effects are expected to create a head wind of approximately 7% compared to last year resulting in overall sales for the quarter of down 34% to 38% as compared to the prior year's second quarter. Given the mix of products, we should see gross margins around 55%. Spending in the quarter excluding restructuring costs will be down approximately 23% reflecting very aggressive spending controls. This outlook results in earnings per share for the second quarter of $0.17 to $0.32. This range is after restructuring charges. Net of other one-time effects in the second quarter, they are estimated to be approximately $0.04 per share.

We do believe that 2009 will be a very challenging year for all capital goods suppliers, and as previously outlined, we have taken significant steps to mitigate the effects in our businesses. This management team has responded very quickly and aggressively to control spending. Our cash flow remains relatively strong. Even in this down year in revenue, our business generates a lot of cash, which coupled with the available free board under our credit facilities ensure that we will continue to maintain a strong balance sheet, providing financial strength as a competitive advantage. Furthermore, we believe we have the products, organization, resources and liquidity that positions us to gain share during these turbulent times.

And in closing, let me state that we expect conditions will likely worsen further before they begin to improve. In our approach to this environment, we are not making decisions based upon any single point forecast or an expectation that the global economy will improve any time soon. We have taken the steps we need to take now, but if conditions do deteriorate, we are prepared to respond, as may be necessary. Nevertheless, I'm confident the steps we have taken or will take, as the case may be, the liquidity we enjoy, the fundamental strength of Nordson's business and the quality of our organization, will see us through these challenges and leave us in a stronger position relative to our competition when markets return to normality.

Let me now turn to your questions.

(Operator Instructions) Your first question comes from the line of Kevin Maczka. You have the floor, sir.

Good morning, everyone. Ed, my first question's on margins. I thought it was a remarkable performance that you could increase gross margins year-over-year in this macro environment when your revenues are down 24%, and it sounds like you're looking for them more like 55% in the second quarter, but yet you just talked about all the head count reductions and other cost savings that didn't hit until late in Q1 or even into Q2. So maybe just give a little more color on how you achieved that margin and why it may not hold up as well going forward.

First of all, in terms of how we achieved the margin, it's two issues. It's mix and it's cost reductions in both the manufacturing segment, as well as on the operating margin level on the SG&A. Mix obviously is a very, a very strong determinant. We've not had the decline in parts, in some of the consumables that we have had in systems, and in fact we have positive comparisons year-over-year in terms of some of the parts and consumables. Not all areas, but some. And the good margins we've received there in quarter one reflect that relationship.

With regard to quarter two, I would point out that currency has moved quite a bit. I know a couple analysts that follow Nordson have commented this morning that the results for the second quarter feel a little weaker than might have been expected, given the Dow Jones interview that we participated in last week. And that was actually published this week, but the interview occurred last week. And I might point out two things have occurred there.

First, the early part of last week which was when we were compiling the forecast that we shared in that interview, the euro, for example, was over 1.30, $1.30 per one Euro. And in the last several days, it has gone from over $1.30 to below $1.26. And in the guidance that we have published with our press release yesterday and discussed this morning, we moved the centerpoint of the forecast to be based on $1.26 per euro and the same conditions are true with regard to the yen. It's moved in the last week or so from 90 yen to the dollar to now it's in the 93-plus, and our forecast is now based on 93 versus the previous 90. And then that runs to both gross margins as well as to pressure on the whole income statement.

The thing that's happened here of late with regard to currency is the yen has started to move. The yen has been very strong here over the last several months during the entirety of this whole financial difficulties in world markets, but here in the last few days, the dollar strengthened against the yen considerably and that does have an impact.

The other point that I'll mention about our guidance for quarter two is that a week ago, as we shared some guidance with Dow Jones, we used a bottoms-up forecast as the basis upon our comments about quarter two compared to quarter one. And we have chosen to make the centerpoint of that forecast rather than a midpoint of a range, we've made it at the high end of the range because we want to ensure that whatever weakness may be creeping into some of the world markets that we've seen even in recent days, we don't want to be overly aggressive in our guidance. Which is not to say we think it is overly conservative, but we have shifted that forecast to be the high point rather than the midpoint.

So you're deliberately getting more conservative just in the way you handle guidance in general?

I would say that my own view of observing things that are developing in world markets in recent days, so much of this is tied to confidence, and as we've seen word of great concerns about what's happening in Eastern Europe, I think some concerns that are being manifested in financial markets of late about the continued weakness in the financial markets, as well as some concerns about the effectiveness and timeliness of stimulus plans in various places, that tells me that perhaps we haven't yet seen the bottom. But the broader point I would make, it is very difficult to forecast. Who knows what this global economy's going to look like in April?

Okay, thanks for that, Ed. And then, your commentary around customer shutdowns and the holiday periods, things like that, can you just talk about how your orders down 31% in the last 12 weeks, how that progressed through the quarter, and are you trying to imply that now that we're beyond holidays and shutdowns and things like that that maybe those order trends get better even if the macro stays unchanged?

Sure. Kevin, it's interesting. When we report these various order trends, we're comparing to another period rather than reporting in the absolute, and it's interesting that in the 12 weeks in the prior year, in fact it was the oldest, if I could say it that way, of those 12 weeks, the oldest four weeks, so it's the last week in November and the first three weeks of December, of the last fiscal year, so that's 2007 calendar basis, but fiscal 2008, were the strongest four weeks in the entire fiscal year. And so we have a real spike in orders a year ago that's comparing. And if we just look at sequential orders, they have been relatively flat here across the entirety of this 12-week period, and we're not seeing any kind of a trend downward if we just look at the individual data points, or perhaps very slight. Clearly during the two weeks around Christmas, there is a real dearth of orders in all western economies, and correspondingly in the last week of February -- or January rather -- there is a weakness of orders in places like China.

But I'm not necessarily saying that we have seen the bottom in Nordson's order patterns, but we've been bouncing along at a fairly level point, and in fact, while we've reported 31% down across the last 12 weeks, our most recent data point, for example, was down 24%. And one week, believe me, does not make a trend, but I guess I'm just trying to say that we don't see continuing deterioration. Perhaps it's due to the fact that we're coming out of this holiday period and so we're intersecting a different trend line as plants are back up to a more stable level of running. It's not clear.

Let me make one other point. And it's analogous to some of the work we're doing here, as well, here at Nordson. We continue to see in many industries some plants working less than full 40-hour types of production weeks. And you will see plants that are working three days out of five. You will see plants that are working with fewer numbers of people or fewer lines proceeding. And, in fact, we've done some of that ourselves, as we have tried to balance the resources in our factories to the quantity of orders and production that we need to ship. And it's a continuing method that many manufacturers are using to keep things in balance.

Okay. Thanks for all that, Ed. And just one clarification if I could. You said spending, you expect down 23% year-over-year in Q2. Was that your SG&A line item?

Yes, it is.

Okay, thank you.

Thank you.

Your next question comes from the line of Charlie Brady with BMO Capital Markets. You have the floor, sir.

Thanks, good morning. Ed, can you just talk, with respect to in Adhesives and the spare parts business, you mentioned that that fared better than some of the larger dollar types of products. But I'm just wondering, was that in fact spares up year on year? And then can you speak just the visibility you have on those type of products? And similarly, with Advanced Tech, on the consumables business, a similar type question in terms of, was that actually up year on year relative to year-ago, and what's your visibility on the consumable side in Advanced Tech?

Sure. Let me start with Adhesives. The spare parts and other very standard systems that are part of the Adhesive Systems segment were not up year on year in all geographies, but they were up that way in a number, and in other areas they were down a little bit as they are apt to do in this kind of a period. But they tend to be very stable and the reason that they are stable is the underlying production of packaged foods and consumable hygiene products like disposable baby diapers and so on. People don't do a wait and see on buying food. In fact, there are some arguments that would say people are dining out less and eating in more that actually is helpful for some of these different types of products.

But within that segment, we also have some durable goods related markets, albeit a minority of the total sales in the segment, but as we sell systems to manufacturers of windows and doors and furniture and appliances, those are the kind of projects that in plants that would be less apt to be expanding production. And so as a result, you might not see the big systems when they want to add an increment of new capacity or new capability. Those are generalities I'm making. And so the parts versus the systems have that kind of bias. Standard packaging parts, for example, and standard packaging systems would tend to be more normal and more robust and less so in the durable goods.

As to visibility, because we tend to ship these parts to our customers the same day they give us the order, and we've proven to them that we have that kind of availability, they tend to not tell us ahead of time that, "We need two dozen hoses," or some such spare part as that and so we don't have visibility. But these things are quite stable over time. And our production capacity is correspondingly geared to respond to that kind of quick turnaround built on demand and so we can flex quite easily. But as it pertains to financial forecasting, all we can really look at is macro trends and momentum rather than have any customer-based visibility as to where it's going to be.

Now, if I turn to Advanced Tech, again, we have within Advanced Tech a very broad range of different product lines and components, and even into markets that we're selling to. So that large plasma systems or x-ray systems that would tend to find their usage in semiconductor manufacturing facilities or large scale consumer electronics facilities that carry price tags that is, as often as not, over $100,000 than less, or multiples of that, these are products that are going to be scrutinized more carefully by customers who are trying to watch their own cash resources.

At the other extreme, we have plastic used once in disposed components that would be used as plastic dispensers to carry materials produced by various types of adhesives and other electronic material makers, for example. And these are directly tied to the pace of production as compared to capacity that needs to be added. And these are much more stable over time and would tend to be influenced by the run rates of the various businesses and customers that they are sold to. Now, within that, we have customers that would range from semiconductor and electronic assemblers at one extreme to life science customers that, frankly, have had no impact and continue to grow in these kind of market conditions. And so these plastic component portions of our Advanced Tech product lines are negatively influenced by electronic end markets, but not nearly to the extent both because of the mix to other favorable end markets and because they are tied to run rates rather than capacity.

As to visibility, we have some pretty good visibility with big systems, and by pretty good, I mean these things are not shipped within one day, but tend to be measured in multiple weeks, usually within a quarter, but sometimes accompanied with nonbinding forecasts extending beyond that. And whereas the plastic components, those are all shipped the same day we get the orders and so we have no visibility there. Does that -- ?

That's great color. Thanks very much. I appreciate it. I'll get back in the queue.

Your next question comes from the line of John Franzreb with Sidoti & Company. You have the floor, sir.

Good morning, Ed. My first question is, in your closing comments, you said you thought things would worsen before they improve. But then if I heard you correctly, you said that the order rates are sequentially generally flat and that you're forecasting volume to be up 3% I think it was, or 2% or 3% in the next quarter. Could you just talk, what are you talking about when you're saying things are worse, going to get worse before they improve? Are you talking about the macros, the business, could you just clarify a little bit?

Absolutely. Yes, when I talk about things are going to get worse before they get better, I'm talking about the global economy. As a student of these types of things, I watch all these indicators very carefully and I don't think we've seen the bottom yet. I think there's a lot of reason to believe that the impact of decreasing demand on employment and a variety of other conditions themselves have secondary effects that have some lag before we really see the consequences of reduced, further reductions in consumer spending, and all that does to everything from retailers to real estate property owners and on, it sadly spirals. I think the stimulative effects of government programs may be having effects with regard to bank liquidity, but I think there's quite a delayed effect that we're going to see in consumer spending levels and consumer confidence. And so, if I had to bet up versus down from this point today, I would say we've got another round of things that we're going to hear in public news announcements on a macroeconomic level. We may not see from here, my personal opinion, the same pace of decline, but I think the absolute direction is further weakness.

Now, if I shift back to Nordson, we have both the real data we have from customers and the real trends that our sales organizations are seeing both with regard to existing customers, but also some very good work they are doing in building the business. I'm going to come back to that in a minute because I think it's an important point. And that generates for us a bottoms-up forecast that then we apply our own color to based upon some of those macroeconomics that Campbell's adding to the mix, and Greg correspondingly does as well, and we come up with something that has got some uncertainty around it because we collectively, you and us, are in uncharted territories here. And so that 3% reflects the mix of those opinions and bottom-up forecast, but I'll also share with you that there are sequentially more work days where plants tend to be open in quarter two than quarter one because of the holidays, and it's very normal for the quarter two to be higher than quarter one.

But we have the intersection of in quarter two a full quarter of the full impact of current weakness, but more work days as compared to the first quarters, some decline still occurring at the beginning of quarter one, but fewer work days, and you net those two out and we get the positive 3 on volume.

Now, let me come back to this point about what our sales organizations are doing and seeing, and it really is quite interesting I think. There's no doubt, particularly in durable goods markets and technology markets, there's large scale customers and factories that are building and selling less product. And whether it's appliance makers or cell phone makers, these are big segments of some of the end markets that we sell to and the volume is lower, and there's no doubt we have direct impacts and you see it in the order rates. On the other hand, we've got a sales organization that's motivated and incented to go out there and find ways to build the business. And my observation is we are working in environments, competing against, in many cases, small private regional competitors that are suffering, and we are having more wins of competitor new applications. We're seeing customers that are looking to find ways to take costs out.

As one of the sales managers wrote to me the other day, he said, our business is to save people money and there's never been a better time to work with customers to enable to do that. And, we're finding ways to, frankly, gain share, sell new technology, convert people to more efficient lines. Things, for example, a labeling systems, something that we've talked about in prior calls that are a point of productivity for bottlers and can companies that are putting labels on bottles and labels. That business is up 65% in the first quarter from the same period a year ago. We're seeing our high speed Piezo electric jets -- Picodostec, with the acquisition we bought back in 2007. These products are very high speed and enabling people to do all sorts of things. And the wins we're getting is just very exciting. And some of that, if you will, runs counter to these macroeconomic forces that I've talked more broadly about.

In a related question, based on call it either historical trends or based on maybe the pent up demand that you're hearing from your sales force, which segment would you expect to see orders turn first based on the current outlook?

I first of all would say that the technology markets, semiconductor and electronics, are going, to a certain extent, be geared to new consumer electronics. The iPod phenomenon, for example, using that as one we all understand. And capacity in some of these fixed capacity type economic business relationships. As compared to a more confidence-driven set of equations that would hit some of the markets like Industrial Coating and Automotive, as well as some of the small durable goods segments within Adhesives.

Clearly Adhesives is down less, and I think it tends to be more immediate in the impacts. When we see plant shutdowns for holidays it, happens quickly because so many of the products are bought as they are needed and shipped and manufactured by us as the customers want to put them into place as compared to the longer lead time stuff that we might get elsewhere. So I'd probably see Adhesives returning back to positive comparisons as a segment as probably the first thing that we would see and then I think the other two segments are going to lag a bit from there.

Thanks a lot, Ed.

You're welcome, John.

Your next question comes from the line of Matt Summerville with KeyBanc. You have the floor, sir.

Good morning. Couple questions. Ed, I apologize if you already said this, but what is your head count reduction target? And if I look in the press release, as of the end of fiscal Q1, you're down about 132 heads sequentially from the end of the year. Have there been a lot of head count reductions since then? And really what I'm trying to back into is where we're at with the cost takeout in Advanced Tech.

Yes, I'm glad you asked that question because, frankly, I'm not real happy with the data that we have around head count in some of our publications because we have, over time, discovered that historically there have been inconsistencies in using temporaries versus full-time employees. In certain countries of the world, the definition of what a full-time is, is a function of the local laws that are different than what you might expect in a western country. For example, if you look at the year end 2008 head count, you'll see a different number in the annual report from the press release. So let's cut through all that and let me talk about where we are.

Where we have moved so far is a reduction of over 400 employees, and that is largely done from where we were back in, call it September of 2008, so 10% is the head count reduction and I believe with my understanding where we are, that's -- that is largely complete. There may be some people that might be considered temporary, but that has to do with staffing strategies where in certain factories we have a permanent layer of temporary workers for protection against volatility of demand and we flex up and flex down. But many of those are with us for extended periods of time. It may not be the same individual, but it would be the same type of head count. So 10%'s the number.

And then when we look at Advanced Tech margins, I think in the quarter they were about 2%, 2.5%. You mentioned that that segment really didn't see, at least on a comparable basis to the other two segments, as much benefit from cost takeout. So in the context of let's assume Advanced Tech revenue is down a bit sequentially, how should we think about the operating margin performance of that specific segment in light of what you're doing on the cost side?

Yes, I'm going to ask Greg to chime in after I share something. The head count across the whole company I told you was 10%, in Advanced Technology the head count reduction is about 15%. Obviously their business is down more than the corporation's business as a whole and we responded correspondingly. And the majority of that reduction occurred at the beginning of the second quarter, and the benefit of those actions is not included in first quarter results, but it is embedded in our forecast for quarter two. As to operating margin, Greg, I don't know --

We really don't take the forecast down to that level, Matt, in sharing the outlook by segment. But I think clearly the comments Ed made with regards to spending will have a positive impact in that particular segment. That segment, as well, is generally less impacted by currency trends as other segments may be. So we generally don't get specific in the guidance with regard to our segment outlook because, at some point, we don't go to that level of specificity, but we will get some benefit out of spending.

With respect to the mix of business, you spent a lot of time talking about that. Is there any way you can quantify or give us a sense maybe, volume on a year-over-year basis, the change in volume, I should say, between engineered systems, standard products, as well as spare parts?

In terms of the mix of those?

Yes, either the mix in the quarter or just the year-over-year change in volume across those three categories, again, trying to get a better feel for the overall mix. Obviously spare parts are clearly helping based on the gross margin performance.

Yes, they sure have. I'm not sure that I can give you specific numbers right here in this call, but I can tell you one of the measures is the fact that we've shifted a lot more towards these standard products and replacement parts and spare parts and the like, is the size of the backlog has shrunk considerably from where it was a year ago -- I'll call that more normal times -- than where it is today. And that reflects not necessarily a shrinkage. If you compared the size of the backlog to the sales forecast, for example, and back into the number of days, you see it's much shorter and that's because all those standard parts and systems are shipped very quickly, depending upon the business unit. And Greg, what are the days?

Yes, if you looked back not too far in the past, backlog might have been mid-40, high 40 number of days, and that number is now closer to 37, high 30s. So I think it is reflective of the fact that, one, it's the weakness in orders of the larger dollar systems and primarily comprised of the shorter lead time items.

Okay. There's a question on the balance sheet. It looks like you have roughly $210 million of debt coming due this year. Can you talk about at what rate that debt is financed at the present time, and when the timing is of when you have to refinance it, what the overall plan is there, and will that financing rate move higher in a meaningful fashion?

Matt, that $200 million is where we choose to show the outstanding balance of our, what was a five-year committed revolving credit facility. That facility, it's a five-year facility that takes us through July of 2012.

And the rate is?

And the pricing on that is based upon a spread over LIBOR that most recently was 28 basis points over LIBOR. Over one-month LIBOR.

Perfect. And then last question and I'll hop out, as far as your operating cash flow expectation for the year, Greg, can you talk a little bit about that?

As Ed shared in his comments, we tend to look at different scenarios that we think are reasonable, if you will, for the balance of the year, and in each of those cases we expect to be cash flow positive for the year.

And is that, again, on an operating cash flow basis or free cash flow basis, Greg?

Free cash flow basis.

Great. Thanks a lot, guys.

Your next question comes from the line of Barry Haimes with Sage Assets. You have the floor, sir.

Good morning. I have one, just following up on an earlier question in terms of some of the parts and service and short cycle versus some of the more expensive bigger ticket items that may be more capacity related. Whenever the upturn might come, what, in your experience, has been the normal lag between when your parts and service and shorter cycles start to turn up along with, say, industrial production? And how long does it take before you tend to see the bigger ticket, more capital items orders start to pick up? Thanks.

First of all, I would say that of these big systems, capacity is probably one of the last reasons that people buy systems from Nordson. More typically they tend to buy them for capability reasons. For example, I'll start with technology, but I can move to the Industrial Coatings segment, as well. They tend to be bought because there is something about their product, whether it is a new cell phone or it is a new pacemaker or it is a new powder painting booth, there is a capability that they don't have, and in order to have features or in order to be able to make it smaller or faster, or there's an economic payback, that is far and away the largest reason people make the investments to buy these systems.

We have, for example, today, large powder painting systems that we're continuing to sell. Some of these, I'll give you a couple examples that are other than capacity. One has to do with a customer who is interested in reducing overall production costs, and they are relocating factories from high cost regions of the world to a low cost region of the world and as a result of that, are replicating their entire painting capacity. In another example, there is merchandising and marketing reasons that multiple colors are necessary as compared to a product strategy and a path that might have a more limited color spectrum, and they need the latest technology that enables them to rapidly change colors from one to another in small batches. And so, again, they are replicating or adding capability and thus we sell the system. And these are, though, nevertheless, influenced by whether it's pure cash conservatism on the part of customers, or in some cases they will make do because they don't have the need.

But nevertheless, there is a component of our demand that has to do with capacity, and I would say that it's probably tied to the specific economics of the cycle where they operate. Portions of our business are consumer durable goods and if it is a capacity to use that reason that some people buy, then it would lag the recovery. In our adhesives and more standard product businesses, because the dollar cost is relatively low, it would probably be current with the cycle.

And then I'll tell you, the technology products really are in a much higher case, they are tied to the next generation product that they are releasing to get consumers to be interested and continue to buy cell phones or what every other product may be. They are embedding new features, and those new features, frankly, require them to have new capability that we can offer. And it's not often that it's capacity-driven.

Got it, thanks very much.

You're welcome.

Your next question comes from the line of Walt Liptak with Barrington Research. You have the floor, sir.

Thanks, good morning, everyone. Ed, when I go through and put in some guidance numbers, revenue down at the low end, 38%, and the SG&A decline, reduction down 23%, I'm having a little bit of trouble coming up with getting to the low end of your EPS guidance of $0.17, and I wondered if there's something below the line in maybe currency transactions that you're accounting for to get to the low end number.

I don't think that you're going to find that it's currency transactions. The currency effect of this year versus last year, where the euro, for example, was in the $1.53 range versus where it tends to be today, we expect negative currency to influence us by about $0.15 per share. We also have in there a restructuring charge that will be about $0.11 a share. You strip those effects out, you come up with a, at the low end, from operations something in the range of $0.21 to $0.36 a share, low to high.

Okay, okay. The spending level's down 23% at the low end, that gets me to a $85 million, $86 million run rate. Is that a level that we should use in the back half of year two?

I don't know, Greg.

No, I think that second quarter, as we mentioned earlier, some of the actions that we've taken with regards to spending reduction have occurred during the second quarter, so I think that, coupled with some of the comments that we made earlier on continued focus on discretionary spending items might suggest that our comparison, as you go out as compared to prior year volume spending could improve.

Okay, okay. The tax rate for the second quarter and the full year?

For the full year, we would be looking at, in the out quarters, about 35%. The second quarter will include a couple of some discreet items that are booked in the quarter that relate to adjustments to prior year returns, but your rate going out for the provisions should be 35%.

Okay, and then you've done a great job with taking costs out and being early with what's been a real brutal environment. For uses of cash, share repurchase is one. Can you talk about what you did during the quarter, what you expect to do the rest of the year?

We, I think, bought back a few shares at the very beginning of the first quarter, but the remainder of quarter we have not bought back shares. As attractive as the share price might appear, we feel like, as we prioritize the actions that we take, the first and foremost of importance to us is to make sure that we've got a very conservative cash flow attitude, and so we have backed away from active share repurchases, which is not to say that we may not change that opinion at some point, but we've not been in the market of late.

Right. So your expectation is in the coming quarter, coming couple of months, that you would be out of the market?

I think until we see some change in external circumstances, we're apt to be less active.

Okay, okay. Thanks very much, guys.

Your next question comes from the line of Matt Summerville with KeyBanc. You have the floor, sir.

(inaudible) $0.15 of FX headwind in terms of EPS in fiscal Q2. And then also what then was the FX EPS headwind in fiscal Q1?

$0.05 in Q1, $0.15 in Q2.

And then how should we think about Q3? Q3, the FX headwind could actually be worse than in Q2, am I right on that?

Yes, I think the -- I don't have precise numbers -- just looking at an FX chart it, looks like order magnitude, Q2's got about $1.53 on the euro, and Q3 something in the range of $1.57. And those are not precise numbers.

I think those are pretty close, yes

So that would say, yes, a little bit more headwind. Then of course in Q4, the comparisons collapse back to easier.

Greg, you talked about the tax rate I think in the back half of the fiscal year, but I was left unsure as to what the tax rate is that's embedded in your guidance and what you expect the magnitude of those discreet items you have referenced to be in fiscal Q2.

Yes, the Q2 items would be about $0.07 per share of discreet items. That's where, in the press release and Ed's comments, we talked about a net $0.04 charge for nonrecurring items. That would be the restructuring charge in the second quarter and then the benefit, if you will, of these tax adjustments.

So what is, just to make sure I'm crystal clear on this, what is the anticipated per share, just the restructuring charge in the second quarter?

$0.11.

Okay, so you're netting the $0.07 against that. Okay, got it. Thanks.

At this time, there are no further questions in queue. Please proceed with your closing remarks.

Okay, thank you. As we close, I would like to summarize what I believe are the take-aways from today's call. This recession is unprecedented and severe and it's impacting every geographic market in nearly every end market to some degree. We do have our sectors of comparative strength, including spare parts used once and disposed components, nondurable end markets like packaging and nonwovens, life science and new technologies and cost savings systems, as well.

Thirdly, our favorable mix has supported relatively good operating margins and we continue to operate with excellent cash flow and excellent liquidity. Fourth, Nordson has started early to deal with these challenges with cost reductions, which are largely implemented, of nearly $60 million in savings this year compared to last year, and that's both the head count reduction, as well as other savings of operating expenses and the like. And lastly, we have the plans and are fully prepared to adjust, regardless of the direction this economy takes.

So that concludes the call. I would like to thank all of you, again, for your continuing interest in Nordson. Have a great day.

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