Nordson Corp (NDSN) 2009 Q3 法說會逐字稿

At this time, I would like to welcome everyone to Nordson Corporation's third quarter, FY 2009 results conference call. (Operator Instructions) After the speakers remarks, there will be a question-and-answer session. Thank you. Mr. Jaye, you may begin your conference.

Thank you, Laura. And 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, August 21, 2009 on Nordson's third quarter fiscal 2009 results. Our conference call is being broadcast live on our Webpage 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, August 28, by calling 1-800-642-1687. You will need to reference ID number 23947653.

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 question-and-answer session. I would like to now turn the call over to Ed Campbell for a overview of our third 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 third quarter results. Our comments this morning will provide highlights of our third quarter performance, as well as some perspective relative to our outlook for the fourth quarter. Relative to the third quarter, I'm pleased to report that Nordson delivered very solid performance in the quarter. With sales, operating profit and earnings per share all improving sequentially. Operating margin and return on sales in the quarter are indicative of very strong operational performance. Compared to a year ago, performance was impacted by the weak global economy. However, as we suggested during last quarter's conference call, there are positive indicators that the global economy is improving and perhaps the worst is behind us.

I will be speaking more directly about current trends specific to Nordson and our outlook for the fourth quarter. But before that, I will turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide a summary of our third quarter financial results.

Thank you, Ed. And good morning to those listening. Regarding third quarter results, sales were $206 million, [down] 29% from the prior year (company corrected after the call). With volume down 24% and unfavorable currency affects reducing sales by 5%. On a segment basis, adhesive dispensing sales volume was down 21% in the quarter, as compared to the prior year third quarter. And advanced technology and industrial coating and automotive sales volumes were down 23% and 37% respectively, again, as compared to the third quarter of 2008. As a general comment, as has been the case for each of the proceeding quarters of 2009, the portions of our business that are associated with consumer nondurable systems, as well as consumables and aftermarket demand in all segments, have continued to perform comparatively better during the quarter. Most softness, as compared to the prior year, was seen in the engineered systems product lines within each of the segments.

As we look at our sales performance on a sequential basis, that is the third quarter of 2009 as compared to the second quarter of 2009, sales are up 9%, comprised of 5% volume growth and 4% favorable currency affects. Advanced technology was the driver of the sequential improvement, as sales increased 38% from the second quarter, while adhesive dispensing sales increased 1%, and industrial coating and automotive sales declined 10%. All as compared to the second quarter of 2009. With regards to the advanced technology sequential improvement, we noted on our second quarter earnings conference call that we were seeing improving trends in some of our advanced technology end markets. And this trend continued during the quarter. The end markets associated with this growth are semiconductor and consumer electronics.

Operating margin for the quarter is 18%, including $1 million of restructuring charges associated with our spending reduction efforts. Excluding this one-time restructuring charge, operating margin is 19% in the quarter. There are two noteworthy items contributing to this strong level of operating margin. First, gross margin of 59% in the quarter is a high mark for Nordson over the last 12 years and is reflective of several factors; a higher concentration of spare parts and consumables in the quarter; a greater mix of higher margin products, as compared to prior quarters; and the reduction in manufacturing overhead costs. The second item contributing to this level of operating margin is the reduction in selling and administrative expenses of 24% from the prior year. At this pace, we are on track to achieve the $80 million savings from the prior year that we previously communicated, excluding restructuring charges and before currency affects.

On a segment basis, the adhesives segment once again delivered very strong operating margin in the quarter, up 29%, up from 28% in the second quarter of 2009, and 27% in last year's third quarter. Advanced technology's operating margin improved to 18% in the quarter, up from slightly negative in the second quarter of 2009, and 17% in last year's third quarter. In addition to the gross margin improvement and operating expense reduction, this segment's operating margin clearly benefited from the 38% sequential growth in sales. Industrial coating and automotive's operating margin performance has improved on lower overall sales, as compared to the previous quarter. And we remain optimistic that when this segment's sales return to the revenue levels of 2007 and 2008, we will see double digit operating margins.

Net income for the Company in the quarter was $24 million. An increase of 73% over the second quarter of 2009 and, at 12% of sales, is reflective of solid execution in the quarter. Fully diluted earnings per share is $0.71 in the quarter. In addition to the $0.02 per share charge in the quarter for restructuring charges, the quarter's results include a one-time tax benefit of $0.02 per share. Cash measures in the quarter were very strong. Sources of cash included net income of $24 million, depreciation and amortization and other noncash charges of $11 million, working capital of $2 million, and changes in long-term liabilities generating $6 million. Uses of cash in the quarter included capital expenditures of $2 million, dividends of $6 million. Resulting in adjusted free cash flow, after dividends, of $35 million in the quarter. This quarter's performance more than doubled the $17 million adjusted free cash flow of last year's third quarter.

The current quarter's EBITDA is $45 million and our debt leverage, measured as debt to total capital, ended the quarter at 25%. Net of cash, this ratio would be 23%. In summary, although we continue to operate in a challenging environment from a sales perspective, the organization has responded appropriately and delivered very strong operating performance in the quarter. In addition, we generated excellent cash flow and continue to maintain a very strong balance sheet.

Thank you, Greg. I will now turn to some brief comments about our outlook for the fourth quarter of 2009 but before I do, I'd like to add some perspective on the outlook we will share. Although we continue to see significant challenges in the global economy, there are indicators that broadly suggest the worst is behind us on a macro basis and several major geographies appear to have turned the corner on recovery. The shape of recovery is still very uncertain though. Specific to Nordson, I do believe we are also turning the corner, as evidenced by our recent order trends, provided both on a segment and geographic basis with our press release. As reminder, these are orders for the latest 12 weeks, as compared to the same 12 weeks of the prior year on a currency neutral basis.

Looking at these orders for the 12 weeks ending August 16, overall, they were down 21% from the same 12 week period in the prior year. At the time of our second quarter conference call, in May, these order rates were down 25%. And orders were down 31% at the time of our first quarter call in February. So we are seeing an improving trend in orders. Within adhesives, orders are down 14% from the prior year, primarily due to a reduction in those product lines associated with durable end markets, which tend to be in larger dollar systems, such as product assembly systems, supporting housing end markets and general industry. Orders associated with consumer nondurable end markets and spare parts has held up fairly well.

Regarding advanced technology, 12 week order rates are down 23% from the prior year, reflecting an improvement from our 12 week order report we shared at our second quarter conference call, when orders were down 33% from the prior year. Although customer buying patterns have not fully recovered, we are seeing improvement in many of the end markets served by this segment, including semiconductor and consumer electronics. More specifically, a particular strength recently is our technology supporting low end computing needs and smartphone applications. Also, as another segment, orders associated with consumable product lines within this segment have fared reasonably well.

Within the industrial coating and automotive segment, the latest 12 week order rates are down 38%, as this segment continues to be challenged by the weakness in consumer durable end markets. Recovery in this segment's end of markets tend to lag overall economic recovery.

Looking at our order rates on a sequential basis, that is our latest 12 week order rates. As of the end of July, as compared to the preceding 12 weeks, again on a currency neutral basis, orders are up in all segments and up 13% for the Company. We've used the end of July as a reference point for this sequential comparison as a way to exclude holiday seasonality, as the month of August includes holidays and shutdowns in much of Europe as well as Japan. Overall, I am pleased with this improving trend in orders and optimistic that business conditions seem to be improving.

As we look at the fourth quarter, we currently project sales of between $224 million and $235 million. At current exchange rates, currency effects are expected to be neutral, as compared to the prior year's fourth quarter. On a sequential basis, the midpoint of this guidance represents sales volume growth of 11%, with an additional 1% increase due to exchange rates. Given the mix of products assumed in our forecast, we expect gross margin to be about 57% in the quarter. Selling, general and administrative expense in the quarter, including restructuring charges of approximately $2.2 million, will be down approximately 23% from last year's fourth quarter, reflecting very aggressive spending controls. As Greg noted earlier, we are on track to deliver on the $80 million reduction in selling and administrative expenses, before currency and restructuring costs.

In terms of our outlook for operating margin in the fourth quarter, we do expect another strong quarter, where the midpoint of this sales guidance will generate operating margin of approximately 19%. This results in earnings per share for the four quarter of $0.75 to $0.87, inclusive of restructuring charges that are estimated to be approximately $0.04 per share. At the midpoint of this range and assuming a consistent share base from the third to the fourth quarter, return on sales would be 12%, matching the strong performance of quarter three.

In summary, the current business environment continues to be very challenging. As such, we have taken significant steps to mitigate the effects on our business by responding very quickly and aggressively to control spending, protect profitability and focus on cash flow. Our strong balance sheet provides an advantage against much of our competition and we do continue to fund those investments that are important to our underlying business. Furthermore, we continue to believe we have the products, organization talent, resources and liquidity that leave us in a stronger position relative to our competition. And we are well positioned to respond to global economic recovery. Let us now turn to your questions. So, operator, could we ask you to begin the questions?

(Operator Instructions) And your first question comes from the line of Kevin Maczka, BB&T Capital Markets. Your line is open.

Good morning.

Good morning, Kevin.

Ed, the first question, remarkable gross margin performance, to put up a record like that with a down nearly 30% revenue. But my question is, just to try to understand the sustainability there, you're looking for 57% in Q4. But can you talk a little bit more in detail about some of the mix shifts, some of the aftermarket mix that really drove that upside this quarter? And maybe talk about how much different are the margins in some of these high profit products or these aftermarket products? And why that might not be the same in Q4 and beyond?

Sure. Well, clearly, the -- when we look at the revenue that we have this year versus the revenue last year, Kevin, it's down big double digit percentages. And if you look at, well, what is not in the income statement this year, if it is in the income statement last year? It's disproportionately systems. And that's true in each of the businesses by the dollar amounts that we've fallen short. Clearly, some consumables and spare parts are down somewhat but not nearly as much. So, we have a favorable mix.

Now, those systems that we didn't sell, if I could describe it that way, they carry gross margins that are substantially higher than the operating margin of the organization. So that the recovery of those systems and the associated expense to, if you will, install and get those sales, all other things being equal, tend to be accretive to operating margins, not the gross margins. But so we've been able, I think, to yes generate very strong gross margins because of that mix. And we've been able to generate strong operating margins because we've taken out costs. Again, though, with a good gross margin as well.

I think if we look at the performance that we would expect going forward, without trying to be specific around time, I think we will see that a recovery will disproportionately bring to us systems revenue, as compared to incremental parts and consumables revenue. And it is reasonable to expect the gross margin to come down. I think as we begin to have a healthier economic environment, we will look on a targeted basis to add resources to get that next round of sales or do the things to support the investment initiatives the customers may have. And we may see some changes, if you will, in the spending pattern sequentially, as we begin to put bonus programs back in and unfreeze wages, as we've done for the last year.

But I'm very optimistic that the changes that we've made have taken us to another level in operating margin performance from where we have been. And I think we'll see shifts within the income statement but I'm pretty optimistic that the overall operating performance of the Company is going to look differently in this recovery than it might have in another period.

Ed, how much higher is the aftermarket spare parts mix now than it typically is?

Kevin, this is Greg. It's, I'd say, several percentage points higher than what we've seen historically.

Okay. And just finally if I could ask one on ITA, I think I heard you say that if revenues get back to the '07/'08 levels, you expect a double digit EBIT margin there. But that seems like that's probably a long way away, given the later cycle nature of that business. So is it your expectation, maybe without quantifying anything, that those revenues sequentially continue to decline, whereas the other two units are not?

I don't know that I would expect a sequential decline. In fact, I think in some of the end market segments, it's hard to imagine for them to get materially weaker. In that, you've got a number of plans that are out there that we seen in various markets, where over the past several months, they've been operating on reduced shifts, reduced days of the week of production and so on. Because the demand for some of the products that they sell, whether it's appliances or office equipment or in fact, things that might go directly into housing and the like. And some of the anecdotal things that we hear about and we're hoping we can begin to connect those dots, is we see that shifts are getting added. The amount of incremental production that people are engaging in is improving sequentially.

So, we may have because of the lumpy nature of some of the orders we have in this business, sometimes multimillion dollars orders, we can bounce around. But I think the trend from where we would see today is going to be tilting upwards. But I'd also say just to put it in perspective, I think we have a forecast that we feel pretty good about for the fourth quarter, in terms of the financial performance and profitability we expect to deliver in quarter four. And I'll tell you, we are not assuming any improvement in the profit contribution of that segment in quarter four, from what we've seen in quarter three.

Okay. Thank you.

Thank you, Kevin.

Your next question comes from the line of John Franzreb of Sidoti and Company. Your line is open.

Good morning, guys. My first question is regarding the cost savings. Ed, you kind of inferred last quarter that roughly 50% of it was variable but given your comments this morning, it seems like more of it's going to stick around, than maybe we had previously thought. What's your thoughts about how much of the cost savings is sustainable in a recovery?

Yes, and I'm going to ask maybe Greg just to put some order of -- numbers behind what I'm going to share. What -- it's in the cost savings this year, of course, as compared -- everything has been measured and compared against 2008, which was a year in which we performed well. Those portions of the employee base that have some of their compensation be variable, they had the benefit of achieving targets. And so, we had a year of incentive compensation that was above the $0 amount that will be provided to the leadership team this year.

I would expect that just assuming 2010 is a average year with various units performing well and perhaps some others being challenged, that we'll see incentive compensation in some amounts being paid that will all be incremental expense to the P&L next year. We expect that, with our employee population more broadly, we will unfreeze the wages. And it's my expectation that we'll see, in our financial performance next year, the cost of the re-establishment of those kinds of traditional things that we've had over time.

I think that some of the restrictions that we've imposed relative to discretionary spending, some of the travel, some of those other things that have been throttled back; will have some amount of increase associated with activity at customers that merit the kind of travel that is productive and useful in a time of increased investment in the marketplace. All of that is going to go up, absent the addition of a single employee.

We have, during this period of time, made continuing selective investments in employees, as it makes sense for opportunities to fund investments around new products or to support customer activities in some emerging economies where we've not had representatives before. And that will continue next year. But I think if I look at the structural things we've been able to do in some of our organizations, where we've combined engineering teams, for examples. Or we've gone to more consolidated production activities in certain places and the like. Some of those structural changes, I think, will continue regardless of what happens within the economy.

And I think we've proved to ourselves that we can perform at a very high level with resources that are down substantially from what we had before. So, my view as I think about it in a macro basis, just that the gross level of the financial statements, in fact, dating back to announcements that we made in September, we said that the changes that we were implementing as part of a cost reduction program we announced in mid-September; is that we expected operating margins to expand by about 2 percentage points from what they otherwise would be. And I think some of the benefits of those programs, that even were expanded from where had started back in September, have shown that the operating margins that we're producing now are substantially higher than the operating margins than we had in the last periods of weakness back in 2001, '02 and '03.

And it would be my expectations that we'll see good operating margins in 2010, presuming that some of the sequential improvement is sustained and maybe even continues, even if at only a modest amount. And Greg, let me see if you have or want to make anything more specific.

Well, I think, given what you've said, clearly, we'll have some of that spending coming back into the P&L. But with the structural changes we've made and our focus on modifying our processes and procedures to help prevent some of that spend coming back into the P&L, I still think my estimate would be, of that total savings, the structural changes should allow us to keep, let's say, 50% of that out of the P&L. And some of the variable spend associated with the travel and compensation and the likes, we will see that come back.

Now, regarding the timing of that coming back, should we be thinking about this as in like a calendar type of event, maybe some time next year? Or make this kind of a fiscal event as the fiscal calendar turns? And on top that question, given that advance technology has come back the quickest, how soon will you have to restaff there? What kind of revenue levels do you start to think about restaffing there or adding to the bonus system there, compared to the other businesses?

All good questions, John. First of all, in terms of base salaries of our employees around the world, we tend to make changes once a year. And they tend to be either at the beginning of the fiscal year or in early January depending upon the country. So our first quarter will have, assuming all things play out the way I described, will have higher run rates of spending. And I would expect, in our December conference call, we'll quantify some of those numbers just so people get a sense. But you can make some assumptions around the employee population and average salaries globally.

And then with regard to bonus systems, they tend to be annual plans and we tend to accrue in our financial statements the amounts that we would estimate based on performance as it moves across the year. So we'll have within the first quarter income statement, both those accruals and some higher base salaries. And then, the second quarter will have the full boat because some of those don't kick in until January 1.

And regarding advance technology, specifically?

Yes, let me also comment that all of this is revenue dependant. But back to advanced technologies. First of all with regard to the production activity, we flex those resources according to the demand that we see. In advance technology, we take it -- we use part time workers and temporaries if we have a surge of work going through. We do everything we can to protect the job security of our permanent employees. And so, that will -- that's flexing the curves on an ongoing basis. And I'm sure we have resources in some of these units today that are higher than we might have seen back in January and February.

With regard to the portion of the spending that has to do with selling and administrative resources, that's sort of semi variable, if you will. It's more associated with the investment opportunities or if we have a major investment program that's occurring within one of our customers and they have a very significant ramp of resources within that facility, then we might add some support personnel in that local site to enable the quality of service and support that we give the customer to be there. But these are, frankly, lost in the scope of the margins that that kind of a sale, in my example, would support.

Okay and one last question. The revenue outlook and the margin outlook for next quarter, does that kind of assume more system sales and adhesive dispensing, given your comments in coatings, or is it less of a parts mix? Can you just give a little bit of color to what you're expecting as far as system and parts in Q4?

Sure. Well, the sort of the answer is all of the above. We do expect more system sales as a percentage of the total. We work that margin estimate from a bottoms up basis across our various business units. And as they look at system shipments that they would expect to ship before the end of the fiscal year, they'll factor those in. So, it's bottoms up, rather than top down. It's not unlike the process that we used in the outlook that we gave you in the third quarter. And Greg, our outlook for the third quarter, I think was 57% also. Was it?

No our outlook for the third quarter was, I believe in the 55% --.

55%, I thought.

Okay, all right. So what that says to us, so we had more revenue when we had more margin. And sometimes some of those estimates that are bottoms up and we of course, will look at it from a consolidated basis and apply our best judgment. But we also have good mix or we have success and realizing system sales that had better margins that we might have anticipated. Sometimes we have geographic mix where we enjoy better performance on a system or a part in that particular territory than we might in a different one. So our ability to very precisely forecast this stuff has its boundaries but I think reflected in our fourth quarter forecast, is that bottoms up view based upon where we think we'll be.

Okay, great. Thank you very much, Ed.

Thank you, John.

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

Morning, a couple of questions. First, if you guys can comment. In the second quarter I asked a question regarding the sustainability of the operating margin performance in adhesives. Obviously, that improved sequentially. But I think, Greg, some of your comments sort of led me to believe that maybe that run rate was not sustainable due to, in part, the favorable mix you were enjoying, which obviously, looked to continue in the third quarter. And, Ed, to your comments of this morning, I'm sort of moving in the other direction that maybe you do think that this kind of run rate and margin in adhesives is sustainable, even if mix starts to swing against you in 2010. I just want to make sure I understand all these dynamics correctly.

Yes. It's a good question. The margins that we enjoy on the gross margin basis, in that business, are obviously reflective of a good market position and differentiated product offerings. And the systems versus parts mix that we've been experiencing has been very favorable on an average basis. But within the adhesive businesses, we have seen shortfalls in the demand for some of the engineered systems. And we've seen shortfalls with regard to the demand for some of the things that we sell through OEM's that come in thinner margins than would the average of the other systems and would come in a lot lower than the spare parts.

Our cost to deliver those systems, though, is not large. And so, these systems are accretive to operating income and they come in, obviously, better than the kind of operating margins that we perform. So, as long as we can control the cost structure of the organization, I think I'm more optimistic than I probably was a quarter ago that we can maintain these kind of operating margins. Widening them then, becomes more challenging of course. But I think for the reasons that we've just been talking about here today, I think we're going to work hard to see if we can sustain this and establish with the structures that we put in place a new target for ourselves.

Ed, in your prepared remarks, I believe you indicated and I think it's helpful to talk about it as well, the sequential order performance for the Company overall, I believe, was plus 13% for the period ended July. Can you comment on what sequential order activity looked like by business segment?

I'm going let Greg look at his numbers and decide what he feels. We typically don't do that.

Well, you've been providing the year-over-year order activity for awhile and there's definitely more of a emphasis, on your part in both your comments today and your comments last call, that you want us to focus sequentially. I just thought it might be helpful to --.

Yes, well I will tell you that they're all up. Using that same date, sequentially, all three segments are up. The advanced technology segment is up most sharply. And it is reflective of -- and I'd like to actually come back and talk a little bit about what's going on in some of the advanced technology end markets. But we're also seeing sequential improvement within our industrial coating and automotive segment, that is not -- "significant" may be too strong of a statement but it's very meaningful.

And Matt, you're talking abut sales sequential Q3 versus Q2 quarters?

Quarters, yes.

For the end of the July, what underlies that. So, it's strongest in advanced tech, followed by ITA, with adhesives being the most stable, as it typically is but meaningful itself as well.

Ed, actually my next question was little more detail on what you're seeing in advanced tech. So, if you want to go ahead and make these comments, that would be great.

Yes, well, we talked about the fact that revenue was up 38% sequentially quarter two to quarter three. And it -- we've seen that in a couple of different end markets, as I mentioned in my comments, both low end computing technology as well as smartphones. And this would be to the whole supply chain. These products are becoming increasingly complex and the componentry that goes into various of these end market products has a whole network of areas where there's a lot of investment going on.

This is not just something you'll hear from Nordson but I'm you're going to hear other people. If I use -- and I oftentime quote Gartner as a publicly available data source. The most recent thing -- I think we quoted March data when we were together last time. When they were forecasting that for 2009, packaging and assembly equipment would be down 47% but in 2010, rebound by 30%. They've since updated that in June. And now, the expectation of growth for packaging and assembly equipment in the semiconductor equipment markets is to be up 42% next year. And then, as they describe the demand for things like test and measurements, they use terms like "explosive growth" and the fact that there's beginning to see some signs of change.

And then, more recently, another data point that's more recent, has been the earnings announcement at the end of July of [Acluo Consafa] and they talked about their sequential growth, where in their quarter third ending at the end of June, their revenue was up 106% from the second quarter. And their outlook for revenue growth in their fourth quarter, which would be end of September, would be up by between 85% and 90% because of really very strong dynamic demand that they're seeing in a lot of end markets.

And I would say that there clearly is, and you heard it in our comments and our conference call three months ago and we're continuing to see several different sectors. Not only is it those two that I mentioned but we're seeing but life science continue to be plugging away. We've seen steady demand for some small bits of aerospace and military that we have access to as well in some of our business units. So it's very encouraging we're seeing sustained activity. And we see it not just in our own orders but we see it in the people that we see out there in the network of companies that there's a lot of stuff going on in technology markets right now. With, I think, some growing enthusiasm that, not just this year but, next year is going to be significant.

Are your customers in advanced tech starting to put together their capital budgets yet for fiscal 2010? And in the conversations you're having with them, do they sort of -- do the numbers they talk about -- are the numbers that they're discussing with you, do they sort of line up with what you shared from other non-Nordson sources in the comments you just made?

I would say it's interesting, our customers fall in various different categories. There are some well known companies out there that they will give you an order and say, "Can I have it tomorrow?" And the visibility is not particularly useful or meaningful. And then, there's other people that have different approaches, that might give you a very long-term forecast with milestones across those times periods and they continue to update it. But I would say, if we look at all of the sources of input that we have, it appears that there's a lot of very good things going on.

But I don't want to overstate this either. There are also some segments, some of the large global accounts that we would deal with, that are important in some of these markets, that have not really begun to step up and make big capital expenditures. So as we sit here in August of 2009, where they are talking about industry investments being significantly below where they were in 2008, there are sectors that are contributing to that less than robust total activity. But there's a lot of rumbling out there and of course, we're seeing very meaningful expansion in the pace of business that we're getting.

Just one more final question, back to orders. The current pace of orders you're seeing for Nordson overall right now, would that coincide with year-over-year order growth in the fourth quarter, as you're up against the first large negative comparison?

I'm sorry, would you just say that again, Matt. I'm not sure if I --.

I'm trying to get -- if you look at the pace of incoming orders Nordson is seeing right now, would that number suggest that as we move into fiscal fourth quarter, would that support year-over-year growth in overall orders? As I'm trying to think about the fact that you face that pretty sizable negative comparison beginning when the capital -- or the credit markets froze. I'm trying to get a sense of, are we back above that pace?

Back above the pace that we had seen -- that we were experiencing sort of October, November of last year?

Yes.

Yes. Clearly, our run rates -- if you use the midpoint of our guidance and do a full year, our revenue will -- it's $811 million or some such number as that in terms of the full year. And there is a period of time where the, if you just looked at what was going on with your shipments and backlog in the first part of the year, we were well below that -- well below those amounts. And correspondingly, the run rates that we've been on right now, you annualize the fourth quarter and we're talking about $900 million kind of pace. So, we are seeing that kind of sequential growth. It's kind of the 11% number, the $800 million to $900 million. Those are the kind of ranges that we're seeing sequentially going on. And we're going to get to a point where we're lapping where we were a year ago. And I think it will be some interesting comparisons. And we'll be operating, as we enter that period, with a lot less expense than we were a year ago.

Thanks, Ed.

Matt, thank you.

Your next question comes from the line of Walter Liptak, Barrington Research. Your line is open.

Thanks, good morning, Ed.

Hi Walt.

Okay. Thanks for the color on this call and most of the questions have been answered already. But I want to try and put some numbers to the leverage ratio discussion that you had earlier. And it sounds to me like that the recovery sustainable, especially in Asia, and that the margins are sustainable, operating margins in the 16%, 17% rate because of the costs out. Is that right?

Yes, in other words, we're talking about 18% this quarter. You do the arithmetic, as we mentioned in our guidance on the various lines on the income statement. We're expecting 19% in quarter four, as a midpoint of our guidance. The first quarter is traditionally a seasonally slower quarter for us. And we'll have a little more more expense cranked into the income statement. But you do the math on that and I would think that if this environment sustains itself at the level that we've seen now and with a little bit of sequential growth taking out seasonal factors, I think that we're going to have some nice comparisons as we enter 2010. Compared to the very challenging times we had back in 2009.

Okay. Fair enough. And I'm trying to factor in, if revenue is flat next year, which it doesn't sound like it's going to be, it sounds like it's going to be up. That these high teens margins are a new operating structure or a new return rate for Nordson.

Yes, we did 17% operating margin in 2006 and again in 2008. And I think if you do the four quarter average of what we've talked about in our guidance and the actual numbers we have for nine months, we're talking about something order of magnitude that's 14% for this year. And I think as we get full year's benefit of this new cost structure, even with some additional costs that would factor in, we're going to be operating in a level that whatever the revenue is, assuming it doesn't go down from where we are, that's competitive with what we had in our best years of late. And I think with any meaningful recovery, we might be able to hit some new high water marks.

Okay. Right. And that's the thing, the new high water marks. If you just take out -- let's do simple math. If you added $50 million in revenue, it sounds like $25 million of that could fall to the operating line. And if that were the case, then you would be talking about operating profits that are in the low 20's again or that would be like you say a new high water mark.

Well, again, I'll use your math. I think the $25 million gross margin would be a little bit better on that $50 million kind of assumption. On 3,750 employees, we're going to have, call it, on average 3% to 4% kind of cost inflation plus some incentive compensation that creeps back in. We'll probably have, and I don't want to throw a number out because it will be wrong, but we'll have some offset to that increased gross margin in there. So, I'm not ready to embrace your low 20's but I think you can do the math pretty simply on that inflation.

Right. Because of the cost out, we're looking at a Nordson that's going to have higher returns in the next up cycle than it's ever had previously.

At least in the last 20 years, I think that's right.

All right, that's long enough. We just need a year. Okay and that's it for me. Thanks very much.

Thank you, Walt.

Your next question comes from the line of Scott Blumenthal, the Emerald Advisers. Your line is open.

Good morning Ed, Greg and Jim. Thank you for a fine quarter.

Thank you.

Ed, considering the remarks that you made a little bit earlier about, I'm not sure if it was you or Greg, that parts were several percentage points higher than historically. Can we assume that most of that percentage in the product type mix came from the systems portion of the business and that the standard products were kind of flat?

No, I don't know that you can necessarily say that. The mix is clearly more consumables and spare part and less systems. Now, the split between standard systems and engineered systems, which is one we typically speak to periodically, I think we've seen both weakness in some of the stand systems. Particularly, in our adhesive markets, where for example, some of the OEM's have not had customers making the investments, even in these nondurable markets. But the plants are still running and the spare parts are still being consumed. But then, as you get over in, let's say, industrial coating and automotive, those are I think, what you've asked or postulated is correct. We've seen particular weakness in some of the engineered systems because they tend to carry the higher price tags. So, it's really across both of those.

When you say or when Greg said that parts and spares was several percentage points higher than historically, are we talking double digits percentage higher?

No. It would be more closer to mid single digits.

Okay. All right, great. And Greg, the $1 million in restructuring charges, where did that appear -- in which number is that?

It's in the financial exhibits with our press release, it's in the corporate managed number.

Okay. And one other modeling question, did you give a tax rate assumption for Q4?

We did not but I would use 35%.

Okay. Terrific, thank you.

Thank you Scott.

(Operator Instructions) We'll pause for just a moment. I am not showing any further questions at this time. Do you have any closing remarks?

I do operator, thank you. And let me summarize, if I could, on what I believe are the take-aways from today's call. The economy does appear to be turning the corner. And more specific to Nordson, we're pleased with the improvement in order rates and the sequential improvement in sales during the year. Our favorable mix and spending reduction efforts have generated strong operating performance and excellent cash flow. And Nordson does have its sectors of comparative strength and these include our spare parts and use-once-and-dispose components; our nondurable end markets, like packaging and nonwoven; life science; technology and other emerging markets and applications; and cost savings systems. And we continue to make the appropriate investments to improve our competitive position in the marketplace. And so, as I conclude the call, let me again thank all of you for your continuing interest in Nordson Corporation. This ends the call.

This concludes today's conference call. You may now disconnect and have a great day.