Nordson Corp (NDSN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for third quarter fiscal year 2012 conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jim Jaye, Director of Investor Relations. Please go ahead.

Thank you, Allie, this is Jim Jaye and I'm here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, our Senior Vice President and Chief Financial Officer. We'd like to welcome you to our conference call today, Tuesday, August 21, 2012, on Nordson's third-quarter results.

Our conference call was 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 Tuesday, August 28 by calling 1-404-537-3406. You will need to reference ID number 16713095.

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'd now like to turn the call over to Mike for an overview of our 2012 third-quarter results and a bit about Nordson's future outlook. Please go ahead, Mike.

Thank you, Jim, and good morning, everyone, and thank you for attending Nordson's third-quarter 2012 conference call. In addition to our comments on the third quarter we will also provide some perspective on our outlook for the fourth quarter of fiscal 2012.

Let me begin by thanking Nordson's global team for continuing to serve our customers at the highest level and for delivering an outstanding quarter. Third-quarter sales, operating profit, net income and diluted earnings per share were record levels for any quarter in Nordson's history where strong organic sales volume in all segments and geographies helped drive this record performance. Our customers continue to respond to our value proposition of best in class technology, applications expertise and global support.

Acquisitions did add 10 percentage points of growth in the quarter. These acquisitions include Verbruggen and Value Plastics, both completed in fiscal year 2011, and the EDI and Xaloy acquisitions completed during this year's third quarter. These two recent acquisitions, along with Verbruggen, provide Nordson with a very strong platform in global plastics processing, a space we think we has good growth and profitability characteristics. Integration efforts are on track and we are very excited about the opportunities for these businesses going forward and the new team members that have come with them.

I would also like to add a few comments regarding Sealant Equipment acquisition which we completed on August 1. Sealant Equipment is a leader in the engineering and manufacturing of meter, mix and dispense equipment and valves which apply one-part, two-part and three-part adhesives, sealant and lubricating materials.

This acquisition provides us with broader presence in cold materials equipment market, especially in the general industry applications. It's an excellent complement to what we already do in the space and we see significant opportunities to leverage Nordson's global infrastructure to grow the business beyond its current largely North American footprint.

I will share some comments about current business trends, but before that let me turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our third-quarter financial results as well as some comments on our guidance for the fourth quarter of 2012. Greg?

Thank you, Mike, and good morning to everyone. As Mike noted, our financial results for the third quarter were outstanding. Sales in the quarter were $380 million, an increase of 22% over the prior year's third quarter. This growth included a 16% increase in organic volume and, as Mike noted, a 10% increase related to the first year effect of acquisitions.

This total sales volume growth of 26% over the prior year's third quarter was offset by a negative 4% impact from the effects of currency translation related primarily to the euro, again as compared to the prior year.

Looking at segment performance, Adhesive Dispensing sales volume increased 21% as compared to the prior year's third quarter. Organic volume increased by 4% while the first year effect of acquisitions accounted for the remainder.

The organic volume growth was driven by those product lines serving consumer nondurable end markets, offsetting the softness in general assembly product lines serving consumer durable end markets. This was also the case for our European adhesives business highlighting the general stability of the consumer nondurable end markets.

Organic sales volume in the Advanced Technology segment was up 33% over the prior year's third quarter and the first year effect of acquisitions added 6% to sales growth. Strong demand for dispensing and sets and inspection equipment serving electronics end markets, especially mobile device applications, along with continued penetration of a variety of niche markets drove the increase.

Within the Industrial Coatings segment sales volume increased 12% compared to the prior year. Sales of powder coating and cold material product lines for durable goods applications drove the improvement. Growth in this segment was strongest in the US and Japan.

Moving down the income statement, gross margin in the quarter was 59% including acquisitions and the associated short-term purchase accounting charges for acquired inventory. Operating margin improved to 26% in the quarter, 1 percentage point higher than the previous year's third quarter.

Operating margin in the quarter, excluding the fiscal year 2012 acquisitions, short-term purchase accounting charges and associated transaction fees, was 28%, in line with our guidance reflecting the continuing strength of our underlying base business.

As a point of clarification, transaction costs associated with the 2012 acquisitions are reported as corporate expenses and were approximately $1.8 million in the quarter. Short-term purchase accounting charges related to inventory totaled $1.7 million and are reflected in the Adhesive segment results.

Looking at operating performance on a segment basis, Adhesive Dispensing delivered another quarter of very strong performance with operating margin of 30%, or 33% excluding the EDI and Xaloy acquisitions and the short-term purchase accounting charges.

Within Advanced Technology outstanding top-line growth, solid execution and operating efficiencies drove operating margin to 33% in the quarter, an improvement of 5 percentage points over the same period a year ago. With this segment's typical seasonality we do expect to see moderation in both sales and operating margin given the volume leverage within this segment.

The Industrial Coating segment delivered operating margin of 14% in the quarter. On a sequential basis operating profit, excluding one-time charges in both quarters, expanded at nearly twice the rate of sales reflecting nice volume leverage within the business.

Continuing down the income statement, reported net income for the quarter was $67 million and diluted earnings per share were $1.03. As in previous quarters, we have included in earnings per share reconciliation schedule in our press release to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items.

Diluted earnings per share in the current quarter include a $0.01 per share discrete tax benefit, a $0.02 per share charge for short-term purchase accounting related to the step-up in value of inventory from the EDI and Xaloy acquisitions, and a $0.02 per share charge for acquisition related costs. The EDI and Xaloy acquisitions, including the short-term purchase accounting charges, transaction fees and financing costs, were dilutive to earnings per share by $0.02 in the quarter.

The current quarter's EBITDA was a record $107 million and third quarter free cash flow before dividends was $72 million, or 108% of net income, reflecting very strong cash conversion.

From a balance sheet perspective, even with the completed acquisitions we remain very liquid with net debt to trailing 12 month EBITDA of less than two times at the end of the third quarter. And remaining capacity under our existing credit facilities of approximately $180 million, along with our strong cash generation, provides adequate liquidity for strategic and investments.

Before moving on to the outlook for our fourth quarter I'll provide comments on recent order trends. As we typically do, we provided our most recent order data both on a segment and geographic basis with our press release. These orders are for the latest 12 weeks as compared to the same 12 weeks of the prior year on a currency neutral basis and with fiscal 2011 acquisitions included in both years and fiscal 2012 acquisitions not owned for the full 12 week period excluded.

Looking at orders for the 12 weeks ending August 12, 2012, they are up 15% compared to the same 12 weeks in the prior year. Within the Adhesive Dispensing segment orders over the last 12 weeks increased 7% from the prior year driven by solid growth from all product lines.

Advanced Technology orders over the latest 12 weeks are up 22% from the prior year. Demand for automated and semi automated dispensing solutions serving mobile consumer electronic devices, as well as demand for fluid management components for healthcare and medical markets, along with ongoing penetration of other niche markets drove the increase. Orders improved in every geography as compared to the prior year within this segment.

Within the Industrial Coating segment the latest 12 week orders are up 23% compared to the prior year. We generated double-digit order growth in every product line with growth strongest in Japan, the US and Asia Pacific.

Let me now turn to the outlook for the fourth quarter which includes the impacts of the EDI, Xaloy and Sealant Equipment acquisitions. We are forecasting sales to be in the range of $408 million to $422 million, an increase of 23% to 27% as compared to the fourth quarter a year ago.

This range is inclusive of organic volume up 11% to 15%, 16% growth from the first year effect of acquisitions and a negative 4% currency translation impact based on current exchange rates. We expect gross margin of between 56% to 57% in the quarter inclusive of $2.5 million of short-term purchase accounting charges for acquired inventory.

Operating margin is forecasted to be approximately 23% for the quarter at the midpoint of our sales range, or 24% excluding the impact of short-term purchase accounting charges. Excluding the fiscal 2012 acquisitions and associated charges, and nonrecurring charges included in the prior year's fourth-quarter, normalized operating margin is forecasted at 26% for the current year's fourth quarter as compared to 25% in the prior year's fourth quarter, reflecting the positive impact of the sales volume leverage.

We are estimating an effective tax rate for the fourth quarter of approximately 30.5% resulting in forecasted diluted earnings per share in the range of $0.96 per share to $1.04 per share. This estimate includes $0.01 per share related to the gain on sale of a facility as a result of our previously mentioned Adhesives footprint consolidation initiative and a $0.03 charge for short-term purchase accounting related to our recent acquisitions.

In summary, we delivered excellent third quarter performance as our global team continued to deliver at a very high level. And current order rates are driving our outlook for a very strong fourth quarter.

Thank you, Greg. Before taking your questions I'd like to point out a few other highlights from the third quarter and also provide initial comments on our current order rates and outlook. On a day-to-day basis our global team continues to get the job done better than almost anyone. I'd like to call out some initiatives we have completed that will help drive superior performance.

During the quarter we opened our newly expanded center of excellence for Advanced Technology in Suzhou, China. In addition to greater manufacturing capability to serve the region, this facility features testing and laboratory capabilities, a full training and demonstration center and will serve as a base for enhanced sales and aftermarket service support for this region. Production capability will ramp up over the next nine to 12 months.

We also completed the consolidation of our Adhesive Dispensing facilities where we have consolidated from four separate facilities to two. One of the vacant buildings has been sold and we will realize a gain in the fourth quarter of about $1 million on proceeds of $5 million, and the other is on the market now.

We've also continued to fund organic strategic initiatives including a variety of innovative new products in each of our segments that are meeting customer needs and helping drive organic growth. We also continue to invest resources to drive growth in emerging markets.

As previously mentioned, we completed the EDI and Xaloy acquisitions during the third quarter and the Sealant Equipment acquisition at the beginning of the fourth quarter. We are clearly executing in the spaces we have previously identified as attractive acquisition opportunities. We welcome these new employees to Nordson and we look forward to the continued growth and success of these businesses.

We recently completed our annual strategic planning process and I'm very pleased with the many opportunities for long-term growth and performance improvement we have before us.

Moving on to our outlook, our recent order rates are strong, as Greg noted, supporting a forecast for an excellent fourth quarter and record year for revenue and profitability. At the same time we are not immune to the macroeconomic trends over the longer-term.

While most economists continue to project growth going forward, many have softened their outlook and you have seen several industrial companies lowering their near-term expectations. The European economy remains very fragile and is impacting global growth opportunities, especially in certain emerging markets like China.

The specter of a fiscal cliff in the US would raise considerable additional concerns, but we have proven we can react quickly if needed. The near-term effect of uncertainty is being expressed by many of our customers, but is unlikely to impact our fourth quarter given our strong backlog and current order rates.

While we continue to monitor these various factors our overall long-term view is positive. We remain strongly positioned to deliver profitable growth. Our winning model includes best in class technology, direct global sales and service, applications know-how, significant recurring revenue derived from parts and consumables and excellent positions in the consumer nondurable spaces, rapid growth opportunities associated with mobile and other electronic devices and multiple avenues for expansion.

While we are not immune from the macro environment, I am confident in our ability to outperform our competitors in any scenario that plays out. At this time let's turn to your questions.

(Operator Instructions). Christopher Glynn, Oppenheimer.

A question on the Coatings business, 2Q orders very strong, third-quarter also very strong, didn't seem to see the backlog conversion there. Is that matter more of a mismatch between the different comps for orders and revenues or more a lead time thing looking like kind of a huge fourth quarter for Coatings?

Do you want to comment?

Yes, Chris, I think it is -- as a bit of background in this segment, we do have larger dollar orders within this portfolio and some of those can be longer lead time items. So I think what you are seeing in this particular quarter is the result of a few orders that are larger dollar systems orders that have longer lead times associated with them.

Okay. And then the ATS operating margin, was that just all volume leverage or any mix strength? And as a corollary, do you need to build more structural cost in that segment at this point?

I would say most of what you are seeing there in improvement is significant leverage around our systems business in particular, so it is largely volume leverage. And we have been investing really in that business over the last three or four quarters, both resources and capability.

We did mention the buildout in Suzhou and where we are at as the physical facility is there and we will be building up our product capability and productline capability, as I mentioned, over the next nine to 12 months.

Beyond that there might be very modest tweaks here or there to expand capability, but largely we can run with additional resources if we need to and we can flex up and down pretty effectively there. So probably not a lot of additional capital required.

Yes, Chris, this is Greg. The only thing I would add to that is as we have been doing and will continue to do, the investment there is largely about adding resource capability in the emerging markets.

And specifically we have stepped up over this last year and we will continue some technology investment in each of the key product lines within that business.

Great, thanks.

John Franzreb, Sidoti & Company.

Last quarter you cautioned about the sustainability of the Advanced Technology order book due to product rollouts. This quarter was a great quarter. Could you talk a little bit about the sustainability of AT orders going into the fourth quarter? A little bit of color there would be helpful.

Yes, if used look at sort of our typical order pattern for the Company, but in particular for that business, it tends to be fairly weak in the first quarter given the holiday period and pick up and be strong in the second and third quarter. And then as we get into this period of time start to decline again as most purchases are made for the various roll outs and holiday seasons.

So we typically would be in a period now where orders would start to decline going forward and that's a typical seasonal pattern. Sometimes our orders peak in the second quarter versus the third quarter; this year they are kind of peaking in the third quarter as a function of customer rollouts of new devices and particularly in the mobile space that has a big impact on timing.

So, orders were strong this quarter with rollouts and the continued strength at the beginning of this quarter -- we would expect them to decline in the normal seasonal pattern though going forward.

Okay. And in industrial coatings, last quarter you said that the order book was largely driven by mid to larger size customers, that some of the smaller customers have been on the sidelines. I guess, A, have the smaller customers returned? And B, kind of on the heels of the backlog number -- and, Greg, what you kind of mentioned about longer lead times -- it's the largest backlog number since, I don't know, I'm looking back down to 2001. Should we be thinking about that backlog differently and the composition of it?

So the first question was really around the smallest customer and the answer is, no, they really are not back in the mix at this point yet. Most of them have interest in doing projects but really can't get the financing to support that. So that has not changed, that is primarily a US and European phenomenon there. So it is really sort of that mid-tier and larger tier that is driving growth.

From an order standpoint I would say there is not a fundamental shift in the sort of delivery times in the business. It is just as if you get sort of lumpy sizable orders that come in, some could stretch out over the period of time that we are talking about here.

Yes, John, this is Greg. But I wouldn't characterize it as something that we see as a structural shift in that business or the composition of that business.

What I would say is we have more systems orders typically in this time of year and are relative to sort of our consumables, and so that has an impact as well.

Are you capacity constrained at all?

We are not capacity constrained, no.

Okay. Thank you very much, guys.

Matt Summerville, KeyBanc.

A couple of questions. First, I guess just the order tempo that you experienced throughout the quarter, can you sort of comment on that? If you came in plus 15 was that more front end loaded, back end loaded? And are you seeing in dollar terms -- are you in fact seeing in your Advanced Tech business, are you seeing that seasonal peak or are you expecting to see that seasonal peak? I just want to be clear on that.

Yes, what I would say is the orders were pretty solid throughout the quarter. We are in the period of time where things, probably in the last week or so, or two, are starting to decline in the normal pattern that we would see. And it would be a fairly steady decline from here throughout the rest of the fourth quarter and into the first part of the first quarter is typically what we see.

So it looks at this point that we're seeing that and we probably turned the corner a bit on the orders probably a little later than we might typically see in this quarter, but still within this quarter.

Do you get the sense that the infrastructure is in place or is still getting put into place on the part of your customers to support a very robust pipeline of new products coming to market?

I would say on the mobile side there is a lot of change over time and the frequency of change is pretty quick -- think of that as less than a year. So I would say this is pretty typical of what we have seen over the last few years from the mobile side.

I would say the more traditional back end part of the business is still pretty weak. I mean some signs of improvement, some orders coming in but not as robust as it would be in a typical upswing type period.

Most of the industry followers suggest that this year is going to play out as a modestly negative year and then next year should be a pretty solid year. So I think that is probably an upside for us in the next year.

As we think about you kind of moving into the next calendar year and some of the macro dynamics you brought up, whether it be Europe, China, what is going on here with the election, et cetera, what are your customers telling you about their capital budgets and their ability to get stuff, for lack of a better term, approved heading into year-end and the early part of next year? I guess, Mike, what I'm trying to do is gauge kind of your level of concern or confidence in whether or not you have a slower than normal start to the year?

Yes. As you know from an order perspective, we've got sort of a half a quarter visibility. But what I would say from along the lines of your question from a customer perspective, I'd say the folks that are currently buying have projects in the mix. I would say they are cautious and I would say I wouldn't be surprised if things stretch out a little bit in certain areas.

We are not seeing that yet, but I would say the tone of our customers are cautious. When you look at the micro environment with the recession in Europe trickling over to having an impact in China and growth here in the US currently in the kind of 1.5% grade, people have money and they have approved projects, I wouldn't be surprised if we saw some delay.

It wouldn't be out of the question to think the first quarter or so of next year looked a lot like the first quarter this year. But we don't really have any better insight than what we are giving you around the fourth quarter. But the macro environment I would say has created some degree of caution in our customers and we are hearing that pretty much around the globe.

Just to change the topic for one last question here, Mike, can you spend a moment kind of talking through the global market for cold materials, how big your business is now with what you bought with the small company you closed on August 1, what you have in your core portfolio?

And I guess how fragmented is the market; how much does this look like, from a high level of course, what you -- are you going to be able to do in this market what you think you can do in plastics processing and what you have done in Adhesives? Can you spend a minute or two on that?

Yes, I'd say the overall global market for cold materials is probably in excess of $600 million, so it is a pretty sizable market out there and not surprisingly growing most rapidly in the emerging markets. And our business is relatively modest and there is some degree of fragmentation out there and it cuts across a lot of difference end markets.

So from our perspective we see good organic growth opportunities so we see the ability to take the new product lines that we have added with Sealant Equipment around the globe. So there is an opportunity to extend that. And there could be further acquisitions down the road.

I would say the opportunity is probably not as large as the plastics processing or the adhesives, but it's a sizable opportunity, particularly outside the auto space. Part of it goes into the auto space, but the general industry applications that are pretty broad are interesting. So we see opportunities there, but probably not as large as plastic processing or Adhesives.

Thanks a lot, guys.

Kevin Maczka, BB&T Capital Markets.

Mike, I guess I'm trying to square this commentary from you and your customers about all the uncertainty and smaller customers still not being back in the market, everything going on in terms of the macro picture that could create headwinds. But we see Europe orders jump from negative [9%] to plus [6%]. Can you give a little more specific commentary around Europe?

Yes, let me just address the first parts of your question. The small customer piece is not new. That has really been the last four or five quarters that we really haven't seen them come back in a big way post the recession. So that's not new news, it is discontinuing news. So I would say that is not changing anything that we have seen over the last four or five quarters, it's just more of a longer-term upside I think there.

Secondly, I would say the whole specter of uncertainty that is out there on the macro front has customers questioning when they pull the trigger. Right now we have got approved projects in all of our business that are going forward and particularly doing well in the consumer nondurable space that has been solid and pretty resilient even in Europe.

So what I would say what you are seeing is really a pickup in that consumer nondurable piece in Europe after a little bit of a slow start in the beginning of the year and continued strength around the region. And then on top of that very strong technology piece.

And on the coating side we've had approved projects. We talked in the past about the bid list being long and as medium size and larger customers are pulling the trigger some of those have very attractive paybacks because they are a result of consolidation or expanding capacity or efficiency improvements and they're short paybacks and they look pretty good.

I think as you go through the next capital budgeting cycle, particularly on our -- some of the bigger projects that affect coatings and part of the Adhesives business, there is where I think you might have some concern from our customer base about when they pull the trigger.

I think there is still pent-up demand from the recession not being fully recovered in certain spaces, like our product assembly business and Adhesives had a strong year last year, is pretty soft this year, particularly in places like Europe. So there is probably pent-up demand and I would say the same thing with parts of our coatings business. So I think those are the ones where there is some concern.

And I would say it spilled over into China a little bit this year too, because export opportunities have declined. And while most of our customers are supplying domestic demand, some are linked into export opportunities too and I think that is where we are seeing caution is around the export opportunities.

I think there is hope there that the actions the Chinese government is currently taking will help stimulate demand, but when you have Europe in recession that is what people see as kind of limited opportunity and the uncertainty until we get through the election here in the US is just -- have people expressing caution.

It has been played out in terms of folks affecting current orders or the latest order trends, so they are still moving ahead with things that are approved. And it's just a question of whether there is enough clarity to move forward in Q1, Q2 or whether there is some concern. And I would say all we wanted to highlight is an expression of some concern right now just because of the uncertainty.

Yes, and, Kevin, this is Greg. Specific to your point on Europe, that speaks largely to the macro of Nordson. In Europe those order rates are largely driven by, again, the resiliency of the nondurable end markets, but we also did see some improvement in the product line supporting within Adhesives the more durable end markets.

And I think some of that is that the pent-up demand that had been missing in the orders, so we are seeing some improvement against albeit you could say weak comps of the prior year, but the order rates in Europe are largely adhesive driven.

So at a high-level I think we have got good -- we've got good positions from a product standpoint, from a niche market standpoint. And even within the geography in Europe we are more northern focused, more eastern focused and where we participate in the south a lot of that is re-export business to OEMs.

So we've got a little different mix than maybe some other companies in Europe, again, not immune to what is going on underneath it. So that helps. And then some of the mix of our business in our other product lines are going reasonably well. And even in our coatings business there are things like the ag business, heavy equivalent business doing pretty well, auto holding and the construction related stuff has yet to come back.

Got it. Shifting over to Tech again, I think, Mike, in the past you've talked generally about the mix there of some of the major buckets there, mobile and PCs and other life sciences and other things. The strength we saw this quarter -- and you are pretty clear about the seasonality going into Q4 -- but the strength we saw this quarter, how much of that is driven by new product development cycle in the mobile piece whether it be key customers designing and developing new tablets and other hand-held devices versus other parts of Tech?

Yes, so if you look at it -- we said in the past that the electronics piece is probably three quarters of that segment and of that kind of mobile has historically been a third, niche a third and sort of the traditional back end of third. This is clearly driven by the mobile and to a little bit lesser extent the niche sort of applications.

And so it is very much linked to the degree of change and innovation that's gone into handsets, tablets, auxiliaries and support equipment that goes with that in some of the niche applications.

We have seen some orders for the more traditional back end, but not as robust as you would typically see in a nice upturn scenario and that is not unexpected for this part of the year. And then I would say pretty solid growth in the medical, general assembly, healthcare areas as well to complement and balance that.

Got it. And just finally from me, on the coatings margins, can you just address that a little bit more? Was there any change in competitive behavior or pricing pressure or mix or anything else that may have weighed on those margins?

Yes, we do have a pretty significant mix change year over year within the businesses. So if you look at our five product lines they are not all at the same level of returns. I would say mix has changed, it probably accounts for 1% or so of the margin impact. And then we have had more systems, particularly engineered systems versus standard systems as well, really just a function of the orders that have come through. So those are two things that contributed.

And we mentioned in the last quarter or so that we were stepping up spending in emerging markets to support growth in a number of our product lines and we have continued to do that. So those are sort of three things that have kind of impacted it in the near term.

Okay, great. Thank you.

Mark Douglass, Longbow Research.

Greg, what did spares parts come in as a percentage of sales this quarter?

Yes, Mark, if we just exclude the acquisitions that came in mid-quarter, just so we are talking kind of the base business, total parts were at about 43% of revenue. And as is typical as we kind of move through the year and have a heavier weighting of systems, that is down a few percentage points than what it had been running earlier in the year, but total Company is 43%.

Okay. And then with the acquisitions, is that going to be still relatively stable in kind of the low [40%'s] or do you think it will shift down a little bit more?

No it will likely -- these acquisitions are more components than systems, so it is going to lever up what we would call parts and consumables portion a little bit.

And then can you talk about -- in ATS, you mentioned the niche market several times. Can you go, at least what you can, in some more detail as to what the niche markets entail?

Yes, for us the biggest ones are MEMS devices, LED, solar and then there is a few others. The area that is really on fire right now is the MEMS devices. A lot of that supports the mobile activity, but a lot of it supports industrial automation, healthcare automation, automation actually in the electronics industry. So that is probably the hottest.

The LED business is improving but probably not driving it and solar has not done so well. So it is largely probably the MEMS applications that are the biggest drivers. And then within that we still see the technology conversion opportunities going on with the under filled continuing to take share over time as the devices get more sophisticated and the geometries shrink.

Okay, so that is still mostly a dispensing application as opposed to (multiple speakers)?

Mostly in dispensing. But what we have seen -- also what is happening is as we put more components into the mobile devices and as they go vertical we are seeing more inspection opportunities. So we did see an uptick in inspection business as well associated with those kinds of activities. It has really been more the traditional back end that has been kind of where it has been most of the year with a slight uptick.

Okay. And then finally, given the really strong mobile this year, it is setting up kind of tough comps. Do you think there is still opportunity even with that to grow on what is looking to be a very strong base?

Yes. Our crystal ball doesn't go out forever. The one thing that seems to be going on here though is a pretty fast cycle of innovation when you look at the leading suppliers here and you also have a fairly significant penetration of the smartphone part of the business.

And so, if you look at what we like the most, we like smartphones and then we like pads and then we like Ultrabooks and so forth. So the smaller footprint with more features and it is what we like the most.

You are seeing relatively high growth continuing and projecting to continue for smartphones. So assuming that continues, yes, it is going to be a strong year for this business. But I think the long-term future is good. Do you run into some timing issues? You could, but I think the opportunity is there because you've got share penetration on the smartphone and you also have markets like China which are opening up in a big way to the smartphone part of the market, emerging markets in general.

So, if you believe that long-term the smartphone piece is continuing to penetrate and you believe the forecasts that have a 15% to 20% plus kind of growth for the next few years, then we should see that be positive. And we should at some point see the more traditional piece come back. I think most people feel that is next year and maybe not right at the beginning of next year.

Yes, and I would add to that what might be largely in our dispensing product family where we benefit from these mobile devices given the smaller geometries and more features being packed into these devices it does spread as well into opportunities and our more broad product offering like test and inspection.

Now the time -- you can't predict the timing on these launches, so you could have some things that looked a little wacky quarter to quarter. But when you do your comparisons, but I think the long-run trend is positive.

Okay, actually this might be the last one. Speaking of share, do you think you are gaining share in the market as well in ATS?

We think we are doing well with the technology investments that we have made.

Okay, thanks.

Charley Brady, BMO Capital Markets.

Mike, your comment about the ATS electronics being about 75% of that market and mobile being a third of that 75%, are smartphones the majority of that third?

I would say smartphones are a big part -- I would have to go back and check, Charley, but I would say smartphones are a big part and tablets are a growing part of that. More traditional phones don't have the same functions in there. So it is not just the processor that is in there, it's the fact that you are putting two cameras in, it's the fact that you have a gyroscope in, it's the fact that you have an accelerometer in, it's the fact that you have more chips to handle all the applications.

So, yes, that is a significant part of that mobile piece and tablets are growing. And we have yet to really see much of an impact from the Ultrabooks, but that could be an upside if Microsoft 8 comes in and the Ultrabooks take off the way certain folks hope they will. But that has not been a big impact yet.

Okay and just going back to Europe for second and the growth rates you are seeing there. You commented your southern European exposure is largely exported emerging markets. Can you give us a sense for your European business, maybe a little more granularity how that breaks down between whether it's eastern, western, southern and how much really gets -- stuff gets sold to Europe but ends up not in Europe, it's sold somewhere else, it is maybe really helping out some of the growth rate relative to what other industrial companies are seeing?

Yes, overall our European business is about I think 32% from a revenue standpoint. And we said in the past about 8 points of that 32 points has really gone to OEMs that re-export and largely re-export to emerging markets. And where they are located is more south and north.

And then of the rest of the business we have big business in Germany, a fairly sizable business in France. Germany tends to support the east which would be many of the Eastern European countries and small business and Russia today. We have got a smaller UK business. Yes, we are in Spain and Italy, but the bigger proportion of our business is in the north.

Yes, the weighting is Germany, France and the UK. Now Italy, again, is a big volume market, but that is the export base.

Mike, you've made a number of acquisitions, particularly in the Adhesive Dispensing segment, regionally in particular. As you look out at that addressable market, clearly that has gotten larger. Do you think if you look at a long-term run organic growth rate for the Company, and I guess specifically Adhesive Dispensing, do you think you have kind of bumped that up to a more sustainable higher organic growth rate because your addressable market is larger? And maybe you can just kind of comment on what you think that kind of is on a longer-term basis.

Yes, we said for a while we thought sort of the core adhesives business was kind of in that 5% to 7% kind of growth rate. We thought things like flexible packaging and the plastic processing probably were markets that grew a point or two faster than that overall. And so it's part of the reason we were interested in that, obviously we also felt that it was closely adjacent and within our core competencies to extend there.

So we do think we have enhanced the overall growth prospects of that business. And we think there are opportunities not only to grow organically, and we talked about some of the business model approaches that we are trying to play out from here what we do in Adhesives, but we also think there might be additional opportunities to acquire in that area. So, yes, we do think we have enhanced the growth prospects of that part of the business and therefore the overall Company.

Thank you.

Jason Ursaner, CJS Securities.

Greg, you provided some details on the operating margin in the quarter and that excluding all of the adjustments you achieved that 28% range. When I look at the fiscal Q4 range though, even when I adjust out the accounting charge, it seems to be applying closer to a 23.5% operating margin.

If you said the gross margin you expect next quarter, could you repeat that? And I guess with parts sales staying where they are, above 40%, and the order growth, what would cause you to see the overall margin pressure to that great a magnitude?

Yes, Jason, what we talked about was or what I mentioned was if I kind of normalized, if you will, the fourth-quarter margins by backing out the effect of acquisitions, both the results from operations as well as the purchase accounting that comes with it, we would see operating margins in the quarter, in the fourth quarter of about 26%, that is up 1 percentage point from normalized margins of a year ago.

So in terms of that base business we are seeing continued improvement in the performance. Then when you layer in the acquisitions and the purchase accounting that is what then is driving margins down to that 23% range. And then gross margins in the quarter, again, are going to be impacted by both the purchase accounting as well as the overall margin dilution, if you will, of the acquisitions coming in at lower gross margins than our base business.

Yes, we have indicated when we made the acquisitions that they were lower EBITDA margins, but close and that we saw improvement plans currently within the business and synergies that we could deliver to get them up to our average over time. So we are pleased with what we see and the plans there, but the initial effect is to lower the operating margin longer term. We see that improving and in addition to adding the growth opportunities that we see.

And in terms of I guess margin in the base business, are you seeing any margin pressure on the gross margin side or is it relatively consistent with where it had been?

Yes, it is relatively consistent. Now if you look sequentially on the base business it is down slightly, maybe 50 basis points. But that is largely the mix, both some segment mix but as well as a weighting of systems versus parts in the fourth quarter, but that is a typical seasonal pattern.

Okay. And just I guess focusing more on the acquisitions, can you break down the revenue and operating profit contribution of each of the acquisitions in the quarter?

In the fourth quarter?

In the third quarter.

In the third quarter. Well, what we talked about was -- I think what we gave you was what acquisition, the first year effect of acquisitions added about 10%. And so, first year effect would be pre-ownership what those business delivered in that same time period. What we don't typically do then is go beyond that down to what we would say the product line level and get more granular than that.

I guess I am only asking, if I look at that 10%, is there any seasonality for any of the businesses in a material way? Just because it looks like one would have to be sort of underperforming if I'm taking two months of Verbruggen, a full quarter of Value Plastics and a month and a half of EDI and a little bit over a month of Xaloy.

Yes, and I think that is part of it is you have got the different acquisitions coming in. I would say from a performance, I wouldn't say that we had an underperformance of any of them. You have got partial quarter for some of those coming in.

In terms of seasonality from -- if you look at the two larger, the EDI, the Xaloy, the newer acquisitions, we do see kind of consistent seasonality to what our industrial business is experiencing and that is a slightly heavier back half of our fiscal year than the first half. But in terms of performance, no, I wouldn't suggest there was any underperformance.

And from an order perspective you will have the same sort of tail off as capital budgets are completed for the year and the holiday season. So we would expect that same kind of seasonal pattern.

Okay. And it is Xaloy still on track with management's expectations for the full year 2012 to get to that under nine times adjusted EBITDA?

Yes, we are on track with our plans.

So I guess just directionally, could you say whether Value Plastics saw growth or whether that was declining year to year?

No, we saw -- we commented earlier on sort of the overall healthcare part of our business, so we saw pretty good growth for the year, not as strong as the electronics piece, but probably in the high single digit range for the year. So, doing pretty well.

And Greg, can you talk at all about how much stock you repurchased during the quarter and what you have left on the authorization?

Yes, we did not -- we were not active post acquisition. So during the quarter we were not active. And we have -- I think we have about $80 million remaining under the authorization. Let me check that number, Jason. But we were not active in the quarter.

Okay, and with net debt to EBITDA still in a pretty reasonable range you have over $250 million capacity on the various balance sheet items. How should we think about your willingness to use that additional capacity for acquisitions at this point?

Well, I think we have a good pipeline of opportunities. You never know when they are going to come forward. If one of the good opportunities in the four areas that we have talked about in terms of areas of interest would come forward we wouldn't pass on it at this point in time.

We have said in the past our general guideline is sort of two times EBITDA because that gives us access to the lowest cost financing. But given our strong performance and cash generation capability if the right opportunity came up we wouldn't shy away from that.

I said, we are focused on integrating three acquisitions that we have just bought and we have put teams and people in place to deliver on the benefits associated with that integration to get those folks smoothly into the Company and continue to deliver on the plans that they have laid out.

So we feel good about where we are at there. We have got quite a bit of effort underway to do that. So we have got a lot on our plate. But if the right opportunity came up we wouldn't shy away from that.

Okay, great. I appreciate the commentary, thanks.

Liam Burke, Janney Montgomery Scott.

Mike, you talked a little bit about China in your comments, but one of the strategies you had laid out in the past is the tiering where you are looking to go deeper into the domestic Chinese market. It looks like activity in Asia-Pacific is pretty strong. Can you give us some color on that strategy in China?

Yes, what I would say is we are doing really well in our Adhesives business and we have been at that the longest and we are at the point now where we are developing products in the region for those regional opportunities. I would say in this past year and a half that we have introduced a line of products in our coatings business, particularly the powder side, that is getting traction there and I think doing generally well.

Our whole Suzhou expansion was to support broad growth in the technology space, but really to allow us to tap a market, that sort of second-tier market in the technology space. And that is really kind of a 2013 opportunity for us. So first we are building the capability not just manufacturing but the technical centers and the resource capability on the ground and that's sort of the fiscal 2013 opportunity.

Probably 50% of our customers in China are not state owned enterprises with largely local demand. So we are pretty focused on capturing local demand but there is an export piece that has clearly declined and made people a little bit nervous and that is kind of contributing to the overall GDP growth rates dipping below 8% in China at the moment.

The government, again, is trying to respond and our customers I'd say are just a little bit more cautious, but we think there are good opportunities to continue to drive that strategy of tiering in the long run.

And just following on on that, do you think there would be any price competition in the space or competitive pricing response as you roll out the strategy?

We feel pretty good about understanding what the specific requirements are and what features that customers are going to buy and what cost position that we have. So I think as we said in the past, we could have some mix effects in terms of selling less fully featured products there, but with a better cost position. So overall we should be in a pretty good shape.

And one of the reasons that we continue to step up across all business is our technology investment is to continue that train of new products to beat off any particular competitive threats that might be out there. We are not seeing a lot of high-level pricing pressure, we don't want to be naive and we want to continue to innovate and that is kind of the approach we are taking.

Great, thank you.

Walt Liptak, Barrington Research.

I wanted to go back to the discussion about the Adhesives business and maybe just start by asking, Greg, at what point do you break out the plastics equipment as its own segment?

Yes, well, I don't know that we have -- that is something that we are -- what we've got to balance there is the competitive aspects of getting too granular and, like you say, down to the product line level. So I think at this point in our view going forward is that this will be part of the Adhesives segment.

Okay, I think -- the question that I have got is related to this and I think this is what other people are trying to get to is in May Adhesives orders were down 5% and then you put up a pretty big volume number, the 21%. And so, I guess the question is, the acquisitions, are they growing significantly faster than Adhesives or is it the pick up that you alluded to in Europe in Adhesives, is that where the growth is coming from?

Yes, just to be clear, part of the impact in terms of the volume numbers are not having it in last year, having it in this year. So it is kind of zero versus kind of a baseline and that is affecting the current quarter. One of the reasons we tried to give you order rates without that confusion is just to give you a sense of, yes, the base business is picking up.

And if you recall, at the beginning of the year we thought the first quarter or two would be soft and Adhesives particularly we said we had a really strong product assembly year last year and it was soft this year. And what we are seeing now is the growth in the consumer nondurable piece coming back as we projected and really offsetting a still softer but better product assembly area. And then the acquisitions are sort of zero last year and adding now. And so that is distorting the short-term sales numbers in the third quarter to an extent.

And, Walt, this is Greg. So what you saw where you talk about a quarter ago some slight dilution in the order rates for the segment we delivered about 4% organic growth. And what we talk about then consistent with that 4% organic growth in the quarter the order growth rates are now 7%.

So consistent with Mike's comments, we are seeing again the resiliency of the nondurable end markets and then some improvement in the general product assembly that is kind of levering those order growth rates up to that 7%. Now again, that 4% growth, core growth, if you will, in the third quarter, the 7% order rates that are now leading us into our fourth quarter exclude the contribution of EDI and Xaloy.

Okay, that helps, getting to that 4% organic number.

Yes, so the 21% in the quarter has 16% or so of the 0 to here it is acquisition effect.

Okay, all right, thanks a lot, guys.

Hey, Allie, we are going to have to end our call now. So help us wrap that up, please.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.

Thank you.